Tax Planning Considerations as we Approach Year-End
By Diane Giordano, Partner, Tax & Business Services
By now, most readers have reviewed methods or ideas to follow related to tax planning for year-end 2019. With just days remaining, there are still many tax ideas to consider which may lower your 2019, and possibly, your 2020 tax bills as well.
The Tax Cut and Jobs Act (TCJA) was signed into law in 2017 and was in full force in 2018 and 2019. Accountants, individuals and business owners are finally settling into the intricacies of the new law. Some of the TCJA provisions have modified the way we tackle planning and present new planning opportunities.
For individuals: Lower income tax rates, a higher standard deduction, limited itemized deductions, no personal exemptions, and a greater alternative minimum tax (AMT) exemption clearly modified a typical plan, which might include prepayment of taxes and a boost in charity deductions.
For businesses: Reduced corporate tax rate of 21%, elimination of the corporate AMT, limits on business interest deductions, and expansion of the fixed asset expensing and depreciation rules, in addition to the special deduction for non-corporate taxpayers with qualified business income from pass-through entities, is causing business owners to re-evaluate their positions on fixed asset acquisition and debt.
It is not too late to implement ideas that will help lower tax bills for this year and possibly next. Below is a list of selected strategies that may help lessen your tax burden if you act before year-end.
Updating year-end tax projections is the first important step in analyzing deductions, expensing, and optimizing utilization of carryovers. As discussed below, deferring income and accelerating deductions to minimize taxes will still be an important step for many taxpayers.
Year-End Individual Tax Planning
- Consider making charitable donations from your IRA. The amount of the qualified charitable distribution reduces the amount of taxable Required Minimum Distribution (RMD), which can result in tax savings.
- Harvesting capital losses will maximize your tax benefits should you be in a position to recognize gains and losses in 2019.
- If you are in a position to have a large capital gain as the result of a sale of a business (for example), you might be able to invest the gain proceeds in a Qualified Opportunity Zone (QOZ) through a “qualified opportunity fund” within 180 days of the date of sale. If this is done, the gain and tax on the gain can be deferred or possibly eliminated depending on the term the investment held.
- Consider converting to a Roth IRA to eliminate income tax on future appreciation.
- Consider creating 529 plans to pay for qualified higher education expenses, which may also yield state tax deductions. The growth of such plans is tax-free.
- The donation of appreciated securities to charities (or Donor Advised Funds) allows for charitable deductions at fair market value without recognition of capital gains.
- Consider disposing of a passive activity, as this will allow you to deduct suspended passive activity losses.
- After reviewing your total itemized deductions, evaluate the benefit to make additional charity donations, interest payments, or even real estate or state income tax payments prior to year-end.
Year-End Business Tax Planning Tips
- Business owners of certain flow-through entities may be entitled to a deduction of up to 20% of qualified business income. These rules are complex, and we suggest you consult with your Marcum tax advisor to assist in this planning.
- Section 179 and bonus depreciation were significantly increased and modified under TCJA. Businesses may consider making expenditures that qualify. For tax years beginning in 2019, the Section 179 expensing limit is $1,020,000, and the investment ceiling limit is $2,550,000. Businesses also can claim a 100% bonus depreciation during the first year certain assets are placed in service.
Year-End Gifts and Estate Planning Tips
- Utilize your lifetime exemption of $11,400,000 (indexed for inflation) over the course of your lifetime or at your death free of federal gift, estate, and generation-skipping transfer taxes. (This federal lifetime exemption is due to sunset on December 31, 2025, but may expire sooner depending on the results of upcoming Presidential election).
- Make annual exclusion gifts to potentially reduce your taxable estate. You may gift up to $15,000 per recipient and make unlimited gifts to a U.S. resident spouse.
- Set up a Grantor Retained Annuity Trust in order to take advantage of the current low interest rates and fund it with assets that you expect to appreciate greatly in the next few years.
- Lock in current low interest rates by making loans to family members and/or trusts. This allows you to transfer future growth free of gift and estate taxes.
- Consider swapping assets with your grantor trust. Swapping low or high basis assets from your trust may be tax advantageous and should be reviewed.
- Remember to update your will and beneficiary designations. Year-end is a good time to review these important documents to ensure they are still in keeping with your wishes.
These are just some of the year-end strategies that you and your advisors can address. Many of the items included in the above article are described in detail in the 2019 Marcum Year-End Tax Guide.
Contact your Marcum tax advisor to determine what strategies will best suit your needs.