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.
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 realize 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 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.
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!