Take a look at your investment portfolio. You have lots of tax-saving opportunities in the coming months as the year’s end approaches. But don’t let the tax impact alone dictate your moves. Your decisions should make economic sense, too. Consider getting rid of poor performers. Capital losses you incur can offset capital gains plus up to $3,000 of other income. Any excess losses are carried forward and can help offset future gains.
See if you’re eligible for the 0% rate on long-term gains and qualified dividends. If taxable income other than gains or dividends does not exceed $38,600 for singles… $77,200 for joint filers…then dividends and profits on the sales of assets owned for more than a year are taxed at 0% until they push you over the threshold amounts.
Some words of caution on the 0% rate. Zero-percent-rate gains and dividends hike adjusted gross income, which can cause more of your Social Security benefits to be taxed and can squeeze some itemized write-offs, such as charitable contributions.
The Social Security wage base is going up to $132,900 in 2019, a $4,500 hike. The Social Security tax rate on employers and employees stays at 6.2%. Both will continue to pay the 1.45% Medicare tax on all compensation, with no cap. Individuals also pay the 0.9% Medicare surtax on wages and self-employment income over $200,000 for singles and $250,000 for couples. This levy doesn’t hit employers.
A reminder for business drivers who use IRS’s standard mileage rates: You can’t also depreciate or expense the vehicle. Nor can you claim write-offs for actual expenses incurred, such as for car repairs, insurance, gasoline and the like. IRS has seen such shenanigans before and is on the lookout for more. Take this case in which a couple deducted vehicle expenses on Schedule C using the optional standard mileage allowance and claimed depreciation deductions and Section 179 expensing on the same automobile. IRS selected their return for audit and allowed only expenses based on mileage rates (Eldred, TC Summ. Op. 2018-49).
IRS’s opportunity zone program is under way. It allows taxpayers to defer capital gains from the sale of business or personal property by investing the proceeds in opportunity funds to help development of low-income communities.
Many key dollar limits on IRAs and retirement plans will be higher in 2019. The maximum 401(k) contribution rises to $19,000. People born before 1970 can contribute an extra $6,000. These limits apply to 403(b) and 457 plans as well. The cap on SIMPLEs climbs to $13,000. People age 50 and up can put in $3,000 more. Retirement plan contributions can be based on up to $280,000 of salary. The payin limitation for defined contribution plans increases to $56,000. Anyone making over $125,000 is highly paid for plan discrimination testing.
Think twice before donating an annuity contract you own to a charity. It’s not the best move taxwise. You’re treated as receiving taxable income equal to the difference between the annuity’s cash surrender value and your investment in the contract. Say you have a small variable annuity in which you invested $10,000, and it’s now worth $18,000. If you donate it to charity, you’ll have to report $8,000 of appreciation as additional income on your tax return in the year of transfer. If you’re able to itemize on Schedule A, you also get a charitable write-off
equal to the value of the annuity in most cases. But with higher standard deductions and cutbacks to itemizations under the new tax law, far fewer people will itemize. You’ll owe the 10% tax on early distributions if you donate before age 59½. Be aware of tax consequences when trading one annuity for another.
To avoid income tax, it must be a direct exchange. Cashing out a policy triggers tax, even if the funds are later used to buy an annuity from another issuer.
Note that the new tax law repealed all miscellaneous itemized deductions on Schedule A that were subject to the 2%-of-adjusted-gross-income threshold. This means that unreimbursed employee business expenses are no longer deductible. Ditto for hobby expenses, though taxpayers must still pay tax on their hobby income. Also nondeductible: Tax preparation costs, investment account management fees, IRA custodial fees paid by the account owner, the cost of a safe-deposit box and more.