Now that both the initial and extended 2018 filing seasons have passed, it’s time to focus on 2019’s taxes and steps to take to leverage additional savings in the closing months of the year. There are steps that can be made now to improve a taxpayer’s position and create additional saving opportunities. While the changes brought about by the Tax Cuts and Jobs Act (TCJA) are still new for many, it’s important to revisit many of the most impactful changes to see how/if they can be leveraged as part of the planning process. To help clients, prospects and others take advantage of these changes as part of their efforts, Barnes Dennig has provided a summary of year-end tax planning opportunities arising from tax reform.
Tax Cuts and Jobs Act – Tax Reform
The TCJA drastically affected both businesses and individuals, and most of the changes went into effect in the 2018 tax year. Now that our country has one year of TCJA under our belt, we have a better idea of how to move forward. A few of the most notable changes that will impact your tax plans are:
The qualified business income deduction (QBI deduction) allows small business owners to take a deduction of up to 20% of their share of business income. Owners of flow-through entities (like partnerships and S corporations), sole proprietors, and individuals with rental real estate activities are eligible for the deduction. In the past year, the IRS has released regulations that clear up some questions the tax community had about this deduction, so talk to your CPA to see if those regulations will change your existing QBI deduction strategy.
New Tax Rate
Many individuals will see a tax rate decrease. The highest marginal tax rate dropped from 39.6% to 37%. Unfortunately, some will see an increase. Single taxpayers with $120,000 of taxable income will now be in the 28% tax bracket, up from 24%. When you see the effect this new tax regime had on your 2018 tax returns, alter your 2019 and 2020 estimated taxes accordingly.
Increase in Standard Deduction
The standard deduction almost doubled when the TCJA was passed, which means that fewer individuals will itemize their deductions. Consider if expenses you had itemized in the past are worthwhile costs if you are one of the many taxpayers now ineligible for itemization. You may want to consider bunching charitable deductions in single year to maximize deductions.
Current Year Business Losses and Net Operating Losses
Current year business losses are now limited. A single non-corporate business owner can only deduct a $250,000 loss against other income in the current year. Any excess business losses will create a net operating loss (NOL). Unfortunately, NOLs are also limited. NOLs can no longer offset prior year profits, and they can only offset up to 80% of current-year income. Understand how these changes will affect your long-term business plans.
Alternative Minimum Tax
The alternative minimum tax (AMT) got a face lift with the TCJA, and fortunately, fewer individuals will be subject to the AMT. Additionally, since fewer individuals will itemize their deductions, fewer taxpayers will have adverse AMT adjustments. Look at your 2018 tax return as a barometer for your 2019 tax position; AMT may no longer be a factor.
Like-Kind Exchanges and Qualified Opportunity Zones
Like-kind exchanges are now restricted to real property, so gains from the sales of personal property will generally be taxable. To combat this, you could invest in a qualified opportunity zone (QOZ) fund. When you recognize a gain by selling appreciated property, you can invest your gain into a QOZ fund and temporarily (or perhaps permanently) defer your capital gains tax. The IRS has released multiple guidelines this year that make it easy to see how QOZs are viable tax-saving mechanisms. There are certain time frames that need to be met so talk to your tax advisor as soon as possible.
Home Acquisition Debt
The deductible interest on a new home is limited to the first $375,000 spent ($750,000 for married taxpayers). If you owned a home pre-TCJA, you will be grandfathered in at the $500,000 ($1 million for married taxpayers) limitation. If you itemize your deductions and are considering purchasing a new home, keep this limitation in mind.
Although not strictly an income tax issue, planning for your estate should be something you think about as we close out the year. The new estate and gift tax exemption is $11.4 million in 2019, and the annual gift tax allowance is $15,000. Take advantage of that $15,000 “freebie” and remember that you can gift $15,000 per year per recipient.
While tax planning is a comprehensive and year-round process, now is the time to take advantage of these opportunities. Our goal for clients is to have them pay the least amount possible based on their business and individual situation. If you have questions about year-end tax planning or need assistance with an accounting or financial reporting issue, Barnes Dennig can help. For additional information please call us at 513-241-8313 or click here to contact us. We look forward to speaking with you soon.