The Bottom Line
The Bottom Line is where Klatzkin’s advisors provide analysis and insight into key developments in taxation, accounting, and other issues and how they affect businesses and individual taxpayers.

Year-End Tax Planning for Individuals

Tax planning never truly ends, but with the end of the year drawing near, it’s a great time to take a step back and make sure you’re on the right track. This year it’s especially important. The Tax Cuts and Jobs Act (TCJA) went into effect in 2018, making this recent filing season the first under the new tax regime. Now that you know how the tax law changes affect you, you may need to tweak your tax strategy.

Here are just a few things you should be reviewing:

Charitable Contributions

Charitable contributions now provide less of a tax benefit, at least for most U.S. taxpayers. The TCJA almost doubled the standard deduction, which means that fewer individuals will itemize. Those affected will no longer receive a Federal tax benefit from contributing to charity. Fortunately, there may be a solution. If your itemized deductions are close to the standard deduction limit, consider “bunching” your contributions. When you cluster one- or two-years’ worth of donations into one tax year, your contributions can bump you above the standard deduction threshold, allowing you to take the charitable contribution deduction.

Another way to make tax-advantaged charitable contributions is by assigning your IRA required minimum distributions (RMDs) to a charitable organization of your choice. RMDs are taxable unless they are made to a charitable organization. By directing your IRA distributions to a charity, you can fulfill your RMDs while reducing your reportable income.  You should review this strategy with your broker to ensure that year-end tax documents accurately reflect this treatment.

Investments

Talk to your advisor to review your investment makeup. You may benefit from tax-loss harvesting. If you have capital gains to report, you can offset those gains with losses from lower-performing stocks. Just keep in mind the wash sale rules – if you repurchase that stock or a “substantially identical” security within 30 days, you will not be allowed to deduct those capital losses

The TCJA’s tax rates are at record lows, so you may also benefit from selling highly appreciated stock even if you do not have losses to offset them. Remember that unless Congress takes additional action, these lower tax brackets will only last until 2026, so take advantage of the low rates while you can.

Child Tax Credit

The TCJA expanded the child tax credit in four ways: (1) It doubled the credit from $1,000 to $2,000; (2) it increased the refundable portion to $1,400; (3) it created an additional credit of $500 per qualifying dependent (like children above age 17); and (4) it increased the phase-out limitations so more taxpayers are eligible for the credit.  Taxpayers will be phased out from receiving the full credit only when their modified adjusted gross incomes exceed $200,000 ($400,000 for joint filers). Talk to your Certified Public Accountant (CPA) if you think you qualify.

Kiddie Tax

Consider the costs and benefits of transferring income-producing property to your children. To prevent parents from shifting income to their children’s lower tax brackets, the IRS created the kiddie tax. Before the TCJA, children’s unearned income was taxed at the parents’ highest marginal tax rate. Now, it is taxed using the estate and trust rate schedules. Although this shift will benefit some, many taxpayers will be worse off. The estate and trust tax brackets are much more compressed, so even a small amount of unearned income can easily reach the highest tax bracket.

Gift, Estate, and Generation-Skipping Transfer Taxes

The lifetime exemption is now up to $11.4 million, which means that taxpayers can make up to $11.4 million of gifts during their lifetime without incurring a tax bill. Any credit that remains will offset their taxable estate.

Regardless of the exemption, it would be best if you were strategic when gifting property. When gifting highly appreciated assets, it will be better for your recipient if you transfer those assets at death. If you transfer during your lifetime, your recipient will adopt your original tax basis and will owe a large capital gains tax bill when they sell the asset. If you instead transfer at death, your recipient’s basis will be stepped up to the asset’s fair market value, lowering their capital gains tax when they subsequently sell the asset.

Other Items

  • Let your accountant know of any significant life events that occurred this year – marriage, divorce, a new child, a new home purchase, a draw on your home equity line of credit, purchases of new energy-efficient appliances, etc.
  • Max out your Health Savings Account (HSA) contributions if you haven’t already. In 2019, taxpayers with an HSA with family coverage can contribute $7,000 pre-tax, up from $6,900 last year.
  • Talk to your lawyer about alimony payments. Alimony payments from divorces settled in 2019 will not be taxable to the recipient and will not be deductible by the payer. If you and your ex-spouse agree, a pre-2019 divorce agreement can be modified to qualify under this new approach.
  • Talk to your CPA about your business. You may benefit from changing your business structure, making different depreciation elections, or changing your accounting method.
  • The 20% qualified business income deduction can be extremely valuable to certain taxpayers. Discuss strategies with your CPA to ensure you are making the most of this deduction.
  • Adjust your estimated tax payments if your withholding and quarterly estimates have fallen short of what is required.

Review the year and see how you’ve fared. There are decisions you can make between now and December 31, 2019 to correct your 2019 tax position if you’ve gotten off course. If you have questions about your 2019 taxes or your plans for 2020, Klatzkin can help. Please contact us at 609-890-9189 or click here to contact us.

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