COVID-19. Financial Assistance information

While most taxpayers have now filed their first tax return under the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, some got an unwelcome surprise that they won’t want repeated on their 2019 tax returns. that surprise came in the form of reduced tax refunds or, in some cases, tax payments due. Although this was due to a confluence of factors, the most notable one was the failure of individuals to adjust their payroll withholding deductions. While they were realizing the benefit of the reduced tax rates under the TCJA in their paychecks, because of changes to the employer withholding tax tables, many individuals did not adjust their withholdings for the decrease in, or the elimination of, deductions taken in prior years. A priority for 2019 year-end tax planning is ensuring that the amount of payroll taxes being withheld from a taxpayer’s wages in 2019, or the amount of estimated payments being made for 2019, will cover the taxpayer’s 2019 tax liability. In addition, the following are some year end strategies to consider on tax planning options for the 2019 tax year.

Taking Deductions in Alternate Years

With the increase in the standard deduction to $12,200 (single taxpayers and married filing separately), $18,350 (head of household), and $24,400 (joint returns and surviving spouses), and the $10,000 limitation placed on state and local tax (SALT) deductions, many individuals are not getting as great a benefit from itemizing deductions as they had in the past. Where an individual’s total itemized deductions will come close to, but not exceed, the standard deduction for 2019 and/or 2020, one strategy to consider is bunching certain itemized deductions into alternate tax years. This means, to the extent practical, increasing or bunching medical and charitable contribution expenses into alternate years so that, along with a taxpayer’s annual mortgage interest and SALT deductions, total itemized deductions exceed the standard deduction, thus giving the taxpayer a greater deduction based on those expenses. In the other years, the taxpayer takes the standard deduction. For taxpayers interested in making a large charitable contribution in one year instead of spreading the same amount over several years, practitioners should recommend using a donor-advised fund (DAF). Taxpayers can take a charitable deduction for the year the contribution to the DAF is made, while spreading the actual distributions to charities out over several years, allowing the taxpayer to later determine the amount of contributions and the organizations for which he or she wants to contribute.

Strategies Involving SALT Deductions

For individuals, the limitation on SALT deductions that took effect in 2018, which is $10,000 for single and married taxpayers filing joint returns ($5,000 for married individuals filing separate returns), has been very unpopular with high-income individuals in high-tax states. Some in Congress are trying to pass legislation that would eliminate or raise the cap on SALT deductions. So, if a taxpayer who is itemizing deductions can postpone paying 2019 state income or real or personal property taxes until 2020, there is a possibility that a favorable change in the law could yield a larger state tax deduction in 2020. Alternatively, if an individual’s SALT deduction is less than the $10,000 cap in 2019 but is expected to exceed the cap in 2020, consideration should be given to prepaying 2020 state income and property taxes in 2019 if possible. IRS guidance provides that whether a taxpayer can deduct a prepayment of 2020 state or local real property taxes in 2019 depends on whether the 2020 real property taxes are assessed in 2019. A prepayment of anticipated 2020 real property taxes that have not yet been assessed is not deductible in 2019. And if a taxpayer is postponing a payment of 2019 state income taxes to 2020, it’s important to ensure enough of the state tax payment has been made in 2019 to avoid any underpayment-of-tax penalties.

Schedule C Taxpayers

While the TCJA suspended the miscellaneous itemized expense deduction through 2025, and thus the ability of employees to deduct home office expenses, the home office deduction is still available for Schedule C taxpayers. And, if those taxpayers have been using the simplified method of calculating their home office deduction, the actual-expense method may be worth a second look in light of the SALT and mortgage interest limitations enacted under the TCJA. Under the simplified method of calculating a home office deduction, the number of square feet in the home office, up to a maximum of 300 square feet, is multiplied by $5, thus allowing a maximum home office deduction of $1,500. It’s simple because taxpayers don’t have to document their actual expenses or the allocation factor used. However, although the actual-expense method requires additional work, it may yield a larger home office deduction. Under the actual-expense method, a portion of the taxpayer’s mortgage interest and SALT expenses, which may be limited as a result of TCJA changes if reported on Schedule A, Itemized Deductions, are reported as above-the-line expenses on Schedule C. Thus, nondeductible Schedule A expenses can be transformed into deductible Schedule C expenses. Additionally, expenses that would not otherwise be deductible, such as utilities, insurance, security, and repairs, are converted into deductible expenses. One thing to remember, however, is that depreciation also needs to be calculated under the actual-expense method and, when a home is later sold, that depreciation will be recaptured as ordinary income. Finally, deductible home office expenses cannot exceed income from the taxpayer’s Schedule C business.

Retirement Plan Contributions

Finally, it’s always a good plan to save for retirement. And, in some cases, the money socked away in a qualified retirement vehicle can substantially reduce taxable income. For 2019, employees can defer up to $19,000 of income into a 401(k), plus catch-up contributions of $6,000 if they are age 50 or older. Alternatively, business owners can establish a simplified employee pension plan for themselves and contribute the lesser of $56,000 or 25% of net earnings from self employment up to $280,000. Still other options include contributions to various types of IRAs, although the contribution limits are much lower, income limitations may apply, and contributions to Roth IRAs are not deductible.

If you have any questions related to your year end tax planning, please contact me.