By Judy Mason, CPA, CVA - Partner
It is hard to believe that about 18 months have passed since President Trump signed into law the Tax Cuts and Jobs Act (TCJA)—the largest major tax reform in over three decades. As the IRS continues to release guidance on the new law, the following are a few planning opportunities that could provide current and future tax savings.
Individual Income Tax Opportunities
Here are some strategies that may lower your individual income tax bill for 2019.
- Consider Adjusting Your Tax Withholding or Estimated Payments. Some taxpayers were surprised they owed money on their 2018 tax returns. For 2019, taxpayers may need to adjust their federal income tax withholding and/or estimated tax payments to account for the tax law changes and corresponding adjustments to the withholding tables. Fortunately, there is still time to make adjustments to withholding by decreasing the number of allowances claimed on Form W-4 or requesting additional amounts to be withheld. If you have significant other income not subject to tax withholding, you should consider adjusting your quarterly tax payment requirements. We can review your tax situation for 2019 to ensure that you are not under or over-paying your taxes during the year.
- Take Advantage of Lower Tax Rates on Investment Income. Gain from sale of an investment held for more than one year is generally taxed at preferential capital gains rates. Those rates are 0%, 15%, and 20%. (Higher-income individuals may be subject to an additional 3.8% net investment income tax.) The rate that applies is determined by your taxable income. For example, the 0% rate applies if your 2019 taxable income is less than $78,750 for joint filers. The 20% rate does not kick in until your taxable income exceeds $488,850 (for joint filers) or $434,550 (for single individuals). If your taxable income hovers around these threshold amounts, there are ways to reduce your taxable income to take advantage of a lower capital gains rate. For example, you could make deductible IRA contributions or reduce taxable wages by deferring bonuses or increasing contributions to employer retirement plans.
- Find Ways to Defer Income. If you expect to be in the same or lower tax bracket in 2020, it may be beneficial to defer some taxable income until next year. For example, if you own a business and use the cash method of accounting, you can wait until the end of the year to send out client invoices so the payments are received in early 2020. You can also postpone taxable income by accelerating some deductible expenses. This may be helpful if you are affected by unfavorable phase-out rules that reduce or eliminate various tax breaks like higher education tax credits.
- Invest in a Qualified Small Business Corporation. A Qualified Small Business Corporation (QSBC) is generally a domestic C corporation whose assets do not exceed $50 million and 80% or more of the corporation’s assets are used in the active conduct of a qualified business. Qualifying QSBC stock must be issued directly by a C corporation, not an S corporation after 2010, and must be held for at least 5 years. By far, the biggest benefit of owning QSBC stock is the ability to shelter 100% of the gain from a stock sale. When combined with the new 21% corporate tax rate, this benefit can make operating a business as a QSBC more tax-efficient than operating it as a pass-through entity.
- Invest in a Qualified Opportunity Fund. Qualified Opportunity Funds (QOFs) are entities that invest in certain low-income communities (known as qualified opportunity zones). There are two major tax benefits of investing in qualified opportunity zones. The first is an election to temporarily defer gain from the sale of property if such gain is reinvested in a QOF. The second benefit is an election to permanently exclude from income post-acquisition capital gains on the disposition of QOF investments held for ten years.
- Re-evaluate Your Deduction Strategy. For 2019, the standard deduction for joint filers is $24,400. Single taxpayers can claim a standard deduction of $12,200. The TCJA suspended or limited many of the itemized deductions. This means many taxpayers will no longer itemize. However, the TCJA also temporarily increased the limit on cash contributions to public charities from 50% to 60% of adjusted gross income. Consider bunching - increasing charitable contributions in alternating years that will allow you to itemize in those alternating years, while taking advantage of the increased standard deduction in the other years. This also may be accomplished by donating to donor-advised funds. Having a multi-year charitable giving plan will allow you to meet your charitable goals and provide beneficial tax deductions.
- Set up a Qualified Tuition Plan. Qualified Tuition Plans (QTPs) generally allow parents and grandparents to set up college savings accounts for children and grandchildren before they reach college age. Under pre-TCJA law, the earnings on funds in a QTP could be withdrawn tax-free only if used for qualified higher education at eligible schools including colleges, universities, vocational schools, or other postsecondary schools. Thanks to the TCJA, qualified higher education expenses now include tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year. QTPs may be particularly attractive to higher-income parents and grandparents because there are no income-based limits on who can contribute to these plans. Depending upon your state of residency and the state administering the QTP, state income tax benefits may also apply.
Planning for Small Businesses
If you own a business, consider the following strategies to minimize your tax bill for 2019.
- Maximize Your Qualified Business Income Deduction. Thanks to the TCJA, business owners may deduct up to 20% of their qualified business income from sole proprietorships and pass-through entities (such as partnerships, LLCs, and S corporations). The deduction, however, is subject to various rules and limitations based on your taxable income, the type of business you operate, and your business’s W-2 wages and property. The good news is that there are certain planning strategies that can be considered now to maximize your deduction.
- Acquire Business Assets. Your business may be able to take advantage of generous Section 179 deduction rules. Under these rules, businesses can elect to write off the entire cost of qualifying property rather than recovering it through depreciation. The maximum amount that can be expensed for 2019 is $1.02 million. This amount is reduced by the amount by which the cost of qualifying property exceeds $2.55 million. In addition, your business can claim 100% first-year bonus deduction for qualified property acquired and placed in service after 9/27/17 and before 1/1/23. The bonus percentage will phase down for years 2023 through 2028. Given these generous provisions, your asset acquisition plan is more important than ever.
- Employ Your Child. If you are self-employed, you might want to consider hiring your child as an employee. Doing so shifts income from you to your child, who is typically in a lower tax bracket or may avoid tax entirely due to the standard deduction. Employing your children has the added benefit of providing them with earned income, which enables them to contribute to an IRA.
This communication is to get you thinking about tax planning moves for the rest of the year. Even though the IRS continues to publish guidance on the TCJA, there are things you can do now to improve your tax situation. Please contact us if you would like more details or would like to schedule a tax planning session. We can be reached at 847.982.0333.
Judy Mason, CPA, CVA, Partner, has over 20 years of tax, accounting, business consulting, and compliance experience, serving closely-held and start-up businesses, entrepreneurial and family-owned companies, their owners and families. Her expertise is in federal, state and local taxation. Judy has a broad depth of expertise in state and local tax research, planning, and compliance matters for entities and individuals with multi-state businesses and/or investments. She has successfully managed a broad range of federal income, and state sales and use tax audits for entities and individuals. As a Certified Valuation Analyst (CVA), Judy prepares business valuations used for various purposes such as estate and gift planning, business succession, buy/sell agreements and litigation support.