Year-end planning for 2019 takes place against the backdrop of recent major changes in the rules for individuals. Changes impacting your individual tax planning for 2019 include:
• Lowered income tax rates
• A boosted standard deduction
• Severely limited itemized deductions
• No personal exemptions
• An increased child tax credit
• A watered-down alternative minimum tax
The following is a checklist of potential actions based on current tax rules that may help you reduce your tax liability if you act before year-end:
• Higher-income earners must be wary of the 3.8% surtax on certain unearned income. Some taxpayers should consider ways to minimize additional Net Investment Income for the year.
• The 0.9% additional Medicare tax also may require higher-income earners to take year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of a threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case).
• Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15%, or 20%, depending on your taxable income. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that it, when added to regular taxable income, is not more than the “maximum zero rate amount” (e.g., $78,750 for a married couple).
• You should postpone income until 2020 and accelerate deductions into 2019 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2019 that are otherwise phased out.
These include deductible charitable contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable if you anticipate being in a lower tax bracket next year due to changed financial circumstances.
• If you are interested in converting a traditional IRA to a Roth IRA you should consider converting traditional IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA in 2019, if eligible to do so.
• It may be advantageous to try to arrange with your employer to defer, until early 2020, a bonus that may be coming your way. This could cut current year tax, as well as, defer tax liability to next year.
• Many taxpayers won’t be able to itemize because of the high basic standard deduction amounts that apply for 2019 ($24,400 for joint filers, $12,200 for singles and for marrieds filing separately, $18,350 for heads of household).
No more than $10,000 of state and local taxes may be deducted; miscellaneous itemized deductions (e.g., tax preparation fees and unreimbursed employee expenses) are not deductible.
Taxpayers can still itemize: medical expenses, but only to the extent they exceed 10% of adjusted gross income; state and local taxes up to $10,000; charitable contributions; and interest deductions on a restricted amount of qualifying residence debt. These deductions won’t reduce tax liability if they don’t cumulatively exceed the standard deduction amount based upon your filing status.
You may be able to work around these deduction restrictions by applying a “bunching strategy” to pull or push discretionary medical expenses and charitable contributions into the year where you will do some tax good. For example, if you know you will be able to itemize deductions this year but not next year, you could benefit by making two years’ worth of charitable contributions this year, instead of spreading out donations over 2019 and 2020.
• You could consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase 2019 deductions even if the credit card bill is paid in 2020.
• If you expect to under withheld state and local income taxes and will be itemizing in 2019, consider increasing withholding of these taxes (or making estimated payments) before year-end to pull the deduction of those taxes into 2019.
Remember – state and local tax deductions are limited to $10,000 per year, so this strategy is not a good one to the extent it causes your 2019 state and local tax payments to exceed $10,000.
• Be sure to take your required minimum distributions (RMDs) from their IRA or 401(k) plans. RMDs from IRAs must begin by April 1 of the year following the year you reach age 70 ½. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Thus, if you turn age 70½ in 2019, you can delay the first required distribution to 2020, but if you do, you will have to take a double distribution in 2020 — the amount required for 2019 plus the amount required for 2020. Think twice before delaying 2019 distributions to 2020, as bunching income into 2020 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2020 if you will be in a substantially lower bracket that year.
• If you are age 70½ or older by the end of 2019, have traditional IRAs, and particularly those that can’t itemize deductions, you could consider making 2019 charitable donations via qualified charitable distributions from your IRAs.
• The annual gift tax exclusion applies to gifts of up to $15,000 made in 2019 to each of an unlimited number of individuals.
Your HW & Associates tax and accounting professional will ensure that you do not miss out on opportunities to optimize your tax position. They will support you in understanding and exploring the options that may benefit you. Your tax organizer will be arriving in your portal soon. Contact your HW & Associates CPA with any questions or to set up your year-end tax planning meeting