As Autumn begins and the leaves start to fall, our thoughts turn to year-end tax planning for our clients. Although many of the tried and true tax planning strategies may still be advantageous under the recently enacted Tax Cuts and Jobs Act of 2017 (TCJA), there are some new “twists” in the opportunities to reap tax savings, as well as an end to some old favorites.
The old favorite still in play is to defer income and accelerate expenses. This is especially helpful to small business owners reporting on the cash basis who may want to prepay certain costs to capture a deduction or possibly postpone sales or client payments until the New Year. However, individuals may see similar benefits, perhaps by postponing the sale of an investment until the New Year to defer the gain recognition, or as Randy states in his article, possibly harvest losses before year end to offset 2019 gains.
Let’s consider a few new “Twists” in Tax Planning for 2019:
Individual tax planning:
With the advent of the increased standard deduction ($12,200 Single and $24,400 Married Filing Jointly) and the $10,000 limitation on combined local and state income taxes, many individuals are no longer itemizing their deductions. Therefore, they are losing the deductions for their charitable giving, medical and taxes. Here are a few new Twists to structure your deductions to maximize the benefit:
- Utilize your IRA Required Minimum Distribution to make your charitable gifts: If you are over 70 ½, you may elect to send all or part of your RMD to your favorite charity. This reduces the taxable amount of your distribution dollar for dollar, and so, in effect, you receive the deduction “off the top”. Therefore, you capture the deduction without having to itemize. The custodian of your IRA must make the payment directly to the charity from your IRA, but you could deliver the check to the charity if you would like. Care must be taken to structure this payment pursuant to the IRS guidelines, but this is a wonderful way to capture the deduction and also reduce your Adjusted Gross Income, which may factor into other calculations on your return.
- “Bunching” deductions: Some taxpayers may be able to use a “bunching strategy” to push or pull discretionary medical expenses and charitable contributions into the tax year they do the most good. An example is probably the easiest way to consider this opportunity. Let’s say you normally have $6,500 in deductible taxes, and you give $5,000 to your favorite charity. If you are single, this will not exceed the Standard deduction of $12,200. But what if you gave $10,000 to your favorite charity in 2019, and skipped a year in 2020. This would allow you to itemize in 2019 (with $16,500 of deductions), benefit from your charitable giving, and in 2020, you would use the standard deduction. By bunching your charitable deductions, you have increased your deductions by about $4,000 over a two year period and saved additional tax dollars. (This may also be a strategy for bunching medical expenses, or certain tax payments, depending on your particular circumstances.)
- Donor Advised Funds: Although these funds have been around for several years, they have become a mainstream choice for tax planning, and are especially helpful in a year you have a large taxable event. A Donor Advised Fund (DAF) allows you to contribute cash or other assets into a “restricted” investment fund, and obtain a current year charitable deduction. Then, you can sprinkle the gifts to your favorite charities over time. There are AGI limitations on the deduction depending on the type of asset you contribute. If you are interested in a DAF, please reach out to Randy or your tax advisor to discuss the funds that are available.
Increasing income: What do you mean, increase my income? Yes, now tax planning includes potentially increasing your taxable income to capture historically low tax rates. Here are few ideas:
- Capture the Zero Percent Capital Gain and Qualified Dividend Rate: If your taxable income is less than $78,950 MFJ or $39,375 for Single filers, you may qualify for a zero percent rate. So, consider realizing gains to adjust your portfolio, or just buy back the same security to get a no-cost step-up in your tax basis. (Note: there is no 30-day restriction on buy backs when you recognize a gain.)
- Additional IRA distribution: If you are in the zero percent bracket, or even a very low bracket and know that the future has higher rates in store for you, take an extra IRA distribution to take advantage of your current low rate.
- Roth Conversions: Convert all or part of your traditional IRA’s to Roth IRA’s. Although you are required to pay the tax on the date of conversion, a Roth IRA grows tax free, does not have a required distribution, and is tax free for future withdrawals.
Business Tax Savings:
In addition to the “old favorite” – income deferral/expense acceleration, here are a few other tax-saving ideas for 2019:
- Expanded Business Property Expensing Option: The TCJA enhanced several key provisions related to business assets.
- First, businesses can claim a 100% bonus First year depreciation deduction for machinery and equipment (new & used property now qualify).
- Second, business property expensing is available under IRC Section 179 up to $1,000,000 cost of qualifying property, with a total allowable investment of $2.5M. Expensing is generally available for most depreciable property (other than buildings) and few other exceptions.
- Third, take advantage of the de minimus safe harbor election to expense certain lower-cost items. If you have an audit (a/k/a “applicable financial statement”), then this amount is $5,000 per item. If you do not have an audit, then the limit is $2,500. As an example, if you buy a desk that costs $2,400, and you don’t have an audited financial statement, then you can make this election and write it off. No 179, no Bonus depreciation — just a straight expense.
Give us a call if you want to discuss potential year-end purchases and qualification under one of these provisions.
- TCJA 20% Qualified Business Income Deduction: There was a lot of hype about this new deduction available to qualified businesses. In general, if modified taxable income does not exceed $315,000 for married couples, or $157,500 for all other taxpayers, you may be entitled to a 20% deduction for your qualified business income. There are many factors that go into determining if your business is a “Qualified” business, and there are additional tests if your income exceeds the income thresholds. A detailed discussion of this is beyond the scope of this article, so please contact your tax advisor to discuss planning options to maximize the QBI deduction.
So many planning ideas, and not enough pages to list them all! Careful planning is required to apply to your unique situation, and we welcome the opportunity to help tailor a plan that is right for you.
As the leader of our Family Legacy Team, Elaine provides comprehensive tax, estate, trust, and gift planning and advisory services to wealthy families and individuals. Elaine also has extensive experience in providing tax compliance and consulting services.