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Tax Guy: 3 tax-planning hacks to make before the end of the year

With year-end rapidly approaching, now is the time to make some tax-smart moves for 2019, before the big ball comes down. This is Part 2 of my short list of foolproof year-end strategies for individual taxpayers like you to consider. For Part 1, see here.

Set up loved ones for 0% tax rate on investment income

After the Tax Cuts and Jobs Act (TCJA), the federal income tax rate on long-term capital gains (LTCGs) and qualified dividends from securities held in taxable brokerage firm accounts can still 0%, even for those with relatively healthy incomes. Yes, it’s true.

While your income may be too high to benefit from the 0% rate, you may have children, grandchildren, or other loved ones who will be in the 0% bracket. If so, consider giving them some appreciated stock or mutual fund shares which they can then sell and pay 0% federal income tax on the resulting long-term gains. Gains will be long-term as long as your ownership period plus the gift recipient’s ownership period (before the recipient sells) equals at least a year and a day.

Giving away stocks that pay dividends is another tax-smart idea. As long as the dividends fall within the gift recipient’s 0% rate bracket for LTCGs and dividends, the dividends will be federal-income-tax-free.

2019 tax rate brackets for LTCGs and dividends

single joint HOH*
0% tax bracket

$ 0 – $39,375

$0 – $78,750 $0 – $52,750

Beginning of 15% bracket

$39,376

$78,751

$52,751

Beginning of 20% bracket

$434,551

$488,851

$461,701

*head of household

Who can benefit from that sweet 0% rate?

Good question. It turns out you can be doing pretty well income-wise and still be within the 0% bracket for LTCGs and qualified dividends. For example:

* Your married daughter files jointly and claims the $24,400 standard deduction for 2019. She could have up to $103,150 of adjusted gross income (including long-term capital gains and dividends) and still be within the 15% rate bracket. Her taxable income would be $78,750, which is the top of the 0% bracket for joint filers.

* Your divorced son uses head of household filing status and claims the $18,350 standard deduction for 2019. He could have up to $71,100 of adjusted gross income (including long-term capital gains and dividends) and still be within the 15% rate bracket. His taxable income would be $52,750, which is the top of the 0% bracket for heads of households.

* Your single favorite niece claims the $12,200 standard deduction for 2019. She could have up to $51,575 of adjusted gross income (including long-term capital gains and dividends) and still be within the 0% rate bracket. Her taxable income would be $39,375, which is the top of the 0% bracket for singles.

* If your loved one itemizes deductions, his or her adjusted gross income (including long-term capital gains and dividends) could be even higher, and his taxable income would still be within the 0% bracket.

Key Point: The adjusted gross income figures cited above are after subtracting any certain write-offs allowed on the gift recipient’s Form 1040. Among others, these so-called above-the-line write-offs include deductible retirement account contributions, deductible health savings account contributions, deductions for self-employed health insurance premiums, deductions for alimony payments required by pre-2019 divorce agreements, and so forth. So, if the gift recipient will have some above-the-line deductions, his or her adjusted gross income can be that much higher, and he or she will still be within the 0% rate bracket for LTCGs and qualified dividends. Nice!

Warning: If you give securities to someone who is under age 24, the dreaded Kiddie Tax rules could potentially cause some of the resulting capital gains and dividends to be taxed at the higher rates that apply to trusts and estates. That would defeat the purpose. For details on how the Kiddie Tax works, see this previous Tax Guy column.

Convert traditional IRAs into Roth accounts while you still can

The best profile for the Roth conversion strategy is when you expect to be in the same or higher tax bracket during your retirement years. Given the current political environment, that is certainly a reasonable expectation for many folks! So, the current tax hit from a conversion done this year may turn out to be a relatively small price to pay for completely avoiding potentially higher future tax rates on the account’s earnings. (Hello President Elizabeth Warren.) In effect, a Roth IRA can insure part or all of your retirement savings against future tax rate increases. Nice!

A few years ago, the Roth conversion privilege was a restricted deal. It was only available if your modified adjusted gross income was $100,000 or less. That restriction is gone. Even billionaires can do Roth conversions under the current rules. But who knows how long the current rules will be allowed to last? Good question. It may be a smart idea to do Roth conversions sooner rather than later. This year would qualify as sooner.

Take advantage of home sale gain exclusion break while you still can

Home prices are on the upswing in many areas. More good news: gains of up to $500,000 on the sale of a principal residence are completely federal-income-tax-free for qualifying married couples who file joint returns. $250,000 is the gain exclusion limit for qualifying unmarried individuals and married individuals who file separate returns.

To qualify for the gain exclusion break, you normally must have owned and used the home as your principal residence for a total of at least two years during the five-year period ending on the sale date. You’ll definitely want to take these rules into consideration if you’re planning on selling your home in today’s much-improved real estate environment.

How long will the home sale gain exclusion break be allowed to last? Another good question. (President Warren, is that you knocking on my door?)

Don’t overlook estate planning

The unified federal estate and gift tax exemption for 2019 is a historically huge $11.4 million, or effectively $22.8 million for married couples. Even though these whopping big exemptions may mean you are not currently exposed to the federal estate tax, your estate plan may need updating to reflect the current tax rules. And you may need to make changes for reasons that have nothing to do with taxes, like all the various life changes that can unexpectedly happen.

In a couple weeks, I’ll supply specific estate planning advice for those who aren’t currently worried about exposure to the federal estate tax and those who are worried that the current ultra-favorable federal estate and gift tax rules might be on life support. So please stay tuned for that.

Next up

In next week’s column, we’ll cover some year-end tax planning ideas for small businesses and their owners. So please stay tuned for that too.