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Smart year-end tax planning moves

By: Kimberly Lankford

You still have time to make smart tax moves for 2019 that can reduce your taxable income, take advantage of tax breaks, meet important deadlines, and improve your financial situation for the future.

Boost your retirement savings and reduce your taxable income. You have until December 31 to save in your 401(k) or other retirement plan at work. You can contribute up to $19,000 in 2019 (or $25,000 if you’re 50 or older). Pre-tax contributions will reduce your taxable income and grow tax-deferred until you withdraw the money in retirement. Or you may be able to make Roth 401(k) contributions, if offered by your employer, which aren’t pre-tax but can be withdrawn tax-free in retirement. Contact your plan right away to have the extra money deducted from your last few paychecks of the year.

Spend money from your flexible-spending accounts. If you have a health-care or dependent-care FSA, you usually have to use the money in the account by year-end or else you lose it (although some employers let you roll over $500 from one year to the next or give you until March 15 to use money in a health-care FSA). Find out your employer’s deadline, and consider making appointments with the dentist, doctor and eye doctor. You can also use FSA money to get new glasses, prescription sunglasses, contact lenses, pay for prescription drugs, and buy eligible drugstore items (such as sunscreen with an SPF of 15 or higher). See the FSA Eligibility List at FSAStore.com for more information about eligible expenses. If you have extra money in a dependent-care FSA, see if you have additional expenses that could qualify — summer day camp and before-school and after-school care for children under 13 can be eligible if you and your spouse work, for example.

— Plan ahead for charitable contributions. Fewer people itemize their tax deductions after the standard deduction nearly doubled last year. If you don’t itemize, you can’t deduct your charitable contributions. In 2019 the standard deduction is $12,200 for individuals, $18,350 for head of household, and $24,400 for married couples filing jointly. If your itemized deductions are close to the cut-off, you may want to give more money to charity this year and itemize, then give less next year when you take the standard deduction. If you bunch your contributions in years when you itemize, consider contributing to a donor-advised fund — you’ll be able to take a tax deduction in the year you contribute, but will have an unlimited amount of time to decide which charities to support. Many brokerage firms and community foundations offer donor-advised funds.

Plan your RMD strategy. If you’re 70 ½ or older, you generally have to take required minimum distributions from your 401(k) and traditional IRAs by December 31 and pay taxes on the withdrawals. This is a good time of year to start thinking about which investments you’re going to tap. If you turned 70 ½ this year, you have until April 1, 2020, to take that first RMD, but then you’ll also have to take next year’s RMD by December 31, 2020. Consider the tax ramifications of having two RMDs in one year before deciding whether to delay the first required withdrawal or to take it before the end of 2019 instead.

Give your RMD to charity. People who are 70 ½ and older can give up to $100,000 per year tax-free from their IRA to charity, which counts toward their RMD but isn’t included in their adjusted gross income. This can be a good way to get a benefit for your charitable gift if you don’t itemize. The money must be transferred directly from the IRA to charity to stay out of your AGI; you can’t withdraw it yourself first. Contact your IRA administrator to find out about its procedure for making this “qualified charitable distribution.”

Save for college. Many states offer an income-tax break for contributing to a 529 college-savings plan, and you usually have to make the contribution by December 31 to count for that year’s taxes (although some states give you until April 15 of the following year). See SavingforCollege.com for more information about each state’s rules.

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