2019 Year End Tax Considerations for Individuals
Most Americans Need to Spend More Time Planning to Limit Tax Liability
Have you taken the time to review where you will be when it comes to your tax liability for this year? Year-end tax planning is an important process for many people, and the number of those who could benefit from the process continues to rise.
Two years into the Tax Cuts and Jobs Act (TCJA) and American taxpayers are still receiving guidance from the IRS on many issues contained in the massive tax overhaul. And, unfortunately, we’re still waiting for more clarification in a few areas. What do these new changes mean for you? You won’t know if you don’t spend time planning for taxes. The key is to look at your tax position before the end of the year to see if there are changes you can make to improve your tax position.
Who Needs Year End Tax Planning
Everyone should take time at the end of the year for tax planning, but it’s especially important this year for:
- Self-employed persons
- Owners of a small business or farm
- Those who saw a significant change in their income
- Individuals with a change in filing status
In addition, businesses taxed as flow-through entities will need to comply with many additional reporting requirements in 2019 so planning will be to their advantage. These are, most commonly, partnerships, S Corporations, and LLC taxed as such.
Areas Impacting Your 2019 Taxes
Your tax planning this year involves much more – both in terms of traditional year-end strategies and strategies developed in response to developments that have taken place since last year. As the year comes to a close, be sure to take time to consider:
- Income tax rates. Your tax bracket is one of the most significant factors in tax planning. It is something you can influence if you control the timing of income and deductible expenses. For example, those who anticipate being in a lower tax bracket in 2020 could defer income to next year while accelerating deductions into this year. Knowing your tax bracket creates a potential for saving through tax planning.
- Withholding. Chances are you saw a significant change in your tax liability and subsequent refund or amount due. If you did, consider updating your withholdings. There will be a new W-4 withholding form next year, and it’s meant to simplify the calculation since withholdings are no longer based on allowances and personal exemptions. In the meantime, the IRS Tax Withholding Estimator is a good place to start.
- Investments. If you have investments like securities, real estate, collectibles, or other assets, then you may have an opportunity to reduce your overall tax bill through strategic buying and selling before the end of the year. Exchanging appreciated real estate for like-kind property in order to defer gains is another option. The challenge is balancing tax considerations with other factors, including ordinary income tax rates, the 3.8% net investment income tax rate (NIIT), the preferential capital gain rates, and the alternative minimum tax (AMT).
- Income caps on benefits. Be sure to monitor your adjusted gross income (AGI) to determine the taxability of certain benefits and your eligibility for certain credits. Tax savings can often be realized by lowering income in one year at the expense of realizing a bit more in another year.
- Life events. Did you get married or divorced? Have or adopt a child? Change or lose a job? Retire? These life events impact your tax liability. Consider them along with other significant or unusual losses of income. You’ll also want to look into the future and predict, if possible, any events that could trigger significant income, losses, or deductions.
- Maximize retirement savings. The end of the year is when many employers require any changes to retirement contributions for the next year. Maximizing your contribution is generally a good tax-saving move. Also look at various savings vehicles, like a Roth IRA or traditional plan, and pick the right option for you.
- Tax-advantaged savings for health care. Are there other health care options you should consider? Health Savings Accounts (HSA) work with a high-deductible health-care plan to allow for pre-tax contributions to pay for out-of-pocket medical expenses. Unused funds grow similar to an IRA. Flexible Spending Accounts (FSA) also allow for pre-tax contributions to pay for qualified medical expenses. These plans have a lower contribution limit and, generally, a carryover balance is not allowed.
- Timing rules. The skilled use of timing rules to accelerate and defer certain income or deductions is a staple of year-end tax planning. For example, the timing of year-end bonuses and tax payments or the timing of the sale of investment properties can help maximize capital gains benefits. You can write a check or pay with a credit card and treat these actions as payments. It often does not matter when the recipient receives a check mailed by the payor, when a bank honors the check, or when the taxpayer pays the credit card bill if it’s done or delivered “in due course.”
New Changes in 2019 Tax Law
Just when you think you understand some basic tax laws, changes occur. While many of the changes that went into effect in 2018 remain the same in 2019, there are a few exceptions including:
- Alimony. For any divorce or separation agreement entered into after December 31, 2018, alimony or separate maintenance payments are no longer deductible by the payor nor counted in the income of the payee. This change does not impact any agreement prior to this year or those altered after 2018 where the changed method of taxation is not expressly stated.
- Increased standard deduction. The standard deduction amounts for 2019 have been adjusted for inflation and are as follows: $24,400 for joint filers, $18,350 for heads of households, and $12,200 for all other individual filers. If you have traditionally itemized in the past, you may still recognize benefits by “bunching” itemized deductions so that they are higher in one year and lower in the next year.
- Medical expenses. The floor for claiming deductions for medical expenses in 2019 increased from 7.5% up to 10% of adjusted gross income (AGI) for all taxpayers.
- Individual mandate (healthcare penalty). The repeal of the individual mandate takes effect this year meaning there is no longer a penalty for not having qualifying health coverage.
TCJA Rules Still in Effect
There were a number of changes in the tax law that upset many people and prompted calls for change. Unfortunately, no changes were made. The one that drew the biggest response was the state and local tax deduction, which is still limited to $10,000 total per year.
Some miscellaneous itemized deductions are still a thing of the past. This includes deductions for unreimbursed employee expenses, the home-office deduction, non-business tax preparation, and advisory fees.
And don’t forget that the home equity debt interest deduction only applies to debt related to home-related improvements. You cannot deduct interest on home equity debt used for other purposes, such as paying off credit cards, taking vacations, or utilized as car loans.
Set Aside Time to Plan Now
With new changes again this year and more clarifications yet to come, make sure you understand now what you can do to limit the amount of taxes you’ll owe. You’ll also appreciate the peace of mind that comes with knowing what you’ll owe Uncle Sam. Now is the time to call your tax advisor and set up an appointment. There is still time to make changes that can result in substantial tax savings.