2019 Year-End Tax Planning Considerations
There were no new major tax laws enacted during 2019 that would have an effect on individual taxpayers. Although 2017’s Tax Cut and Job Act (TCJA) did eliminate many of the deductions that taxpayers relied on in prior years, there are still issues that should be considered during year-end tax planning.
The standard deduction for a couple filing a joint return is $24,400 in 2019; $12,200 for single filers. The following deductions are still allowed:
Medical expenses - Expenses in excess of 10 percent of adjusted gross income are deductible on Schedule A, but this floor, when coupled with the $24,400 standard deduction, prevents most taxpayers from realizing any benefit from this deduction. One exception in this area would be for expenses related to nursing home care, which are deductible under certain circumstances. If you pay such expenses, it makes sense to request a statement of the annual costs incurred from your provider so you can discuss the deductibility of these expenses with us.
Local taxes - The TCJA limited the amount of deductible local taxes (real estate, state income, local, etc.) to $10,000. If you are a homeowner, and live in a state with an income tax, there’s a fair chance that you will be limited by the cap. If that is the case, there’s no need to accelerate real estate taxes or fourth quarter state estimated tax payments as you may have done in prior years.
Interest expense - For home acquisition debt beginning after 12/31/17, you can now only deduct the interest incurred on $750,000 of acquisition debt, down from $1,000,000 in prior years. In addition, the deduction for home equity loan interest is no longer available unless the debt was used to finance improvements on your primary residence.
Charitable deductions - This deduction is still available, however, due to the increased standard deduction from the TCJA, charitable contributions may not provide any tax benefit to you. There are a couple of options that can still give you the maximum tax benefit from a charitable contribution:
Donor Advised Fund (DAF): A DAF is an account set up with a financial institution that allows you to accelerate your charitable contribution tax benefit. You fund the account with cash, or other allowed assets, and receive an immediate tax deduction. Over time, you decide which charities that you want to support and funds are withdrawn from the DAF. If you have long-term appreciated assets, such as stocks, bonds or real estate, you have an opportunity to further maximize your deduction. By donating these types of assets directly into a DAF, you generally won't have to pay capital gains, and you can take an income tax deduction in the amount of the full fair-market value, up to 30% of your adjusted gross income (AGI).
Qualified Charitable Deduction (QCD) from required minimum distribution (RMD): If you are at least 70.5 years old and must take an RMD from a traditional IRA, you can designate any part of that RMD up to $100,000 as a QCD. This allows your IRA trustee to pay the portion of your RMD that you designate directly to the qualified charity of your choice. This amount then meets your RMD obligation without generating any taxable income to you. See your trustee for assistance on this issue.
The IRS eliminated the personal exemption in 2018. Going forward, there is a child credit of $2,000 for each child under the age of 17, and a $500 other dependent credit for older children.
One of the most beneficial items that came out of the TCJA was the qualified business income deduction (QBID). Taxpayers who own S corporations, partnerships or are sole proprietors may be eligible to take advantage of this deduction, which allows owners of operating businesses to reduce their taxable income by up to 20 percent. This deduction was designed to even out the playing field for business owners with the lower C corporation tax rates that the TCJA provided. If you are in this situation, please contact us so we can assist you in realizing the maximum tax advantage.
Estate Taxes - The TCJA increased the estate tax exemption to $11.2 million (adjusted for inflation to $11.4 million in 2019). The law also allows the estate of the first spouse to die to transfer his or her unused exemption to the surviving spouse. This generated a combined $28.8 million exemption for a married couple. This, however, is only for federal estate tax purposes. Not all states have adopted this exemption. For example, in Illinois, the exemption is $4 million. If you had a $5 million taxable estate in Illinois, in the absence of estate planning, your estate could end up paying over $300 thousand in Illinois inheritance tax. Please consult with us or your estate plan advisor to protect yourself from this result.
While the tax laws are being changed in an attempt to simplify the preparation and filing of returns, it is important to pay attention to the deductions and other benefits that are still available to minimize tax liabilities. Everyone’s situation is different, so please contact us for assistance in evaluating your tax planning needs.
As always, ECS would like to wish you a wonderful holiday season and we look forward to working with you in 2020!
About the Author - Mark Neeb, Manager, joined ECS Financial Services in 2014, coming to ECS Financial Services with over 20 years of experience in public accounting. Mark’s areas of expertise include business and individual income tax, tax planning, and real estate accounting, as well as review and compilation engagements and the related financial statement preparation. Mark is a licensed CPA in the state of Illinois and holds a Master of Science in Taxation degree from DePaul University, and a Bachelor of Business Administration degree from the University of Wisconsin - Eau Claire.