2019 Year-End Individual Tax Planning

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2019 Year-End Individual Tax Planning

As year-end approaches, it is a good time to think of planning moves that may help lower your tax bill this year.

Last year, the federal tax reform bill commonly known as the Tax Cuts and Jobs Act of 2017 (“Tax Act”) became effective, resulting in major changes in tax rules for individuals. Some of the major changes included lower marginal tax brackets, a higher alternative minimum tax (AMT) exemption, an increased standard deduction, increased child tax credits, and the limitation or elimination of various other popular tax deductions. Although federal and state taxing agencies are still releasing guidance and updating tax forms, there are a number of things you can do to prepare for the second filing season under these new rules.

Below we have compiled a list of items that may be helpful if taken into account before the end of 2019. Of course, not all alternatives will apply to your particular situation; therefore, we ask that you please review the following list and contact us to discuss the benefit and/or your eligibility before taking any action to save or defer taxes.

  • Qualified Business Income deduction (applies to rental property as well): As a result of the Tax Act, you may be eligible for a deduction of 20% of your self employed business income, passthrough income from business operations, and/or rental real estate activities. There are limitations based on the type of business, wages paid by the business, basis of your property assets, and your total taxable income. Maximizing this opportunity requires careful planning and can be complex if you have one or more of these types of activities.
  • Roth IRA conversion:  Consider converting Traditional IRA funds to a Roth IRA before year end to accumulate earnings in a Roth IRA free from future income taxes. Although the conversion to a Roth IRA may be taxable, timing the conversion in a tax year in which your total anticipated taxable income will be less than any prior and/or subsequent tax year may be beneficial in the long term.
    • Reminder – A reversal or recharacterization of IRA conversions are no longer allowed
  • Retirement contributions: Consider accelerating contributions to your employer provided retirement account up to the 2019 maximum of $19,000. Additionally, if eligible, make contributions to Traditional, Roth, and/or SEP IRA retirement accounts to maximize current and potentially long term tax savings / deferrals.
  • Required Minimum Distributions (RMD): Remember that you may be required to take a distribution from any retirement account (IRA, 401(k), etc.) if you are over 70 ½ years of age in 2019. Timing options are available for your first year; thus, planning may provide tax saving opportunities. Take time to ensure you have met or exceeded any distribution requirement for 2019 to avoid the onerous 50% penalty.
    • If you are eligible, you may wish to consider a Qualified Charitable Distribution from your qualified retirement account to meet RMD requirements and exclude the earnings from your taxable income concurrently.
  • Capital gains tips: Consider holding appreciated capital assets for at least 12 months to take advantage of preferential long-term capital gains rates. In addition, consider utilizing any of the following methods to lessen your taxable gains prior to year-end:
    • Timing capital losses: Consider speaking with your investment adviser about carefully weighing the potential tax savings of disposing of “loss” securities you hold against taxable gains you may recognize in 2019. Be aware that the tax benefit derived from this strategy may not outweigh the economic reality of your investment portfolio and your predesigned financial plans/goals.
    • Contribution of appreciated stock: Avoid potential capital gains tax by contributing appreciated securities to charity. Donating appreciated stock entitles you to a charitable contribution at the fair market value of the stock, and also avoids the capital gains tax if you otherwise sold the stock.
    • Net Investment Income Tax (NIIT): Consider ways to reduce your exposure to the 3.8% net investment income tax (NIIT) on passive income. One option, if you intend to sell appreciated assets, is to consider structuring the sale as an installment sale so the gain recognized is spread over several years. Another option is to consider the advantages of a like-kind exchange. Lastly, tax exempt income is not subject to the 3.8% tax, so consider speaking with your investment adviser about tax exempt investments.
  • Withholding elections and exposure to underpayment penalties: The Tax Act lowered tax rates across the board, but it also limited or eliminated many popular tax deductions and withholding rates changed. As a result, many taxpayers who were accustomed to receiving refunds ended up owing tax with their 2018 returns. Consider reviewing the amount of withholding from wages you anticipate to have at year end and consider whether you need to adjust your withholding or make an estimated tax payment before year end.
  • Timing itemized deductions: The standard deduction in 2019 will be increased to $12,200 for single filers and $24,400 for taxpayers who are married filing jointly. Applying a bunching strategy to defer or accelerate charitable contributions into a tax year in which you plan to exceed these thresholds and itemize your deductions can provide you with a potential tax benefit. Consideration should also be given to timing your property tax payments, as the Tax Act limited the deduction for state and local income and property taxes to a total of $10,000 per year.
    • Arizona state tax credit contributions: In general, charitable contributions that provide for a dollar-for-dollar state tax credit are no longer deductible for federal tax purposes. However, you have flexibility in timing your tax credit contributions through April 15th, 2020 and still receive a 2019 tax credit. For contribution limits and an overview of several popular Arizona tax credit programs, please review our summary on our website.
  • Health Savings Account (HSA): If you have an IRS defined “high deductible” medical insurance plan and you qualify for an HSA, contributions to the account are deductible (within IRS-prescribed limits), earnings on the account may avoid taxation, and distributions are tax free if made for qualifying medical expenses. Remember that contributions to an HSA account can be made through April 15th, 2020 and still be deductible on your 2019 income tax return.
  • Gifts before year end: Make any gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $15,000 in 2019 to each of an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets (if they are not subject to the kiddie tax).
  • Investing in education: Consider utilizing a 529 Education Fund or Coverdell Education Savings account when planning for higher-education costs. As a result of the Tax Act, 529 Education Funds can now also be used to pay for K through 12 tuition expenses with a $10,000 annual cap. Amounts contributed to a 529 plan grow tax free and distributions from the plan are not treated as income to the extent they are used to pay for qualified education expenses. Contributing to a 529 plan may also entitle you to a state tax deduction.
  • Flexible Spending Account (FSA): FSAs provide employees a way to use tax-free dollars to pay medical expenses not covered by other health plans. An employee who chooses to participate can contribute up to $2,700 during the 2019 plan year. If you have an employer provided FSA, be sure to check the balance in your account and spend any remaining funds before year end to avoid forfeiting the account balance.
  • Kiddie tax: Children with greater then $2,200 in unearned taxable income may be subject to trust and estate income tax rates as a result of the Tax Act (rather than their parents marginal tax bracket as in prior years). Deferring or moving taxable income to your children will require more diligence on your part. This change in the computation of kiddie tax is costly because trust and estate income tax brackets accelerate much faster in comparison to individual income tax rates. For example, trust and estate income tax brackets reach the maximum 37% when income reaches only $12,750, compared to $510,300 for single filers.

Other items to consider in year end planning

  • With careful planning, taxes on capital gains can be deferred or avoided if you make an “opportunity zone” investment.
  • Effective January 1, 2019, the penalty for not maintaining minimum essential health insurance coverage required under the Affordable Care Act is reduced to zero. This may impact your consideration when renewing health insurance benefits before year end.
  • Track the miles you put on your personal vehicle for medical, charitable, and business purposes as each may be deductible to you based on published federal mileage rates.
  • Count the days in which your vacation home was used personally and rented to third parties as it may impact your ability to deduct the operating expenses for the home.

State income tax conformity to Tax Cuts and Jobs Act

Many states have adopted the federal changes from the Tax Act. However, these rules vary by state and in some instances, may be unclear. Some consideration may be warranted if you anticipate having to file income tax returns in multiple states this year (i.e. due to a move, job change, investment income from other states)

For example, Arizona House Bill 2757 was signed into law in May 2019. The Bill included income tax conformity legislation, which conformed the states’ tax code to the Internal Revenue Code (IRC) under the Tax Act. As a result, Arizona individual income tax returns for tax year 2019 will include the following adjustments:

  • Match the federal standard deduction amount ($12,200 single/married filing separate, $18,350 head of household, $24,400 married filing joint).
  • Remove Arizona personal and dependent exemption amounts.
  • Provide $100 child tax credit per dependent under 17 years of age and $25 for dependents 17 and older. The Credit is phased out for federal adjusted gross income (FAGI) greater than $200,000 single/married filing separate and head of household, $400,000 married filed joint.
  • Allow taxpayers to increase standard deduction by 25 percent of the charitable donations that would have been claimed as an itemized deduction.

Although we strive to provide you with applicable and valuable  tax planning opportunities, the magnitude of additional guidance yet to be received from the Internal Revenue Service, U.S. Treasury, state taxing agencies, and possibly from Congress may be material. Therefore, subsequent developments changing the facts provided to us by the applicable taxing authorities may affect advice we provide.

We are happy to discuss any of the above items with you further and tailor a tax strategy that will work best for you; please contact us with any questions you may have.