Top 10 Tax Planning Ideas for Individuals

By Staff

Year-end tax planning for 2019 takes place against the backdrop of legislative changes that occurred in late 2017 that fundamentally altered the tax rules for individuals and businesses. The Tax Cuts and Jobs Act (TCJA) was the largest tax law change in 30 years, and 2018 was the first year that TCJA changes were in effect. It seems as if some taxpayers are still just filing their 2018 tax returns that were on extension and digesting the impact that the TCJA had on their situation, and now it’s already time to plan for the 2019 year-end.

The issues to navigate for the remainder of 2019:

For the wealthiest taxpayers, personal income is subject to a top ordinary rate of 37% and a potential high-wage earners Medicare tax of 0.9%.
Special maximum tax rates generally apply to long-term capital gains and qualified dividends (0%, 15%, or 20%).
There is still a 3.8% Medicare surtax on net investment income.
Fewer taxpayers are affected by alternative minimum tax (AMT).
Many more taxpayers are using the increased standard deduction.
Many itemized deductions have been repealed or significantly reduced. State and local tax deductions are capped at $10,000, qualified home interest deduction rules have changed, the former Pease limitation has been removed, and some prior miscellaneous itemized deductions are gone.
There is the new qualified business income deduction for pass-through income.

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Despite the fact that tax rates for 2019 and the next year will remain the same (with modest increases for inflation), the time-honored approach of deferring income and accelerating deductions to minimize taxes still works for many taxpayers. For those taxpayers who will remain in the same tax bracket from year-to-year, deferring income will not cause them to be taxed at a lower rate. Rather, it just delays the recognition of income, bringing into play time value of money considerations. However, if you expect to be in a lower tax bracket, then you should consider deferring income using strategies such as the installment sale method to defer taxable gain on sales, postponing income received by cash basis taxpayers, or delaying the receipt of a bonus. For accrual basis taxpayers who want to defer the recognition of income, consider postponing the actual right to payment for services or merchandise delivered.

You should take advantage of the lower taxed dividend income. Qualified dividend income is taxed at the same favorable tax rates that apply to long-term capital gains. Consider shifting investments out of holdings that generate income taxed at ordinary rates (e.g., bonds) and into dividend-paying stocks to achieve tax savings that result in higher after-tax income. However, be cautious that the 3.8% surtax on net investment income could apply.

Manage your taxable income so that you are under the limitations. If taxable income exceeds $321,400 for a married couple filing jointly, or $160,700 for all other taxpayers, the deduction is subject to multiple limits based on the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid with respect to the qualified trade or business, and/or the unadjusted basis of qualified property held by the trade or business.

With the number of taxpayers who itemize deductions projected to decline and more taxpayers instead taking the now higher standard deduction, how can you maximize your charitable gifts? Taxpayers should consider bunching charitable deductions into particular years or consider making gifts to a donor-advised fund to obtain the deduction now and make actual distributions from the fund at a future date. Consider gifting low-basis assets directly to charity and avoiding paying capital gains tax on the appreciation of the asset. Alternatively, sell loss assets first and then gift the cash to charity, in order to take advantage of the loss to offset other capital gains.

If you haven’t already taken your required minimum distribution (RMD) for 2019, consider the Charitable IRA rollover, which allows an individual age 701/2 or older to make a qualified charitable distribution (QCD) from their IRA directly to a charity and exclude the distribution from gross income (up to $100,000 per year). You may not receive a separate tax deduction for the charitable donation, but there are several benefits to this strategy.

With the federal estate and gift exemption amount nearly doubled now to nearly $11.4 million per person, those with taxable estates should make use of the increased exemptions with the use of lifetime gifts. Also, for transfers that could potentially be subject to the generation-skipping tax, take advantage of the increased generation skipping transfer (GST) tax exemption as well by making current gifts to skip persons or making late allocations of GST exemptions to trusts that previously were not exempt.

As you get close to year end, determining your 2019 marginal tax bracket and projected investment income can be done with more certainty. If you are trying to convert your traditional IRA to a Roth IRA to fill up a tax bracket, start those conversations now. Traditional IRA to Roth IRA conversions can reduce future required minimum distributions and create a potential tax-free inheritance for children. Under present law, there are no required distributions by the participant from the Roth IRA in future years. Higher-earning taxpayers who cannot contribute directly to a Roth IRA may be able to contribute to a non-deductible IRA that might later be converted to a Roth IRA. Just be mindful that the ability to recharacterize Roth conversion contributions was eliminated by the TCJA for tax years beginning after December 31, 2017.

Also, with IRA planning, it is important to consider the future potential legislation that could limit what is known as the “stretch IRA,” a concept that allows IRA or defined contribution plan beneficiaries to draw down the remaining plan benefits over the beneficiary’s life expectancy. The new legislation would cause inherited IRAs and inherited defined contribution plans to be distributed within 10 years of the original owner’s death.

The TCJA also created a new tax-deferred investment opportunity called the qualified opportunity zone (QOZ) and led to the emergence of some QOZ funds. Taxpayers may defer and partially reduce capital gains tax due on the disposition of existing property by reinvesting the capital gains into a QOZ though a qualified opportunity fund (QOF). In order to benefit from the 15% step-up in tax basis, the QOZ must be held for seven years, so gains would need to be harvested before the end of 2019 and reinvested within 180 days beginning on the date of the sale or exchange. The taxes on the deferred gain would be due when the QOF is sold or at the end of December 2026 (whichever comes sooner). After holding the investment for 10 years, 100% of the post-reinvestment gain could be exempt from federal tax.

Investors should carefully consider the lock-up commitments of QOZs. If you may need access to funds invested in a QOZ within the next 10 years, this may not be a suitable investment for you. Before you consider investing in a QOZ, consider constraints such as liquidity, minimum investment criteria, and the infrequent valuations. They are likely to include large minimums, limited transparency, and delayed tax reporting (Schedule K-1).

Taxpayers who live in high state tax jurisdictions, who felt the high taxes were a fair price to pay for better schools, roads, etc., have a different decision model now that their deduction for those high taxes is limited to $10,000. Also, with the higher standard deduction, those taxes may provide no deduction at all. It does not appear that the $10,000 limitation is indexed for inflation.
Similarly, taxpayers with mortgage interest have a different decision model regarding prepaying their mortgage if the mortgage is over $750,000 or they will no longer itemize.
The cost of a home equity loan that isn’t used to buy, build, etc. a personal residence has become more expensive to persons who previously got a tax benefit for the interest.
Taxpayers who are employees, who aren’t reimbursed for expenses such as entertaining their customers, travel to their customers, or continuing education, may want to cut back on those items because they no longer provide a tax deduction.
Deductions previously permitted in determining net hobby income are now generally disallowed.
Personal casualty losses are deductible only if the losses were incurred in federally declared disaster areas.

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