Looking Forward while Reflecting on 2018: What You Need to Know for 2019 Year-End Tax Planning
2019 is rapidly drawing to a close. With 2020 just around the corner, we are working hard to implement tax strategies that will benefit our clients for the 2019 tax year and beyond. The Tax Cuts and Jobs Act (TCJA), enacted in December of 2017, made navigating new tax laws particularly challenging for 2018 tax year filings. Now that 2018 tax filings are complete, we are encouraging our clients to review components of the TCJA that will continue to affect their filing situations. While planning at year-end, please keep these current key components of tax law in mind:
Increased Standard Deduction/Eliminated Personal Exemptions: The standard deduction will remain at $12,000 for individuals and $24,000 for married couples who file jointly.
Certain Personal Deductions Eliminated: The TCJA prohibits taxpayers from deducting tax preparation fees, investment management fees, and unreimbursed business expenses. Unless taxpayer homes are in federally declared disaster areas, personal casualty losses are also disallowed. Please note that these deductions are still allowed for California tax purposes.
State and Local Tax Deductions Capped: Combined state income taxes and property taxes are capped at $10,000 per year. In prior years, there might have been a benefit in prepaying state and/or property taxes by December 31st; however, with the new limits, any benefit is highly unlikely.
General Charitable Contributions: Donations made to charitable organizations are still deductible if taxpayers itemize their deductions. With the increase in the standard deduction to $24,000 per year and limiting the state tax deduction to $10,000 per year, fewer people are itemizing. If you are not itemizing, or if your deductions slightly exceed the standard deduction, you may want to consider grouping your charitable gifting in one year. For example, if you typically gift $5,000 per year, we may encourage you to prefund future gifts for two or three years. This means that you would gift either $10,000 or $15,000 to a Donor Advised Fund. This would allow you to receive an increased benefit for charitable contributions. You could use the funds within the Donor Advised Fund for future gifts, rather than gifting these funds all in one year. Gifting cash now will provide you with a deduction up to 60% of your adjusted gross income.
Charitable Contributions of Appreciated Assets: Rather than using cash to support your favorite charity, consider gifting highly appreciated assets held for over one year. This will yield a double tax benefit. This will allow you to deduct charitable donations for the fair market value of the donated assets without paying capital gains taxes. You are eligible to deduct up to 30% of your adjusted gross income using appreciated assets.
Charitable Contributions & IRA Funds: If you are over the age of 70 ½, you may be eligible to contribute a maximum of $100,000 to charity. Such a donation would, in this circumstance, satisfy the required minimum distribution (RMD) without being included in income. In other words, this donation allows for a charitable contribution without income limitations. Please note that any charitable gift from an IRA must be made directly from the IRA to the charity. SEP or SIMPLE IRAs are not eligible.
Mortgage Interest Deduction: Taxpayers looking to purchase a new home may now deduct mortgage interest on loans up to $750,000 of the principal ($375,000 for married filing separate taxpayers). Interest on home equity indebtedness is no longer deductible. For loans written prior to 12/15/17, which are “grandfathered”, interest can be deducted up to $1M of the principal. Refinances after 12/15/17 are still eligible for “grandfathered” treatment as long as the original debt was secured before 12/15/17. Mortgage loans on rental properties are still fully deductible. Also, certain loans where proceeds were used for investing purposes may also still be deductible as investment interest expense.
Loss Harvesting: Consider harvesting unrealized capital losses to offset any net realized capital gains. Please be aware of the wash sale rules, which may disallow your capital loss if you have any intention of repurchasing the same securities within 31 days after your sale. If you own securities that have become worthless, or if you have made loans that have become uncollectible, ensure that the losses are deductible in the current year by obtaining substantive documentation to support the deduction. We are happy to assist in reviewing losses to determine if they are eligible for Section 1244 treatment as ordinary losses.
Qualified Small Business Stock (QSBS): Gain on the sale of Qualified Small Business Stock that is held for more than five years may be eligible for a federal gain exclusion ranging from 50% to 100% depending on your date of purchase.
Qualified Opportunity Zones: Capital gains realized and re-invested in Qualified Opportunity Funds (designed to bring private funds into lower-income and distressed communities around the nation) may be eligible for gain deferral and stepped-up cost basis if held 5-7 years. There is also the potential for full gain exclusion on the actual QOF investment if held longer than 10 years.
20% Passthrough Deduction: Your self-employed or passthrough operating business income may be eligible for the deduction. We encourage you to ask us about this potential deduction as the calculations are complex and, in many circumstances, may be limited.
Stock Options: If you own options with fast approaching expirations dates, or options with exercise prices well below today’s market value, it may be time to consider exercising. When to exercise options is a matter of personal preference contingent upon your own beliefs about the future potential of the stock. However, we must caution that there are major tax implications to consider when exercising. We strongly recommend seeking our advice before exercising options.
Gifting: For 2019, the annual gift tax exclusion is $15,000, the same as it was in 2018. However, the lifetime giving exemption has increased from $11,180,000 to $11,400,000. It will continue to be adjusted for inflation each year.
Business Update – Bonus Depreciation: As a reminder, the TCJA allows full and immediate expensing of 100% of the cost of qualified property acquired and placed in service during the period between September 27, 2017 and January 1, 2023. Additionally, bonus depreciation is available for both new and used qualified property.
We are prepared to strategize with you so that you may reap any benefits available to you as allowed by the latest tax reforms. We would be happy to discuss any questions that you might have about minimizing your taxes and maximizing any benefits you receive from the deductions or credits presented above. Please contact us for specific advice regarding your individual tax planning needs.