CHICAGO — Taxpayers should be able to approach year-end tax planning for 2019 with more confidence than last year.
Tax reform made 2018 a particularly difficult year as taxpayers and the Internal Revenue Service (IRS) raced to contend with sweeping changes. But, with the dust settling and significant IRS guidance available, taxpayers can approach the end of the year with more certainty.
To help individuals and businesses prepare for filing season now that tax reform has taken shape, Grant Thornton LLP has released a collection of year-end tax tips for 2019.
“The changes brought on by historic tax reform in 2017 are starting to come into focus for most people and businesses,” said Dustin Stamper, managing director in Grant Thornton’s Washington National Tax Office. “Tax reform upends a lot of traditional tax planning, so it’s important to revisit the usual year-end strategy.”
Stamper continued by stressing the need to take action now that tax reform has come to fruition. “A ‘wait and see’ approach to tax planning is no longer a viable option for taxpayers. Businesses and individuals alike have now seen tax reform play out, and they must adjust their tax planning in response. Limits on popular deductions like state and local taxes present challenges, but there are also new opportunities to employ transfer tax planning and defer capital gains with targeted investments.”
Here are the 10 most important 2019 year-end tax-planning considerations for individuals:
- Know whether you’ll take the standard deduction. It’s critical to know whether you expect to take the standard deduction before making decisions about year-end spending that would normally generate itemized deductions. Tax reform doubled the standard deduction while repealing or limiting numerous itemized deductions, leaving millions fewer taxpayers claiming actual itemized deductions. If your itemized deductions are unlikely to total at least $12,200 (or $24,400 if married and filing jointly), you will not get any deduction for things like charitable gifts or elective healthcare procedures.
- Make your opportunity zone investment before year-end. Opportunity zones were created to encourage investment in specific geographic areas by offering generous tax incentives. If you have sold or are considering selling assets this year that would generate large capital gains, keep in mind the gain can be deferred if you invest an equal amount in an opportunity zone fund within 180 days of the sale. If you hold the investment for 10 years, you won’t recognize any gain on the new investment itself. You still have to recognize the original gain you deferred by Dec. 31, 2026, at the latest, but if you make your investment by the end of the year, an extra 5% will be forgiven. You can get up to 10% of the deferred gain forgiven entirely if you hold the investment for five years, or 15% if you hold it for seven years, meaning 2019 presents the last opportunity to qualify for the extra 5% step up in basis. There are more than 8,000 opportunity zones throughout the U.S. in areas ripe for investment, and numerous funds are soliciting investors.
- Defer tax. Deferral remains a cornerstone of good tax planning. Why pay tax today when you can put it off until tomorrow and enjoy the time value of money? Deferring tax is about accelerating deductions and postponing income. You may be able to control the timing of items of income and expense. Consider deferring bonuses, consulting income or self-employment income. On the deduction side, you may be able to accelerate state and local income taxes, interest payments and real-estate taxes, but remember the $10,000 cap on deducting tax.
- Maximize “above-the-line” deductions. Above-the-line deductions are especially valuable because so many taxpayers will no longer itemize deductions. They also reduce your adjusted gross income (AGI), and AGI affects whether you’re eligible for many tax benefits. Common above-the-line deductions include traditional Individual Retirement Account (IRA) and Health Savings Account (HSA) contributions, self-employment taxes, certain health insurance costs and any bank penalties you may have had to pay for early account withdrawals. Note that tax reform repealed some popular above-the-line deductions, such as moving expenses (except for members of the military) and alimony payments (for divorces finalized after 2018).
- Leverage retirement account tax savings. It’s not too late to maximize contributions to a retirement account. Traditional retirement accounts like 401(k)s and IRAs still offer some of the best tax savings in the tax code. Contributions reduce taxable income at the time you make them, and you don’t pay taxes until you take the money out at retirement. The 2019 contribution limits are $19,000 for a 401(k) and $6,000 for an IRA (not including catch-up contributions for those 50 years and older). Remember that 2019 contributions to your IRA can be made as late as April 15, 2020.
- Make up a tax shortfall with increased withholding. Many taxpayers were unpleasantly surprised by smaller refunds or unexpected bills when they filed their 2018 returns because of changes to tax rules and withholding schedules. This year, make sure your withholding and estimated taxes align with what you actually expect to pay while you have time to fix a problem. If you find yourself in danger of being penalized for underpaying taxes, you can make up the shortfall through increased withholding on your salary or bonuses. A larger estimated tax payment at the end of the year can still expose you to penalties for underpayments in previous quarters, but withholding is considered to have been paid ratably throughout the year, so increasing it for year-end wages can save you in penalties.
- Don’t squander your gift tax exclusion. You can give up to $15,000 to as many people as you wish in 2019, free of gift or estate tax. You get a new annual gift tax exclusion every year, so don’t let it go to waste. If you combine gifts with your spouse, you can use your exemptions together to give up to $30,000 per beneficiary each year. So if you have three married children, you could give each couple $60,000 and remove $180,000 from your estate in a single year. You can give even more tax-free if you have grandchildren.
- Plan around the changing “kiddie tax.” The so called “kiddie tax” has gone on a wild legislative ride that makes planning tricky. Tax reform originally repealed the old version, which generally taxed the unearned income of children at parents’ marginal rates. Under the Tax Cuts and Jobs Act of 2017 (TCJA), a child’s unearned income was taxed at trust and estate rates. This change cut both ways. For some low- and middle-income families whose children receive unearned income like scholarships or military survival benefits, the trust and estate rates are much less favorable than their parents’ tax brackets. For some high-income families, the ability to use the trust tax brackets allowed more capital gains and qualified dividends to qualify for the zero and 15% brackets. But Congress just passed a law repealing the TCJA change and reverting back to the original “kiddie tax.” This change isn’t mandatory until 2020, but for 2018 and 2019 you can elect either version of the law. You should consider whether you may benefit from the TCJA version by transferring assets earning investment income to children before 2020, but keep in mind there will be little benefit next year. If you would do better under the original “kiddie tax” for 2018 and 2019, keep an eye on forthcoming IRS procedures for how to make the election.
- Don’t count on charitable gift state and local tax workarounds. Your state may be one of several to enact charitable giving laws designed to circumvent the $10,000 cap on the state and local tax deduction enacted as a part of tax reform. These laws offer state tax credits in exchange for contributions to charitable programs that provide state services, essentially turning state tax payments into charitable contributions for federal tax purposes. But the IRS has shut the door on these workarounds. If you have made such a contribution, new rules negate any potential benefit by requiring you to reduce your charitable deduction by the tax credits received in return. However, there is some relief. You can treat the contributions as state tax payments so that you can continue to deduct them up to the $10,000 cap.
- Leverage low interest rates and generous exemptions before they’re gone. The historically low interest rates and lifetime gift and estate tax exemptions present a powerful estate-planning opportunity. Many estate and gift tax strategies hinge on the ability of assets to appreciate faster than the interest rates prescribed by the IRS. There’s a small window of opportunity to employ estate-planning techniques while interest rates are still low and the lifetime gift exemption is at an all-time high. Tax reform doubled the gift and estate tax exemptions, but like the rest of the individual provisions, this change is set to expire in a few years.
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