Dec 10, 2019

Five End-of-Year Tax Items to Check Off of Your December To-Do List

December is here and that means holiday fun, colder weather, and… the end of another tax year! While that may not warm your bones as much as a cup of hot chocolate or a seat close to the fire, taking care of these tax related items before December 31st will hopefully reduce your stress level for the start of 2020.

1. If you are 70½ or older, make sure to complete your RMD

We’ll start with the most pressing item for individuals born prior to 1950. If you are at least 70½ the federal government requires that you distribute (and expose to taxation) a percentage of your assets that are held in Individual Retirement Accounts (IRAs). The amount of this distribution is based on account values from December 31st of the prior year and gradually increases as a percentage of the account balance as you get older. This is item number one on most tax planning checklists because the penalty for neglecting to make a required minimum distribution is 50%! These distributions need to be completed during the calendar year so that they are reflected on the 10-99R you’ll receive in February. This is not a mistake you want to make!

2. Make a tax withholding payment if you’ve withdrawn money from an IRA

This is another item that prevents you from owing IRS penalties in April. If you’ve taken money out of a traditional IRA and not paid quarterly tax estimates throughout the year, consider making a payment directly to the IRS prior to year-end. If completed by December 31st these payments will be credited towards your 2019 taxes and are deemed pro-rata payments. This means that a tax payment in December can cover taxable IRA distributions made in January. Keep in mind that withholding payments increase your taxable income, so you’ll need to add their value to your tax estimate calculations.

3. Consider a Traditional or Roth IRA Contribution

If you earned income in 2019 you are eligible to contribute to a traditional IRA. The amount of income earned, and whether you have access to a retirement plan through work will determine if you can deduct that contribution on your 2019 tax return. Traditional IRAs grow tax deferred and can be invested in a variety of investments. Another option, if your income falls below IRS phase-out ranges, is a Roth IRA. Roth IRA contributions are never deductible, but they grow tax free if age and length of ownership requirements are met. Both vehicles can be attractive options to supplement existing retirement savings.

4. Complete Charitable Gifts

Recent tax reform makes the standard deduction more prevalent, but if you plan to itemize deductions in 2019 it could make sense to move planned charitable gifts into 2019. This strategy is especially attractive if you don’t anticipate itemizing deductions in 2020 and beyond. When planning your charitable deductions, it is important to remember that they are capped at 50% of your adjusted gross income. This is relevant for retired or semi-retired people who don’t have a lot of earned income. In that case pre-planning IRA distributions and charitable gifts can benefit your tax situation and your charities of choice simultaneously.

5. Use your Gift Tax Exclusion if you are helping aging parents or children just starting their careers

The 2019 Gift Tax Exclusion is $15,000, meaning that you can gift up $15,000 to any person without having to file a gift tax return. Planning around the gift tax exclusion works best when a parent or grandparent know that support will be necessary and want to maximize the help they can provide without using their lifetime estate tax exemption. Another item to consider when gifting to family members is whether cash is the best option to complete the gift. In some cases, gifts of securities can lower overall tax obligation or help the recipient get started in investing for personal goals.

While Baird does not offer tax or legal advice, our Financial Advisors regularly work with clients' attorneys and tax professionals to help ensure that all phases of wealth management are addressed.  

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