Mid-Year Tax Planning
It’s hard to believe that about 18 months have passed since President Trump signed into law the Tax Cuts and Jobs Act (TCJA)—the largest major tax reform in over three decades. As the IRS continues to release guidance on the new law, we discover tax planning opportunities that could put more cash in your pocket. Some of these opportunities may apply to you, some to family members, and others to your business. Here are some ideas to evaluate this summer while you have time to think.
Individual Income Tax Opportunities
Here are some strategies that may lower your individual income tax bill for 2019.
Consider Adjusting Your Tax Withholding or Estimated Payments. If you owed taxes for 2018, you may want to decrease the number of allowances claimed on Form W-4. To help determine the number of allowances you should report, consider using the IRS’s “Withholding Calculator” available at www.irs.gov. Also, if you pay estimated tax payments throughout the year (you’re self-employed, for example), we can take a closer look at your tax situation for 2019 to make sure you’re not underpaying or overpaying.
Pay Attention to Filing Status. If one spouse has substantial unreimbursed medical expenses, he or she may pay less tax by choosing a “married filing separately” status (assuming deductions are itemized by both spouses on their respective returns). That’s because for 2019, only medical expenses that exceed 10% of adjusted gross income are deductible. By filing separately, the spouse generally lowers his or her adjusted gross income, which allows a larger deduction for medical expenses.
Take Advantage of Lower Tax Rates on Investment Income. Income from an investment held for more than one year is generally taxed at preferential capital gains rates. Those rates are 0%, 15%, and 20% for most investments. The rate that applies is determined by your taxable income. If possible, you should get your income low enough to qualify for the 0% rate. If your income is too high to benefit from the 0% rate, try gifting investments (like appreciated stock or mutual fund shares) to children, grandchildren, or other loved ones. Chances are these individuals will be in the 0% or 15% capital gains tax bracket. If they later sell the investments, any gain will be taxed at the lower rates, as long as you and your loved one owned the investments for more than one year. However, beware of the “kiddie tax,” which applies to all children under age 18 and most children age 18 or age 19–23 who are full-time students. It may limit your opportunity to take advantage of this strategy.
Find Ways to Defer Income. If you expect to be in the same or lower tax bracket in 2020, it might be beneficial to defer some taxable income until next year. For example, if you own a business and use the cash method of accounting, you can wait until the end of the year to send out some client invoices. That way, you won’t receive payments until early 2020. Also, you can postpone taxable income by accelerating some deductible expenses this year.
Invest in a Qualified Small Business Corporation. A Qualified Small Business Corporation (QSBC) is generally a domestic C corporation whose assets don’t exceed $50 million. In addition, 80% or more of the corporation’s assets must be used in the active conduct of a qualified business. By far the biggest benefit of owning QSBC stock is the ability to shelter 100% of the gain from a stock sale. Another major benefit is the ability to roll over (defer) the gain on a stock sale to the extent you acquire replacement QSBC stock within 60 days of the original sale.
Invest in a Qualified Opportunity Fund. Qualified Opportunity Funds (QOFs) are entities that invest in certain low-income communities (known as qualified opportunity zones). There are two major tax benefits of investing in qualified opportunity zones. The first one is an election to temporarily defer gain from the sale of property if such gain is reinvested in a QOF. The second benefit is an election to permanently exclude from income post-acquisition capital gains on the disposition of QOF investments held for ten years.
Re-evaluate Your Deduction Strategy. It’s best to itemize your deductions if you have significant personal expenses. However, don’t rule out the standard deduction. For 2019, joint filers can enjoy a standard deduction of $24,400. The standard deduction for heads of household is $18,350, and single taxpayers (including married taxpayers filing separately) can claim a standard deduction of $12,200. If you’re able to itemize, please note that the TCJA suspended or limited many of the itemized deductions. However, we have some planning techniques that may help.
Set up a Qualified Tuition Plan. Qualified Tuition Plans (QTPs) generally allow parents and grandparents to set up college savings accounts for children and grandchildren before they reach college age. Once established, QTPs qualify for favorable federal (and often state) tax benefits, which can ease the financial burden of paying for college. QTPs may be particularly attractive to higher-income parents and grandparents because there are no income-based limits on who can contribute to these plans.
Planning for Small Businesses
If you own a business, consider the following strategies to minimize your tax bill for 2019.
Maximize Your Qualified Business Income Deduction. Thanks to the TCJA, business owners may deduct up to 20% of their qualified business income from sole proprietorships and pass-through entities (such as partnerships, LLCs, and S corporations). The deduction, however, is subject to various rules and limitations based on your taxable income, the type of business you operate, and your business’s W-2 wages and property. The good news is that there are certain planning strategies that can be considered now to maximize your deduction.
Acquire Assets. Your business may be able to take advantage of very generous Section 179 deduction rules. Under these rules, businesses can elect to write off the entire cost of qualifying property rather than recovering it through depreciation. The maximum amount that can be expensed for 2019 is $1.02 million. This amount is reduced (but not below zero) by the amount by which the cost of qualifying property exceeds $2.55 million. Above and beyond that, the TCJA established a 100% first-year deduction for qualified property acquired and placed in service after 9/27/17 and before 1/1/23 (1/1/24 for certain property with longer production periods). Unlike under prior law, this provision applies to new and used property.
Employ Your Kid. If you’re self-employed, you might want to consider hiring your child as an employee. Doing so shifts income from you to your child, who normally is in a lower tax bracket or may avoid tax entirely due to the standard deduction. There also can be payroll tax savings since wages paid by sole proprietors to their children age 17 and younger are exempt from Social Security, Medicare, and federal unemployment taxes. Employing your children has the added benefit of providing them with earned income, which enables them to contribute to an IRA.
Please Contact Us
As we said at the beginning, this is to get you thinking about tax planning moves for the rest of the year. Even though the IRS continues to publish guidance on the TCJA, there are things you can do now to improve your tax situation. Please don’t hesitate to contact us if you want more details or would like to schedule a tax planning session.