Year-End Tax Planning Tips

As we approach the end of another year, it is a good time to think of planning strategies that will help lower your 2019 tax bill as well as provide reasonable expectations for your tax filings. 

The 2018 tax filing year was the first year that major changes from the Tax Cuts and Jobs Act (TCJA) were introduced for individuals and businesses.

• For individuals, TCJA included newer and lower income tax rates, a much higher standard deduction, limited itemized deductions, no personal exemptions, and an increased child tax credit.
• For C Corporations, the corporate tax rate was reduced to 21% and there were liberal depreciation rules (expensing and bonus).
• Other business entities benefited from the generous depreciation rules as well as being entitled to a special deduction: the qualified business income deduction (QBID).

Even with these major changes, many taxpayers are still able to minimize taxes by deferring income and/or accelerating deductions along with possibly bunching expenses in 2019. You might consider using a credit card to pay deductible expenses before year end. Doing so will increase your 2019 deductions even if you don’t pay your credit card bill until after the end of the year.

For Individuals

• Investment Income: Investors may get a tax break on certain types of investment income. Qualified dividends and long-term capital gains are eligible for a tax break of 0%, 15% or 20% depending on what tax bracket you are in. Also, harvesting losses on investments to offset capital gains could be a viable strategy.
• Education Expenses: Make a 529 Plan contribution for qualified education expenses. The contribution is set aside in an account that generates tax-free income, so if you use it for the qualifying education expenses, you won’t pay tax on the funds.
• Health Savings Accounts (HSAs): For those with high-deductible health insurance coverage who want to set money aside to cover health care costs, an HSA is an option. Contribution amounts of up to $3,500 for self-only policies or $7,000 for family policies are possible in 2019.
• Contribution to an IRA – Traditional or Roth: If under age 50, the maximum contribution is $6,000. If you are age 50 or older, the maximum is $7,000.
• Itemized Deductions: For those able to itemize, increase your charitable donations; or increase your withholding of your state and local taxes on your W-2 or pay state estimated tax payments before year end. Remember, however, that state and local tax deductions are limited to $10,000 per year.
• Required Minimum Distributions (RMDs): If you are 70 ½ or older and required to take RMDs from your traditional IRAs, particularly if you can’t itemize, consider making 2019 charitable donations via qualified charitable distributions from your IRAs.  Such distributions are made directly to charities from your IRAs. The amount of the contribution is neither included in your gross income nor deductible as an itemized deduction.  It still does reduce the amount of your RMD.

For Businesses and Business Owners

• Qualified Business Income Deduction (QBID): Taxpayers other than C Corporations may be entitled to a deduction of up to 20% of their qualified business income. This deduction began in 2018. Options for maximizing this deduction could involve increasing W-2 wages, deferring income or accelerating deductions before year-end.
• Expensing and bonus depreciation: Liberal depreciation rules could mean businesses might want to consider making machinery and equipment expenditures before year end. The expensing limit is $1,020,000 for 2019 and the investment ceiling limit is $2,550,000. Alternatively, businesses can possibly claim a 100% bonus first year depreciation for machinery and equipment placed in service before year end.
• De Minimis Safe Harbor Election: Business may be able to take advantage of the de minimis safe harbor election to expense the costs of lower-cost assets and materials and supplies.
• Cash Method of Accounting. More business may be able to use the cash method of accounting as opposed to the accrual method.
• Minimize A Net Operating Losses (NOL): If a C Corporation anticipates a small NOL, it may be worth it to accelerate enough of 2020 income or defer deduction to create a small amount of net income for 2019. This strategy could permit you to pay estimated taxes based on 2019 income rather than potentially higher 2020 taxable income. This strategy could also help to even out income between years.
• Deduction of Prepaid Farm Supplies: Cash-basis farmers can deduct expense for prepaid farm supplies (such as feed, seed or fertilizer) if the prepaid expenses are less than 50% of the other deductible expenses for the tax year.
• Change of Type of Business Entity: For a long-range strategy, it may be advantageous to select a different type/form for your business operations.

The above includes some common actions that may be taken to save taxes. Depending upon your circumstances, some of the above may or may not be available for you. Please contact us if you would like us to tailor a plan that works best for you. We can narrow down the choices to specific actions that would be most advantageous for you.

Contributing Author:

Amy M. DuPuis, CPA  |  Email Amy has been with Sink, Gordon & Associates LLP since January of 2010 and works with business entities and individuals on taxation, research and consulting. Amy has a combined 20 years of accounting experience and is a member of the American Institute of Certified Public Accountants and the Kansas Society of Certified Public Accountants. She pursued a Bachelor of Science in Allied Health-Medical Dietetics at The Ohio State University and graduated in 1977. She gained her Master of Professional Accountancy from Wichita State University in December 1996. Amy gained her CPA designation in January 1997. Outside of the firm, she is involved with her church in Topeka, St. David’s Episcopal. Additionally, Amy volunteers for several organizations within the Topeka community by participating in Share Fest, Let’s Help and volunteering at Rescue Mission, among other organizations. Amy has three children.