Now that 2018 tax returns have been filed (hopefully) and we have seen how the Tax Cut and Jobs Act (TCJA) of 2017 has changed the tax world, it is a good time to reflect on those changes and plan for the close of 2019 coming up. Below are some year-end tax planning strategies that may help reduce your tax burden.
- Check your withholding and estimated taxes to make sure you are penalty-proofed. For federal taxes, that means paying the lesser of 110% of prior year tax (100% for joint filers with adjusted gross income (AGI) of $150,000 or less) or 90% of current year tax. Withholding is deemed to take place prorata throughout the year. Q4 estimated tax payments are due January 15, 2020.
- The investment markets generally have had a great year, but If you have unrealized capital losses in your investment portfolio, sell appropriate investments to realize such losses. The goal is to offset capital gains (and capital gain distributions) with losses plus $3,000 to offset ordinary income.
- Long-term capital gains continue to be taxed at favorable federal rates: 0%, 15%, 20% depending on income levels (with a few exceptions for certain real estate and collectibles). There is also the 3.8% Net Investment Income Tax (NIIT) that could apply to these gains, as well as dividends and interest, if your modified AGI exceeds $200,000 ($250,000 for joint filers).
- If you have very large capital gains, consider reinvesting the gains into an “opportunity zone fund” to defer the gains and possibly even eliminating 10-15% of the gain. It’s still challenging to identify suitable investments (mostly through syndications), but if you find a good real estate or business opportunity, the tax benefits can be significant. For more information, refer to the guidance the IRS issued this year (at more than 150 pages, it is beyond the scope of this article).
- The standard deduction has been increased to $12,200 for single and $24,400 for joint filers. Those 65 years or older generally get an extra $1,300. If your itemized deductions will exceed these amounts, consider paying charitable contributions before year-end. You may even want to consider prepaying 2020 commitments in 2019. Some clients are considering prepaying additional charitable commitments to donor advised funds or private foundations. Making donations to qualified charities with appreciated stock or property instead of cash is a good way to get the full value of the contribution and avoid the capital gains on the appreciation.
- Speaking of charitable contributions, taxpayers who are 70-1/2 or older can make charitable contributions with IRA funds that otherwise would be required to be distributed under the IRA rules. Contributions made directly to the qualified charity would not be taxable.
- Review your mortgage debt and consider the limitations now in place on interest deductions. Home equity interest is no longer deductible unless the debt can be traced to business or investment activities. New qualified home mortgage debt is limited to $750,000. Pre-2018 qualified home mortgage debt is grandfathered under the old $1 million limit. Be prepared to lose interest deductions if you are over these limits.
- For those itemizers, the deduction for medical expenses will be more difficult to claim. For 2019, only medical expenses that exceed 10% of AGI will be deductible. You may benefit from “bunching” two years of medical expenses into one; either 2019 or 2020, depending on your income level.
- Employees remain ineligible to deduct unreimbursed business expenses and should instead negotiate to have such expenses reimbursed by employers. Qualified reimbursed expenses could be tax-free to the employee and deductible by the employer.
- Georgia residents can get up to a $2,000 deduction ($4,000 for joint filers) on their Georgia return for each beneficiary to which a Section 529 college savings plan contribution is made. It must be made to a Georgia plan. The maximum deduction will increase to $4,000 ($8,000 for joint filers) in 2020. Under the 2017 Act, up to $10,000 in the savings plan can be used for K-12 school.
- Georgia has reduced the top income tax rate for individuals from 6% to 5.75% effective for 2019. The rate will be reduced further to 5.5% for 2020.While not significant, you will get a permanent tax savings by deferring income to 2020.
- Georgia has a retirement exclusion for certain income for taxpayers aged 62 and older — up to $35,000 for those age 62-64, and up to $65,000 for those 65 and older.
- Most people now understand the $10,000 limit for deducting taxes (state income taxes, real estate taxes etc.) as an itemized deduction. However, if the taxes are related to a business or rental property, they might be deductible and you should consider whether to pay the taxes before year-end for the deduction.
- We converted many eligible clients to cash basis under the new law in 2018. Cash basis businesses should defer income into 2020 and accelerate deductions into 2019, assuming your effective tax rates will be the same or lower in 2020. Similarly, accrual basis businesses should consider whether delaying year-end invoicing to customers and accelerating the receipt of vendor invoices will reduce your effective tax rate between 2019 and 2020.
- Review fixed asset needs for your business and consider year-end purchases to benefit from the 100% bonus depreciation or the enhanced Section 179 deductions. We are still monitoring Congress in hopes they issue a technical correction to the new law that will allow certain leasehold improvements to be depreciated under the bonus depreciation rules.
- Small businesses with gross receipts under $25 million might be able to deduct more inventory purchases and capitalize less under the new rules. Those with inventories should review what’s on hand and write-off/dispose of obsolete items before year-end to accelerate tax deductions.
- Review your recordkeeping for meals and entertainment with the understanding that only half of the business meals and none of the entertainment are deductible (in general). Note that certain activities such as holiday office parties are not subject to these limits, so related expenses should be reported separately.
- Maximize retirement plan contributions/accruals to optimize the 2019 deductions. Certain contributions can be made in 2020 but still be deducted on 2019 tax returns.
- If you anticipate a low-income year in 2019, consider whether converting traditional IRAs into Roth IRAs before year-end makes sense. The conversion would be taxable, but perhaps the low/zero tax rate would make it beneficial in the long run.
- Pass-through businesses such as S Corporations, LLCs and partnerships should now be well-positioned to take advantage of the 20% qualified business income deduction under Section 199A. Regulations came out in 2019 that helped clarify some of the rules; some provisions more favorably than others.
- Employers can get a federal and Georgia credit for providing qualified childcare benefits on behalf of eligible employees. Payments need to go directly to the childcare provider.
- Eligible employers with a paid family leave policy can get a credit as high as 25% of amounts paid to eligible employees in limited circumstances. A written policy must be in place by December 31, 2019 to be retroactively effective for all of 2019. Unless Congress extends this credit, 2019 will be the last year.
- For 2019, you can make gifts of up to $15,000 to any recipient without any gift tax reporting necessary. If you gift beyond this, be aware that the lifetime exclusion from paying gift taxes is currently $11,200,000. Given this large exclusion, now may be a good time to revisit and possibly update your will.
Congressional tax writers are still working toward a year-end tax package. One priority is the renewal of close to 30 expired or soon-to-expire tax breaks spanning from 2017 to 2019, the so-called tax extenders. Technical corrections of the 2017 TCJA and a new retirement savings bill have bipartisan support and could be included, but passage will depend on more controversial items legislators may try to attach to the bill. With the political climate as it is and the fact that Congress has not come to agreement on a spending bill that will keep the government open past Friday, optimism of a year-end tax bill is waning.
As always, the Williams Benator & Libby tax professionals will monitor all tax legislation and court cases to identify savings opportunities and changes.