Every year, as we approach year-end, Smith Dickson professionals receive many questions about year-end moves to minimize personal and business taxes. For 2019, there are several last-minute tax moves that you could consider.
Below are a few to evaluate – please note that these are very concise descriptions and do not apply to all situations, so contact Smith Dickson to discuss tailoring the application to your personal situation.
- Postpone income until 2020 and accelerate deductions into 2019. This time-tested technique can still apply. Delaying income (such as a bonus paid by your employer) may be desirable for those taxpayers who anticipate being in a lower tax bracket next year.
- If you hold long-term, appreciated capital assets, consider selling enough of them to generate long-term capital gain sheltered by the 0% rate. Long-term capital gains (assets held for more than one year) are taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income.
- Tax loss harvesting. If you are subject to capital gains income, you should consider selling any securities you own with an unrealized loss so the loss can offset the capital gains income.
- Maximize deductible HSA contributions. If you become eligible in December 2019 to make health savings account (HSA) contributions, you can then contribute a year’s worth of deductible HSA contributions.
- Consider using a credit card to pay deductible expenses before year-end. Doing so may increase your 2019 deductions even if you do not pay your credit card bill until next year.
- Bunching of charitable giving. With an increase in the standard deduction, more taxpayers are finding that they don’t have enough expenses to itemize. Some instances dictate that bunching charitable giving into one year, as opposed to over two years, can allow the taxpayer to itemize their deductions in the year of giving while receiving the stepped-up standard deduction in the other year.
- Make gifts sheltered by the annual gift tax exclusion before the end of the year, if doing so would save gift and estate taxes.The exclusion applies to gifts of up to $15,000 made in 2019 to each of an unlimited number of individuals. Unused exclusions cannot be carried over to future years.
- Convert all or part of your 401(k), traditional IRA to a Roth IRA. While such a conversion will increase your AGI for 2019, and possibly reduce tax breaks, your CPA can calculate if it will be a beneficial long-term strategy. Opportunities can exist where little to no tax can be incurred upon conversion while allowing future earnings to grow tax free.
- Consider making 2019 charitable donations thru qualified charitable distributions from your IRAs.Upon age 70 ½, the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. The amount of the qualified charitable distribution reduces the amount of your RMD, which can result in tax savings.
- Avoid underpayment of estimated tax penalty by receiving an eligible rollover distribution from a qualified retirement plan.Take a distribution in the amount equal to what your estimated tax payments for the year would have been; this will be applied pro-rata over 2019 to reduce previous underpayments of estimated tax.
The Tax Cuts and Jobs Act (TCJA) included numerous business-related provisions, most of which took effect last year. The TCJA’s complexities are requiring businesses to adjust their tax strategies accordingly.
Some of the changes that took place in 2018 included reducing the corporate tax rate to 21%, eliminating corporate AMT, limiting business interest deductions, new expensing and depreciation rules, and a special deduction for non-corporate taxpayers with qualified business income from pass-through entities. Year-end strategies for 2019 to consider include:
- Consider Section 179 expenditures. For tax years beginning in 2019, the expensing limit is $1,020,000, and the phase-out starts at $2,550,000.
- 100% bonus first-year depreciation. This deduction is for property and equipment bought new or used (with some exceptions) if such purchases are placed in service this year. 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.
- 199A Optimization. The 199A deduction is equal to 20% of net profits for passthrough entities and sole proprietorships. It is subject to limitations based on the taxpayer’s income, type of business, amount of wages paid by the business, and cost of property placed in service. Proper planning before year-end can ensure that most, if not all, of these limitations can be avoided in order to optimize the 199A deduction.
- Set up and contribute to a retirement plan. Options can include 401k, SEP-IRA, and defined benefit plans. Each option can provide substantial tax savings now while saving for your future. It is imperative that you choose the plan that aligns with your overall goals and cash flow needs.
- Income Acceleration. Certain corporations (other than a large corporation) that anticipate a small net operating loss for 2019 and substantial net income in 2020 may find it worthwhile to accelerate 2020 income (or to defer just enough of its 2019 deductions) to create a small amount of net income for 2019. This allows the corporation to base its 2020 estimated tax installments on the relatively small amount of income shown on its 2019 return, rather than having to pay estimated taxes based on 100% of its much larger 2020 taxable income.
- Dispose of a passive activity in 2019, if doing so will allow you to deduct suspended passive activity losses (to reduce 2019 taxable income).
This is not an exhaustive list, but it is a good starting point for discussions with your tax accountant. Since tax planning strategies for businesses can be complex and application depends on numerous factors, it is essential to discuss your business tax planning with your CPA.
Looking toward 2020, Senior Tax Manager, Richard Warner, CPA has updated his annual “Tax Outlook” – please take a look and let us know if you have any questions.