10 Tax Planning Tips For Year End

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Above The Line Deductions

According accountingtoday.com these deductions are very valuable, especially now that taxpayers won’t be itemizing deductions anymore. Also, they reduce the taxpayer’s adjusted gross income, which affects their eligibility for many other tax benefits.

Some of the better known above-the-line deductions are:

  • Individual retirement account savings
  • Personal health savings account contributions
  • Self-employment taxes
  • Some health insurance costs
  • Bank penalties paid to or early withdrawals

Reforms repealed some popular deductions including moving expenses – except for military personnel – and alimony for divorces after 2018.

 

Charitable Gifts: Workarounds

The tax reform placed a cap on deductions of state and local tax deductions.  Some state as a result, enacted charitable giving laws designed to get around these caps.  It works by offering state tax credits in exchange for contributions to charitable programs that provide state services. In fact, it changes state tax payments into charitable contributions for federal tax purposes. 

No wonder the IRS put a stop to it.  If you made such contributions, new rules mandate that you reduce your charitable donation by the tax credits you received, nullifying your benefit. However, you can still treat these as state tax payments and deduct them up to the cap of $10,000.

Defer Tax

Deferrals are still significant for tax planning.  It is always better to pay tax later rather than sooner.  It allows you to enjoy the time value of money.  You need to accelerate your deductions and postpone your payments.  By deferring bonuses, consulting income and self-employment income, a lot can be gained.  Attempt to accelerate state and local taxes, interest payments and real estate taxes. Just remember the $10,000 cap on tax deductions.

Increased Withholding To Make Up Tax Shortfalls

If you were disappointed by your refunds last year, you can join the club.  You have a better chance to make your target for refunds, but embrace the advice of your tax practitioner.  Your tax advisor can ensure that your withholding aligns with estimated tax payments and what you actually expect to pay.  Do not end up with a penalty for underpaying your taxes.  Make up any potential shortfall with increased withholding on your salary or bonus.  If you end with a larger estimated tax payment at the end of the year, you can still be penalized for underpayments in previous quarters. Withholding, in turn, is considered to be paid throughout the year. If you increase it for year-end wages, it can save you some on penalties.

Kiddies-Tax

In terms of the TCJA, a child’s unearned are taxed at the trust or estate rate.  For low-and middle-income families with children who received scholarships and military survival benefits, these rates are a lot higher than their parents’ rates.  For some high-income families, the use of trust or estate rates allowed more capital gains and qualified dividends to qualify for the zero or 15% brackets.

Congress just repealed the TCJA version and reverted back to the original “kiddies” tax.  Until 2020, for 2018 and 2019, you can choose any one of the two versions of the law.  You can possibly benefit from the TCJA version if you transfer assets earning investment income to your children before 2020. Just remember this is a once-off. There will be no such benefit next year. 

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Low-Interest Rates And Generous Exemptions

You have to make use of the historically low-interest rates and lifetime gift and estate tax exemption in your current estate planning. Many strategies are based on the assumption that the assets will grow faster in value than the interest rates prescribed by the IRS.  This provides a window of opportunity for estate planning techniques while interest rates remain low and the gift exemption is high. Tax reform doubled the gift and estate tax exemptions, but this will not last forever.

Opportunity zones

If you sold or plan to sell assets this year and face substantial capital gain taxes, the gains can be deferred if you invest an equal amount in opportunity zone fund within 180-days after the sale.  And, if you keep the investment for ten years, you will face no gain on the new investment either.  You must still recognize the deferred gain, but if you invest before the end of this year, you will pay an additional 5% less.

Hold the investment for five years and the IRS will forgive 10% of the deferred gain and hold it for seven years and it will be 15%. 

Retirement Account Tax Savings

You can still maximize your contributions to your retirement account. Your 401(k) or IRA always provide some of the very best savings available.  Contributions reduce taxable income when you earn it and defer taxes until you take money out of your retirement.  For 2019 the limits are $19,000 for a 401(k) and $6,000 for an IRA (excluding catch-up contributions for those 50-years old and older). You can make 2019 IRA contributions until April 15th, 2020.

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Standard Deductions

Do you expect to take the standard deduction?  You need to make this decision before you decide on your-end spending that would typically have generated itemized deductions.  Your standard deduction has been doubled by the TCJA.  But, your itemized deductions were repealed and limited.  If your itemized total deductions are not more than $12,200 ($24,400 if married and filing jointly), you will not get any deduction for charitable gifts and elective health care products.

The Gift Tax Exclusion

You can gift up to E$15,000 to as many people you want for 2019.  You get a new gift tax exclusion every year. Do not waste the opportunity. With your spouse, the limit is $30,000 per beneficiary per year.  This means if you have three married children, you could remove $180,000 per year from your estate in a single year. This amount grows if you have grandchildren.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.

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Fulton Abraham Sánchez, CPA I am Certified Public Accountant, specialized in Tax Planning & Offshore Strategies for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution. You can email me fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

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