Category: Individual Tax Planning
Posted: December 2019
Although the tax laws have not changed, the end of the year is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Here are some important points to remember.
Tax rates. There are seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top rate applies to taxable income above $510,301 for single taxpayers and $612,351 for married couples filing jointly. Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income.
Itemized deductions. Tax law suspends the overall limitation on itemized deductions that formerly applied to taxpayers whose adjusted gross income (AGI) exceeded specified thresholds. The itemized deductions of such taxpayers were reduced by 3% of the amount by which AGI exceeded the applicable threshold, but the reduction could not exceed 80% of the total itemized deductions, and certain items were exempt from the limitation.
Suspended exemptions. Starting in 2018, taxpayers can no longer claim personal or dependency exemptions. The rules for withholding income tax on wages will be adjusted to reflect this change, but the IRS was given discretion to leave the withholding unchanged for 2019.
Fewer Americans are able to itemize deductions now because of the increase in the standard deduction (now $24,400 for joint filers, $18,350 for heads of household, and $12,200 for singles and married taxpayers filing separately). That doesn’t mean that you can’t do anything though. One simple tool to get the best “bang for your buck” is called bunching of charitable contributions. This trick guides you to make charitable contributions every other year so that you double up and get a deduction in some years without giving it up in others. Simply make your 2020 contributions as early as possible in 2020, and then make your 2021 contributions at the very end of 2020 so that you “bunch” all your amounts in one year to potentially get the best itemized deduction amount.
“Qualified business income” deduction. Starting in 2018, taxpayers may deduct up to 20 percent of “qualified business income,” otherwise known as “pass-through” income, i.e., income from partnerships, S corporations, LLCs, and sole proprietorships. The income must be from a trade or business within the United States. Investment income does not qualify, nor do amounts received from an S corporation as reasonable compensation or from a partnership as a guaranteed payment for services provided to the trade or business. The deduction is not used in computing adjusted gross income, just taxable income.
For taxpayers with taxable income above $160,700 ($321,400 for joint filers), (1) a limitation based on W-2 wages paid by the business and depreciable tangible property used in the business is phased in, and (2) income from the following trades or businesses is phased out: health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners.
Child and family tax credit. The credit for qualifying children (i.e., children under 17) increased to $2,000, and increased the refundable portion of the credit to $1,400. It also introduced a new (non-refundable) $500 credit for dependents who do not qualify as children. The adjusted gross income level at which the credits begin to be phased out has been increased to $200,000 ($400,000 for joint filers).
If your employer offers a 401-k plan, this primary tax shelter continues to be deferring the maximum amount the IRS allows to your 401-k this and every year. Because employers are required by law to match a portion of your own deferral, this is a tax deduction with “free” money!
If you are over 70 and ½ and have an IRA you should not be writing checks to charity, instead you should be making direct IRA to charity donations to avoid tax issues while qualifying for the required distribution rule.
Mortgage interest. Starting with loans taken out in 2018, mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000 (down from $1 million). There is no longer a deduction for interest on home equity loans, regardless of when the debt was incurred.
State and local taxes. Starting in 2018, the itemized deduction for state plus local income and property taxes is limited to $10,000.
Health care “individual mandate.” Starting in 2019, there is no longer a penalty for individuals who fail to obtain minimum essential health coverage.
Medical expenses are deductible to the extent they exceed 7.5 percent of adjusted gross income for all taxpayers. Previously, the AGI “floor” was 10% for most taxpayers.
Alimony. For post-2018 divorce decrees and separation agreements, alimony will not be deductible by the paying spouse and will not be taxable to the receiving spouse.
Remember that your Social Security benefit is based on your highest 35 years of earnings, so taking some time away from the workforce, or aggressively writing off business expenses can have a long-term negative effect on retirement.
This year the IRS and Congress have become very concerned about crypto-currency (like Bitcoin) and you must be certain to report any of these transactions. There is even a new question on every tax return asking about it.
If you wish to discuss the impact of tax laws on your particular situation, please contact our office.
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