155R | Year End Tax Planning With Sean Mullaney

year end tax planning
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Sean Mullaney joins the show to discuss year-end tax planning. He goes into deductions, self-employment income, and how to get the most from your deductions.

Insights From Leslie Tayne

In this week’s episode, Leslie has a very frank conversation with Brad and Jonathan about balancing family and money as a single parent.

If you haven’t listened yet, you can find the full episode here.

Leslie has overcome an abusive financial relationship to provide for her children. Now she is a beacon of hope for those going through dark times because she was able to build a great life for her family.

However, the idea of a perfect balance is something she pushed back on. It was impossible to be the best mom and best businesswoman at the same time. Some days she focused on her children. On others, she focused on the business.

She did the best she could based on the value that was available in her life.

For MK, this struck a personal note. She was raised by a single mother until her stepdad joined the picture. Both were incredibly hard-working and MK sees many similarities between Leslie and her own mother. Her mother taught her the importance of hard work and living within her means.

Looking back, the best thing that they gave me was a hard work ethic and seeing that hard work does pay off.

Sports And Financial Goals

Leslie also touched on the idea that creating limits for your spending on sports and other activities is okay. In fact, it is important to analyze your reason for committing to this spending.

Every family needs to look at their own priorities and what they are truly getting out of this.

Take a minute to evaluate your own reasons for helping your kids participate in sports.

Tax Planning

As the end of the year approaches, it is time to take a look at your tax strategy. Sean Mullaney, the FI Tax Guy, shared many helpful tips. Of course, you should consult a tax professional about your unique situation but this can be a place to start the conversation.

Deductions

In the post-tax reform world, deductions are significantly easier. Most Americans will take the standard deduction but some should choose to itemize.

The standard deduction for 2019 is $12,200 for singles and $24,400 for married couples filing jointly. The big items for itemization include home mortgage interest, state and local taxes, and charitable contributions. Depending on your situation, it may make more sense to itemize.

For example, let’s say you are single and you’ve already paid $10,000 in state tax and given $5,000 to your church. In this case, it makes more sense to itemize.

Anything you plan to deduct needs to be completed by December 31. However, there is some flexibility on this date for retirement accounts.

Listen: How to Fund Your Child’s Roth IRA and Other Tax Optimizations with the FI Tax Guy

Tax Loss Harvesting

If you have a stock that lost money this year, then you can use it to offset your capital gains. Simply sell-off this losing stock to offset your capital gains.

State Tax Deductions

Currently, there is a $10,000 cap per year for this deduction.

Related: How To Plan Your Itemized Deductions

Accelerating Business Payments

The deadline for this deduction is December 31. If you are a solo entrepreneur with a Schedule C business, then you recognize deductions when you make the payment.

You can pay for 2020 expenses in 2019 to accelerate payments. For example, you can pay for your January 2020 rent in December 2019. The primary benefit would come if you plan to be in a lower tax bracket for 2020. Additionally, there is the time value of money benefit.

Exemptions VS Dependants

Since tax reform, there are no more exemptions on your federal tax return. However, dependants still matter. Most people will receive a child tax credit of around $2,000 for kids under the age of 16.

Since the terminology changes, tax calculators might still use exemptions as an input term. If you are using a tax projection calculator, then check the output. If you are receiving too much for the child credit in their estimate, then you might need to adjust your exemptions.

Related: Best Places To Get Your Taxes Done!

Roth Conversions

If you are planning to make more money in 2020, then you should consider making your Roth conversions in 2019. A Roth conversion is a planned taxable event that many in the FI community choose to undertake.

Related: How And Why To Set Up A Roth Conversion Ladder

Tax Protections

Although tax planning is important, it is also important to protect your finances. Here are some more tips from Sean.

Required Minimum Distributions

If you are 70.5 or have inherited a retirement account, you will be required to take minimum distributions each year. You need to withdraw this RMD by December 31. Otherwise, you could be subject to a 50% penalty.

Beneficiary designations

It is critically important to have your beneficiary designations up to date for your retirement accounts. Now is a good time to double-check these documents.

IRS PIN

The IRS Personal Identification Number is a way to protect against identity theft. It is available in 19 states and the District of Columbia. You can apply for this PIN through an application on the IRS website. Once you sign up for the program, the IRS will give you a unique pin for each year. You will submit this PIN when you submit your tax return.

Otherwise, criminals may try to steal your tax return. Check out Sean’s post to learn more.

Note: After recording, the IRS temporary suspended applications to the IRS PIN program until January 2020. In January 2020 residents of 19 states and the District of Columbia can apply through the IRS website to obtain a PIN for use filing 2019 tax returns.

Tax-Advantaged Savings

If you are using tax-advantaged retirement accounts, then you usually have until April 15 of the following year to make your contributions.

Side Hustle Taxes

If you have a side hustle, then you have more ways to save.

Solo 401(k)

This is a great option if you are self-employed or have a side hustle. You will need to establish the account by December 31 but you may have some flexibility on the funding deadline.

SEP IRA

Another option for optimized side hustle savings is the SEP IRA. You have until October 15 of the following year to fund this account. Although there are drawbacks, such potential lower contribution limits, it could be a good last-minute option.

Related: Retirement Plans For The Self Employed: SEP IRA Vs Solo 401(k)

Tax Payments

Making accurate tax payments throughout the year is important. Otherwise, you could be penalized by the IRS.

To avoid any underpayment penalties, abide by the safe harbor provisions.

Start by looking at your 2018 tax return and find the total tax. If you made less than $150,000, then you need to pay at least the same total tax again in 2019 to avoid a penalty. Preferably, this would be evenly distributed throughout the year. If you made more than $150,000, then multiply your total tax of last year by 1.1.

If you misjudge and are penalized, then you may be able to have the penalty waived by filing a petition with the IRS.

Related: How Estimated Quarterly Taxes Work

How To Connect

You can connect with Sean through his website, the FI Tax Guy. Through Twitter @seanmoneyandtax. Or through his financial planning firm Mullaney Financial and Tax.

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ChooseFI has partnered with CardRatings for our coverage of credit card products. ChooseFI and CardRatings may receive a commission from card issuers.
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