Year-End Tax and Financial To-Do List for Individuals
With the dawn of 2020 on the near horizon, here’s a quick list of tax and financial to-dos you should address before 2019 ends:
Check your Flexible Spending Account (FSA) balance. If you have an FSA for health care expenses, you need to incur qualifying expenses by December 31 to use up these funds or you’ll potentially lose them. (Some plans allow you to carry over up to $500 to the following year or give you a 2½-month grace period to incur qualifying expenses.) Use expiring FSA funds to pay for eyeglasses, dental work or eligible drugs or health products.
Max out tax-advantaged savings. Reduce your 2019 income by contributing to traditional IRAs, employer-sponsored retirement plans or Health Savings Accounts to the extent you’re eligible. (Certain vehicles, including traditional and SEP IRAs, allow you to deduct contributions on your 2019 return if they’re made by April 15, 2020.)
Take required minimum distributions (RMDs). If you’ve reached age 70½, you generally must take RMDs from IRAs or qualified employer-sponsored retirement plans before the end of the year to avoid a 50% penalty. If you turned 70½ this year, you have until April 1, 2020, to take your first RMD. But keep in mind that, if you defer your first distribution, you’ll have to take two next year.
Consider a qualified charitable distribution (QCD). If you’re 70½ or older and charitably inclined, a QCD allows you to transfer up to $100,000 tax-free directly from your IRA to a qualified charity and to apply the amount toward your RMD. This is a big advantage if you wouldn’t otherwise qualify for a charitable deduction (because you don’t itemize, for example).
Use it or lose it. Make the most of annual limits that don’t carry over from year to year, even if doing so won’t provide an income tax deduction. For example, if gift and estate taxes are a concern, make annual exclusion gifts up to $15,000 per recipient. If you have a Coverdell Education Savings Account, contribute the maximum amount you’re allowed.
Contribute to a Section 529 plan. Sec. 529 prepaid tuition or college savings plans aren’t subject to federal annual contribution limits and don’t provide a federal income tax deduction. But contributions may entitle you to a state income tax deduction (depending on your state and plan).
Review withholding. The IRS cautions that people with more complex tax situations face the possibility of having their income taxes underwithheld because of changes under the Tax Cuts and Jobs Act. Use its withholding estimator (available at https://www.irs.gov/individuals/tax-withholding-estimator) to review your situation.
If it looks like you could face underpayment penalties, increase withholding from your or your spouse’s wages for the remainder of the year. (Withholding, unlike estimated tax payments, is treated as if it were paid evenly over the year.)
For assistance with these and other year-end planning ideas, please contact us.
Pump the Brakes Before Donating That Vehicle to Charity
Many people might consider donating their vehicles to charity at year end to start the new year. Why not get a fresh ride and a tax deduction, eh? Pump the brakes — this strategy doesn’t always work out as intended.
Donating an old car to a qualified charity may seem like a hassle-free way to dispose of an unneeded vehicle, satisfy your philanthropic desires and enjoy a tax deduction (provided you itemize). But in most cases, it’s not the most tax-efficient strategy. Generally, your deduction is limited to the actual price the charity receives when it sells the car.
You can deduct the vehicle’s fair market value (FMV) only if the charity 1) uses the vehicle for a significant charitable purpose, such as delivering meals to homebound seniors, 2) makes material improvements to the vehicle that go beyond cleaning and painting, or 3) disposes of the vehicle for less than FMV for a charitable purpose, such as selling it at a below-market price to a needy person.
If you decide to donate a car, be sure to comply with IRS substantiation and acknowledgment requirements. And watch out for disreputable car donation organizations that distribute only a fraction of what they take in to charity and, in some cases, aren’t even eligible to receive charitable gifts. We can help you double-check the idea before going through with it.