Are you worried that you might be hit with a big tax bill at the beginning of next year? If you aren’t sure of your personal tax situation, it’s time to have a conversation with your CPA. You still have options, but it’s best to act before the end of 2019.
Talking with your tax professionals becomes even more important if you are a high net worth taxpayer. You need a more in-depth strategy–one that weighs pros and cons, compares 2019 to 2020, and avoids triggering the alternative minimum tax (AMT). Thoughtful planning is key.
Any good tax planning session starts with big questions that encourage self-reflection. Your CPA can help you work through your answers and ask detailed follow-up questions. So, before you make any moves, we suggest thinking about these topics:
- What are your financial goals, short- and long-term? Depending on your intent, there are various tax advantages to saving for retirement or college as well as securing your assets and legacy through gifting larger sums of money.
- Did you recently or are you anticipating experiencing any major life events like marriage, divorce, relocation, retirement, etc.? Many soon-to-be or current retirees downsize their large home in favor of a smaller, more affordbale home; if this sounds like you, be sure to talk to your CPA about the tax benefits as well as the obvious savings in fewer home expenses.
- How do tax reform and the global markets affect your situation? The Tax Cuts and Jobs Act created some favorable positions for many high net worth taxpayers, especially laws concerning capital gains, deferral strategies, and the 20% pass-thru entity tax deduction. There are still downsides, though, especially in disappearing deductions and the impact of global policy on investment holdings and business interests.
Once you know where you want to go, you can choose the tax tools that best suit your personal situation. Read on to find out which tax policies might work hand-in-hand with your wealth management strategy.
Tax Tools for High Net Worth Individuals
- Defer income. One of the first things you should do is to max out your retirement accounts. As you know, there are several different retirement account options, and each one comes with its own rules and limits. Reach out to your CPA with any questions.
Another way to defer income is to actually delay receiving it until the next year. This only makes sense if you expect to be in a lower tax bracket for 2020. There are two common ways to achieve this: 1) Push your end of the year bonus into the next year and 2) For the self-employed, delay invoicing customers until December 31st; that way you receive the payment in the new year.
- Accelerate deductions. If you think your 2019 tax burden might be too high, there is still time to check for available deductions. The one that gives you the most control is charitable giving. You get to pick the amount, timing, and type of asset. If you choose to donate stock or property, you may get the double tax benefit of deducting the actual donation and avoiding capital gains tax.
It’s also popular to gift stocks or mutual funds to your children or grandchildren. This one is slightly more complicated in that you need to beware of the gift tax at any amount over $15,000 and actively avoid the “kiddie tax” that applies to all children under the age of 18 and also 18 to 23 year olds who are considered full-time students.
Lastly, you may want to frontload your property tax payments (but be aware of the $10,000 cap, especially for high-tax states) and/or bunch health care expenses. If you qualify, these strategies can significantly lower your tax liability.
Remember, you want to weigh your total deduction amount against your AGI to avoid any penalties. Meeting with your tax advisor can provide valuable insight here.
- Investment planning. When talking about investments, most people immediately think of the stock market, but there are several other ways to manage your wealth that don’t involve putting money into Wall Street.
The first way actually involves selling off losing stocks or mutual funds to offset any gains for 2019. This is commonly referred to as “loss harvesting,” and it lets you write-off up to $3,000 for this year.
Better yet, if your capital loss is more than $3,000, it can be used to reduce your taxable income year after year. You can also look into opportunity zone programs if you are selling property to offset capital gains.
Finally, take a look at your health savings account (HSA) if you have one. This vehicle offers a rare triple tax benefit and should be maxed out every year if possible.
Are you ready to discuss the tax-saving opportunities available to you? Contact the experts at Naden/Lean.