With 2019 passing, let’s take a look at what we need to do before December 31.
- Maximize retirement contribution to increase tax deduction.
For those that want to receive deductions through retirement pension plans, all plans must be set up before December 31. Contributions can be made just before the due date of the tax return on October 15, 2020, if you’re filing late. It is crucial to note that the plans must be in place for the contribution to be allowed. For contributions to a SEP-IRA or IRA account, you can contribute next year when the tax report is due. However, in the case of 401(k), all distributions must be completed by the end of 2019, so that they can be properly deducted from the payroll within that tax year. Thus, it is essential to confirm with Human Resources the 401(k) contribution amount to maximize it for the year before the date passes.
For non-qualified funds, it is pivotal to review the year’s investment performance and in the case, there is an investment resulting in a loss, it is best to realize the loss by liquidating that investment to receive tax deductions for the losses.
- RMD distribution requirement before 12/31/2019
If you are over 70.5 years old, you must withdraw a certain amount designated as RMD (Required minimum distribution) from the qualified funds (i.e., IRA, Pension, or other retirement accounts) and recognize the distribution as income for the year. If you do not withdraw the RMD within the year, the IRS will require you to pay 50 percent of the RMD amount as a tax penalty. Thus, it is increasingly urgent to review all retirement accounts to make sure you have met the RMD needs.
Nonetheless, for those over 70.5 years of age who are either still in the company, running a business, or individuals who do not own more than 5% percent of a company’s equity, are exempt from the RMD obligation until they retire. But if you own more than 5 percent of the company, you should still withdraw the proper RMD amount when you turn 70.5 years old, even if you are still working and not yet retired.
- Review investment performance and offset the gain with the loss.
If the total deductible amount is not higher than the standard deduction ($12,200 for single taxpayers and $24,400 for joint taxpayers), then consider combining this year’s donation with next year’s donation so that it can be above the standard deduction amount and receive more than just standard deduction amount which is another way to receive greater tax deductions.
As usual, when setting up a tax plan or a financial plan, we recommend that you discuss your situation in detail with an experienced financial consultant to avoid making financial mistakes and reduce possible losses.