Year-end planning for 2019 takes place against the backdrop of recent major changes in the rules for individuals and businesses. For individuals, these changes include lower income tax rates, a boosted standard deduction, severely limited itemized deductions, no personal exemptions and increased child tax credit. For businesses, the corporate tax rate has been reduced to 21%, there are limits on business interest deductions and there are very generous expensing and depreciation rules. And, non-corporate taxpayers with qualified business income from passthrough entities may be entitled to a special deduction.
Despite these major changes, the time-tested approach of deferring income and accelerating deductions to minimize taxes still works for many taxpayers, along with the tactic of “bunching” expenses into this year or the next to get around deduction restrictions.
Checklist of Tax-Planning Moves for Individuals
The following is a checklist of actions based on current tax rules that may help individual taxpayers reduce their tax liability if they act before year-end.
- Long-term capital gain from sales of assets held for over a 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 that the “maximum zero rate amount”(e.g., $78,750 for a married couple).
- Individuals should postpone income until 2020 and accelerate deductions into 2019 if doing so will enable the taxpayer to claim larger deductions, credits, and other tax breaks for 2019 that are phased out over varying levels of adjusted gross income (AGI). These included deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest.
- 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 married 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.
- Individuals could consider using a credit card to pay deductible expenses before the end of the year. Doing so will increased 2019 deductions even if the credit card bill is paid in 2020.
- Clients that are younger than age 70 ½ at the end of 2019 and do not have a traditional IRA, should establish and contribute as much as they can to one or more traditional IRAs in 2019, if they anticipate that in the year that they turn 70 ½ and/or later years they will not itemize deductions. Clients that already have one or more traditional IRAs, should consider making maximum contributions to one or more traditional IRAs in 2019.
- A taxpayer that becomes eligible in December 2019 to make health savings account (HSA) contributions can make a full year’s worth of deductible HSA contributions for 2019.
- The annual gift tax exclusion applies to gifts of up to $15,000 made in 2019 to each of an unlimited number of individuals. Taxpayers can’t carry over unused exclusions from one year to the next. Making gift sheltered by the annual gift tax exclusions before the end of the years may save gift taxes and avoid having to file a gift tax return. Such transfers may also reduce overall family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
Checklist of Tax-Planning Moves for Businesses and Business Owners
- Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income.
- Taxpayers may be able to achieve significant savings with respect to this deduction, by deferring income or accelerating deductions to be below these thresholds (or be subject to a smaller phaseout of the deduction) for 2019. Depending on their business model, a taxpayer also may be able to increase the new deduction by increasing W-2 wages before year-end. The rules are quite complex, so tax advisors play a significant role in year-end tax planning for those business owners looking to claim this deduction.
- Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2019, the expensing limit is $1,020,000 and the investment ceiling limit is $2,550,000. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It 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 HVAC, fire protection, alarm, and security systems. The generous dollar ceilings that apply this year mean that many small and medium-sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What’s more, the expensing deduction is not prorated for the time that the asset is in service during the year. The fact that the expensing deduction may be claimed in full (if the taxpayer is otherwise eligible to take it) regardless of how long the property is held during the year can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of 2019, rather than at the beginning of 2020, can result in a full expending deduction for 2019.
- 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 advising clients to purchase such qualifying items before the end of 2019. I would like to thank Thompson Reuters for providing this information.
There is no time like now to lower your taxable income and reduce the taxes you pay your favorite Uncle Sam. Call us today to discuss how some of these items can benefit you and your tax situation. We are here year around to assist with all your tax questions.