Guidance

RESOURCES TO HELP SHAPE YOUR FINANCIAL FUTURE

We have now had the past year to assess the impact of 2017’s Tax Cuts and Jobs Acts (TCJA) and to understand how our own tax situation was affected. We check our withholding, add up our capital gains and losses, and compete our list of tax deductions we have not yet funded. We count down the days until the end of the year, checkbook in hand, pen ready, our financial advisor on speed dial, poised to make those smart year-end tax decisions.

As a primer, and to help you get ready for the season, here are five smart 2019 year-end tax planning moves to consider.

Bunch Deductions in Alternate Years
Because of the larger standard deduction and the limitation on state and local tax (SALT) deductions since the passage of TCJA, most individual taxpayers will now find that their standard deduction will be greater than their allowable itemized deductions. For example, in 2019, medical expenses are only deductible to the extent they exceed 10% of adjusted gross income (AGI), up from 7.5% in 2018. Therefore, you should consider bunching medical and charitable itemized deductions in specific tax years to get the most out of your deductions and possibly exceed the standard deduction.

Consider Charitable Contributions and Donor Advised Funds
A similar strategy to the bunching of deductions is the use of donor advised funds (DAFs) to make charitable contributions. The number of funds has increased significantly since TCJA because they allow a taxpayer to “prefund” their charitable contributions into a single tax year and grant the payout to charities in future years. Always a sensible alterative to a private foundation, DAFs have now become a favorite charitable giving tax strategy for taxpayers. In fact, Wintrust has had its own DAF for 15 years, establishing the “Generations in Giving” program in 2004. To learn more, contact Ethel Kaplan at
ekaplan@wintrustwealth.com or talk to your financial advisor.

Open a Health Savings Account
A Health Savings Account (HSA) should be considered to allow you to take advantage of medical deductions that you otherwise would not have had. Some call this a turbo-charged IRA because it offers three tax savings benefits: first, contributions are currently tax deductible; second, the earnings compound tax-free; and third, withdrawals are tax-free when the money is withdrawn for medical expenses. After age 65, withdrawals can be used for non-medical expenses as well. Consider HSAs as a form of long-term care insurance, which grow tax free to be used in retirement. To contribute you must be enrolled in a high-deductible health plan. The 2019 contribution limit is $3,500 for an individual coverage and $7,000 for a family, with an additional $1,000 contribution allowance for those 55 or older. Contributions for 2019 can be made up until April 15, 2020.

Contribute to Your Retirement Plan(s)
For 2019, the maximum 401(k) or 403(b) contribution amount is $19,000, and if you are 50 years or older, you can contribute an additional $6,000. Understanding your marginal tax bracket is important to determine your tax savings, including whether to consider a Roth 401(k) or Roth conversion. A Roth has several advantages, and while your 2019 contributions will not be tax deductible, your money grows and can be withdrawn tax-fee. In addition, unlike an IRA, you can continue to fund a Roth IRA after age 70 1/2 and you never have to take required minimum distributions from a Roth. A Roth conversion should be considered in a year of lower income when your marginal tax bracket is lower. Spreading a Roth conversion over several years to avoid the higher tax brackets is another sound strategy.

Manage Capital Gains Taxes via Qualified Opportunity Funds
The Qualified Opportunity Zones program was enacted as part of TCJA to encourage long-term private investment in economically distressed communities. The program provides individual and corporate investors with the opportunity to defer and partially eliminate capital gains by investing any portion of your capital gains into a qualifying project through a qualified opportunity fund (QOF). It provides three significant tax benefits: investors’ capital gains are deferred until the QOF is sold or until December 31, 2026; investors receive a step-up in basis of 10% or 15% of the original capital gain depending on whether you invest for five or seven years; and if the QOF is held for longer than 10 years, the investors pay zero capital gains taxes on the appreciation of their investment. These benefits are attractive to long-term investors with capital gains which can be invested within 180 days. Capital gains which pass through a partnership or are the result of netting of business asset sales are deemed sold on the last day of the year, so for those gains the taxpayer has until late June of the following year to make the QOF investment to meet the 180-day requirement.

To learn more, and to ready yourself for year-end tax decisions, contact your financial advisor