As the end of the year is fast approaching, it’s time to consider year-end strategies that may reduce your 2019 tax bill. Planning can help minimize your tax liability and reduce any tax surprises. This letter is long and not every section will apply to everyone. Our goal is that the strategies and ideas will lead to discussion and implementation which in turn will save you money by lowering your taxes. We are available to answer any of your questions and help utilize any tax saving strategies.
Bunching Deductions into 2019
The Tax Cuts and Jobs Act of 2017 (TCJA) significantly increased the standard deduction for all taxpayers. This means that many individuals who previously received a tax benefit by itemizing deductions no longer do, because taking the standard deduction is more advantageous. For 2019, the standard deduction is $12,200 for single taxpayers, $24,400 for married taxpayers filing a joint return, $18,350 for taxpayers filing as head of household, and $12,200 for married taxpayers filing separately.
In addition, there is a $10,000 cap ($5,000 in the case of married taxpayers filing separately) on the combined amount of state and local taxes and property taxes that may be deducted when itemizing. The $10,000 limitation applies to single as well as married taxpayers.
If the total of your itemized deductions in 2019 will be close to your standard deduction amount, alternating between bunching itemized deductions into 2019 and taking the standard deduction in 2020 (or vice versa) could provide a net-tax benefit over the two-year period. For example, if you give a certain amount to charities each year, and if it’s financially feasible, you might consider doubling up this year on your contributions rather than spreading the contributions over a two-year period. If these amounts, along with your mortgage interest and medical expenses exceed your standard deduction, then you should double up on the expenses this year and take the standard deduction next year.
Similar opportunities may be available for bunching property tax payments and state income tax payments, subject to TCJA’s$10,000 limitation on deductions for such payments. This strategy can be especially attractive for single taxpayers because the standard deduction is so much lower for single individuals. It’s important to remember, however, that the deduction for property taxes applies only to property taxes that have been assessed. If the assessment for 2019 property taxes occurred in 2018 and the taxes are due and paid in 2019, you can deduct on your 2019 tax return. Similarly, for property taxes assessed for 2020, assuming you also pay the 2020 taxes in 2019.
Finally, if any of your real estate or state income taxes can be allocated to a business or rental real estate, they may not subject to the $10,000 limitation.
Medical Expenses and Health Savings Accounts
For 2019, your medical expenses are only deductible as an itemized deduction to the extent the expenses exceed 10 percent of your adjusted gross income. Depending on what your taxable income is expected to be in 2019 and 2020, and whether itemizing deductions would be advantageous for you in either year, you may want to accelerate any optional medical expenses into 2019 or defer them until 2020. The right approach depends on your income for each year, expected medical expenses, as well as your other itemized deductions.
However, health saving accounts (HSAs) present an attractive alternative. If you are eligible to set up such an account, you can deduct the amount you contribute to the account in computing adjusted gross income. Thus, the contributions are deductible whether you itemize deductions or not. Distributions from an HSA are tax free to the extent the expenses are used to pay for qualified medical expenses (i.e., medical, dental, and vision expenses). For 2019, the annual contribution limits are $3,500 for an individual with self-only coverage and $7,000 for an individual with family coverage.
Mortgage Interest Deduction
If you sold your principal residence during the year and acquired a new principal residence, the deduction for any interest on your acquisition indebtedness (i.e., mortgage) could be limited. The TCJA limits the interest deduction on mortgages of more than $750,000 obtained after December 14, 2017. The deduction is limited to the portion of the interest allocable to $750,000 ($375,000 for married taxpayers filing separately). For mortgages acquired before December 15, 2017, the limitation is the same as it was under prior law: $1,000,000 ($500,000 for married taxpayers filing separately).
You can potentially deduct interest paid on home equity indebtedness, but only if you used the debt to buy, build, or substantially improve your home. Thus, for example, interest on a home equity loan used to build an addition to your existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not.
Charitable Contribution Deductions
As a result of the increase in the standard deduction, some taxpayers are no longer getting a benefit from itemizing their deductions, such as charitable contributions, as they once were. You can still help charities and get a tax benefit if you contribute enough to get over the standard deduction amount or bunch itemized deductions that would otherwise be spread over multiple years into one year.
Additionally, you can reap a larger tax benefit by donating appreciated assets, such as stock, to a charity. Generally, the higher the appreciated value of an asset, the bigger the potential value of the tax benefit. Donating appreciated assets not only entitles you to a charitable contribution deduction but you also avoid the capital gains tax that would otherwise be due if you sold the stock. However, it’s important to also keep in mind that tax deductions for appreciated property are limited to 50 percent of your adjusted gross income (AGI). Cash donations are limited to 60 percent of your AGI.
Finally, taxpayers 70 1/2 years old and older who own an individual retirement account (IRA) are required to take minimum distributions from that account each year and include those amounts in taxable income. If you are in this category, a special rule allows you to make a charitable contribution directly from your IRA to a charity. Making the contribution directly to a charity counts towards your required minimum distribution but that amount is not included in income and reduces your taxable income.
Home Office Expenses
When the TCJA eliminated the miscellaneous itemized expense deduction, it eliminated the ability of employees to deduct home office expenses. However, taxpayers with their own business can still file a Schedule C and take a home office expense deduction if part of the home is used for that business. State income taxes, property taxes, and home mortgage interest allocable to your business can also be deducted and such deductions are not subject to the limitations that apply to individual taxpayers who do not operate a Schedule C business from their home.
Child-Related Expenses and Credits: For 2019, if you file a joint return and your modified adjusted gross income (MAGI) is $400,000 or less, youare eligible for a $2,000 child tax credit for each qualifying child. If you are filing as single, head of household, or married filing separately, the MAGI limitation for claiming a child tax credit is $200,000 or less. For income above those levels, a pro rata credit may be available depending ontotal MAGI. Taxpayers with income below certain thresholds may be eligible for a refundable child tax credit.
Additionally, if you paid someone to take care of your child or a dependent up to $3,000 ($6,000 for two or more dependents) so you can work or look for work, you may be entitled to a tax credit for 20 to 35 percent of the expenses paid for a child under 13 years old, an incapacitated spouse or parent or another dependent. Also, if you paid someone to come to your home and care for a child or dependent, you may be a household employer subject to employment taxes.
If you incurred expenses to adopt a child, you may be eligible for a tax credit of up to $14,080 per child. The 2019 adoption tax credit is not refundable. This means the credit offsets your tax liability. If you are planning to or have already adopted a child, please call our office to discuss.
- If your employer has a 401(k) plan and you are under age 50, you can defer up to $19,000 of income into that plan. Catch-up contributions of $6,000 are allowed if you are 50 or
- If you have a SIMPLE 401(k), the maximum pre-tax contribution for 2019 is $13,000. That amount increases to $16,000 if you are 50 or
- If you are under 50, the maximum contribution amount to an individual retirement account (IRA) for 2019 is $6,000. If you are 50 or older but less than 70 1/2, the maximum contribution amount is $7,000.
Reevaluating Your Stock Portfolio
Year end is a good time to review your stock portfolio to see if you might want to sell stocks that have lost value. You should evaluate whether you might benefit from selling off appreciated stocks and using the resulting gain to limit your exposure to a long-term capital loss on stocks that have diminished value.
Planning for the 3.8 Percent Net Investment Income Tax
A 3.8 percent tax applies to certain net investment income of individuals with income above the threshold amounts are $250,000 (married filing jointly and qualifying widow(er) with dependent child), $200,000 (single and head of household), and $125,000 (married filing separately). In general, investment income includes: interest, dividends, capital gains, rental and royaltyincome, non-qualified annuities, and income from businesses involved in trading of financial instruments or commodities. Thus, while the top taxrate for qualified dividend income is generally 20 percent, the top rate on such income increases to 23.8 percent for a taxpayer subject to the netinvestment income tax (NIIT). If it appears you may be subject to the NIIT, the following actions may help avoid the tax and we should discuss whether any of these options make sense for your situation.
- Donate or gift appreciated property. As discussed above, by donating appreciated property to a charity, you can avoid recognizing the appreciation for income tax purposes and for net investment income tax purposes. Or you may gift the property so that thedonee can sell it and report the In this case, you’ll want to gift the property to individuals that have income below the $200,000 (single) or $250,000 (couples) thresholds.
- Replace stocks with state and local bonds. Interest on tax-exempt state and local bonds are exempt from the NIIT. In addition,because such interest income is not included in adjusted gross income, it can help keep you below the threshold for which the NIIT
- If you intend to sell any appreciated property, consider whether the sale can be structured as an installment sale, so the gain recognition is spread over several
- Since capital losses can offset capital gains for NIIT purposes, consider whether it makes sense to sell any losing
- If you have appreciated real property to dispose of and are not considered a real estate professional, a like-kind exchange may bemore By deferring the gain recognition, you can avoid recognizing income subject to the NIIT.
Because the NIIT does not apply to a trade or business unless (1) the trade or business is a passive activity with respect to the taxpayer, or (2) the trade or business consists of trading financial instruments or commodities, we may want to look at ways in which a venture you are involved with could qualify as a trade or business.
Additional Medicare Tax
An additional Medicare tax of 0.9 percent is imposed on wages, compensation, and self-employment income in excessof the threshold amounts of $250,000 (joint return or surviving spouse), $125,000 (married individual filing a separate return), and $200,000 (allothers).
For married couples, employers do not take a spouse’s self-employment income or wages into account when calculating Medicare tax withholding for an employee. If you and your spouse will exceed the $250,000 threshold in 2019 and have not made enough tax payments to cover the additional .9 percent tax, you can file Form W-4 with the your employer before year end to have an additional amount deducted from your paycheck to cover the additional .9 percent tax. Otherwise, underpayment of tax penalties may apply.
Timing Income and Deductions
If there is going to be a dramatic swing in your taxable income or your life circumstances between 2019 and 2020, it may make sense to either: (1) accelerate income into 2019 and defer deductions into 2020, or (2) accelerate deductions into 2019 and defer income into 2020.
- Accelerating Income into 2019. Options for accelerating income include: (1) harvesting gains from your investment portfolio, keeping in mind the 3.8 percent NIIT; (2) converting a retirement account into a Roth IRA and recognizing the conversion income this year; (3) taking IRA distributions this year rather than next year; (4) if you are self-employed and have clients that owe you money, try to get them to pay before year end; and (5) settling any outstanding lawsuits or insurance claims that will generate income this
- Deferring Deductions into 2020. If you anticipate a substantial increase in taxable income next year, it may be advantageous to pushdeductions into 2020 by: (1) postponing year-end charitable contributions, property tax payments, and medical and dental expense payments, to the extent deductions are available for such payments, until next year; and (2) postponing the sale of any loss-generating property.
- Deferring Income into 2020. If it looks like you may have a significant decrease in income next year, either from a reduction in income or an increase in deductions, it may make sense to defer income into 2020 or later years. Some options for deferring income include: (1) if you are due a year-end bonus, having your employer pay the bonus in January 2020; (2) if you are considering selling assets that will generate a gain, postponing the sale until 2020; (3) if you are considering exercising stock options, delaying the exercise of those options; (4) if you are planning on selling appreciated property, consider an installment sale with larger paymentsbeing received in 2020; and (5) consider parking investments in deferred annuities.
- Accelerating Deductions into 2019. If you expect a decrease in income next year, accelerating deductions into the current year can offset the higher income this year. Some options include: (1) prepaying property taxes in December, keeping in mind the $10,000limitation on deducting state income and property taxes and the fact that the property taxes must have been assessed in order to be deductible; (2) if you owe state income taxes, making up any shortfall in December rather than waiting until your state income tax return is due (and similarly keeping in mind the $10,000 limitation); (3) making your January mortgage payment in December;(4) making any large charitable contributions in 2019, rather than 2020; (5) selling some or all loss stocks; and (6) if you qualify for ahealth savings account, setting one up and making the maximum contribution
Foreign Bank Account Reporting
The IRS has become increasingly aggressive at tracking down individuals who have not reported foreign bank accounts. If you have an interest in a foreign bank account, it must be disclosed; failure to do so carries stiff penalties. You must file a Report ofForeign Bank and Financial Accounts (FBAR) if: (1) you are a U.S. resident or a person doing business in the United States;
- you had one or more financial accounts that exceeded $10,000 during the calendar year; (3) the financial account was in a foreign country; and (4) you had a financial interest in the account or signatory or other authority over the foreign financial account. If you are unclear about the requirements or think they could possibly apply to you, please let me know at your earliest
- Flexible Spending Accounts. Generally, you will lose any amounts remaining in a health flexible spending account at the end of the year unless your employer allows you to use the account until March 15, 2020, in which case you’ll have until then. You should check with your employer to see if the employer gives employees the optional grace period to March
- Life Events. Life events can significantly impact your For example, if you are using head of household or surviving spouse filing status for 2018 but will change to a filing tax status of single for 2019, your tax rate will go up.
- Individual Healthcare Penalty. For 2019, the tax penalty on individuals who fail to carry health insurance, which was enacted as part of the Affordable Care Act, has been eliminated.
- Moving Expense Reimbursement. If you received a reimbursement from your employer for moving expenses incurred in 2019, the reimbursement is taxable income. While taxpayers could previously deduct employment-relating moving expenses, this deduction is nolonger available for moves taking place in years 2018-2025, unless you are a member of the S. Armed Forces on active duty and move pursuant to a military order to a permanent change of station.
- Casualty and Theft Losses. If you incurred a casualty loss in a presidentially declared disaster area in 2019, it may be
Any other casualty loss, along with all theft losses, are not deductible.
- Section 199A Passthrough Tax Break. Enacted as part of TCJA, the Section 199A tax break allows a 20 percent deduction for qualified business income from sole proprietorships, S corporations, partnerships, rental real estate and LLCs taxed as partnerships. If you qualify for the deduction, it is taken on your individual tax returns as a reduction to taxable
Please call our office today at 281-406-8984 so we can set up an appointment for a year-end review. We can estimate your tax liability for theyear and determine whether any estimated tax payments may be due before year end. Planning can help you minimize your tax bill and position you for greater success.