Fourth Quarter Financial Planning Series: REDUCING TAXES

In part one of this series ‘Investments,’ I discussed investment to-dos between now and yearend.  Today, I’d like to cover some tax-related strategies that can save you money or avoid tax penalties.

  1. File on time. Ok, this is not exactly a 2019 year-end strategy but a reminder of the importance of filing by April 15, 2020.  If you fail to file on time, you’ll face a late payment penalty of up to 25% of your unpaid balance.  Beyond 60 days late filing, you’ll also face another level of penalties equal to the lesser of $205 or 100% of what you owe.   File timely even if you’re unable to pay your taxes.  This will reduce your late penalty to one-half of one percent per month up to a total of 25%.
  2. Pay taxes on all your income. For W2 employees, this is easy since your company withholds income taxes from your paycheck.  But if you have self-employment income or significant interest and dividend income, you are responsible for filing/paying quarterly tax estimates.  Miss these deadlines and you may face penalties and interest.
  3. If you’re age 70 ½ or older, pay your Required Minimum Distributions (RMDs) timely. If you turned 70 ½ this year, you have until April 1, 2020, to take required distributions.  After that, RMDs are due by December 31 each year.  Miss this payment and you’ll face a 50% penalty of the amount owed.  For an additional tax benefit, use a Qualified Charitable Distribution (up to $100,000).  Under a QCD, the gift to charity will not be reported as income…a good idea if you plan to take the standard deduction.
  4. Have a strategy for bunching income and expenses. With the standard deduction at $24,400 (couples), many more people will file using this method, causing them to lose deductions such as charitable gifts.  Do a trial tax return to determine if you could benefit by itemizing this year.  Look at things like medical expenses, tax-loss harvesting, multi-year charitable giving (using a donor-advised fund).
  5. Contribute to a 529 College Savings Plan. Alabama allows a state income tax deduction of up to $10,000.
  6. Max out your (deductible) retirement plans. This includes company 401k (up to $19,000 + $6,000 if you are age 50 or older) or a personal IRA (up to $6,000 + $1,000 if you are age 50 or older) or other deductible plans. 

Follow The Welch Group every Tuesday morning on WBRC Fox 6 for the Money Tuesday segment.


4th Quarter Planning (series): Taxes 

  • File on time
  • Pay taxes on ALL income
  • Pay RMD timely
  • Standard deduction vs. itemize?
  • Contribute to a 529 plan
  • Max out retirement plans

Stewart H. Welch, III, CFP, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only investment management and financial advice to families throughout the United States. He is the author or co-author of six books, including  J.K. Lasser’s New Rules for Estate, Retirement and Tax Planning- 6th Edition (John Wiley & Sons, Inc.); THINK Like a Self-Made Millionaire; and 100 Tips for Creating a Champagne Retirement on a Shoestring Budget. More information about The Welch Group and important Disclosures can be found on our website. Investing in securities involves the risk of loss. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy will be profitable or equal any historical performance level(s). Consult your financial advisor before acting on comments in this article.