As the clock winds down on 2019, people automatically start thinking about holiday shopping, New Year’s Eve celebrations – and tax planning. Although the filing deadline for the 2019 tax year is not until April, getting organized now can help individuals take advantage of deductible expenses that may need to be completed before the tax year closes on December 31st.
The Tax Cuts & Jobs Act that went into effect in 2018 brought some important new rules for taxpayers. One of the biggest changes that affects individual taxpayers is a sizable increase in the standard deduction. In a move that was aimed at simplifying the process of filing annual tax returns for many Americans, the U.S. government nearly doubled the amount of the standard deduction, which for 2019 is set at $12,200 for single filers and $24,400 for married couples.
Personal expense deductions are used to offset or reduce taxable personal income on an individual tax return. The first step for taxpayers is to determine whether it is worthwhile to take the easy route, check the box for the standard deduction, or continue to claim an itemized list of expenses. The extra steps in itemizing deductions can be well worth the effort for those who have higher amounts of eligible deductions. Below are some examples of qualifying tax deductions for expenses that may have already paid in 2019, or for any expenses that an individual may choose to make before January 1, 2020.
• Contribute to a retirement account: The U.S. government uses tax incentives as a means to encourage individuals to increase retirement investments and savings. Making a cash contribution into a qualifying retirement account, such as an IRA, 401k or self-employed retirement plan (SEP), is an easy way to lower the amount of taxable income. However, it is important to note that those tax-free contributions are limited to a maximum dollar amount that varies depending on whether an individual is under or over the age of 50, as well as different limits based on the type of retirement savings account.
It is important to check with your financial advisor to confirm the maximum contribution amount for 2019. It also is important to know that the government offers an extended deadline for contributions to retirement accounts, whereas most expense deductions must be made in the same calendar year as the tax filing year. Tax deductions for retirement accounts can be made up until the April tax filing date, and in some cases, even later for taxpayers who file for an extension on their tax return.
• Sell losing investments: Individuals can use investment losses to offset any capital gains income that they may have received. So, it may be wise to sell an investment, such as a stock that has dropped in value, to offset other investment gains. In addition, any losses that may exceed gains can be “saved” and carried over to use to offset gains in the next tax year.
• Donate to Charities: Making a gift or charitable donation to a charity is another easy way to offset taxable income. The caveat is that the charity must be a qualifying tax-exempt non-profit, such as a 501(c)(3) organization. Some examples include the United Way and American Red Cross. Gifts of items, such as donated clothing or art, are accepted based on current market value. The IRS also sets a maximum deduction amount on charitable donations, which is typically 50% of a taxpayer’s adjusted gross income (AGI). People that volunteer at approved charities, such as a church or other non-profit, also can deduct any out-of-pocket expenses spent related to that volunteer work, such as mileage or parking fees.
• Medical expenses: The government allows taxpayers to deduct qualified medical expenses, such as the cost of prescription medication or co-payments. Individuals also can deduct home renovations that are medically required, such as adding wheelchair ramps or modifying bathrooms to include safety rails, as long as those improvements do not increase the value of the home. The maximum amount of medical deduction for 2019 is set at 10% of AGI.
• Property taxes: State and local property taxes paid on real estate, as well as other personal property such as a car, boat or airplane are deductible on federal tax returns. However, the Tax Cuts and Jobs Act lowered the maximum deduction limit an individual can claim on property taxes to $10,000. In addition, new tax law no longer allows individuals to deduct foreign taxes paid on property owned outside of the U.S.
As it relates to any financial planning decisions, it is wise to work with a trusted financial advisor. Contact CanAm Capital Management to learn more about our services.