Why Tax Planning is More Essential Now
Another tax season is approaching. Talking to your accountant about tax strategies throughout the year is always best, however; there is still time to avoid a tax bill or increase your refund in 2020.
The Tax Cuts and Jobs Act (TCJA) that passed at the end of 2017 will continue to affect most tax returns due in 2020. Most of the over 100 new tax laws went into effect in 2018. A few provisions will pan out in 2019.
Here are the most significant tax reform changes along with simple and easy ways to reduce your tax bill or increase your tax refund.
INDIVIDUALS:
Itemized Deductions:
Many of you who itemized your deductions in years past ended up claiming the standard deduction for 2018. TCJA changes reduced or eliminated many itemized deductions through 2025 unless Congress acts to make these changes permanent.
Here’s why:
The standard deduction nearly doubled in 2018. In 2019, single filers standard deduction is up to $12,200 and $24,400 for married couples (these amounts will increase annually for inflation through 2025)
Personal exemptions are still suspended and many of the most utilized itemized deductions have been eliminated or limited
State and local income and sales tax deduction is limited to $10,000. This includes property taxes.
Mortgage interest deduction remains; however, it reduces the mortgage debt limit from $1 million to $750,000 for debt incurred after December 15, 2017 with some exceptions.
Home equity interest deduction is now only allowed if the funds were used to buy, build, or substantially improve the home that secures the home equity loan or line of credit.
Miscellaneous itemized deductions subject to the 2% of adjusted income floor is suspended. This includes deductions such as home office deductions for employees, job expenses, advisory fees, and moving expenses – with few exceptions.
Here’s what to do:
Medical expenses could be a determining factor in itemizing so total your medical expenses now and schedule any last minutes appointments in December if you are close the reaching the threshold
Unreimbursed medical expenses threshold is 10% of your adjusted gross income (AGI) in 2019; up from 7.5% in 2018
If your AGI is $150,000, every dollar over $15,000 (10% of $150,000) is deductible in 2019
Medical expense example include payments to doctors, dentists, glasses, contacts, hearing aids, supplies, diagnostic devices, prescriptions drugs, travel expenses related to medical care, and miles driven for health care purposes at 20 cents per mile for 2019
If you have the option of controlling the timing of any elective medical procedures, services, and purchases (without negatively affecting you or your family’s health) consider ‘bunching’ these expenses into alternating years. This will benefit you if it will help exceed the 10% threshold and if you plan on itemizing.
Charitable giving AGI limits remain the same as 2018
Deductions for charitable contributions cannot exceed 60% of your AGI; a reduced limit of 30% and 20% for certain contributors; contributions exceeding 60% can be carried forward and deducted for up to five years
Due to the increased standard deduction, bunching your charitable gifts to one year (the year you anticipate itemizing) and taking a standard deduction on the following year may increase your overall deductions over two years
Donations records should include cash amounts, official charity receipts, canceled checks, value of donated property, miles driven, and out-of-pocket expenses
Alternative Minimum Tax (AMT)
The TCJA increased AMT exemptions through 2025 which means fewer taxpayers are affected by this separate tax.
What is AMT? It is a tax system implemented to ensure high-income individuals with many tax deductions pay their fair share of taxes. Prior to TCJA modifying the exemption amounts, AMT had not been adapted properly for inflation leaving middle-class taxpayers susceptible. Your tax advisor can tell you if you need to plan for this.
Defer and Offset Capital Gains
What’s a Capital Gain? If you invest in stocks, bonds, or property and sell your investment for a profit, you are taxed on the sale.
Keep these factors in mind:
Take capital gains next year if you expect to be in the same or lower tax bracket in 2020
Do not defer capital gains if you expect higher income in 2020 tax year as annual tax bracket changes may mean greater taxes for you
More importantly for high-income tax payers, selling underperforming investments to realize losses will offset taxable gains during the year
Up to $3,000 of excess losses can usually be used to offset ordinary income and can be carried forward
Contribute to Retirement Accounts
The deadline for certain retirement accounts are after December 31st so talk to your retirement advisor now.
Here are contributions amounts to keep in mind:
401(k) base contribution: $19,000 (up from $18,500 last year)
401(k) catch-up contribution (for taxpayers age 50 and older): additional $6,000 (unchanged)
IRA base contribution: $6,000 (up from $5,500)
IRA catch-up contribution (for taxpayers age 50 and older): additional $1,000 (unchanged)
Many retirement plans allow you to contribute up until October 15, 2020 if you file an extension for your 2019 tax return.
Dependent, Child, and Adoption Credits
TCJA eliminated personal exemptions in 2018. For individuals with dependents (such as children or elderly parents) you may now qualify for a tax credit anywhere from $500 (family credit) to $2,000 (child credit) to make up for losing out on personal exemptions. Adoption credits for 2019 have increased to up to $14,080 per child. These credits are subject to an income-based phaseout; however, the income ranges are higher than they were pre-TCJA.
Health Insurance Mandate
If you did not have health insurance under the Affordable Care Act, you were paying a penalty when you paid your taxes. Effective 2019, if you do not have health insurance TCJA zeroed out the penalty called the shared responsibility payment, often referred to as the individual mandate penalty.
Alimony Income and Deductions
If you paid alimony or receive alimony in 2019, you will not deduct your payments or report the money received as income on your tax return. Elimination of the alimony deduction and income is a TCJA change that will affect divorce and separation agreements modified or made this year and henceforward.
SMALL BUSINESSES:
Business Structure
You decided your business structure but now with the changes to the tax law it may be beneficial to re-evaluate. Corporations are now subject to a flat tax rate of 21% and corporate AMT has been removed. This is considerably lower than the top individual rate of 37%. For all other pass-through entities (LLC’s - sole proprietorships or partnership – and S Corporations) you may be subject to the top individual tax rate and you may also receive up to 20% qualified business income deductions. Your accountant can help you decide if a change will benefit you.
Maximize the Qualified Business Income (QBI) Deduction
One of the most significant business changes passed under TCJA is the Sec. 199A deduction that remains in effect until 2025.
Important factors related to this deduction include:
To qualify you must be a pass-through entity which is defined for this deduction as single member LLC sole proprietorships, multi-member LLC partnerships, and S Corporations.
It is only available to non-corporate taxpayers
The deduction can be up to 20% of the pass-through entities QBI
This is a “below-the-line deduction” which means it reduces taxable income
There are several layers of complexity to this deduction. Your tax-pro can determine if you qualify for this.
Defer Income and Accelerate Expenses: ONLY if you anticipate the same or lower tax bracket next year
Here’s how for cash method accounting businesses:
Delay invoices until late December so payment comes in 2020
Accelerate deductible expenditures so expenses are taken in 2019
You can claim 2019 expenses on your credit card bill even if you won’t pay it off until 2020
Pay expenses via checks and mail them before year-end
If you anticipate more income, do the opposite by postponing deductible expenditures until 2020 and accelerate income into this year.
Purchase New and Used Property
Property acquired and placed in service in 2019 may mean you can write off the entire cost.
Important items about purchasing assets include:
New and use heavy vehicles used for over 50% business may qualify
Specifically, for SUV, pickup, or van’s with a manufacturers gross vehicle weight rating (GVWR) above 6,000 pounds
The definition of qualified assets expanded to include assets typically not available for additional first year write offs
If assets were purchased during the last quarter of the year, you may not be eligible a 100% write off
Special rules apply for certain real estate business
Planning in advance to help maximize your depreciation deduction with your accountant will ensure you take advantage of these changes.
Employee Benefits
Are you in a position to offer benefits to your employees? Offering benefits increases employee retention and saves you taxes.
Consider retirement packages, health savings, flexible spending, and health reimbursement accounts, along with fringe benefits such as life and health insurance.
Although the individual health insurance mandate has been lifted in 2019, some ‘large’ employers can still be penalized for not offering ‘minimum essential coverage’ to full-time employees. Smaller businesses offering health insurance may still qualify for a health care tax credit.
Additional Tax Credits
Other tax credits businesses still qualify for include the research credit, work opportunity credit, retirement plan credit, and new markets credit – this credit is scheduled to retire in 2019. TCJA began the family medical leave credit in 2018 and is also scheduled to retire in 2019.
Contribute to or Establish Retirement Accounts
Most retirement accounts allow for significant deductible contributions.
Here are a few important items to know:
Deadlines for setting a SEP-IRA for a sole proprietorship is October 15, 2020 if you file an extension for your 2019 tax return
Other types of retirements usually must be established by December 31st
Simple IRA’s must be established by October 1 so you have missed the deadline for 2019
There are many other ways to increase your refund or eliminate your tax bill. Call me today to schedule a free consultation! Let’s make sure you are covered for the 2019 tax year!