Dear Clients and Friends:
It is that time of the year again. A time when we can predict and project the results of our year from a tax perspective.
There have been major changes to the tax code for businesses and individuals over the last couple of years. Self-employed individuals and those that own and operate pass-through entities have a completely new planning opportunity with the
Qualified Business Income deduction. Liberalized property and equipment depreciation rules require consideration of options to choose the best course. Many itemized deductions have been eliminated, but the larger standard deduction actually benefits most taxpayers.
Tax planning involves review of your current situation as it relates to current law. There are potential opportunities to change when and how transactions take place to maximize tax saving opportunities. Of course, the time-tested approach of deferring income and accelerating deductions to minimize taxes still works for many taxpayers. We are happy to answer any questions you may have for us.
A brief summary of items we believe are important and widely applicable to many taxpayers is presented below.
Year-End Tax Planning Moves for Individuals
• Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s 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). In other words, joint filers with taxable income up to $78,750 will pay zero tax on capital gains. From a planning perspective, one should be looking to recognize capital gains every year if it can be done without paying tax and makes sense in relation to investment goals and needs.
• As noted above, 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), and because many itemized deductions have been reduced or abolished. 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; and personal casualty and theft losses are deductible only if they’re attributable to a federally declared disaster and only to the extent the $100-per-casualty and 10%-of-AGI limits are met. You can still itemize medical expenses but only to the extent they exceed 10% of your adjusted gross income, state and local taxes up to $10,000, your charitable contributions, plus interest deductions on a restricted amount of qualifying residence debt. Payments of those items won’t save taxes if they don’t cumulatively exceed the standard deduction amount that applies to your filing status.
Some taxpayers 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 they will do some tax good. For example, if a taxpayer knows he or she will be able to itemize deductions this year but not next year, the taxpayer will benefit by making two years’ worth of charitable contributions this year, instead of spreading out donations over 2019 and 2020. Because of this new reality, you should try to determine in advance whether you can itemize your deductions so you do not spend the time gathering receipts and otherwise determining the amounts to give to your tax preparer who won’t use them anyway.
•Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70½. (That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they
retire.) 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 if you can’t itemize your deductions, consider making 2019 charitable donations via qualified charitable distributions from your IRAs. Such distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. But the amount of the qualified charitable distribution reduces the amount of your required minimum distribution, which can result in tax savings. This method of making charitable contributions is superior to making them directly for many taxpayers.
Year-End Tax-Planning Moves for Businesses & Business Owners
• Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2019, if taxable income exceeds $321,400 for a married couple filing jointly, $160,700 for singles and heads of household, and $160,725 for marrieds filing separately, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased in – for example, the phase-in applies to joint filers with taxable income between $321,400 and $421,400 and to single taxpayers with taxable income between $160,700 and $210,700.
Taxpayers may be able to achieve significant savings with respect to this deduction, by deferring income or accelerating deductions so as to come under the dollar thresholds (or be subject to a smaller phase-out of the deduction) for 2019. Depending on their business model, taxpayers also may be able to increase the new deduction by increasing W-2 wages before year-end. The way in which you run your business and compensate yourself can have a major impact on the amount of this deduction.
• Businesses claim a 100% bonus first year depreciation deduction for machinery and equipment bought used or new if purchased and placed in service this year. This is the default; one must elect out of this method to not use it. The 100% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2019.
• Businesses should also consider making expenditures that qualify for the liberalized business property expensing option under IRC Section 179. For tax years beginning in 2019, the expensing limit is $1,020,000, and the investment ceiling limit is $2,550,000. This deduction is the same deduction that has been in the Code for years but is now somewhat overshadowed by the bonus depreciation provisions noted above. Expensing is generally available for most depreciable property (other than buildings), however, expensing is also available for “qualified improvement property” (generally, any interior improvement to a building’s interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems. The expensing deduction is not prorated for the time that the asset is in service during the year. The IRC Section 179 election is subject to various limitations at the entity and shareholder level and may or may not be better than selecting bonus depreciation. One consideration is how bonus depreciation and Section 179 is treated by state and local tax authorities. In many cases, bonus depreciation is added back for state and local tax calculations.
• Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs don’t have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500. Where the UNICAP rules aren’t an issue, consider purchasing such qualifying items before the end of 2019.
These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can answer any questions or tailor a particular plan that will work best for you.