2019 Year End Letter
Dear Valued Client:
As the end of the year approaches, it is a good time to take a look at your 2019 projected tax liabilities, making certain that your income tax withholding and/or estimated taxes are appropriate or need to be modified, and consider what actions might be taken before the end of the year that can reduce your tax liabilities.
While we are available to discuss any questions that relate to your unique circumstances, here are some items you may want to consider:
- Make sure you have taken the required minimum distribution (RMDs) from retirement plans before December 31, 2019. RMDs from IRAs must begin by April 1 of the year following the year you reach age 70½. (That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire.) Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Thus, if you turn age 70½ in 2019, you can delay the first required distribution to 2020, but if you do, you will have to take a double distribution in 2020, the amount required for 2019 plus the amount required for 2020. Think twice before delaying 2019 distributions to 2020, as bunching income into 2020 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2020 if you will be in a substantially lower bracket that year.
- Consider converting your IRA to Roth IRA or converting funds in an employer sponsored 401K plan to a Roth 401K account within the plan if the employer plan offers this option.
- Ensure you have necessary paperwork for your health and dependent care flexible spending account reimbursements as well as Health Savings Account (HSA) reimbursements.
- Plan for 2020 pre-tax deduction, such as 401(k), flexible spending account and HSA contributions.
- If you become eligible in December of 2019 to make HSA contributions, you can make a full year’s worth of deductible HSA contributions for 2019.
- If your children have earned income during 2019, consider funding a Roth IRA for them. The contribution limit is the lower of the amount of their earned income or $6,000. This needs to be funded by April 15, 2020.
- With restricted itemized deductions and an increased standard deduction, it may be advantageous now more than ever to bunch expenses into one tax year to maximize the deductions. Consider bunching discretionary medical expenses and charitable contributions into one tax year.
- If you are age 70½ or older by the end of 2019, and have traditional IRAs, consider making 2019 charitable donations via qualified charitable distributions from your IRAs. Such distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. The amount of the qualified charitable distribution reduces the amount of your required minimum distribution, which can result in tax savings. This strategy is also tax efficient particularly if you will not realize a significant benefit from your charitable donations due to the larger standard deduction and reduction in the allowable deduction for state income taxes and real estate taxes paid.
- Long-term capital gain income from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income. Discuss with your financial advisor the amount of your realized gains and losses in 2019. Consider whether any loss harvesting or reallocation of portfolio assets would be useful to minimize the federal tax rate applicable to your capital gain income.
Year-End Tax-Planning Moves for Businesses & Business Owners
- Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2019, if taxable income exceeds $321,400 for a married couple filing jointly, $160,700 for single and head of household taxpayers, and $160,725 for a married couple filing separately, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The phase-in applies to joint filers with taxable income between $321,400 and $421,400 and to single taxpayers with taxable income between $160,700 and $210,700.
- More small businesses are able to use the cash (as opposed to accrual) method of accounting than were allowed to do so in earlier years. To qualify as a small business a taxpayer must, among other things, satisfy a gross receipts test. For 2019, the gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts don’t exceed $26 million (the dollar amount was $25 million for 2018, and for earlier years it was $5 million). Cash method taxpayers may find it a lot easier to shift taxable income between years. For example, by holding off on customer billings until next year to defer income, or by accelerating expenses by paying bills early or making certain prepayments.
- Businesses will continue to benefit from the liberalized business property expensing option. For tax years beginning in 2019, the expensing limit is $1,020,000, and the investment ceiling limit is $2,550,000. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for roofs, HVAC, fire protection, alarm and security systems, and for qualified improvement property (generally, any interior improvement to a nonresidential building’s interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework). The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What’s more, the expensing deduction is not prorated for the time that the asset is in service during the year. The fact that the expensing deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is held during the year can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of 2019, rather than at the beginning of 2020, can result in a full expensing deduction for 2019.
- Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment bought new or used (with some exceptions) if purchased and placed in service this year. Land improvements, such as sidewalks, parking lots, retaining walls, etc. also qualify for 100% bonus depreciation. The 100% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2019.
We encourage you to contact us to discuss any questions that you have regarding the suggestions outlined above regarding individual taxpayers or the planning opportunities affecting qualified small businesses. The provisions of the current tax law warrant coordination of strategies applicable to individual taxpayers’ sources and types of compensation, portfolio income and non-business deductions with the availability of the increased deductions and changes in accounting methods available to businesses they own and operate or in which they are passive investors.
We look for to discussing these matters with you in the near future.
Very truly yours,
Scott B. Price & Company