2019 Individual Planning Guide

December 6, 2019

With the end of the year approaching, you should consider strategies that might help reduce your 2019 tax bill. Last year was the first year impacted by the Tax Cuts and Job Act of 2017(TCJA).  Even though there were no significant legislation changes in 2019 affecting individual taxes, situations vary from year to year, requiring a fresh look at how to approach year-end tax planning.

Below is a compiled list of actions based on current tax regulations that may help you save tax dollars if you act before year-end.  If you would like to discuss these matters in further detail, feel free to reach out to your WellsColeman tax professional at 804-385-1180.

 

Timing Income/Losses/Deductions

Realize gains or losses on stock while substantially preserving your investment position. These techniques are used when you already have realized gains or losses for the year, or carryover losses, and allow you to fully utilize losses, or reduce the impact of gains. Please let us know if you anticipate utilizing these techniques, so we can make sure that you and your investment advisor have all of the information you need to take informed action.

Postpone income until 2020 and accelerate above the line deductions and allowable itemized deductions into 2019 to lower your 2019 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2019 that are phased out over varying levels of adjusted gross income (AGI).

  • These include child tax credits, higher education tax credits, and deductions for student loan interest.
  • Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.
  • Note, however, that in some cases, it may pay to accelerate income into 2019, such as when a person’s marginal tax rate is much lower this year than it will be next year.

Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2019 deductions even if you don’t pay your credit card bill until after the end of the year.

For 2019, the “floor” beneath medical expense deductions for all taxpayers is 10% of AGI. If you are eligible to contribute, maximize your 2019 health savings account (HSA) contributions prior to year-end.

It may be advantageous to arrange with your employer to defer a bonus until early 2020.

 

Bunching Deductions into 2019 In Order To Reduce Taxes

TCJA significantly increased the standard deduction for all taxpayers, which 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 limitation on the combined amount of state income taxes and property taxes that may be deducted when itemizing ($5,000 in the case of married taxpayers filing separately).

  • Unfortunately, this $10,000 limitation applies to single as well as married taxpayers and is not indexed for inflation.

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 if the total of your itemized deductions in 2019 will be close to your standard deduction amount.

  • 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.

 

Retirement Plan/IRA Strategies

Consider whether it is advantageous to maximize your permitted salary deferrals into an employer plan by deferring additional amounts from your regular pay and/or from bonuses to be received before the end of the year.

  • Contemplate deferring an amount that will at least maximize any matching employer contribution on your behalf.

If you reached age 70-½ during 2019, consider whether you should take your first required minimum distribution (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan) in 2019, rather than bunching 2 years’ distributions into 2020.

  • RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-½. That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire.
  • Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. RMDs must begin no later than April 1 following the year in which the IRA owner attains age 70-½, but can begin in the calendar year you turn 70-½.
  • If you turn age 70-½ in 2019, you can delay the first required distribution to 2020, but if you do, you will have to take a double distribution in 2020 – the amount required for 2019, plus the amount required for 2020.
  • Think twice before delaying 2019 distributions to 2020, as bunching income into 2020 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels.
  • It could be beneficial to take both distributions in 2020 if you will be in a substantially lower bracket that year.

IRA owners and beneficiaries who have reached age 70-½ are permitted to make cash donations directly from their IRAs.

  • This will total up to $100,000 per individual IRA owner per year – $200,000 per year maximum on a joint return if both spouses make qualified charitable distributions of $100,000 to IRS approved public charities directly out of their IRA.
  • These qualified charitable distributions are tax free to you, but you get no itemized charitable deduction on your Form 1040.
  • The benefit is that you get tax free treatment of the distribution which equates to an immediate 100% federal income tax deduction of the contribution.
  • To qualify for this tax break, the funds must be transferred directly from your IRA to the charity.

If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA, if eligible to do so.

  • Keep in mind, however, that such a conversion will increase your AGI for 2019. Please consult with us regarding the potential tax impact of such a move prior to taking action.

If you do not have an IRA, but have a qualified retirement plan account, consider rolling over amounts that are not required distributions into a regular IRA account.

  • You can take advantage of the above charitable contribution distributions in later years.

 

Surtaxes

Higher-income earners have unique concerns to address when mapping out year-end planning.

  • They must be wary of the 3.8% surtax on certain unearned income (NII) and the additional 0.9% Medicare (hospital insurance, or HI) tax on earned income.

If your modified adjusted gross income (MAGI) exceeds certain limits, these surtaxes may affect you.

  • If affected, you should consider ways to minimize (e.g. through deferral) additional NII for the balance of the year, and/or reduce your MAGI.

In cases where the 0.9% additional Medicare tax may apply, you may want to take action either to defer income to 2019.

  • Or revise withholding or estimated tax payments (the earned income from wages and self-employment on your return exceeds certain thresholds).

 

Section 199A Passthrough Tax Break

Enacted as part of TCJA, the Section 199A tax break allows for up to a 20 percent deduction for “qualified business income” from sole proprietorships, S corporations, partnerships, and LLCs taxed as partnerships.

  • The deduction, which is available to bothitemizers and nonitemizers, is claimed by individuals on their personal tax returns as a reduction to taxable income, but is subject to some complicated restrictions and limitations.
  • For 2019, if taxable income exceeds $321,400 for a married couple filing jointly or $160,700 for all other taxpayers, the deduction may be limited based on:
    • Whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), and
    • The amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business.
  • The limitations are phased in for joint filers with taxable income between $321,400 and $421,400 and for all other taxpayers with taxable income between $160,700 and $210,700.

 

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 of Foreign Bank and Financial Accounts (FBAR) if:

  • 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;
  • The financial account was in a foreign country; and
  • 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 us know at your earliest convenience.

 

Miscellaneous

Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes.

  • The exclusion applies to gifts of up to $15,000 in 2019 to each of an unlimited number of individuals.
  • You cannot carry over unused exclusions from one year to the next.

Tax reform increased the applicable estate and gift exemption for individual taxpayers and doubled the generation-skipping transfer tax exemption amounts for tax years beginning after December 31, 2017, and before January 1, 2026, with amounts adjusted for inflation each year.

  • For 2019, the gift exemption and generation skipping transfer tax exemption increased to $11,400,000 ($22,800,000 for married couples).

Information requirements increase when clients claim the child tax credit, head of household status or education credits. 

  • Paid tax preparers will continue to be required to ask additional questions of their clients when the taxpayer claims any of the aforementioned. We appreciate your understanding and patience with these required questions.

Pay medical expenses or education expenses on behalf of another person without it being considered a gift, if the payments are made directly to the provider.

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