By Len Green
It's the “Most Wonderful Time of the Year” filled with family, friends and hopes for a wonderful 2020. During this season of giving, The Green Group would like to share some year-end tax-saving strategies to assist with planning your 2019 tax filing.
Prepare a 2019 Income Tax Projection
In order to determine whether you are on target with your year-to-date tax payments and to afford yourself the time to still take steps to reduce your 2019 tax liability, ask your tax professional to run an income tax projection, including any taxable events or transactions which did not occur in prior years. An example is any significant gains from the sale of real or personal property (i.e. horse sales).
A timely prepared projection not only enables you to visualize where you stand from a tax perspective, but also assists you with your cash flow needs. We provide our clients with specific tax reduction recommendations, thereby helping them avoid any potential penalty for underpayment of estimated tax.
Check Your Year-to-Date Withholding
Many taxpayers showed a balance due last year with their 2018 income tax returns because of December 2017 tax legislation which provided revised tables for reduced withholding.
If your 2019 income tax projection shows a balance due, request that a disproportionate amount of withholding be taken from your December paychecks or year-end bonus, rather than paying a comparable significant amount with a fourth quarter estimated tax voucher.
Under a special rule, which has saved our clients thousands of dollars and avoids being subject to penalties and interest, taxes that are withheld are deemed to be “thrown back” and treated as evenly spread through the calendar year. This enables you to catch up on any shortfall and still avoid a penalty for the first three quarters. By contrast, a payment mailed with Voucher 4 is identified and earmarked as a fourth quarter payment, leaving you exposed for any year-to-date under withholding penalty.
Bunching Your Itemized Deductions
Since recent tax law changes have increased the standard deductions (generally $12,200 for single taxpayers, $18,350 for head of household and $24,400 for married filing joint), itemizing your deductions has become more of a challenge. Consider bunching your deductions one year, then taking the standard deduction the next year or vice versa.
For example, if you are already at or near the threshold for itemizing and need dental work or an elective medical procedure, you should schedule and pay those medical treatments in 2019. The same holds true with any charitable contribution which you are contemplating. Next year you may not be nearly as close to the standard versus itemizing break-even point, so those expenses may not provide you the same tax benefits.
Remember Charitable Contributions
For those of you who are charitably inclined, there is still time to save taxes by making a contribution to your favorite local or national charities. In addition to the traditional contribution by check, there are other alternatives including non-cash contributions of clothing or household furnishings, contributions of appreciated stock or artwork, setting up a private foundation and a charitable remainder trust.
There are also certain mechanisms specifically set up for real estate developers who donate land to conservation easement programs. The tax deduction would be a multiple of your investment.
Funding a 529 Plan
In order to soften the blow for when your child, grandchild or other relative receives that first tuition bill, consider establishing a 529 College Savings Plan now.
The first $15,000 per year contribution for each beneficiary is not subject to gift tax filing and a special five-year gift tax averaging is available if a parent or grandparent wants to frontload a contribution. As long as the distributions are made for qualified education expenses, no tax is paid on the accumulated earnings. The recent Tax Act expands the eligible tax-free distributions to years prior to college and some states (i.e. New York) allow you to take a contribution deduction on your state income tax return.
Getting Full Benefit on Your Opportunity Zone Fund (OZ)
A few months ago, we described how the tax on capital gains can be deferred, reduced and prospective gains eliminated by rolling your gain proceeds into an OZ.
The “qualification” is very specific, so the investment must be reviewed by someone who fully understands all the tax and economic issues.
With respect to the feature which reduces your gain, when the taxpayer holds the fund interest for five years, 10% of the deferred gain is permanently excluded. Once the holding period reaches seven years, an additional 5% of the gain is excluded.
However, the window of opportunity on the incremental 5% gain exclusion is closing on December 31, 2019. If you rollover gain proceeds into an OZ after December 31, 2019, the gain reduction will be eligible only for the 10% exclusion and no longer the 15% exclusion.
Matching Your Capital Gains and Losses
For those of you fortunate enough to have realized capital gains, but who also have unrealized losses, consideration should be given to triggering those losses before year-end, thereby reducing your 2019 income tax liability.
At the same time, if you have realized losses but also have unrealized gains, keep in mind that the maximum net capital loss to be deducted in any given year is $3,000. Therefore, you might want to trigger some of those gains with a view toward accelerating the benefit of those losses by using the gains to absorb most of those losses currently.
Setting Up a Retirement Plan
You may be eligible to establish a retirement plan before year-end (or beyond). Contributions to a Keogh Plan or one-person 401(k) Plan can be meaningful and save you significant 2019 tax dollars if set up before December 31, 2019. A SEP-IRA is another flexible choice. A SEP can be set up before the filing date of your 2019 tax return, yet still provide you with a 2019 deduction.
If you are age 70 1/2 or older, please remember to take your required minimum distribution from your retirement plan in order to avoid a harsh penalty (up to 50% of the amount you should have withdrawn)!
For estate planning purposes, keep in mind that the annual gift tax exclusion for 2019 is $15,000 per recipient or $30,000 if married. With the federal estate tax exemption scheduled to return to the old amount of $5.5 million after 2025 (from the 2018-2025 threshold of more than $11 million), an opening is available for high net worth individuals to transfer substantial assets tax-free now to family members or trusts.
Maximize the Pass-Through Business Income Deduction (QBI)
Certain taxpayers can now deduct 20% of their qualified business income. Take whatever steps are possible to keep your taxable income below this new provision's phase-out thresholds. If your taxable income is less than $160,700 for single taxpayers or $321,400 for married filing jointly, you may be eligible for this pass-through deduction. The deduction phaseout is $210,700 for individuals and $421,400 for married filing jointly. In some cases, the deduction may be limited to 50% of wages paid. Certain steps can be taken to maximize the use of the QBI deduction.
Bottom Line: Don't make the IRS a recipient of your largest holiday gift!
The Green Group welcomes the opportunity to discuss your 2019 year-end tax-saving possibilities with you by telephone or in person. Please don't hesitate to contact us at (732) 634-5100.