The following provides you end of the year tax planning opportunities….
The Tax Cuts and Jobs Act (“TCJA”), initially effecting individuals’ 2018 tax returns, was the most sweeping tax legislation since the Tax Reform Act of 1986 was signed into law. Among other things, the act shifted tax brackets, reduced or eliminated some itemized deductions, and created new tax credits and deductions. This following provides you, the taxpayer, some 2019 tax planning opportunities pertaining to some of the most consequential changes provided by the TCJA and other key provision that you should be aware of:
- Standard Deduction – The TCJA nearly doubled the standard deduction which resulted in less individuals ‘itemizing’ than ever before. For 2019 the federal Standard Deduction is $12,200 for individuals ($24,400 for married couples filing jointly) meaning taxpayer must exceed these thresholds before they start receiving any benefit from their itemized-deductions. Consider the timing of some of your itemized deduction as they relate to this Standard Deduction when tax planning to minimize your tax liabilities between tax years.
- Charitable Contributions – Consider bundling you charitable giving into one tax year rather than over time. By doing so you have the opportunity to maximize your benefit by switch in-between both the Standard Deduction and the Itemized Deduction rather than losing the charitable deductions all together. Donor-advised funds or charitable remainder trusts are potential vehicles that could also be used. These vehicles enable you to make charitable contributes now, obtaining the benefits of the charitable deduction, whereas the distributions from the fund to the underlying charities are made at a later date. Taxpayer’s age 70½ or older are allowed to make direct contributions from their IRA to charitable organizations thereby satisfying an IRA owners required minimum distribution requirements.
- Alimony Agreement Modifications – The deduction for Alimony paid has been repealed and therefore recipients are no longer required to include alimony as income for any divorce agreement, separation instrument, or modification executed after 12/31/2018. Furthermore, those making alimony payments should be aware that agreement modifications made to a divorce agreement in effect before 12/31/2018, could result in the payment being no longer deductible.
- Net Investment Income Tax – Consider your modified adjusted gross income (MAGI) before selling any investments at year end. Taxpayers with MAGI in excess of $200,000 ($250,000 for married filing jointly) are subject to an additional 3.8% Net Investment Income Tax which includes capital gains, dividends, and interest.
- Additional Medicare Tax – When considering a year-end bonus be cognizant that high income taxpayers should be aware of an additional .09% Medicare tax on self-employment income exceeding $200,000 ($250,000 for married filing jointly).
- Self-Employed Home Office Deduction – If you are self-employed and your home is your principal place of business, you can generally deduct a portion of your home office. This includes a portion of your mortgage interest, property taxes, insurance, utilities, certain other expenses, and the depreciation for the allocable space.
- Alternative Minimum Tax – Because of higher income thresholds and the reduction/elimination of many itemized deductions with the TCJA, fewer taxpayers than ever are subject to this parallel tax. Be aware that substantial net long-term capital gains could possibly trigger a parallel “AMT” tax in excess of the traditional federal income tax. Those individuals holding stock options should consider the effects of AMT when exercising those options.
In order to avoid these pitfalls, it is vital to undergo at least a minimal amount of advance planning. As in everything we do, our goal is to make this process as smooth as possible. In that regard, if you would like help navigating these changes in an advantageous way to you and your family, please email or call us to discuss your specific situation.