BY JULIA ZIECHMANN, JD, LLM
There is still time to implement some great tax planning ideas for 2019. While many planning tools remain similar to last year, the IRS has issued new guidance that could affect your tax situation.
1. CHARITABLE CONTRIBUTIONS
- Consider a Donor Advised Fund (DAF). If you want to take advantage of itemized deductions, but do not want all the money to go to the charity in a single year, a DAF is the perfect vehicle to accomplish this goal.
- Consider a Qualified Charitable Distribution (QCD). Instead of taking a distribution from an Individual Retirement Account (IRA), taxpayers age 70 ½ and over may directly transfer up to $100,000 to public charities. The income tax benefit is not a charitable deduction, but rather, the exclusion of the donation amount from your income.
- Charitable contributions in exchange for state or local tax credits are now limited. The IRS issued final regulations that require taxpayers to reduce their Federal charitable deduction by state or local tax credits received in return for their contribution. For PA residents, this has a direct impact on charitable contributions made through Pennsylvania’s Educational Improvement Tax Credit and Opportunity Scholarship Tax Credit programs.
2. STANDARD VS. ITEMIZED DEDUCTIONS
- The standard deduction for 2019 has increased slightly to $24,400 for joint filers ($12,200 for single filers). The total of your itemized deductions must be greater than $24,400 to benefit from a tax standpoint. With the increased standard deduction, a bunching strategy could be utilized to maximize tax benefits.
- The new tax laws have eliminated or greatly limited certain deductions. The deduction for state and local income and property taxes (SALT) is limited to $10,000. Miscellaneous itemized deductions—such as investment advisory fees, tax preparation fees, certain legal fees, and unreimbursed business expenses—have been eliminated.
3. MEDICAL EXPENSES
While medical expenses are still deductible, the threshold to claim the deduction has increased (from 7.5%) to 10% of Adjusted Gross Income (AGI). Try to bunch the payment of medical expenses in one tax year to better utilize the benefit of the medical deduction.
4. STANDARD MILEAGE RATES
The standard mileage rates for 2019 are $.20/mile for medical, $.14/mile for charitable, and $.58/mile for business.
5. QUALIFIED BUSINESS INCOME DEDUCTION
Taxpayers are allowed a deduction of up to 20% of net QBI plus 20% of qualified real estate investment trust dividends and qualified publicly traded partnership income. Calculating the QBI deduction is complex and involves many moving parts. For 2019, the IRS has introduced new Forms 8995 and 8995-A to report the deduction.
6. NEW GUIDANCE REGARDING VIRTUAL CURRENCIES
The IRS has issued much needed guidance on the taxation of certain virtual currency events. The sale of virtual currency is still considered the sale of a capital asset with application of the preferential capital gain rates. The basis is calculated on a first in, first out (FIFO) basis if the virtual currency units being sold are not specifically identified.
7. ESTIMATED TAX PAYMENTS
The fourth quarter estimated tax payments for the tax year ending December 31, 2019 must be paid by January 15, 2020. As a general rule, you could be penalized for underpayment if your 2019 payments are less than 90% of your actual 2019 tax.
8. CAPITAL GAINS/LOSSES
Harvest capital losses to offset capital gains in your portfolio; however, depending on your income level, harvesting gains may be beneficial.
9. 2019 BONUS
Ask your employer to defer your bonus until 2020 or accelerate if you are in a low income year.
10. PASSIVE ACTIVITY
Consider disposing of a passive activity in 2019 if doing so will allow you to deduct suspended passive activity losses.
11. 529 COLLEGE SAVINGS PLANS
Make contributions to 529 plans before the end of the calendar year. PA offers a deduction for contributions to a 529 plan.
Make annual exclusion gifts before the end of the year. You may gift up to $15,000 per each recipient.
Refer to this article for a number of additional 2019 year-end planning opportunities. Please note these planning ideas may not apply to everyone. Taxpayers should take into consideration their unique set of circumstance and any life events on the horizon, as well as current market conditions.