With the latest change of seasons, that means that filing your tax return is right around the corner and will require your full attention very soon. Although there were a number of tactical strategies proposed and utilized during the most recent tax filing season under the latest changes from the Tax Cuts and Jobs Act (TCJA), 2019 and years moving forward will bring their own set of potential obstacles. With that in mind, it may be time to dig a little deeper into your current strategies and see if there are any opportunities to reduce your tax liability.
Have You Considered Deferring Income and Accelerating Expenses?
When choosing to defer income into the next tax year and accelerate expenses into the current tax year, taxpayers have found this to be a successful, time-tested technique if they don’t plan on moving into a higher tax bracket the following year. For workers like independent contractors and other self-employed individuals, they have the option to hold off on sending invoices until late December, which would, in turn, push their associated income into 2020. This hold means that all taxpayers, no matter their employment status, have the ability to defer income by choosing to take capital gains after the first of the year. It’s important to be very careful with this strategy because should you wait too long to sell, you also risk the possibility of your investment becoming less valuable.
There may also be several other beneficial reasons for taking income this year instead of the next. For example, future tax rates will almost always increase. Depending on factors moving into 2020, the income tax rates, especially for those with higher incomes, increase substantially by 2021. Regardless, the highest tax rates from 2017 will return in 2026.
Now that being said, if a taxpayer qualifies for the qualified business income (QBI) deduction for pass-through entities (sole proprietors, limited liability companies, partnerships, and S corporations), he or she may have the ability to reduce the size of that deduction should their income be reduced. In that case, maximizing the QBI deduction before it is scheduled to end after 2025 may be the best option.
Choose the Perfect Timing for Itemized Deductions
After the TCJA passed, the standard deduction increased substantially. For 2019, it’s $24,400 for married couples and $12,200 for single filers. Since many of the itemized deductions that were previously popular were eliminated or capped, some taxpayers may find it difficult to claim more in itemized deductions as opposed to the standard deduction. By timing, or “bunching,” these deductions, you may be able to make the process a little easier.
Bunching your deductions means delaying or accelerating deductions into a specific tax year with the intention of exceeding the standard deduction and in turn, claim itemized deductions.
For example, you could always bunch any charitable contributions you may have made if it means you can get a tax break for a particular tax year. Now, if you typically make your donations towards the end of the year, it may be a viable option to bunch your donations in alternative years—for example, if you donated in January and December of 2019, wait to make your donations again until January and December of 2021.
If you have a donor-advised fund (DAF), you can accelerate the deduction by making multiple contributions to it in a single year. This strategy allows you to decide when the funds will be distributed to the charity that you have selected. Now, if your objective is to give in equal increments on an annual basis, your chosen charities will receive a more reliable stream of yearly donations, which is critical to their overall financial stability and health. In turn, you can deduct the total amount in a single tax year.
By choosing to donate appreciated assets that have been held by you for more than one year to a DAF or a nonprofit, you’ll have the ability to avoid any long-term capital gains taxes that you’d have to pay if you sold the property. Now keeping in mind certain other restrictions, you can also obtain a deduction for the fair market value of the assets. It’s important to recognize that this method can pay off even more if you’re subject to the 3.8% net investment income tax or the top long-term capital gains tax rate (20% for 2019).
Now, if you’re looking to divest yourself of assets on which you may have had a loss, consider selling it to take advantage of the loss and then donate the proceeds. From a tax perspective, this may be a better move compared to donating the asset.
When it comes to medical expenses, timing is also a significant factor. Last year, the TCJA decreased the threshold for deducting unreimbursed medical expenses to 7.5% of adjusted gross income (AGI) for 2017 and 2018. However, it will return to 10% of AGI for 2019. By bunching qualified medical expenses into one year, you could become eligible for the deduction.
Assuming local law allows you to pay in advance, you also have the option to bunch property tax payments. Although, with this approach, your total state and local tax deduction may be over the $10,000 limit. This overage would effectively mean that you would forfeit the deduction on the excess.
With income deferral and expense acceleration, it’s imperative that you consider your tax bracket status when timing deductions. As you move up into higher tax brackets, itemized deductions start to become worth more. If you believe that you will move into a higher bracket in 2020, timing your deductions will help you save more.
Capital Gains and Loss Harvesting
For some investments, 2019 brought more than a few ups and downs. That being said, it may be time to start taking a closer look at your portfolio and its value. By selling underperforming investments before year end to realize losses, you may be able to offset taxable gains that you also realized this year, on a dollar-for-dollar basis. Now, if your losses exceed your gains, you generally can only apply up to $3,000 of the excess to offset ordinary income. In the case of any unused losses, you can carry these forward indefinitely throughout your lifetime, allowing you the opportunity to use the losses in a subsequent year.
Are You Ready to Maximize Your Retirement Contributions?
Each year, individual taxpayers should consider making their maximum allowable contributions to their IRAs, 401(k) plans, deferred annuities, and other tax-advantaged retirement accounts. For 2019, you can contribute up to $19,000 to 401(k)s and $6,000 for IRAs. Those age 50 or older are eligible to make an additional catch-up contribution of $1,000 to an IRA and, so long as the plan allows, $6,000 for 401(k)s and other employer-sponsored plans.
Don’t Forget About Changes From the TCJA
Almost all of the TCJA provisions took effect in 2018. Certain items, like the repeal of the individual mandate penalty for those without qualified health insurance, aren’t effective until this year. In addition, the TCJA also does away with the deduction for alimony payments for couples divorced in 2019 or later. With this deduction removed, alimony recipients are no longer required to include the payments in their taxable income.
With the future of tax planning uncertain and many of the most significant TCJA provisions set to expire within six years, it’s crucial to start preparing. Contact your CRI tax advisor with any questions you may have in regards to developing a stronger tax planning strategy.