Make the Most of Tax Season by Getting a Jump Start Now

This month, we’re welcoming Rick Foster, CPA, as a guest contributor to the CWM blog. As our clients’ central advisor, we regularly partner with Rick and his team to offer comprehensive financial planning services to help them reach their lifestyle goals.

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For many, the months of November and December conjure images of our family gathered around the Thanksgiving table, or the glow of holiday lights adorning the houses on our block.

While I also take joy in the promise of spending time with loved ones at this time of year, as a Certified Public Accountant, I can’t help thinking about another important (and perhaps not as exciting) element of the season: tax planning.

Before your schedule becomes overrun with holiday events and vacations, I encourage you to set aside a few moments with your financial planning team to make sure you are poised to make the most of your 2019 tax benefits by the time you file in the spring, and also in preparation to set up your withdrawal strategy for 2020.

Here are some questions you can ask your financial advisor, accountant and estate planner to get started:

How can I be sure I’m in the right tax bracket for my situation?

The 2017 Tax Cuts and Jobs Act, which went into effect last season, increased the bracket thresholds across the board to offer lower tax rates. If you were a married couple earning $165,000, you would have owed 28% of your taxable income in 2017. For the 2018 tax season, the revised income brackets put you at a 22% tax rate.

This change will also affect your short-term capital gains tax on profits from the sale of an asset held for one year or less. For short-term capital gains, the rate will equal your ordinary income tax rate, as well (in this example, 22%).

But what about taxes on long-term capital gains? These refer to profits from the sale of assets held for—you guessed it—more than a year. The rates on long-term capital gains fall into three brackets: 0%, 15% or 20% depending on taxable income, with most people fall into the 15% bracket ($78,751 to $488,850 for married couples).

For either short- or long-term capital gains, it may be in your best interest to use investment capital losses to offset some of your gains in order to decrease your tax bill. Now’s the time to discuss your buy-sell options with your financial advising team to determine the best path for you.

Will I have any tax credits?

A tax credit is an incentive that allows individuals to subtract from what they owe in taxes, depending on the amount of the credit. For example, if you purchased a qualifying electric vehicle (EV) this year, such as a Tesla, you’ll receive up to $7,500 in tax credits. So, if you end up owing a total of $10,000 in taxes, you’ll only need to pay $2,500. The specific credit you’ll receive depends on the size of the vehicle and its battery capacity.

One important thing to note about the EV tax credit is that it’s non-refundable. If you only owe $6,000 in taxes at the end of the year, you’ll forfeit that extra $1,500 of your $7,500 tax credit. In this situation, the best course of action would be to incur more capital gains between now and the end of the year, so you can put the rest of the tax credit toward your now-higher tax bill. Your financial advisor can help you identify which assets to sell to help reach your individual tax goals.

What if I don’t need my required minimum distribution?

Once you turn 70 ½ years old, you are required to take out a percentage of your IRA’s prior year-end balance – a Required Minimum Distribution (RMD) – as taxable income. But if you have income from other sources and don’t need to use your RMD for any expenses, I recommend setting up a charitable donation directly from your IRA, instead. In order for the funds to be considered tax-exempt, it’s important that the donation is funded directly from the IRA and is not distributed to you beforehand. This way, you lower your taxable income while benefiting a charitable cause.

Should I take the standard deduction or itemize?

Beyond changing the tax brackets, the 2017 Tax Cuts and Job Act nearly doubled the standard deduction from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples. This benefits many who don’t incur big expenses, like large medical bills or a new vehicle. However, for individuals who were accustomed to itemizing deductions for costs exceeding $6,350 but under $12,000, this poses a disadvantage. One way to maximize your itemized deductions under this new rule is to plan to group your larger purchases into a shorter time frame, so you can itemize expenses like your teenager’s braces and your hip replacement surgery within the same year, lowering your taxable income.

How will my estate value affect my tax rate?

The federal government offers a tax exemption on estates and gifts up to $11.4 million per individual, and $22.8 million per married couple. This means that most Americans who inherit large estates will not pay taxes on the first $11 million to $22 million.

However, Washington and Oregon are two of five states that follow their own gift and estate tax exemption laws. In Washington, the estate tax exemption is $2.193 million per individual—significantly lower than the federal rate. In Oregon, the exemption is restricted to the first $1 million of the estate.

Regardless of where you live, it’s important to have your estate assessed every year to confirm whether your assets have appreciated or depreciated in value. Any change in net worth may affect your estate tax rate, and how you and your financial planning team choose to structure your trust if you have one in place.

I know it’s tempting at this time of year to curl up by the fire with a hot toddy or warm mug of cocoa, but before you get too comfortable, reach out to your financial planning team to position yourself for success come tax season. You’ll thank me when you see your return in the spring!

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Article written by Rick Foster, CPA and Partner at EFG CPAs, PLLC.

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Comprehensive Wealth Management, LLC does not offer tax advice. Please consult your CPA for specific tax questions. This article has been prepared and distributed for informational purposes only and is not a solicitation or an offer to buy any security or investment or to participate in any trading strategy. The opinions voiced in this material are for general informational purposes only and are not intended to provide or be a substitute for specific professional financial, tax or legal advice or recommendations for any individuals. Individual circumstances vary. Information is based on sources believed to be reliable. Please consult a financial professional prior to investing.