2019 Tax and Personal Financial Planning: It’s Not Too Late

While you may have been contemplating financial planning and investment opportunities throughout the year, life happens, and time may have gotten away from you. With less than 45 days left in 2019, it’s not too late to put thought into action. The following topics include some suggestions for managing your personal finances and healthcare benefits which may help minimize your tax exposure now and in the future.

Qualified Opportunity Zones (QOZ)

• The QOZ provision of the 2017 Tax Cuts and Jobs Act allows investors to defer large capital gains by investing in specified economic opportunity zones around the country. The law states that tax must be paid by the end of 2026 on realized capital gains subsequently re-invested in a QOZ fund. There are opportunities to receive a step-up in cost basis: 10% when assets are held in the fund for five years and another 5% if the investment is held for seven years. In order to capture the full 15% step-up in basis, investors must purchase a QOZ fund before 12/31/19.

Donor-Advised Funds (DAF)

• Given the reduced limits on itemized deductions, it may be wise to combine deductions into one year. For example, taxpayers who routinely gift to charity may want to contribute a few years’ worth of donations into one year to help increase total eligible itemized deductions. Donor-Advised Funds (DAFs) can be a terrific way to achieve this charitable donation in a lump-sum format. Taxpayers essentially open a DAF account and fund it with low-basis securities (rather than cash; although cash is acceptable) for a more efficient way of gifting. Using highly appreciated securities held for more than one year avoids having to pay the capital gains tax due if the shares were sold in the taxpayer’s account, and therefore, can be more effective than donating cash. In this case, the market value of the gifted shares is what’s used to calculate the charitable deduction and the shares can be sold inside the DAF with no tax consequence. The account can then reinvest the proceeds in a more diversified solution or keep all or a portion of the proceeds in cash for distributions to the charitable organizations of the individual’s choosing.

Required Minimum Distributions/Qualified Charitable Distributions

• Required Minimum Distributions (RMDs) from traditional IRAs – Individuals who have reached the age of 70.5 must begin taking mandatory minimum annual distributions according to life expectancy tables published by the IRS. The distribution amount starts out around 3.5% to 4% of the prior year’s ending IRA account value and increase gradually over time. Failure to take the minimum amount required by law can result in harsh penalties of 50% of the amount that should have been distributed. The dollar value of the distribution is categorized as taxable income on the individual’s tax return and taxed at the marginal tax rate.
• Qualified Charitable Distributions (QCD) – For IRA owners who are older than 70.5 and charitably inclined, there is a provision of the law that allows an individual to “gift” their RMD to charity, called a Qualified Charitable Distribution. Up to $100,000 of a taxpayer’s RMD can be distributed directly to charity. This strategy accomplishes two things: 1) it satisfies the minimum distribution, and 2) the dollar value of the QCD is not recognized as taxable income on the taxpayer’s tax return (it will not qualify as an itemized deduction; essentially, it’s an invisible gift to charity for federal income tax purposes).

Retirement Plan Contributions

• For those investors participating in a company retirement plan, such as a 401(k,) the maximum employee deferral limit in 2019 is $19,000 (plus a catch-up contribution of $6,000 for those age 50 and older). Contributions made on a pre-tax basis help to reduce taxable income dollar-for-dollar. For the self-employed, plans like a solo 401(k) or a SEP IRA allow larger contributions. The maximum deferral limit for these plans is $56,000 in 2019. Same as company retirement plans, pre-tax contributions help reduce taxable income.

Roth Conversions

• TCJA eliminated an attractive provision for Roth IRA conversions which gave taxpayers the ability to undo (i.e., “recharacterize”) a conversion if it ultimately did not make sense. An individual might want to recharacterize if, for example, their $100,000 conversion lost value by the time they had to file their tax return and was only worth $80,000. Under TCJA, this provision is no longer available and Roth conversions are irrevocable. Converting assets from a traditional IRA to a Roth IRA can still make sense and should be evaluated on a case-by-case basis. Dollars contributed to a Roth IRA are done on an after-tax basis and future withdrawals can be made tax-free if certain holding requirements are met. Having assets in a Roth IRA can help diversify the tax characteristics of assets owned by an individual. Conversions for 2019 need to be completed by 12/31/19. Please consult with your tax advisor to see if a Roth conversion makes sense for you.

Annual Gift Exclusion

• The estate tax laws allow each individual to gift up to $15,000 per year per person without a gift tax. The deadline is 12/31 and if you don’t use it, you lose it for that year. This can be an effective way for individuals to gift on a regular basis to family and/or friends without being subject to gift tax. Married couples can combine their gifting powers to gift $30,000 per year.
  • Gifting to 529 Plans – One unique area of the law involving annual gifting includes 529 college savings plans. 529 plans can allow up to five years’ worth of annual gifts in a lump sum (i.e. $75,000) without violating the gift laws or having to eat into one’s lifetime gift exclusion amount. This can be a great way to front-load a 529 account for a family member.

Flexible Spending Accounts (FSA)

• Many employers offer benefits including FSAs which allow employees to set aside cash for qualified health expenses and/or dependent child care costs. Employees make their elections at the beginning of the year and contributions are made on a pre-tax basis. The funds in an FSA must be used by the end of the calendar year or the employee will forfeit any dollars remaining in the account. It behooves account holders to spend down their FSA balances on qualified expenses before 12/31.

Medicare Open Enrollment

• Each year Medicare provides an open enrollment period that lasts for several weeks from mid-October to the beginning of December. The deadline this year is December 7th. This is the time when those eligible for Medicare can make changes to their coverage options. These options include switching from traditional Medicare to a Medicare Advantage plan (Part C) or vice versa, choosing a different Part D prescription drug plan or adding one for the first time, and switching among Advantage plans. There are penalties assessed for not enrolling in Medicare on time if there is no other creditable health insurance coverage being provided. Each person’s situation is a little bit different, so it pays to evaluate the choices to make the best decisions.