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by Don Purvis

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Year-end planning for 2019 takes place against the backdrop of recent major changes in the rules for individuals and businesses. For individuals, these changes include lower income tax rates, a boosted standard deduction, severely limited itemized deductions, no personal exemptions, an increased child tax credit, and a watered-down alternative minimum tax (AMT). For businesses, the corporate tax rate has been reduced to 21%, there is no corporate AMT, there are limits on business interest deductions, and there are very generous expensing and depreciation rules. And non-corporate taxpayers with qualified business income (QBI) from pass-through entities may be entitled to a special deduction.

Nevertheless, the best year-end tax planning strategy for many taxpayers may still be to follow the time-honored approach of deferring income and accelerating deductions to minimize 2019 taxes. Deferring income also may help you minimize or avoid adjusted gross income (AGI)-based phaseouts of various tax breaks that apply for 2019. As always, year-end tax planning must consider each taxpayer’s particular situation and planning goals, with the aim of minimizing taxes to the greatest extent possible. 

While most taxpayers will come out ahead by following the traditional approach, others with special circumstances may do better by accelerating income and deferring deductions. In some situations, total combined taxes for 2019 and 2020 will be reduced if income is accelerated from 2020 into 2019 and certain expenses are deferred to 2020 where they may give a greater tax benefit in that year. 

In addition to shifting income and expenses, there are a number of other actions taxpayers can take before the end of the year to reduce their 2019 tax bills. At a minimum taking a look at your 2019 tax projection before the end of the year will help you to avoid unnecessary surprises.

Valuable year-end planning moves you should consider include taking advantage of the new 20% deduction for qualified business income, utilizing expanded Code Sec. 179 expensing and 100% first-year bonus depreciation; year-end moves to reduce or eliminate the 3.8% surtax on net investment income; making the best tax use of stock market losses; converting traditional IRAs to Roth IRAs; planning moves for beneficiaries of IRAs and qualified retirement plans; year-end strategies for qualified charitable distributions; increasing withholding on salaries and wages to avoid the estimated tax underpayment penalty; making year-end gifts of appreciated property to shift taxable gain to lower-bracket family members while taking advantage of the annual gift tax exclusion; and disposing of passive activities to free up suspended passive losses. 

There are many tax-saving steps that can be taken before the end of this year. Here is a list of some of the most important actions that should be considered no later than December 31, 2019 to save taxes: 

Tax strategies for individuals: 

Realize losses on stock while substantially preserving your investment position.

  • Convert investment income taxable at regular rates (e.g., interest income) into qualifying dividend income.
  • Arrange with your employer to defer a bonus until 2020. 
  • Increase basis in your S corporation or partnership to make possible a 2019 loss deduction. 
  • Make gifts taking advantage of the $15,000 gift tax exclusion for 2019.
  • Watch out for the marriage penalty in regard to year-end marriage plans. 
  • Decide whether to elect to deduct investment interest against capital gains and/or qualified dividends.  Take steps to avoid or minimize income tax on Social Security benefits.
  • Apply bunching strategy to medical expenses to increase deductible amounts. 
  • Increase withholdings to eliminate or reduce estimated tax penalties.
  • Take steps to utilize your prior year carryovers.
  • Consider setting up and funding a health saving account.
  • Contribute your required minimum distribution directly to a qualified charitable organization.
  • Consider purchasing eligible solar equipment or electric vehicles eligible for tax credits.
  • If selling an investment in a qualified small business stock consider the tax savings and rollover provisions.
  • Consider investing in one of the established opportunity zones.

Tax strategies for businesses:

  • Set up/plan to fund your self-employed retirement plan, or your corporate retirement account.
  • Take note of California’s new CALSAVERS requirement to provide retirement plans to employees, phasing in starting mid 2020.
  • Place equipment in service before year-end to qualify for 100% bonus first-year depreciation deduction.
  • Make expenditures qualifying for the Section 179 expensing (more items now qualify).
  • Project your QBI deduction and determine how to maximize the benefit.
  • Use a credit card to pay deductible expenses to preserve cash for other items.
  • Consider deferring a debt cancellation event until 2020.
  • Pay contested expenses to deduct them this year while continuing to contest them next year.
  • Avoid the personal holding company tax by making dividend payments.
  • Structure a real estate deal to avoid paying interest on tax deferred under installment method or consider entering into a like-kind exchange to defer the tax.
  • Step up level of participation in business activity to meet material participation standard under passive loss rules.
  • Dispose of a passive activity to free up suspended losses.
  • Increase basis in your S corporation or partnership to make possible a 2019 loss deduction.

Give us a call now so we can get started on discussing these steps, determine a plan, begin implementing these tax saving opportunities, and make sure you avoid any unnecessary surprises.

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