Tax Planning in the Age of the TCJA
It’s been nearly two years since the Tax Cuts and Jobs Act was signed into law, and it continues to alter the landscape for taxpayers at all income levels. We can expect further changes in the years to come, with many TCJA provisions changing from year to year and a Presidential election on tap for 2020. All of which makes effective tax planning an ever more complicated – and essential – endeavor. With that in mind, we’d like to share some thoughts on a number of topics of key importance to many of our clients.
Deferring income and accelerating expenses
Deferring income into the next tax year and accelerating expenses into the current one constitute a time-tested and proven planning technique for taxpayers who do not expect to be in a higher tax bracket the following year. Independent contractors and other self-employed individuals can, for example, hold off on sending invoices until late December to push the associated income into 2020. And all taxpayers, regardless of employment status, can defer income by taking capital gains after the New Year.
Keep in mind that there also may be good reasons to take income this year instead of deferring. For example, it is possible that income tax rates might increase substantially by 2021, especially for those with higher incomes, depending on 2020 election results. Moreover, the higher tax rates that were in place for 2017 are scheduled to return in 2026.
Another example: Taxpayers who qualify for the qualified business income (QBI) deduction for pass-through entities – that is, sole proprietors, partnerships, limited liability companies and S corporations – could end up reducing the size of that deduction if they reduce their income. It might make more sense to maximize the QBI deduction while it is still available.
Bunching medical and charitable deductions
The TCJA substantially boosted the standard deduction. For 2019, it is $24,400 for married couples and $12,200 for single filers. With many of the previously popular itemized deductions eliminated or limited, some taxpayers can find it challenging to claim more in itemized deductions than the standard deduction. Timing, or “bunching,” those deductions may make it easier.
Bunching basically means delaying or accelerating deductions into a tax year to exceed the standard deduction and claim itemized deductions. For example, you could bunch your charitable contributions, if it means you get a tax break for one tax year. If you normally make your donations at the end of the year, you can bunch donations in alternative years; for example, donate in January and December of 2020, then in January and December of 2022.
If you have a donor-advised fund (DAF), you can make multiple contributions to it in a single year, thereby accelerating the deduction. You then decide when the funds are distributed to the charity. If your objective is to give annually in equal increments, doing so will allow your chosen charities to receive a reliable stream of yearly donations – which is critical to their financial stability – while you deduct the total amount in a single tax year.
If you donate appreciated assets that you have held for more than one year to a DAF or a not-for-profit organization, you will avoid long-term capital gains taxes that you would have to pay if you sold the property, and also (subject to certain restrictions) obtain a deduction for the assets’ fair market value. This tactic pays off even more if you are subject to the 3.8% net investment income tax or the top long-term capital gains tax rate (20% for 2019).
What if you are looking to divest yourself of assets on which you have a loss? Rather than donate the asset, the better move from a tax perspective is more likely to sell it to take advantage of the loss, then donate the proceeds.
Timing also comes into play with medical expenses. The TCJA lowered the threshold for deducting unreimbursed medical expenses to 7.5% of adjusted gross income (AGI) for 2017 and 2018, but it bounces back to 10% of AGI for 2019. This will make it even more difficult to take this deduction. Bunching qualified medical expenses into one year could make you eligible for the deduction.
Offsetting capital losses against capital gains
2019 has been a turbulent year for some investments. Thus, your portfolio may be ripe for loss harvesting — that is, selling underperforming investments before year end to realize losses you can use to offset taxable gains you also realized this year, on a dollar-for-dollar basis. If your losses exceed your gains, you generally can apply up to $3,000 of the excess to offset ordinary income. Any unused losses, however, may be carried forward indefinitely throughout your lifetime, providing the opportunity for you to use the losses in a subsequent year.
Maximizing your retirement contributions
As always, individual taxpayers should consider making their maximum allowable annual contributions to their IRAs, 401(k) plans, deferred annuities and other tax-advantaged retirement accounts. For 2019, you can contribute up to $19,000 to 401(k)s and $6,000 to IRAs. Those age 50 or older are eligible to make an additional catch-up contribution of $1,000 to an IRA and, so long as the plan allows, $6,000 for 401(k)s and other employer-sponsored plans.
Accounting for 2019 TJCA changes
Most, but not all, provisions of the TCJA took effect in 2018. The repeal of the individual mandate penalty for those without qualified health insurance, for example, is not effective until this year. In addition, the TCJA eliminates the deduction for alimony payments for couples divorced in 2019 or later, and alimony recipients are no longer required to include the payments in their taxable income.
The time to act is now
To summarize, it’s clear that our future tax environment is uncertain. Even without dramatic change, many of the most significant TCJA provisions are set to expire within six years, and you can be sure there will be plenty of other changes to deal with before then. Our advice: start planning now. Contact your Weiss tax professional for help with your year-end tax planning today.
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