2019 Year-End Tax Planning and Law Changes
As the end of the year approaches, it is a good time to focus on year-end tax planning moves that will help you lower your tax bill this year and possibly future years.
Year-end planning for 2019 starts with the second year of the new tax law, the Tax Cuts and Jobs Act (“TCJA”), which made major changes to the tax rules for individuals and businesses. While planning for 2019, we will look for ways to maximize your tax benefits relating to the new tax laws as well as finding other ways to lower your tax bill. The following is a narrow list of actions to consider during year-end tax planning.
Year-End Tax Planning Moves for Businesses & Business Owners
Thanks to TCJA, business owners may deduct up to 20% of their qualified business income from proprietorships and pass-through entities such as S corporations and partnerships. Owners of real estate may also qualify, but more analysis would need to be done. If your taxable income exceeds $321,400 for 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), 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. If you are not maximizing this deduction, then tax planning strategies should be considered.
Taxpayers may be able to achieve tax savings by deferring income or accelerating deductions to come under dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2019. Depending on the business model, taxpayers also may be able to increase the new 20% deduction by increasing W-2 wages before year-end.
A small business can use the cash (as opposed to the accrual) method of accounting in 2019 and later years. To qualify as a small business a taxpayer must, among other things, satisfy a gross receipts test. The gross receipts test is satisfied if, during a three-year testing period, the average annual gross receipts don’t exceed $25 million. Cash method taxpayers may find it a lot easier to shift income by holding off billings till next year or by accelerating expenses by paying bills early or by making certain prepayments.
Your business may benefit by taking advantage of the generous section 179 deduction rules for 2019. Under these rules, your business may expense up to $1.02 million on qualified asset acquisitions immediately, with a phase-out threshold of $2.55 million. Expensing is generally available for most depreciable property (other than buildings and currently not available for qualified improvement property due to a drafting error), and off-the-shelf computer software. This deduction is not prorated for the time the asset is in service during the year and the taxpayer can get the full deduction in 2019 for property acquired and placed in service in the last days of 2019.
Businesses also can claim a 100% bonus first-year depreciation deduction for machinery and equipment – bought used (with some exceptions) or new – if purchased and placed in service this year. This deduction is also not prorated for the time the asset is in service during the year and the taxpayer can get the full deduction in 2019 for property acquired and placed in service in the last days of 2019.
Year-End Tax Planning Moves for Individuals
Long-term capital gains from sales of assets held for over one year are taxed at 0%, 15%, or 20%, depending on the taxpayer’s taxable income. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that it, when added to regular taxable income, is not more than the maximum zero rate amount (e.g., $78,750 for a married couple filing jointly, $39,375 for single). If you are in the 0% tax rate and you have assets with a capital loss, consider not recognizing the loss until a year which would be beneficial. If you are not in the 0% tax rate, consider taking capital losses in 2019 to offset capital gains.
For 2019 the standard deduction amounts are $24,400 for married couples filing jointly and $12,200 for single filers. For itemized deductions, TCJA eliminated miscellaneous itemized deductions (e.g., tax fees, investor fees), unreimbursed employee expenses, and personal casualty and theft losses (except for federally declared disaster). You can still itemize medical expenses to the extent they exceed 10% of your adjusted gross income, state and local taxes up to $10,000, your charitable contributions, plus interest expense deductions on qualifying residence debt (new debt of $750k). It may be beneficial to bunch medical expenses and charitable contributions (donor-advised fund with appreciated securities) in one year but not the next to save on taxes.
It may be advantageous to try to arrange with your employer to defer, until early 2019, a bonus that may be coming your way. This could cut as well as defer your tax.
Year-End Planning for Gift and Estate Taxes
The TCJA put the estate, gift, and generation-skipping transfer tax exemptions at a record high levels available through 2025. The estate tax rate is at 40% and the inflation-adjustment exemption amount for 2019 is $11.4 million (up from $5 million).
Even if you are not required to file a federal estate tax return, you may be required to file a Minnesota estate return. For 2019, the Minnesota estate tax exemption is $2.7 million ($3 million for 2020) with a top Minnesota tax rate of 16%. If your estate is over the Minnesota tax exemption amount, then estate tax planning strategies should be considered.
One way to reduce your taxable estate is to make a 2019 annual gift of $15,000 per person by the end of the year. For married couples, this means they could give $30,000 per child without having to file a gift tax return. Annual gifts could be contributed to your child’s college savings 529 plan, which allow assets to grow tax-free, and distributions from the plan are not treated as income to the beneficiary to the extent they are used to pay for qualified higher-education expenses.
