Part 2 of 3
THE Tax Cuts and Jobs Act made significant changes to income tax rates and traditional deductions. Let’s look at 10 tips on how those changes affect tax plans for this year ending December 31, 2019. This is the second of a three-part series.
4. Convert your traditional IRA to a Roth IRA
You can convert all or a portion of your assets from a traditional IRA to a Roth IRA. Qualified distributions from a Roth IRA are not subject to federal income taxes if your Roth IRA has been open at least five years and you have reached age 59½. And that’s probably you.
Remember though that you’ll be required to pay income taxes on the amount you previously deducted as contributions plus any earnings. If you don’t convert, pay income taxes and take withdrawals from your traditional IRA when you retire.
5. Utilize stock losses to offset capital gains
If you have capital gains from sale of stocks this year, consider selling underperforming investments to produce capital losses before the end of this year. This move helps offset capital gains with capital losses. You can also deduct up to $3,000 ($1,500 if married and filing separately) of capital losses in excess of capital gains per year from your ordinary income.
If your net capital losses exceed the yearly limit of $3,000 ($1,500 if married and filing a separate return), you can carry over the unused losses to the following year. Note that under the new law, investors will continue to pay long-term capital gains taxes at a rate of 0%, 15% or 20% depending on your overall income. Married couples filing jointly and earning $78,750 or less ($39,375 or less for singles) will pay 0%. Married couples filing jointly earning between that and $488,850 (or that and $434,550 for singles) will pay 15%, while married couples filing jointly and earning more than $488,850 ($434,550 for singles) will pay 20%.
6. Fund a 529 education savings plan
You can give a tax-free gift to a beneficiary by placing money into a 529 education savings plan account. You can make a gift of up to $15,000 per beneficiary annually ($30,000 from a married couple electing to split gifts) without having to fill out a federal gift tax form. You may also be able to contribute up to five years’ worth of gifts ($150,000 from a married couple electing to split gifts) per beneficiary in one year, if there are no other gifts made during that year.
Section 529 plans can be utilized to pay up to $10,000 of tuition annually for the beneficiary’s enrollment or attendance at a public, private or religious elementary, middle or high school, free from federal income taxes. Lovely.
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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation.
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He retired after 50 years of defending taxpayers audited by the IRS, EDD, BOE and other governmental agencies. He published a book on “How to Avoid or Survive IRS Audits.” Readers may email tax questions to [email protected].