Personal Finance

2019 Year-End Tax Tips (And Some Surprising Deductions You Can Claim)

With the holiday season drawing to a close, it’s time to start thinking about the next major season all Americans look forward to: tax season! All joking aside the end of the year is actually a great time to start considering your taxes and making moves to potentially reduce your bill. That’s right, while you’ll have until April 15th, 2020 to file your 2019 return, there are some actions you may want to take before January 1st.

Whether you want to plan ahead and reduce your tax bill now or just start off 2020 on the right foot, here are a few last-minute tax moves to make along with some surprising deductions you should know about.

Last-Minute Year-End Tax Moves to Make

As the end of the year rolls around, there are a few things you should consider regarding your taxes. From making moves that will likely reduce your bill to ensuring you’re taking full advantage of other breaks, here are a few things you can do right now. But first…

A Note About the Standard Deduction 

Before we dive into some of the deductions you can take advantage of, it’s important to note one big change that happened a couple of years ago that will continue to impact those filing their 2019 returns. As a result of the Tax Cuts & Jobs Act, the standard deduction that filers are offered doubled and has since been further adjusted. For 2019 the standard deduction for single filers is $12,200 and the standard deduction for married couples filing jointly is $24,400.

Why is this important? Well, this major change drastically reduced the number of Americans who will find it more lucrative to itemize deductions — something that’s required for many of the deductions we’ll discuss.  Just keep this in mind as we explore different deduction options.

With all that said, even if you do plan on taking the standard deduction, that is separate from various business deductions you may claim. Additionally certain income deductions (sometimes known as “above-the-line” deductions) such as those you may receive from retirement contributions are also not affected by whether or not you take the standard deduction or itemize. Therefore it’s important to look at all of the deductions you qualify for and determine which are “stackable” when deciding what the best tax plan is for you.

Contribute to your retirement account

Perhaps the best way to close out your tax year and reduce your impending bill is to contribute to your retirement account. When you’re putting money in a traditional IRA, your contributions can be deducted from your income, thus reducing your taxable income. This strategy is so popular that the IRS actually gives you until April 15th (Tax Day) to make contributions and apply them to your previous year’s taxes.

Of course you will still need to adhere to account contribution limits. For example, for the 2019 tax year, IRA contributions are limited to $6,000 for those under the age of 50 and $7,000 for those over 50. Also remember that limits are per person, not per account. Finally your income may also be a factor in how much (if any) of your contribution you can deduct. If you want to double check to see if you qualify, be sure to visit the IRS website.

On top of the regular tax benefits that come with retirement savings, you may also qualify for what’s known as a Saver’s Credit. This program allows households earning below a certain threshold to receive 10%, 20%, or even 50% of their retirement contributions back in the form of a tax credit. Not to be confused with a deduction that subtracts from your taxable income, a credit actually directly reduces the amount of taxes you owe. Unfortunately, don’t expect this credit to automatically result in a healthy refund — this benefit will cap out once the amount of tax you owe reaches $0 (although you may still be entitled to a refund overall if you’ve paid more than required during the year).

As for Roth IRAs, since contributions are post-tax, you won’t get the same deduction you’d receive with a traditional IRA. However, depending on your income, you may still qualify for the saver’s credit, making this plan a real win-win.

Donate to charities and non-profits

Another way to potentially reduce your 2019 tax bill is to donate to qualifying charities and non-profits. Whether you have an organization in mind or want to use tools like Charity Navigator to choose a worthy cause, your donations may be tax deductible. However you’ll want to verify that your giving is deductible by conducting a search on the IRS’s Tax Exempt Organization site.

Keep in mind that it’s not just cash givings that are tax deductible. Donating some of your used goods to charities like Goodwill, Salvation Army, and others may also help reduce your bill. Most of the time it will be up to you to peg a value for your donations, but be ready to defend that figure just in case. For example the IRS says you must use the “fair market value” to determine your deduction. In other words, even if you paid $100 for a pair of jeans at the time, claiming they’re still worth that amount might be a stretch (no pun intended). Luckily, if you’re really lost, Goodwill does have a basic donation value guide you can apply or you can inquire about a similar resource at your charity of choice.

Sell losing stocks 

Although it’s been a fairly strong year on Wall Street overall, there’s still always the chance that you have some losers in your portfolio. If you want to let go of your shares and reduce your tax bill at the same time, you may consider selling them before the end of the year and counting them as capital losses.

Not only can these losses be used to offset any capital gains you may have earned for the year but may also be able to offset taxable income. If your capital losses exceed your gains, you can deduct those losses from your income, up to $3,000 per year. However, if your losses are deeper than that, you can carry your losses forward, deducting up to the same $3,000 a year.

Keep in mind, in order for losses to qualify for the current tax year, stocks will need to be sold on or before December 31st. On top of that, you cannot claim a loss on a stock if you repurchase the same stock fewer than 30 days after selling. So, if you offload your losers on December 31st, you can’t rebuy them until at least January 30th.

Make a bonus mortgage payment

As mentioned the doubling of the standard deduction means that far fewer homeowners will likely be deducting their mortgage interest on their taxes for 2019 as they did earlier in the decade. Still, if you do plan on itemizing, you might consider making an extra payment on your mortgage before the year’s end to increase this deduction. Plus, if you get in the habit of making extra payments on a regular basis, you might even be able to shave off some time on your repayment and end up saving on interest in the long run — just a thought.

Mind your flexible spending accounts

While this one won’t actually deduct from your tax bill, it could prevent you from wasting money. A Flexible Spending Account (FSA — also referred to as a Flexible Spending Arrangement) is a pre-tax account set up through your employer that sets aside a portion of your paycheck to create a fund that can then be spent on health care, dental care, etc. As a result there are tax benefits to utilizing these accounts during the year. The problem is that these accounts are “use it or lose it” and technically expire on December 31st.

There is some good news as there are exceptions to that deadline. For one, your employer may offer a “grace period,” giving you until March 15th of the following year to use your funds. Alternatively your employer may have a carry-over policy, enabling you to roll up to $500 of your leftover funds over to the next year. The catch is that employers may offer one of these options but not both — and some might not have either. Therefore, if you have an FSA, you’ll definitely want to check and see what your options are.

See if you can hold off on your year-end bonus

Speaking of your employer, if you’re due for a year-end bonus and are worried about your 2019 tax bill, you may want to inquire about holding off your payment. As SuperMoney notes some employers may give you the option to withhold your bonus until January so you can worry about the tax implications in April 2021 instead. Yes, this only kicks the can down the road but it may make sense depending on your 2019 income and how close you are to moving up into the next tax bracket.

Surprising Tax Deductions You Should Know About

Beyond many of the common ways individuals aim to lower their tax bills, there are actually some surprising deductions to be found in the tax code as well. At the same time some of these lesser-known rules have been altered thanks to the recent tax reform, leaving only self-employed individuals eligible to receive them. With that in mind here are some interesting deductions up for grabs — first for the self-employed and then for everybody else.

Tax deductions for self-employed individuals

Airline baggage fees

If you’re self-employed you probably already know about deducting various business travel-related expenses. But did you know that, among other things, you can deduct airline baggage fees? Those who can get free checked bags thanks to status or can pack light are still better off doing so — but it’s nice to know this is an option as well.

Tax preparation costs

Perhaps one of the most ironic tax deductions available is the ability to deduct what you pay to prepare your tax returns. Previously the IRS actually allowed numerous individuals to deduct these fees but the Tax Cuts & Jobs Act has now made them exclusive to self-employed workers. These fees can include e-filing costs or the amount you pay to a tax preparer (or the amount you pay for a service like TurboTax) and are deducted as a business expense. 

Professional organization membership dues

Another business expense that self-employed individuals may be able to deduct from their taxable income are membership dues paid to professional organizations. Eligible organizations may include the likes of trade organizations or chambers of commerce. Lest you go thinking that just any kind of club membership will count, The Balance notes that fees paid for such things as airline lounge clubs, country clubs, and the like are not deductible.

For everyone else

Volunteering expenses

There’s a classic episode of the sitcom Friends in which Joey and Phoebe debate whether or not there’s such a thing as a selfless act. Well, in addition to the feel-goods you may receive from volunteering, it turns out you may also be able to claim a tax break. Although the time you spend volunteering won’t result in any monetary tax gain, you can deduct any out-of-pocket expenses you may have incurred as a result of your work. This could include mileage driven for the charity (or actual gas costs), parking fees, and other incidental costs you might shell out for as part of your participation. Of course only non-reimbursed costs can be deducted, so no double dipping.

Loans you made that weren’t (and won’t be) paid back

If you loaned money to a friend that ended up skipping town, you may be able to write off that bad loan on your taxes. According to the IRS, only whole “worthless debts” are deductible and not partial losses. They also note that you “must establish that you’ve taken reasonable steps to collect the debt,” but do not need to go to court to prove the debt is worthless. Additionally you may only subtract the debt in the year it became worthless but don’t need to wait until the debt is due to determine its worthlessness.

For more specific instructions on claiming this deduction, be sure to visit the IRS’s page on the subject.

Gambling losses*

In many cases the government uses taxes to dissuade vices and encourage certain behaviors — and yet the ability to write-off gambling debts remains. I put an asterisk on this one because there is a pretty big catch: your losses can only offset winnings you’ve also reported. Furthermore you must keep records of both your winnings and losses by providing “receipts, tickets, statements, or other records.” Lastly you can only be a “casual gambler’ and not in the business of gambling to qualify. On second thought, maybe it’s better to skip the casino and look elsewhere for tax deductions instead.

Medical-related home improvements

Under most circumstances, the costs associated with renovating your home aren’t tax deductible. However, according to 1040.com, home renovations that are medically required — such as adding ramps, modified stairways, or other alterations — may be deductible if they do not increase the value of your home. What’s more the site also notes that  costs of “maintaining and operating medically required equipment installed in the home, such as electricity, may also be deducted.”

Even though tax season won’t reach a fever pitch until March or so, it’s important to remember that the tax year ends right along with the calendar year. Because of this, if you’re looking for some last-minute ways to lower your impending tax bill, now is the time to consider some of these moves. Additionally it’s always worth looking into some of the lesser-known deductions you may be eligible for and start to get the necessary documentation together now before the April deadline arrives. So Happy New Year — and Happy Tax Season!

Also published on Medium.

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