THE FORESIGHT GUIDE TO YEAR-END TAX PLANNING

After the sweeping changes brought on by the Tax Cuts and Jobs Act of 2017, this year seems almost anticlimactic.

Hard to believe that it’s already December 2019! After the sweeping changes brought on by the Tax Cuts and Jobs Act of 2017, this year seems almost anticlimactic.  The TCJA made some tried and true tax planning strategies obsolete, but there are still ways to minimize tax by taking action in late 2019 and early 2020.

• Income Shifting: Since 2020 is an election year, there is little chance of any significant legislation being passed, so we are not anticipating any tax rate increases for 2020. In fact, it’s unlikely that we’ll ever see tax rates as low as they are right now, so it may be advantageous to recognize income now in anticipation of rates rising in the future.  However, if your income is expected to significantly drop in 2020, you may want to accelerate deductions / losses in 2019 or defer income to 2020.

• Capital Gains Recognition: If you are considering selling investments, it might be wise to consider waiting until 2020 if you believe your income will be significantly lower in 2020, conversely if 2020’s income looks to be significantly higher than 2019, it may make sense to accelerate these sales.  It’s important to consider that this doesn’t just have an impact on capital gain taxes, but also on the net investment income tax. 

• Charitable Deductions / Bunching: Many taxpayers who have itemized in the past found that they received more benefit from taking the standard deduction in 2018.  One way to maximize your deductions is to consider a bunching strategy.  While this won’t work for state, local, and real estate taxes, it could be advantageous to bunch charitable contributions and possibly even medical expenses from two or more years into one tax year.  This strategy can have a meaningful impact on a taxpayer’s liability but requires some advance planning to maximize benefits.

TRADITIONAL WAYS THAT STILL THRIVE IN TAX PLANNING

Some of the traditional strategies that existed before the TCJA can still be utilized to help reduce tax liabilities for individuals:

• Individuals can claim a credit for tuition paid in 2019 (education credits), even if the expenses are for an academic period beginning in 2020, as long as the period begins by the end of March.

• Maximizing 401(k), IRA and/or SEP contributions can reduce adjusted gross income, which can not only reduce taxable income, but could potentially increase the qualified business income deduction for taxpayers eligible to take that (high income earners).

• Teacher deductions are a small benefit to qualified educators but do reduce adjusted gross income by up to $250 for classroom expenses such as books, supplies and computer equipment.

• Required minimum distributions – if you have reached the age where a distribution is required and you are considering large charitable contributions, making a qualified charitable distribution could be a way to save taxes and still support your favorite charity.

• State taxes – consider the PA EITC / PA OSTC program.  This is when a taxpayer can make donations to qualified private schools and get up to a 90% credit on your PA taxes.  If you are a higher income earner, this program is a must to evaluate.

QUALIFIED BUSINESS INCOME DEDUCTION (QBID)

One of the biggest and most challenging changes that came from the TCJA was the allowance of an up to 20 percent deduction of qualified business income for owners of sole proprietorships and passthrough entities, known as the qualified business income deduction or QBID.  While some taxpayers benefitted significantly from this deduction, taxpayers in the specified service industries were restricted on the deduction they could take when income exceeded certain thresholds. 

For 2020, thresholds have increased to $312,400 for married filing joint taxpayers and $160,725 for all others.  Taxpayers in specified service industries may consider deferring income or maximizing expenses before year end if they are close to being phased out of the deduction due to income thresholds.

TAX RELIEF DOES NOT COME TO THOSE WHO WAIT

The TCJA also provided tax relief in depreciation and expensing limitations.  Business owners may want to consider taking advantage of these increased limits and purchase equipment or machinery now instead of waiting until 2020.

WHAT LIFE EVENTS HAVE YOU EXPERIENCED?

Every taxpayer has their own unique circumstances. Foresight can help by discussing them with you to see if tax saving opportunities exist.  It’s also important to consider life events which may have an impact on your taxes.

• Change in filing status due to marriage, divorce or death
• Birth of a child
• Children too old for dependent care credits or child credits
• Changes in medical expenses
• Moving/relocation
• College and other tuition expenses
• Change of employment
• Retirement
• Starting or closing a business

If you’ve experienced any of these in 2019, or anticipate them in 2020, now is the time to get the conversation started. 

It’s our pleasure to work with you at Foresight and it’s our goal to make your tax compliance less complicated and more pleasant.  If you have any questions or would like to set up a meeting with your Foresight tax advisor, please call us at 484-368-3183.

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