Year-end Navigation for Individual Tax 2019

17 December 2019

Lucy Luo, CPA

Tax reform significantly altered the U.S. taxation system for the 2018 tax year. We have completed our initial pass through the maze and now it’s time to navigate the tax issues for the remainder of 2019.  The biggest drivers of tax planning are your personal goals and situation.

You should consider strategies such as deferring income into a subsequent year, accelerating deductions or expenses, or acting based upon an implication of the tax reform. Whether you should defer or accelerate income and deductions between 2019 and 2020 mainly depends on your projected marginal tax rate for each year. If your rate is expected to be the same for 2019 and 2020, generally you should defer income to 2020 and accelerate deductions into 2019 due to the time value of money.

Control Your Income
You should arrange your year-end bonus with your employer to the year in which you will be in a lower tax bracket.  If you are a small business owner, you can control the receipts of various types of income depending on your situation, such as dividend payments from closely- held companies. For commissions, you can close sales in December or January. You should be cautious about constructive receipts when you take care of these matters. You can also use strategies such as the installment sale method to defer taxable gains on sales.

If you plan to convert a traditional IRA to a Roth IRA, convert in a lower tax bracket year since you will pay tax on the amounts converted that were previously deducted. Keep in mind, a conversion will increase your AGI and potentially increase your tax bracket overall.

Control Your Deductions
Many taxpayers are not able to itemize now because of the higher standard deduction and the $10,000 limitation on state and local taxes deduction. You can use a “bunching strategy” to pull or push discretionary medical expenses and charitable contributions into the years in which you plan to itemize. This may include making charitable contributions every other year, for example.

If you become eligible in December 2019 to make health savings account (HSA) contributions, you can make a full year deductible contribution for 2019.

If you want to accelerate deductions, consider using a credit card to pay expenses before the end of the year. You can take the deductions for 2019 even if you do not pay your credit card bill until 2020.  If you have a business, consider purchasing and placing business assets in service in 2019. The section 179 expense
limit is $1,020,000 for 2019 with an investment ceiling limit of $2,550,000.

Establish a SEP plan for you and your employees if you are a sole proprietor.  Maximum allowable contributions are $56,000 for an employee.

Section 199A
Tax reform allows business owners of pass through entities and sole proprietors to deduct up to 20% of qualified business income. Depending on your business model, you may be able to increase your deduction with certain strategies, such as paying additional wages before year end. The rules for the 20% deduction are complex, so please contact our office for assistance.

Qualified Opportunity Funds (QOF)
QOF were created under tax reform to promote the investment in low-income communities. QOFs are a hot topic since you can defer, reduce, or permanently exclude capital gains on investment in a QOF. If you expect large capital gains, consider making this investment to obtain significant tax savings.

Other Year-end Reminders
Make gifts sheltered by the annual gift tax exclusion before year end. The exclusion is up to $15,000 for 2019 to each of an unlimited number of donees.  The tax reform also nearly doubled the estate tax exemption. For 2019, the exemption is $11.4 million per person. Review your estate plan with your advisor and make use of it.

Consider making traditional or Roth IRA contributions. The limit is $6,000 for 2019 ($7,000 for age 50 or older).  Remember to take required minimum distribution (RMD) from your IRA or 401(k) if you reach age 70½ to avoid the 50% not-withdrawn penalty.

If you invest Qualified Small Business Stock (QSBS) and have a projected gain, make sure you have held the stock for more than five years before selling to qualify for the QSBS gain exclusion.

Review your income, deductions, withholding, and estimated taxes paid for any significant changes from the prior year. Catch up withholdings or estimated tax payments may help reduce or eliminate an underpayment penalty.

The above ideas only scratch the surface of tax-planning and savings strategies and may differ based upon your personal tax situation. If you have any questions, please contact our office. Our tax professionals can review and consider the interplay of various tax rules for you.