Articles

There’s Still Time in 2020 to Reduce Your 2019 Tax Bill by Jeffrey M. Mutnik, CPA/PFS

Posted on February 13, 2020

Tax season has begun and, for the most part, your 2019 tax liabilities are already set in stone based on the income you earned and the actions you took before Jan. 1, 2020. However, depending on your unique circumstances, there are a few ways that you can still lower your tax bill for 2019 before filing your returns in April.

Contribute to Retirement Accounts

You generally have until April 15, 2020, to make a 2019 contribution to your traditional IRA and receive a tax deduction for that amount. Unlike Roth IRAs that allow for tax-free withdrawals in retirement, distributions from traditional IRAs are fully taxable. For 2019, the maximum tax-deductible IRA contribution is $6,000, plus an addition $1,000 if you are age 50 or older.

If you are self-employed, you have until April 15 of this year to make a tax-deductible employee contribution to a solo 401(k) that can lower your tax liabilities for 2019. The April 15 deadline also applies to any employer match you wish to give yourself. It is important to remember that employee contributions to 401(k) plans grow tax-deferred until the account owner reaches retirement age. At that point, withdrawals will be taxed as ordinary income.

Distribute Trust Income to Beneficiaries

Trusts are taxed at the highest individual rate of 37 percent, plus 3.8 percent net investment income tax, at far lower income levels than individual taxpayers. With this gap in income tax treatment, a trust will generally pay much more in taxes on the same amount of interest income reported by an individual.

To eliminate this risk and minimize overall federal income tax liabilities, calendar-year trusts have until March 5, 2020, to distribute investment income to their beneficiaries and treat those transactions as if they occurred in 2019. With this strategy, trusts can reduce their taxable income and pass that income to trust beneficiaries, who may be in lower tax brackets and will therefore pay less tax than the trust would on those distributed amounts.

About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director of Taxation and Financial Services with Berkowitz Pollack Brant Advisors + CPAs, where he provides tax- and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.