2019 year-end tax planning has businesses and individuals making moves to maximize deductions due to recently-changed tax rules. At a glance, key changes include:
Lower income tax rates, a larger standard deduction, severely limited itemized deductions, no personal exemptions, an increased child tax credit, and a watered-down alternative minimum tax (AMT).
The corporate tax rate has been reduced to a flat 21% rate, there is no corporate AMT, there are limits on business interest deductions, and there are very generous expensing and depreciation rules.
*Non-corporate taxpayers with qualified business income (QBI) from pass-through entities may be entitled to a special 20% deduction.
Below is our curated year-end tax planning checklist for 2019. It includes actions that may help you save tax dollars if you act before year-end. Reach out to your Withum Tax Professionals to discuss planning ideas that may be applicable to your situation.
Individual Tax Planning
Tax Brackets and Rates
|Rate||For Unmarried Individuals||For Married Individuals Filing Joint Returns||For Heads of Households|
|Taxable Income Over|
Married, Filing Jointly
Head of Household
Capital Gain Brackets and Rates
|Rate||For Unmarried Individuals||For Married Individuals Filing Joint Returns||For Heads of Households|
|Taxable Income (including Capital Gains) Over|
2109 Year-End Tax Planning Checklist
- Postpone income until 2020 and accelerate deductions into 2019.
- Doing so 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).
- Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.
- Long-term capital gain from sales of assets held for more than one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income. If you hold long-term, appreciated capital assets, consider selling enough of them to generate long-term capital gain sheltered by the 0% rate, if applicable.
- The 3.8% Net Investment Income (NII) tax will apply depending on a taxpayer’s modified adjusted gross income (MAGI) and NII for the year. Some taxpayers should consider ways to minimize or eliminate (e.g., through deferral) additional NII for the balance of the year, while others should try to see if they can reduce MAGI other than NII.
- The 0.9% additional Medicare tax applies to individuals for whom the sum of their wages received with respect to employment and/or self-employment income exceeds a threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in other cases). Employers must withhold the additional Medicare tax from wages in excess of $200,000, regardless of filing status or other income. Thus, planning opportunities may exist with respect to eliminating this tax by deferring income to a later year.
- Many taxpayers will claim the standard deduction because of the increased standard deduction and the limits on itemized deductions that apply for 2019—
- No more than $10,000 of state and local taxes (including real estate taxes) may be deducted;
- Miscellaneous itemized deductions (e.g., tax preparation fees and unreimbursed employee expenses) are not deductible;
- Interest paid on home mortgage debt (subject to a grandfathering rule) is deductible to the extent of debt up to $750,000 (down from $1,000,000 in 2017); and
- Personal casualty and theft losses are deductible only if they are attributable to a federally-declared disaster, and only to the extent the $100-per-casualty and 10%-of-AGI limits are met.
You can still itemize medical expenses, but only to the extent they exceed 10% of your AGI. Permissible itemized deductions would need to cumulatively exceed the standard deduction applicable to your filing status in order to lower your taxes.
- Consider asking your employer to increase withholding of state and local taxes (or you can pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2019. But remember that state and local tax deductions are limited to $10,000 per year, so this strategy is not a good one to the extent it causes your 2019 state and local tax payments to exceed $10,000.
- It may be advantageous to defer a bonus to be paid by your employer until early 2020. This could reduce as well as defer your tax.
- It may make sense to convert all or part of your eligible retirement accounts (e.g., 401(k), traditional IRA, or other non-Roth accounts) to a Roth IRA before year-end. However, such a conversion will increase your AGI for 2019, and possibly reduce tax breaks that are tied to AGI (or MAGI).
- Taking versus delaying required minimum distributions (RMDs) from your IRA or 401(k) (or other employer-sponsored retirement plan).
- If you turn age 70½ 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).
- 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. However, it could be beneficial to take both distributions in 2020 if you will be in a lower bracket in that year.
- Consider making 2019 charitable donations via qualified charitable distributions from your IRAs. When you reach age 70 ½, the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. And the amount of the qualified charitable distribution reduces the amount of your RMD, which can result in tax savings.
- Consider bunching charitable deductions in the current year with a donor-advised fund, so you increase your charitable deduction and therefore your itemized deductions above the standard deduction, and you can allocate charitable funds from the donor-advised fund in later years.
- Avoid underpayment of estimated tax penalty by taking an eligible rollover distribution from a qualified retirement plan before the end of 2019. Take a distribution in the amount equal to what your estimated tax payments for the year should have been, and direct that total withdrawal to be withheld/sent to the IRS. The “distribution” will be applied pro-rata over the 2019 tax year to reduce previous underpayments of estimated tax.
- Consider increasing the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
- If you become eligible in December of 2019 to make health savings account (HSA) contributions, you can make a full year’s worth of deductible HSA contributions for 2019.
- 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.
- If you were in federally-declared disaster area, and you suffered uninsured or unreimbursed disaster-related losses, you can choose to claim them either on the return for the year the loss occurred (in this instance, the 2019 return normally filed next year), or on the return for the prior year (2018).
- If you were in a federally-declared disaster area, you may want to settle an insurance or damage claim in 2019 in order to maximize your casualty loss deduction this year.
Contact our Withum Tax Professionals to discuss year-end tax planning ideas applicable to your situation.
Year-End Tax Planning for Businesses
- Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (QBI).
- If the taxpayer’s taxable income exceeds a certain threshold amount, 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); 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.
- Taxpayers may be able to achieve significant savings with respect to this deduction, by deferring income or accelerating deductions so as to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2019. Depending on their business model, taxpayers also may be able to increase the new deduction by increasing W-2 wages before year-end.
- Limits on Deduction of Business Interest
- Post-TCJA, every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income (ATI). The net interest expense disallowance is determined at the tax filer level; however, a special rule applies to pass-through entitles, which requires the determination to be made at the entity level, for example, at the partnership level instead of the partner level.
- For tax years beginning after 12/31/2017 and before 1/1/2022, ATI is computed without regard to deductions allowable for depreciation, amortization, or depletion and without the former Section 199 deduction (which is repealed effective 12/31/2017).
- Exemptions –
- An exemption from these rules applies for taxpayers (other than tax shelters) with average annual gross receipts for the three-tax year period ending with the prior tax year that do not exceed $25 million.
- Real property trades or businesses can elect out of the provision if they use ADS to depreciate applicable real property used in a trade or business.
- Farming businesses can also elect out if they use ADS to depreciate any property used in the farming business with a recovery period of ten years or more.
- An exception from the limitation on the business interest deduction is also provided for floor plan financing (i.e., financing for the acquisition of motor vehicles, boats or farm machinery for sale or lease and secured by such inventory).
- Expansion of small businesses that are able to use the cash (as opposed to accrual) method of tax accounting. To qualify as a small business, a taxpayer must, among other things, satisfy a gross receipts test (during a three-year testing period, average annual gross receipts cannot exceed $25 million). Cash method taxpayers may find it a lot easier to shift income, e.g., by holding off billings until next year or by accelerating expenses, e.g., paying bills early or by making certain prepayments.
- 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 phase-out starts at $2,550,000.
- Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software.
- Expensing 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), as well as roofs, HVAC, fire protection, alarm, and security systems.
- Many small- and medium-sized businesses may be able to make timely purchases and be able to currently deduct most if not all their outlays for machinery and equipment. Further, the expensing deduction is not prorated for the time that the asset is in service during the year. 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 expensing deduction for 2019.
- 100% bonus first-year depreciation – Businesses are permitted a deduction for machinery 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.
- De minimis safe harbor election – Also known as the book-tax conformity election, businesses may be able to expense the cost of lower-cost assets and materials and supplies, assuming the costs do not have to be capitalized under the Section 263A uniform capitalization (UNICAP) rules.
- Income Acceleration – Certain corporations (other than a large corporation) that anticipate a small net operating loss (NOL) for 2019 and substantial net income in 2020 may find it worthwhile to accelerate just enough of its 2020 income (or to defer just enough of its 2019 deductions) to create a small amount of net income for 2019. This will permit 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.
- To reduce 2019 taxable income, consider deferring a debt-cancellation event until 2020.
- To reduce 2019 taxable income, consider disposing of a passive activity in 2019 if doing so will allow you to deduct suspended passive activity losses.
- Section 1202 Stock – For certain C corporations satisfying an active trade or business requirement, shareholders that held original issuance stock for more than five years generally can be eligible to have gain on the stock excluded from tax, to the extent of the greater of $10 million or 10 times the original tax basis.
Year-End Planning Resources