"Worried, you betcha ya’... Discouraged, I don't know; Every time I see a 1040 ... Out of my pocket it goes." — from "1040 Blues" as performed by Robert Cray
Was your recent tax bill dramatically different than what you expected?
If so, there are several things you may want to consider as we progress through the 2019 tax year.
Why, you may ask, is an investment advisor writing about taxes? Good question. The answer is that it's not what you make that matters; it's what you get to keep. Investing without considering tax implications is foolhardy. Savvy investors and the best investment advisors think as much about taxes as they do about investments. Investment results are not knowable in advance, but the impact of tax regulations can be.
We recently added a CPA to our team, who prepares returns and crafts tax strategies for our clients. As we conferred throughout the year, here are a few tax season takeaways.
First, many folks were unprepared for how the changes in the treatment of itemized deductions impacted their tax bill. Charitable giving, in concert with other deductions, that falls short of the new $24,000 standard deduction (for married couples filing jointly) now provides no tax benefit. Say you gave your church $100 every Sunday all year (for a total of $5,200 contributed). Imagine also that your itemized deductions, including charitable giving, totaled $17,500.
This year you were not able to deduct that $17,500 from your adjusted gross income, as it did not eclipse the $24,000 standard deduction. Possible remedies may include Qualified Charitable Distributions, which allow you to donate some or all of your Required Minimum Distribution. A QCD is taxable neither to you, the giver, nor to the receiving charity, and is not added to your gross income. Or lumping charitable contributions into one year to reach an amount in excess of the standard deduction. Say you were planning to give your church $50,000. You may want to give the total amount in one year to take advantage of a larger deduction, rather than give $10,000 for five years. Naturally, every investor's situation is unique, so you'll want to confer with your advisor to make sure strategies are appropriate for your individual situation.
Another step that taxpayers may take in 2019, that perhaps they missed last year is to ensure that their withholding amount on income is on target. Many people did not alter their withholding from IRA distributions like RMD's or from their Social Security income. Thus, they were surprised when their tax bill was quite a bit different than what they expected. Some folks got more money back than they anticipated and those dollars could have been working for them throughout the year.
Margaret R. McDowell, ChFC, AIF, author of the syndicated economic column "Arbor Outlook," is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.