Year-end tax planning – 2019 update on using the tax laws to save you money

we hope your planning does not look like this!

Last year, we provided a three-part series explaining the impact of the new tax law.  In our first part, we discussed the impact of the new law on personal taxes and in our second part, we discussed planning for small businesses.  In this part, we update the third part posted last year, which is our guide for year-end moves to reduce total taxes between 2019 and 2020. 

Can you act at all?   

Each year we advise that you be practical, focusing on where you can actually take action. 

For many, the new $24,000 standard deduction for married couples, $12,000 for single taxpayers, means you will not itemize (i.e., your total for itemized deductions is less than the standard amount so you take the higher, standard deduction).  The standard deduction goes up when you reach 65. 

If you are not itemizing, you have fewer ways in which to affect change in the taxes due in either year (but you can also stop collecting receipts for those deductions!). 

Some possible deduction strategies

One technique for getting around the limit is to bunch deductions from two or more years into one year.  The one deduction that you can easily move is for charitable donations.  Your state, local and real estate taxes are limited to a $10,000 maximum and you cannot accelerate, or delay, significant amounts of mortgage interest. 

If you do not want any one charity to receive the full amount in a single year, you can still use this bunching strategy.  Donate to a donor advised fund, from which you may be able to designate donations to particular charities in future years.

IRA donations:  If you are 70½ or older, you have the option of distributing up to $100,000 from your IRA or other qualified plan to an IRS-approved charity and having none of the distribution taxed. 

Capital Gains:  Review your portfolio.  You may be able to “harvest losses” to offset capital gains realized on stock sales or mutual fund capital gains distributions.  If you have substantial unrealized gains, consider donating to a charity.  See below. 

The tax planning steps

If you are able to itemize, determine what income and deductions you can move from 2019 to 2020 or vice versa.  You want to minimize total taxes for both years.  Make sure your planning includes the 3.8% Medicare tax on high income and review Roth conversions (Roth distributions are not taxed, so converting a traditional or roll-over IRA to a Roth could be beneficial, as long as the tax cost now is not too great).  And business owners will want to review our post on planning under 199A for QBID

Next, review the impact of moving income and expense to see what happens if you shift any of these amounts from one year to the other year.

But, watch for the Alternative Minimum Tax (“AMT”):

  • The exemption for the AMT and the threshold above which that exemption gets phased out are now higher than before 2018, so fewer taxpayers will owe the AMT.  

Finally, if you have not maxed-out your 401(k) plan, IRA, Health Savings Account or flex plan account, consider doing so before the end of the year.

Capital gains

Your mutual funds may have large capital gains distributions.  Christine Benz says, “Brace yourself: 2019 is apt to be another not-so-happy capital gains distribution season, with many growth-oriented mutual funds dishing out sizable payouts.”  

Review your unrealized losses to see if you can “harvest” those losses to offset or “shelter” realized gains, reducing your total taxable income.  If you have more losses than gains, you can take up to $3,000 of capital losses against other income. 

If you sell an asset that you would prefer to retain, in order to shelter gains in 2019, make sure you do not run afoul of the wash-sale rule (any loss on an asset that you repurchase in 30 days will be disallowed, so you have to either wait 30 days or purchase a similar asset that fits your asset allocation while not counting against the wash sale rule). 

If you have significant unrealized gains, consider using appreciated stock for charitable donations – that way you avoid the tax on the gain while still getting the full fair market value for your charitable donation.  

Some reminders on itemized deductions

As you may recall, mortgage interest on new home purchases is deductible only for loans of up to $750,000 used to purchase or improve your primary or secondary residence.  Interest on home equity loans will not be deductible, except when the home equity indebtedness is used to purchase or improve the residence.

Also, all miscellaneous deductions were eliminated.  This includes investment and tax preparation fees, safe deposit box charges and unreimbursed employee business expenses.  And moving expenses are no longer allowed (except for military personnel in certain cases). 

Check taxes paid

Make sure your total paid in withholdings and estimates meets the safe harbor rules.  If not, you could owe interest for under-withholding. 

Estate plan review

While you review your taxes, consider reviewing your estate plan and your beneficiary designations.  The federal exemption is just over $11 million in 2019, so fewer people will owe any federal estate tax.  However, many states still impose estate taxes on smaller estates.  If you have “excess wealth” and want to reduce your taxable estate by gifting assets to children or others, you can give $15,000 per person, per year.  If your spouse joins you, that is $30,000 per person.  This includes funding a 529 plan for education costs – expanded to provide for more than just college. 

Note, however, that holding appreciated assets for the step up in basis at death may be better for your heirs than gifting. 

Check on 2018

Check to see if you over-paid a penalty for under-withholding.  If you filed early, the penalty calculation may have over-stated the total you owe, so you will want to review your 2018 filing. 

Summary

Carefully review any income and deductions that you can still shift to see if moving will lessen the total taxes you pay for 2019 and 2020. 

Good luck and best wishes for the holidays!

Tax Planning Hacks for your Itemized Deductions and more

The Tax Cut and Jobs Act brought the most significant changes to our income taxes in the last thirty years.  We continue to assess its impact in this post, which provides updates and some strategies for items discussed at the end of 2018 in these three posts:

As a quick summary of the posts, in the first post, we discussed the impact of the new law on personal taxes; in the second post, we discussed planning for small businesses; and in our third post, we provided a practical guide for year-end action.   

Itemized deduction strategies

As we noted in these tax planning posts, far fewer US Taxpayers will itemize because of the increased $24,000 standard deduction for married couples ($12,000 for individuals).  One estimate is that the number will be about 6% of all taxpayers for 2018, down from over 30% in prior years. 

Bunching your itemized deductions into a single year is one way to push your total above the standard deduction amount, and thus restore the tax deduction benefit for such items as charitable donations.  We discussed bunching and giving to donor advised funds in our third post.  As we noted then, charitable donations are the easiest Schedule A items to which to apply bunching.

Miscellaneous deductions are gone;
Or are they? 

Now that the miscellaneous itemized deductions are gone, can you do anything with tax prep and investment fees? 

Take tax prep fees on other schedules

For the tax preparation fees, you can deduct those amounts on Schedule C, Schedule E (page 1), or Schedule F.  And, if you have K-1s, input the fees as unreimbursed expenses so that the fees flow to Schedule E (page 2).

Capitalize investment fees

As for investment fees, there is support for capitalizing these costs, but the support is not dispositive.  This interpretation of the Treasury regulations is that you can capitalize the cost of evaluating the value of stocks purchased and sold.  You would need to elect to capitalize the related fee for each transaction, so this could be a great deal of work, depending on the amount of fees and number of stocks purchased or sold in a given year.  Taking this approach seems fair, as the treatment parallels treatment of fees in mutual fund, where the advisory fees are netted out before capital gain and dividend distributions to shareholders. 

Notes:  First, that there is a Treasury memorandum that says you cannot add carrying costs to basis.  Second, even if you could, capitalizing takes a great deal of work so it may not be worth the effort. 

Kiddie tax

The first $1,050 of unearned income for children who are dependents is not taxed in 2018.  Amounts above that level are taxed at the same rate as trusts and estates.  Those brackets are quite compressed compared to individual brackets.  Nonetheless, a child of a parent in the 37% tax bracket can still have $12,500 of income taxed at a lower rate.  That could save taxes on college funds (but compare to sheltering in a 529 plan).

Child tax credit

The $2,000 child credit phases out at much higher adjusted income levels for 2018:  over $400,000 for married couples, $200,000 for single taxpayers.  If your child is age 17 or over, you lose the $2,000 credit, but you may qualify for the $500 dependent credit.   This credit could not only applies to college students, it covers disabled children, elderly parents and other family that are your dependents.      

QBID for rental real estate

The IRS regulations provide a safe harbor for people who spend 250 or more hours a year on activities related to their rental properties.  You will need to keep records of your time and maintain separate bank accounts for the activities. 

Enterprise Zone rollovers  

You can roll over gain from stock or other capital assets to investments in an enterprise zone, delaying tax on the gain, and even eliminating tax on a portion.  We will post more on this at a future date.

Estate taxes

With the doubling of the federal gift and estate tax credit, few estates will be subject to federal estate tax.  This means that gifting is not nearly as important as retaining low basis assets for the step at death.  By this we mean that keeping assets in your name results in those assets are treated as having basis equal to the fair market value at death, so your heirs only pay tax on any gain that occurs after your death. 

Conclusion

There have been many changes to our tax law, so if you are not sure how you are affected, contact me for some planning. Maybe we can help you save on taxes!

Steven

2017 year-end tax planning – a year of uncertainty (updated)

(as also seen online at IRIS)

The Republican Congress is in the process of passing the Tax Cut and Jobs Act, a new tax law. President Trump is expected to sign it by Christmas.

The law was created and passed hastily and affects many aspects of the federal tax code, so many details are still not clear. Furthermore, regulations have yet to be issued. Also, while the provisions affecting corporations are permanent, most affecting individuals expire in 2026. Thus, tax planning is complicated.

How do you plan? Very carefully – you need to augment your traditional year-end planning by anticipating the impact of the many changes.

Note: many proposed changes did not make the final law, so be sure you are referring to the final version when making your planning decisions!

Planning steps

First, be practical:

  • Determine what income and deductions you can move from 2017 to 2018 or vice versa.

Second, review the impact:

  • What happens if you shift any of these amounts of income and deductions to the other year?

Finally, watch for the impact of the Alternative Minimum Tax (“AMT”):

  • The exemption for the AMT and the threshold above which that exemption gets phased out both rise next year, so some deductions lost to the AMT in 2017 could have value in 2018. Others simply vanish next year, so you need to plan carefully!

Income

The new law lowers the tax brackets, so income will be generally subject to less tax in 2018.

Conclusion: You probably want to move income to next year if you can.

Exemptions and standard deduction

The new law eliminates personal exemptions and raises standard deductions to $12,000 for single filers and to $24,000 for married couples. These amounts will be indexed for inflation. The increased standard deduction may offset deductions that you lose, as discussed below. If you have children and others who are dependents, those tax credits are increased, which may help as well.

Conclusion: You probably want to move itemized deductions to 2017.

Itemized Deductions and Credits

The deduction for property taxes and for state and local income taxes is capped at $10,000.

Mortgage interest on new home purchases is deductible only for loans of up to $750,000 used to purchase your primary residence. Interest on home equity loans will not be deductible. (It is not clear if converting any part of home equity indebtedness that was used to purchase or improve your primary residence to a mortgage would make that interest deductible, subject to the cap.)

All miscellaneous deductions are eliminated. This includes investment and tax preparation fees, safe deposit box charges and unreimbursed employee expenses.

The casualty loss deduction is also eliminated and the bike to work exclusion ends.

Moving expenses will no longer be allowed (except for military personnel in certain cases).

The deduction of alimony will be eliminated for divorces occurring after 2018.

What survived? The deduction of student loan interest and medical expenses survived. The latter is subject to a 7.5% rather than a 10% floor. And, the new law repeals the reduction applied to itemized deductions for high-income taxpayers, which may help with some deductions.

Here are several items that were considered for limitation or elimination that remain unchanged:

Dependent care accounts, adoption expenses, tuition waivers and employer paid tuition, capital gains on the sale of your personal residence, the teacher deduction, electric car credit, Archer medical accounts and designating shares of stock or mutual funds sold.

Conclusion: you will want to move any of the eliminated deductions that you can prepay into 2017.

Note: a last-minute provision added to the new law makes prepaying 2018 income taxes in 2017 non-deductible.

Pass-through businesses

If you have income from a sole proprietorship, LLC, partnership or S Corporation, you may be able to deduct 20% of that income, subject to certain rules on wages and a phaseout beginning at $157,500 for singles and $315,000 for married taxpayers. These rules are designed to avoid abuse seen when Kansas enacted a similar law.  (Watch for a post on this soon.)

Conclusion: read the fine print (e.g. rules for personal service firms) to see if there are any opportunities you can exploit.

Estate taxes

The credit before estate or gift taxes are due is doubled to $10,000,000, indexed for inflation.

Conclusion: you may want to postpone your year-end gift planning.

Summary

Carefully review any income and deductions that you can still shift to see if moving will lessen the total taxes you pay for 2017 and 2018.

Good luck and best wishes for the holidays!

If you have any questions, please contact me.

Holiday Planning Series with the Squash Brothers, part I, tax planning

Watch our Holiday Planning Series, Part I, as Steven and the Squash Brothers discuss taxes, “starting backwards with tax planning now so you pay less next April.”

Next time, they discuss cash management.

Year-end tax planning – how to minimize the total tax paid in 2015 and 2016

To act or not to act? That is the question.

You still have time as year-end approaches to finalize your tax planning for 2015. With that in mind, this post separates areas where you may be able to act and provides more detail on the rules affecting how you act. If any of this is not clear, just ask questions, please.

  • Look through the list below to see if there are any items in your 2015 and 2016 finances that you can change in any way – moving from one year to the other, or delaying further.
  • Determine what impact each of these has and then the impact of all of them in concert:
    • This includes the alternative minimum tax (“AMT”), which is the 28% flat rate as opposed to the marginal rate of up to 39.6%.
    • If your deductions bring the regular tax down too low, the AMT kicks in, so that the deductions are wasted and need to be moved to another year, if possible, or income for that year increased to “pull you out of the AMT.” The AMT exemptions amounts for 2015 are $53,600 for individuals and $83,400 for married couples filing jointly.
  • Be sure to prepare tax projections for both tax years to determine which changes have the best results so that the total tax paid in the two years is minimized.

Not easy!

What do you act on?
To get started, it is helpful to know the current tax rates. Here are the new rates for 2015: Federal Tax Rates for 2015. Also, note that the Standard Deductions rises to $6,300 for single taxpayers and married taxpayers filing separately, $12,600 for married couples filing jointly, and $9,250 for heads of household.

3.8% Medicare surtax
This affects all income for 2015 and beyond, but only to the extent of the lesser of:

  • Net investment income, or
  • The excess of modified adjusted gross income (“AGI”) over the threshold, which is $250,000 ($200,000 for single taxpayers).

Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income but excludes pensions and IRA distributions.

N.B. – the 3.8% surtax must be covered with your withholdings and estimated payments. See our post Update on the impact of the 3.8% Medicare surtax .

Wages – Can you defer or accelerate between years or even convert income into deferred income, such as stock options, or income to be received at retirement? Can you convert compensation into tax-free fringe benefits?

Stock options – can you exercise a non-qualified option (“NQ”), which is treated as ordinary income, or instead of as an ISO, which can be investment income? Disqualifying an ISO converts it into a NQ, so that you have control over the type and timing of the income.

Schedule C income and expenses – can you defer or accelerate income and deductions between years so that the net income falls in the best year?

Schedule A itemized deductions – like income, can you deductions for the maximum benefit, given the income-based deduction thresholds?

Medical – only the amount above 7.5% (10% above certain income levels) of qualified medical expenses, which include amounts paid for prescriptions, doctor co-pays, long-term care insurance premiums, and glasses, are allowed on Schedule A.

Miscellaneous – only the amount above 2% is allowed on Schedule A. Miscellaneous expenses include unreimbursed employee expenses, tax preparation fees and investment-related expenses.

Deductions – certain itemized deductions are phased out once your AGI exceeds $305,050 for married filing jointly ($254,200 for singles), so that your itemized deductions are reduced by 3%, on up to 80% of the deduction, for the excess of your AGI above $305,050 ($254,200 for single filers).

N.B. – many of the deductions affected by the phase-out are the ones not allowed in the AMT calculation. Also, investment interest expenses are not subject to reduction on Schedule A.

Investment income – can you shift interest, dividends, and capital gains? Can you use an installment sale to spread out a large gain or, if feasible, a like-kind exchange to defer the gain?

(An installment sale that spreads gain over several years; a like-kind exchanges involve investment property, which means you can swap, rent and later convert to residential.)

The tax rate on capital gains was as low as 0% in 2014, with a cap at 20% and those rates remained in place for 2015. The 20% rate applies in 2015 for AGI over:

  • Married filing jointly – $464,850;
  • Head of Household – $439,000;
  • Single – $413,200;
  • Married Filing Separately – $232,426; and
  • Trusts and Estates – $12,300.

You net losses against gains. If you have a loss, with up to $3,000 of the loss is allowed to shelter other income, with any remaining losses carried to the next year.

Investment Loss – Take advantage of tax-saving losses by selling depreciated stocks or mutual funds that are in a taxable account, not your 401(k) or IRA. However, if your traditional IRA has declined in value, you may want to consider converting some or all of the funds in it to a Roth.

Caution:

  • Purchasing mutual funds late in the year can lead to dividend and capital gains distributions where the mutual fund price changes but your investment does not. This means that you have no economic gain for the distribution on which you pay taxes – you are effectively pre-paying taxes because you did not purchase after the declared distribution date.
  • If you sell to recognize a loss, and want to hold the stock again, be aware of the wash sale rule which bars recognition of the loss if you re-purchase substantially the same security within 30 days – which applies to different accounts you own, including repurchasing in your IRA. An example of what works: a bond swap with the same issuer, where the maturity or interest rate is different, is a way to recognize a loss without being affected by the rule.

Investment income also includes passive income and losses (rental property, limited partnerships and LLCs).

If you can re-characterize any activities as material participation rather than passive by grouping together to meet the material participation rules, you have a one-time election to regroup.

N.B. – Gains include the sale of a primary residence (above the $250,000 per owner shelter).

Roth conversions – can you convert an IRA to a Roth IRA, so that future distributions are not subject to tax? Be sure to pay the tax with funds outside of the IRA so that the conversion has maximum benefit.

Health Insurance – It’s the time of year to choose your health insurance for next year and your decision could affect your 2015 tax filing:

  • Choosing to opt out of buying health insurance could be a costly decision. The new penalty is $695 per adult and $347.50 per child, with a family maximum of $2,085. Those whose income is too low or for whom insurance is too costly may qualify for an exemption from this penalty;
  • If you purchase insurance on an exchange, you may qualify for a tax subsidy if your income is between 100% and 400% of the federal poverty level; and
  • The subsidy will be based on your expected 2016 income. However, if your income is higher than the estimated income, your credit may factor into your tax filing for that year.

Required Minimum Distribution (RMD) – If you are 70 ½ or older, you must take a withdrawal by the end of the year from your traditional IRA or face a significant penalty. To calculate your RMD, take your year-end IRA balances as of December 31, 2014, and divide each one by the factor for your age, which can be found in IRS Pub. 590-B. If you turned 70 ½ this year, you can delay your payout until April 1, 2016. If you opt to take your distribution 2016, you will be taxed on two IRA distributions in 2016.

Federal Estate Tax Exemption – the exclusion amount for estates of decedents who die in 2015 is $5,430,000, up from a total of $5,340,000 in 2014.

Gifting – can you shift assets by gifting within the $14,000 per year/per person annual gift tax exclusion, or even by filing a gift tax return to use some of your unified credit now, so that income is in the lower tax bracket of new owner?

If you’re looking to shift more than $14,000 per year per person, amounts directly paid to college tuition and medical services are exempt from gift-tax rules.

Inherited IRA – be sure to divide an inherited IRA among beneficiaries to get the maximum life expectancy for RMD calculations for each

If you made it this far, I hope you have a good idea of your 2015-2016 tax plan, or else a set of questions to ask so we can help devise one for you! Please Contact Us.