Paul Hurley, BridgeTower Media Newswires
Year-end tax planning for 2019 takes place against the backdrop of legislative changes that occurred in late 2017 that fundamentally altered the tax rules for individuals and businesses. The Tax Cuts and Jobs Act (TCJA) was the largest tax law change in 30 years, and 2018 was the first year that TCJA changes were in effect. It seems as if some taxpayers are still just filing their 2018 tax returns that were on extension and digesting the impact that the TCJA had on their situation, and now we are planning for the 2019 year-end already.
The issues to navigate for the remainder of 2019 involve the following items:
- For the wealthiest taxpayers, personal income is subject to a top ordinary rate of 37 percent and a potential high-wage-earners Medicare tax of 0.9 percent.
- Special maximum tax rates generally apply to long-term capital gains and qualified dividends (0 percent, 15 percent, or 20 percent).
- There is still a 3.8 percent Medicare surtax on net investment income.
- Fewer taxpayers are affected by the alternative minimum tax (AMT).
- Many more taxpayers are using the increased standard deduction.
- Many itemized deductions have been repealed or significantly reduced. State and local tax deductions are capped at $10,000, qualified home interest deduction rules have changed, the former Pease limitation has been removed, and some prior miscellaneous itemized deductions are gone.
- There is the new qualified business income deduction for pass-through income.
Here are four things to focus on as 2019 comes to a close:
Defer income and accelerate deductions
Despite that tax rates for 2019 and the next year will remain the same (with modest increases for inflation), the time-honored approach of deferring income and accelerating deductions to minimize taxes still works for many taxpayers. For those taxpayers that will remain in the same tax bracket from year-to-year, deferring income will not cause them to be taxed at a lower rate. Rather, it just delays the recognition of income, bringing into play time value of money considerations. However, if you expect to be in a lower tax bracket, then you should consider deferring income using strategies such as the installment sale method to defer taxable gain on sales, postponing income received by cash basis taxpayers, or delaying the receipt of a bonus. For accrual basis taxpayers who want to defer the recognition of income, consider postponing the actual right to payment for services or merchandise delivered.
If you expect to be in a higher tax bracket in 2020 than in 2019 due to increased income or lower deductions or a change in filing status, you should consider accelerating income using strategies such as accelerating the installment sale gain or moving up the closing date of a sale.
For deductions that are subject to a floor, such as medical expense or charitable deductions, the tactic of "bunching" expenses into this year or the next helps to get around deduction restrictions imposed by TCJA. Prepay expenses where feasible. Use credit card charges to accelerate deductible expenses.
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Reduced capital gain tax rates
Long-term capital gains are taxed at a rate of 0 percent, 15 percent, or 20 percent. And, the 3.8 percent surtax on net investment income may apply. Work with your tax adviser and portfolio strategist near year-end for strategies to match capital gains and capital losses. Remember that for individuals, capital losses can't be carried back, but they can be carried forward indefinitely.
Taxpayers wanting to realize paper losses on stocks while still retaining the same investment position can sell shares and buy shares in the same company or another company. Be sure to avoid the wash-sale rules, which disallow the loss if substantially the same shares are acquired within the 61-day period beginning 30 days before and ending 30 days after the sale.
You should take advantage of the lower taxed dividend income. Qualified dividend income is taxed at the same favorable tax rates that apply to long-term capital gains. Consider shifting investments out of holdings that generate income taxed at ordinary rates (e.g., bonds) and into dividend-paying stocks to achieve tax savings and result in higher after-tax income. However, be cautious that the 3.8 percent surtax on net investment income could apply.
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Review your estate plan
With the federal estate and gift exemption amount nearly doubled now to nearly $11.4 million per person, those with taxable estates should make use of the increased exemptions with the use of lifetime gifts. Also, for transfers that could potentially be subject to the generation skipping tax, take advantage of the increased generation skipping transfer (GST) tax exemption as well by making current gifts to skip persons or making late allocations of GST exemption to trusts that previously were not exempt.
Save on future estate taxes by utilizing the annual per-donee exclusion of $15,000. Post-transfer appreciation on the gift won't be included in the donor's estate. When reviewing your estate plan, consider the possibility that a reference to the exemption amount in an estate planning document that was drafted before the enactment of TCJA could create an undesirable result.
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IRA to Roth IRA conversions
As you get close to year end, determining your 2019 marginal tax bracket and projected investment income can be done with more certainty. If you are trying to convert your traditional IRA to a Roth IRA to fill up a tax bracket, start those conversations now. Traditional IRA to Roth IRA conversions can reduce future required minimum distributions and create a potential tax-free inheritance for children. Under present law, there are no required distributions by the participant from the Roth IRA in future years. Higher earning taxpayers who cannot contribute directly to a Roth IRA may be able to contribute to a non-deductible IRA that might later be converted to a Roth IRA. Just be mindful that the ability to recharacterize Roth conversion contributions was eliminated by the TCJA for tax years beginning after Dec. 31, 2017.
Also, with IRA planning, it is important to consider the future potential legislation that could limit what is known as the "stretch IRA," a concept that allows IRA or defined contribution plan beneficiaries to draw down the remaining plan benefits over the beneficiary's life expectancy. The new legislation would cause inherited IRAs and inherited defined contribution plans to be distributed within 10 years of the original owner's death.
The end of 2019 is fast approaching. Review your tax situation with your tax adviser now and make adjustments before time runs out.
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Paul Hurley is a senior vice president with Key Private Bank in Rochester. He can be reached at (585) 238-4132 or paul_hurley@keybank.com. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice. KeyBank is a member of the FDIC.
Published: Tue, Dec 17, 2019
