‘Tis the season for friends, family and holiday cheer! It’s the time of year when no matter where you live, life becomes busier than usual. We are all preparing our holiday menus, making last-minute shopping trips and even beginning to plan for some tax-smart moves as we say good-bye to yet another year. All taxpayers have now filed their first tax return under the law known as the Tax Cuts and Jobs Act and while the 2019 tax year is shaping up to be much quieter, no one can afford to be complacent. The following are some year-end strategies to take into consideration.
Check Your Withholding. Many received an unwelcome surprise in the form of reduced tax refunds or, in some cases, tax payments due when filing their 2018 returns. The benefit of the reduced tax rates under the TCJA were being received throughout the year as a result of not adjusting payroll withholding. A priority for 2019 year-end tax planning is ensuring that the amount of payroll taxes being withheld from wages, or estimated payments being made, will cover any 2019 tax liability.
Bunching Deductions. With the increase in the standard deduction, many individuals are not getting as great a benefit from itemizing deductions as they had in the past. If you know you will be close to, but not exceed the standard deduction for 2019, it may be time to consider bunching certain itemized deductions. Consider no longer putting off that dreaded medical procedure or give to your favorite charitable organization so that along with your annual mortgage interest and SALT deductions, total itemized deductions exceed the standard deduction.
Max Out on Your Retirement Plan. The new laws didn’t change this advice. Not only does maximizing your retirement contribution increase your savings, but it will also potentially lower your taxable income. IRA contribution limits are $500 higher than 2018 levels at $6,000 for those younger than 50 and $7,000 for those 50 or older. 401(k) contribution limits are also higher for the 2019 tax year. People younger than 50 can contribute up to $19,000 toward a 401(k) or similar plan in 2019, while those 60 or older can contribute up to $25,000.
Consider Investment Income. If you have an investment showing a loss, you may consider selling the shares to realize the loss. You can use these losses to offset any taxable gains realized during the year. Under the new law, you will still receive the beneficial lower long-term capital gains taxes at a rate of 0%, 15% or 20% depending on overall taxable income.
QBI Deduction. One of the most significant changes to come out of the TCJA is the qualified business income (QBI) deduction under Section 199A. The deduction is available to sole proprietors, partners in partnerships, members in limited liability companies, shareholders in S Corporations, and some trusts and estates. Since taxable income is a threshold for the deduction, consideration needs to be given yet again to accelerating deductions, possibly deferring income, and additional retirement contributions. Since a business’ W-2 wages may impact this deduction as well, increasing W-2 wages may potentially allow for a more favorable deduction. This assumes the deduction outweighs any increased payroll tax burden.
While everyone’s tax situation is different and there are a variety of opportunities in addition to those listed above, no one wants to talk taxes at the Thanksgiving dinner table. However, your HORNE tax advisor would love to help you navigate through year-end tax planning and any potential tax-saving opportunities.