Year-End Tax Planning with Holiday Cheer
As the holiday season approaches, there never seems to be enough time to plan your gatherings and celebrations with family and friends. Yet, it pays to spend a few moments to take stock of your taxes before the end of the year to mitigate your tax exposure, boost your refund, or just to make sure there are no surprises when it comes time for filing your 2019 returns. While one of the claimed benefits of the Tax Cuts and Jobs Act (TCJA) was the simplification of filing and the lowering of income tax rates, there are still many steps that individuals can take that can lower their tax bills. Here are some points to consider:
Year-end planning should start with data collection and a review of prior year returns. This includes information on losses or other carryovers, estimated tax installments, and items that were unusual. Plans for significant purchases or dispositions, as well as any possible life cycle events (…more on this below) should be taken into account.
- Virtual Currency Transaction: The IRS has stepped up their effort to address noncompliance related to the use of virtual currency in recent years and made that one of their top priorities. As part of that effort, more than 10,000 letters had been sent since July this year to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly. All taxpayer must also now respond to the question “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?” when they prepare their 2019 returns. If you have any such transactions, it is time to start reviewing your records which may be scattered across different platforms to ensure you have the information necessary for tax filing.
Timing is Key
As the saying goes, timing is everything. When it comes to taxes, accelerating and deferring certain income or deductions are the linchpin for year-end tax planning. For example, timing year-end bonuses or year-end tax payments, or timing sales of investment properties to maximize capital gains benefits should be considered. So, too, sometimes fairly sophisticated “like-kind exchange,” “installment sale” or “placed in service” rules for business or investment properties come into play. In other situations, however, implementation of more basic concepts is just as useful. For example, taxpayers can write a check or can charge an item by credit card and treat these actions as payments. It often does not matter for tax purposes when the recipient receives a check mailed by the payor, when a bank honors the check, or when the taxpayer pays the credit card bill, as long as done or delivered “in due course.”
Income Tax Rates
One of the most significant factors in year-end tax planning for individuals is their tax bracket. The most direct control taxpayers have over their tax bracket rests in their ability to control the timing of income and deductible expenses. For example, taxpayers who expect to be in a lower tax bracket in 2020 should consider deferring income to 2020 and accelerating deductions into 2019. While tax brackets seem as though they will be relatively stable for the next few years, individual circumstances could mean a shift in brackets from year to year.
Taxpayers holding investments, whether in the form of securities, real estate, collectibles, or other assets, often have an opportunity to reduce their overall tax bill by some strategic buying and selling toward the end of the year, as well as, exchanging appreciated assets for like-kind property in order to defer gains. Tax rates on investments are also impacted by the total amount of your income, so a determination should be made of the best time to sell investments. Balancing tax considerations with other factors is part of the challenge in dealing with investments, including: the ordinary income tax rates, the net investment income tax rate, the capital gain rates, and the alternative minimum tax (AMT).
Income Caps on Benefits
Monitoring adjusted gross income (AGI) at year-end can also pay dividends in qualifying for a number of tax benefits. Often tax savings can be realized by lowering income in one year at the expense of realizing a bit more in another year.
The biggest variables for many taxpayers impacting their year-end tax planning surrounds life events such as marriage, divorce, birth or adoption of a child, a new job or the loss of a job, and retirement. These life events may, for instance, result in a change in filing status that will affect tax liability. The possibility of significant changes and/or significant or unusual items of income or loss should also be part of a year-end tax strategy. Additionally, taxpayers need to take a look into the future and predict, if possible, any events that could trigger significant income, losses, or deductions.
2019 Tax Law Changes
Nearly all of the provisions of TCJA came into effect during 2018. However, there are many new tax laws that came into effect in 2019 that individuals should be aware of.
- Alimony: One very significant change that came into effect January 1, 2019, is the treatment of alimony. Beginning with divorces and separation agreements entered into after December 31, 2018, alimony or separate maintenance payments are no longer deductible by the payor, nor includible in the income of the payee. This change does not affect divorce or separation agreements entered into before 2019, nor those altered after 2018 where the changed method of taxation is not expressly stated to apply.
- Medical Expenses: The floor for claiming deductions for medical expenses increased to 10% for 2019 after TCJA lowered it to 7.5% for all taxpayers for two years.
Remember that the below significant changes came into effect in 2018 under TCJA:
- State and Local Taxes: TCJA limits the deduction for state and local taxes to $10,000 per year.
- Increased Standard Deduction: One of the most broadly impactful provisions of TCJA was the near doubling of the standard deduction for all taxpayers. For 2019, the standard deduction amounts are $24,400 for joint filers, $18,350 for heads of households, and $12,200 for all other individual filers. As a result of the increased amounts, Tax Foundation estimated that only about 13.7% of the taxpayers itemized their deductions on their 2019 returns as opposed to 31.1% before TCJA came into effect.
- Miscellaneous Itemized Deductions: TCJA eliminated miscellaneous itemized deductions for individuals. This includes deductions for unreimbursed employee expenses.
There are still actions that can be taken with regard to all of these new rules, many of which can still be completed before the end of the year.
TCJA significantly impacted employee withholding, and taxpayers who didn’t adjust it in 2018 found themselves with a large tax bill when filing returns in 2019. The IRS gave some relief from penalties for not withholding enough during 2018, but it is unlikely to do so again for 2019. There is still time at the end of 2019 to check withholding status and correct it, but only if action is taken quickly.
Those who have a Form 673 and/or a W-4 on file with their employers to exempt them from income tax withholding should also review their responsibility for actual and/or hypothetical taxes to avoid surprises. Depending on the terms of your employment/secondment agreement and/or your employer’s assignment policy, your share of the tax liability may not necessarily be determined by the actual amounts of income, deductions, and credits reflected on your returns.
Early Planning for 2020
While we acknowledge that it is a bit too early to herald in the new year of 2020, it is certainly not too early to plan for the coming tax year.
- Qualified Business Income Deduction: This is especially true for those who have interests in rental real estates that may not rise to the level of Internal Revenue Code Section 162 trade or business but would like to claim the deduction in reliance on the safe harbor provided by Rev. Proc. 2019-38. Starting 2020, taxpayers who rely on the safe harbor are required to maintain contemporaneous records, for inspection by the IRS on request, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services. You may follow this link and refer to our newsletter for more information.
Please feel free to call our offices if you have any questions about how year-end tax planning might help you save taxes. U.S. tax laws operate largely within the confines of “the tax year.” Once 2019 is over, tax savings that are specific to this year may be gone forever.
American Expatriate Tax is a part of Contexo Global Mobility Solutions & Tax Consulting Ltd. registered in Hong Kong. Together, we help companies and individuals navigate through the complexities of global mobility and related tax issues. Here is where you will find a blend of expertise from Big 4 accounting firms and Fortune Global 500 companies but the attention of a boutique consulting practice. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.