As 2019 winds down, the upcoming Holidays are at the forefront of everyone’s mind. Between planning gifts, meals, and travel arrangements, many forget the importance of year-end tax planning. With that in mind, we offer seven (7) strategies that may save everyone money when April 15th comes around in 2020.
- Avoiding Estimated Tax Underpayment Penalties
To avoid the IRS charging penalties for underpaying estimated taxes, individuals must meet at least one of these three criteria:
- a person's total tax due after withholdings is less than $1,000, or
- they have paid in at least 90% of their taxes for the current year, or
- the individual has paid in at least 100% of the prior year’s tax amount in the current year. However, if their adjusted gross income (“AGI”) in the prior year was above $150,000 ($75,000 if their status is married filing separately), then they must pay in at least 110%.
If a taxpayer does not meet any of these criteria, they can still minimize penalties and interest by adjusting their employee withholdings by December 31, 2019, or by making an estimated tax payment to the IRS before January 15, 2020.
- Planning Charitable Giving
Due to the Tax Cuts and Jobs Act (“TCJA”), many taxpayers are not itemizing their deductions because of the increase in the standard deduction. Under the TCJA, individuals are permitted a standard deduction in 2019 of $12,200, while married couples filing jointly have a standard deduction of $24,400. Those who regularly contribute to charities may, therefore, not see any tax benefits for their yearly giving.
Folks should consider itemizing every few years (as opposed to claiming the standard deduction) by "bunching" their charitable contributions into years where they can reduce their tax bill.
Some taxpayers may consider starting a Donor Advised Fund ("DAF"). A DAF acts as a charitable investment account. A large contribution to the fund can be deducted in the year paid (assuming it is enough to put them over the standard deduction), and using the DAF strategically, the funds can be distributed to the person’s charities of choice.
- Accelerating Mortgage Payments
Besides planning whether to take either the standard or itemized deduction, taxpayers should consider how the timing of making their mortgage payments may affect their deductions.
Individuals can take a deduction for mortgage interest they pay during the year, up to certain mortgage value thresholds. Savvy taxpayers should accelerate their mortgage payments in the year they plan to itemize – if their bank allows it – and they should make their January payment before December 31st, giving them an additional deductible interest payment.
- Considering the Timing of Gifts to Friends & Family
Individuals can make annual exclusion gifts up to $15,000 per donee, or $30,000 if married and electing to split gifts. Annual exclusion gifts are generally not reportable on the donor's gift tax return, nor are they applied against a person's lifetime gift tax/estate tax exemption, which is $11,400,000 in 2019.
Someone who plans on making a large one-time gift to a loved one, in excess of the annual exclusion amount ($15,000/$30,000), should consider giving a part of the gift in December and the remaining part of the gift in January 2020. This way, they can benefit from utilizing two years' worth of annual exclusions.
- Planning and Distributing Retirement Account Funds
With input from their financial advisors, individuals should consider maximizing traditional IRA and 401(k) contributions to reduce their AGI. Workers should also consider if they are in the optimal retirement plan. Those who expect to be in a higher tax bracket during retirement may consider converting from a traditional IRA plan to a Roth plan, but should always have their advisors run the calculations first to see if this makes sense.
Seniors over age 70 ½ will need to take required minimum distributions (RMD) from their retirement plans. If someone does not take their RMD by December 31, 2019, or by April 1, 2020, if they turned 70 ½ in 2019, they may be assessed penalties as high as 50% of the amount not distributed.
- Selling Investments
For taxpayers who receive investment income, consider the length of time they have held securities. The IRS allows lower tax rates for capital gains from investments held over 12 months.
If a person is planning on selling securities, and they haven’t held the security for at least a year, they should hold onto their investment longer to benefit from the lower tax rate on those gains.
- Strategies for Business Owners
With year-end approaching, business owners should consider whether they can delay the recognition of income or accelerate their business expenses, and if it makes sense to do so. Someone who will be in a higher tax bracket next year because of onboarding a major new business customer may want to accelerate income into this year (and defer expenses to next year) to have an overall lower tax bill.
Business owners should also consider the new 100% bonus depreciation rule, which was another gift from the TCJA. Most fixed assets (with a depreciation recovery period of 20 years or less) can be entirely deducted in the year they are purchased instead of having to be depreciated over their useful life.
Not to be forgotten is the supercharged Section 179 deduction, which permits up to $1 million of qualified property to be expensed. The rules for bonus deprecation and Section 179 are similar, but there are several differences. Speak with your advisor to determine which depreciation write-off is best for your business.
We hope that these seven tips are useful as your year closes. If you have any questions regarding year-end planning, contact The Tax Warriors® at Drucker & Scaccetti. We are always prepared to assist you with this or any tax-related matter.