“It’s That Time of Year Again” From a CPA’s Perspective
By Sherry S. Johnson, CPA, Partner
The holiday season is again upon us with a lot of music in the air, excited children, family gatherings, shopping and tons of tasks filling our already busy schedules! This compacted time at the end of the year often requires us to make notes and prepare to-do lists. As you are preparing these, remember to add year-end tax planning as one of the items. Being able to save tax dollars is a definite plus in offsetting the expense of this time of the year. This article will touch on some things to consider as you are planning your tax saving strategies.
First, let’s talk about individual income tax planning items. All taxpayers should take a look at their federal and state income tax payments made during 2019 through withholding and/or quarterly estimated tax payments to ensure they have met the minimum thresholds to eliminate underestimating penalties. These thresholds are: (1) to pay in at least 90% of the current year projected tax liability or (2) 100% of the prior year actual tax liability. This percentage increases to 110% for taxpayers whose prior year adjusted gross income was in excess of $150,000, unless the prior year was not a 12-month period. If there has not been enough tax paid in, an adjustment can be made by filing updated federal and state withholding forms with your employer and/or increasing the next quarterly estimated tax payment due. Withholding amounts are considered to be payments made ratably throughout the year; therefore, year-end bonus withholding can be used for payment shortfalls.
The standard deduction for 2019 has been increased to $12,200 for single or married filing separately taxpayers and $24,400 for married filing jointly taxpayers. The limit on medical deductions has been increased to 10% of adjusted gross income for 2019. If you plan on itemizing your deductions, make sure all your medical expenses are paid by the end of the year. Also, consider contributing to a health savings account if you have a qualifying high deductible health insurance plan. The contribution limits have been increased for 2019 to $3,500 for self-only coverage and $7,000 for family coverage.
Under current law, for taxpayers who itemize, there is a $10,000 limit on the deduction for state and local taxes paid. If the taxpayer plans on itemizing his or her deductions for 2019, an effort should be made to pay the expected state income tax liability and 2019 real estate and personal property tax liabilities prior to December 31, 2019 up to the $10,000 deductible limit. If the taxpayer anticipates being subject to alternative minimum taxes, additional analysis is needed to determine the feasibility of this strategy.
For taxpayers who plan on making charitable contributions but may not have enough deductions to itemize due to the increased standard deduction amounts, consideration should be given to timing the contributions and other deductions in order to itemize in every other tax year. Charitable cash contributions are now deductible up to 60% of adjusted gross income. Appreciated securities held more than a year can also be contributed at fair market value, thereby escaping capital gains tax on the appreciation. Make sure contributions of $250 or more are substantiated in your records with contemporaneous written acknowledgments from the donee organization.
Individuals should consider funding their retirement plans for 2019. The maximum traditional and Roth individual retirement account contribution which can be made for 2019 is $6,000, with taxpayers 50 years or older being able to contribute an extra $1,000. Individual retirement account contributions can be made up to the return due date of April 15th. For those with employer retirement plans, consider maximizing your deferrals into those plans for 2019. If you have traditional individual retirement accounts and expect little or no taxable income for 2019, explore the option of converting the accounts to Roth individual retirement accounts for the beauty of no future income taxes on distributions if holding periods are met.
For taxpayers age 70½ or older, make sure you have received any required annual retirement plan minimum distributions by December 31, 2019. If you plan on making charitable contributions, up to $100,000 can be made directly from your individual retirement account to charity and the distribution will not be included in your taxable income. These contributions, known as qualified charitable distributions, will also not be an itemized deduction. In addition, 70½ or older taxpayers are no longer eligible to make traditional individual retirement account contributions.
Another tax planning strategy is for taxpayers with securities to review their portfolios to optimize the balancing of 2019 gains and losses. If the taxpayer’s adjusted gross income exceeds $200,000 for singles and $250,000 for those married filing jointly, the 3.8% investment income tax will apply to investment income. Consideration should be given to portfolio diversification since tax-exempt investments are exempt from the net investment income tax.
The estate tax exclusion amount has increased to $11,400,000 for 2019. We recommend all taxpayers have an up-to-date will, and they should also review the beneficiaries on their life insurance and retirement accounts for any necessary changes.
To help reduce future includible estate assets, taxpayers can make annual gifts up to $15,000 per person. These gifts can be in cash or other assets such as depressed securities expected to appreciate. Also, tuition and medical payments paid directly to third-parties are not considered gifts; however, they reduce the cash value in an estate. In addition, education savings accounts and college 529 plans are excellent gift ideas for children and grandchildren.
Finally, an overall look at your tax situation for 2019 should be done to see if there is a need to defer income and accelerate deductions. In special circumstances, accelerating income and deferring deductions is beneficial.
Let’s now touch on a few planning items for business and rental investors. If you are expecting losses from partnerships and/or S corporations, make sure you have adequate basis by the end of the year to be able to deduct the losses. This may include contributing additional capital and/or making loans to the entity.
If you have unreimbursed business expenses, make sure the business has a written accountable reimbursement plan and all reimbursements are paid by the end of the year. The 2019 mileage rate is 58¢ per mile.
The expensing of new and used eligible business property placed in service by December 31, 2019 is a great tax saving plan. Section 179 expensing has increased to $1,020,000 with an aggregate purchase limit of $2,550,000; however, there must be taxable income to accommodate this deduction. 100% bonus depreciation is now allowed for new and used purchases of eligible business property without taxable income limitations. In addition, construction or the purchase of real estate during 2019 may warrant the expense of a cost segregation study to take advantage of faster depreciation write-offs.
Taxpayers with eligible businesses may claim the 20% qualified business income deduction. As applicable, analysis should be made to determine if wages in the business are at the right level to optimize the deduction and if not, bonuses could be paid by the end of the year.
Thank you for taking your precious holiday time to read this article. Hopefully, some of the planning ideas mentioned will be applicable to your particular situation and help you minimize overall taxes. Please note that our lawmakers are forever making changes to the tax laws; therefore, there could be changes even before the end of 2019 and on into next year which may impact your tax scenario.
We would like to take this opportunity to wish you a holiday season filled with much joy and peace and a very prosperous 2020!