The Tax Cuts and Jobs Act (TCJA) of 2017 changed individuals’ tax return filings, from 2018-2025, in some significant ways:
- $10,000 cap on the state and local tax deduction
- Qualified Business Income Deduction (Section 199A)
- Qualified Opportunity Zone program
- Kiddie tax simplification
- Charitable contribution percentage increase
- Elimination of the miscellaneous 2% deduction
Although the TCJA eliminated some of the year-end tax strategies accountants traditionally discussed with clients — most notably, whether they should prepay their state and local taxes — in the end, tax reform still left a number of opportunities individual taxpayers can look forward to and maximize at the end of 2019. Below are our top nine to consider this year.
1. Retirement Planning
Maximizing your retirement contributions allows you to contribute dollars pre-tax, lowering your overall taxable income. Take advantage of this opportunity as much as possible using this year’s new limits:
- If you are under age 50 you can contribute up to $19,000 to your 401(k) plan/year.
- If you are 50 or older you can contribute up to $25,000/year.
- The 2019 traditional and ROTH IRA contribution limits are $6,000 for individuals under 50 and $7,000 for those above 50 years of age (although the amount you can contribute to a ROTH is reduced at higher incomes).
- Self-employed persons contributing to a solo 401(k) can contribute up to $56,000.
Additionally, if you have reached 70 ½, make sure you are planning for your required minimum distributions from your IRA.
2. Health Accounts
For Health Savings Accounts (HSAs), the 2019 annual contribution for a family has increased to $7,000 ($3,500 for individual). If you are 55 or older there is a catch-up contribution you can make, which is an additional $1,000.
If you have a flexible spending account, make sure you monitor how much you still have in your account. You may lose funds not used by the end of the plan year.
3. Charitable Contributions
With the reduction of the state and local tax deduction, as well as the loss of other itemized deductions, taxpayers should look more closely at what strategy regarding charitable contributions will help maximize tax deductions. If you only itemize because you make charitable contributions, you may want to set up a donor advised fund, which would allow you to make a large, single-year contribution. This strategy allows you to “bunch” your contributions into one year, giving you the benefit of itemizing in that year and taking the standard deduction in the other years.
If you are age 70½ and have traditional IRAs, consider making charitable donations directly from your IRA. These donations are not included as an itemized deduction, but they are not included in your gross income either.
4. Harvesting Capital Gains or Losses
If you are expecting a large capital gain in the current year, consider offloading some of your underperforming stocks to offset this gain. If you have capital loss carryforwards from prior years, you may want to generate some gains to offset these losses.
5. Net Investment Income (NII) Tax
As with previous years, reducing NII is important to lowering the related NII tax. Consider, where possible:
6. Section 199A – Qualified Business Income Deduction (QBID)
- Selling property with losses,
- Postponing net capital gains,
- Using an installment sale to spread a large gain over a number of years,
- Deferring gain using a Section 1031 exchange or donating appreciated securities to a qualified charity,
- Reducing modified adjusted gross income by maximizing retirement plan contributions,
- Contributing to your health savings account or
- Altering the tax characteristics of your investments.
Business owners (individuals, estates and trusts) of partnerships, S Corporations and sole proprietorships can take a maximum deduction of 20% of their qualified business income. However, wage limitations apply and owners of specified service businesses are not eligible for the deduction if their taxable income is above a certain threshold. To qualify without any limitations, owners may want to consider reducing their income by making contributions to retirement plans or health savings accounts, for example, to fall below the $160,700 phase-out threshold for individuals ($321,400 married filing jointly).
7. Taxes & Children
The TCJA simplified the kiddie tax. However, in 2019 a child under age 18 who has unearned income over $2,200 is taxed at the trust rates, which are as high as 37% for taxable income over $12,751. Conduct a cost/benefit analysis of reporting the child’s unearned income on parents’ tax returns.
Additionally, keep in mind the child tax credit was doubled to $2,000 per qualifying child starting in 2018, and taxpayers filing jointly who earn up to $400,000 of annual income are eligible to take this credit.
8. Estate Tax Planning
With increased gift and estate tax and exemptions —$11.4 million for individuals and $22.8 million for married filing jointly for 2019 — many taxpayers are no longer subject to the federal estate tax for at least the next seven years. Here are some items to consider:
- Continue making annual exclusion gifts – up to $15,000 to any individual per year.
- If you are under the exemption amounts, income tax basis planning should be the focus of your planning.
- Make sure all of your estate planning documents are up to date.
- Non tax-related estate planning remains critical.
9. Qualified Opportunity Zones
The Opportunity Zone program created by the TCJA incentivizes long-term investment in low income and economically distressed communities by deferring capital gains tax when taxpayers invest those gains into Qualified Opportunity Funds (QO Funds). A taxpayer with realized capital gain from an unrelated party has 180 days to invest in a QO Fund and can defer that gain until whichever event occurs first: 1) the sale of the QO Fund interest, 2) the QO Fund ceases to qualify or 3) December 31, 2026. The original deferred gain is reduced based on how long the QO Zone Fund is held, and post-acquisition appreciation on the QO Fund investment is permanently excluded from tax if the investment is held for 10 years or longer. As always, it is important to evaluate any investment carefully and discuss with your investment and tax advisors.
Miscellaneous Items to Note for 2019 Tax Planning
There are a few other things to keep in mind:
- The standard deduction increased to $24,400 for married filing jointly, up from $24,000 in 2018.
- Alimony payments are no longer deductible to the payer, nor included as income to the payee for divorces finalized in 2019 or later.
- Check your withholdings, as many people withheld too little in 2018.
- Form 1040 is changing again, reducing the number of schedules from six to three and making a new Form 1040-SR for seniors over 65 with less complicated returns.
We are fortunate to have certainty in individual tax planning through 2025, and some of these simple strategies can still be put into place before December 31, 2019. Work with your advisors now to evaluate your financial situation in its totality and take advantage of every opportunity available to you.
Contact Nicole Rococi at email@example.com or a member of your service team to discuss this topic further.
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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.