People: Alumni

5 tips on tax preparation

By Alan R. Sumutka ’72

Be aware of federal law changes

Contribution limits increased for IRAs (Traditional or Roth) to $6,000 (from $5,500) and for 401(k)/403(b) plans to $19,000 (from $18,500). The medical expense floor increases to 10 percent (from 7.5 percent). The Affordable Care Act penalty for failure to maintain health insurance was repealed (though New Jersey instituted its own penalty). Estates valued at $11,400,000 (up from $11,180,000) escape estate taxation.

“Bunch” itemized deductions

If itemized deductions are below the standard deduction (single = $12,200; married = $24,400), alternating their use can save taxes. For example, make no charitable contributions and take the standard deduction in 2019, but double/maximize contributions (consider a donor-advised fund) to itemize deductions in 2020.

Take advantage of tax-advantaged education

Under certain conditions, contributions and earnings from Section 529 savings plans, Coverdell accounts and Roth IRAs are tax-free when used to pay for primary, secondary and/or college education; the American Opportunity Tax Credit and Lifetime Learning Credit provide tax relief for undergraduate and graduate studies, respectively; and student loan interest is deductible.

Plan well for retirement

Before required minimum distributions (RMDs) begin at age 70½, retirees lower taxes by delaying Social Security (to increase future benefits) and taking tax-free withdrawals from after-tax savings. However, at 70½, RMDs can cause higher income taxes and Medicare premiums. To reduce RMDs make Roth conversions or take distributions from tax-deferred accounts before 70 ½.

And also for post-RMD

After 70½, taxpayers with charitable intentions can reduce RMDs (and income taxes, Medicare premiums) by making a “qualified charitable distribution” of up to $100,000 by a direct transfer from a Traditional IRA to a charity. The withdrawal counts as part of the RMD but is not considered taxable income. No charitable deduction is allowed.

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