Considerations for Your 2019 Tax PlanningBy Jay Sussman | November 22, 2019
Though the end of each year marks the time to begin tax planning, recently many clients have come to me expressing uncertainty over where to begin. They have noticed that the “traditional” strategies that they relied on prior to the Tax Cuts and Jobs Act (TCJA) are no longer effective. And while it’s true that many popular deductions were either reduced or eliminated by the TCJA, there are new strategies that can be used to maximize the benefits you receive for your itemized deductions and other deductions and losses. Below are some of the considerations I am sharing with my clients as they prepare for year end.
PLAN CHARITABLE CONTRIBUTIONS CAREFULLY
The deduction category of charitable contributions was somewhat improved by the TCJA, with the deductible limit for cash contributions increasing from 50% to 60% of adjusted gross income. However, the increased limit will not result in a larger deduction for every taxpayer— in order to deduct charitable contributions, you must itemize, and your total itemized deductions must exceed the standard deduction. With the 2019 standard deduction set at $12,200 for single filers and $24,400 for those filing married-joint returns, there is a higher hurdle to clear before you receive a benefit for your charitable contributions.
Proper planning and timing of your charitable giving can maximize the tax savings from those charitable contributions. If you took the standard deduction in 2018, you may want to consider bunching your charitable contributions into alternating years. This strategy may help you get over the standard deduction amount, allowing you to itemize in that year. Another option is donating appreciated, publicly traded stock instead of cash. If you donate publicly traded stock held for longer than one year, you can deduct the fair market value and avoid the capital gains tax you would have paid if the stock was sold. Even if you are taking the standard deduction, you can still benefit from the tax savings by not paying tax on the capital gains. (Note that you should not donate depreciated stock. In this scenario, you would want to sell the stock, benefit from the loss and donate the proceeds.)
For those taxpayers who are taking required minimum distributions from their Individual Retirement Accounts (IRAs), an additional option is available to maximize the benefit of your charitable giving. Qualified Charitable Distributions (QCDs) are not a new thing—in fact, they have been around since 2006—but prior to TCJA, this option was often overlooked by clients who received the full benefit of their itemized deductions. Although not a deduction, for 2019, you can exclude up to $100,000 from gross income for a QCD. A QCD is an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 701⁄2 or over that is paid directly from the IRA to a qualified charity. In addition, your charitable distribution can satisfy all or part of your 2019 required minimum distribution.
REVISIT YOUR PORTFOLIO
The timing of deductions is not the only strategy one can employ at the end of the year to minimize their tax liability. Many clients are often surprised at year end by the capital gain distributions generated by investments in mutual funds. Taxpayers should beware of purchasing mutual fund shares at the end of the year, as funds often throw off large capital gain distributions at year end. If you own the shares on the distribution’s record date, you will be taxed on the full amount of the distribution, even if you did not own the fund for the entire year. With the recent market volatility, it may be a good idea to evaluate your stock portfolio to see if there are unrealized losses you can take to offset any gains you have. Both long- and short-term gains and losses can offset one another.
If you want to realize those losses without changing your portfolio’s asset allocation, be mindful of the wash sale rules. They prevent you from taking a loss on a security if you buy a substantially identical security (or option to buy that security) within 30 days before or 30 days after selling the security that generated the loss. You will only be able to take the loss for tax purposes after the replacement security is disposed of. The wash sale rules will also apply if you purchase the same or a substantially similar security in your IRA.
SECTION 529 PLANS
The TCJA expanded the use of Section 529 plans, and under the new law, up to $10,000 annually per student can be used from a Section 529 plan to pay tuition for kindergarten through grade 12. There are some states that do not conform to the federal law change related to Section 529 plans. Speak with your tax advisor before making any distributions from a Section 529 plan for K-12 tuition expenses—while contributions to a 529 plan are not deductible for federal tax purposes, some states including New York offer a deduction for some of your contributions. A special rule for 529 plans allows you to front load five years’ worth of annual gift tax exclusions and make up to a $75,000 contribution ($150,000 if you split gifts with your spouse) per recipient in 2019.
The TCJA added the Section 199A deduction for an individual’s income from passthrough entities such as partnerships, S corporations and LLCs that are taxed as sole proprietorships, partnerships or S corporations for tax purposes. The deduction is generally limited to 20% of qualified business income (QBI).
Additional limitations to the deduction begin to apply if your taxable income in 2019 exceeds the threshold amount of $160,700 for single taxpayers or $321,400 for married taxpayers filing a joint return. If your taxable income is over these amounts, the W-2 wages and Unadjusted Basis (UBIA) limitations begin to phase in. The limits fully apply once your taxable income exceeds $210,700 for single taxpayers and $421,400 for married couples filing a joint return. If your income is over the threshold amount, your deduction is limited to the lesser of:
1. 20% of the QBI for that trade or business
2. The greater of
a. 50% of W-2 wages with respect to that qualified business or
b. The sum of 25% of W-2 wages plus 2.5% of UBIA with respect to that qualified business.
In addition, if your income is over the threshold amount, the deduction is not available for income earned for any “Specified Trade or Business.” Specified trades or businesses include services provided in the field of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing or investment management, trading and dealing in securities.
If your taxable income is below the threshold amount, the W2 wages, UBIA and specified service limitations will not apply to you. In this case, your deduction will be 20% of the lesser of your QBI or the amount your taxable income exceeds your capital gains. If your taxable income is over the threshold amount, there are some things you can do to maximize your deduction. Consider accelerating deductible expenses into the current year. Bonus depreciation and the Section 179 expense election allow you to get a larger upfront deduction for big purchases such as equipment and furniture. While these expenses will reduce your QBI, they will also help you get below the taxable income threshold. You can also look to accelerate itemized deductions such as charitable contributions or realize losses such as capital losses if you have gains to bring your taxable income below the threshold amount. If you expect to be in a higher tax bracket next year, you may want to delay larger purchases or deductions until the following year. A two-year analysis should be performed to maximize your potential tax savings.
Taxpayers are right to start planning at year end, and utilizing the proper tax-planning strategies can have a significant impact come April 15. These are just some of the strategies I’m sharing with my clients as they prepare for the 2020 tax season, and depending on your specific tax situation, there may also be other options available. Speaking with your tax advisor will help you determine the most effective and beneficial ways to prepare.
About Jay Sussman
Jay Sussman, CPA, is a Partner in the Private Client Services Group at Marks Paneth LLP. In this role, Mr. Sussman provides tax planning, consultation and preparation services for high-net-worth individuals, trusts and estates, partnerships and corporations. Mr. Sussman has developed additional expertise in tax planning and preparation for non-resident alien individuals, controlled foreign corporations and passive foreign investment companies, as well as treaty-based returns and foreign reporting for U.S. resident taxpayers. Mr. Sussman began his... READ MORE +