2019 Year End Tax Planning
Year-end planning for 2019 is just around the corner
We have just finished preparing individual income tax returns for the tax year 2018 and it’s hard to believe that year-end planning for 2019 is just around the corner. I don’t know where this year went. We have had one tax season with the December 2017 Tax Cuts and Jobs Act (TCJA) changes for individuals which include lower income tax rates, double standard deduction, severely limited itemized deductions, no personal exemptions, an increased child tax credit, and a watered-down alternative minimum tax (AMT). Following are some tax changes that may affect you, and some tax planning strategies you should be doing between now and year-end to help lower your tax bill.
The TCJA eliminated the alimony deduction beginning this year. This means that any alimony payments pertaining to any divorce or separation agreement executed (or modified as to alimony) after December 31, 2018, are no longer deductible by the payor and included in the gross income of the payee. This significant tax change could cost alimony payors thousands of dollars.
Medical expense deduction threshold
The medical deduction threshold has increased to 10% (up from 7.5% for 2018). If you plan on itemizing in 2019, your unreimbursed medical and dental expenses must exceed 10% of your adjusted gross income in order to qualify as a medical deduction.
Standard deduction or itemize
For 2019, the standard deduction amounts are $12,200 for singles and married filing separate status, $24,400 for married filing joint, and $18,350 for heads of household. If your total annual itemizable deductions for 2019 will be close to your standard deduction amount, you should consider making additional expenditures before year-end to exceed your standard deduction. That will lower this year’s tax bill. Next year, you can claim the standard deduction, which will be increased a bit to account for inflation.
Limitation on state and local taxes
The TCJA capped state and local taxes, which include state withholding, state estimates, real estate taxes, and auto registration fees, at $10,000. If you have exceeded this limit to date, you will want to defer paying fourth quarter state estimates and second half 2019 real estate taxes until next year since there is no tax benefit to pre-paying them. Alternatively, if you plan to itemize and have not reached the $10,000 limit, you should pay additional state taxes on or before year-end.
With the doubling of the standard deduction, you may have been surprised that you received no tax benefit from your 2018 charitable donations if it was more advantageous to claim the standard deduction. If this happened to you last year and you want to itemize, consider bunching your charitable contributions, i.e. contributing two (or more) years’ worth of contributions, so you can itemize in 2019 and claim the standard deduction in 2020. Another option is to set up a donor-advised fund in 2019 to pre-fund charitable contributions. This way, you get a 2019 charitable deduction, and you can designate which charities you want to receive the funds in future tax years. Lastly, if you have appreciated stock you have held for more than a year, consider donating the stock to charity in lieu of a cash donation. This will save capital gain taxes. See blog on Donating Appreciated Stock to Charity for additional details.
RMD to charity
If you are over 70 1/2 and receiving required minimum distributions (“RMD”), consider donating some, or all, of your RMD to charity. Although the RMD won’t qualify as a charitable deduction, it will reduce your taxable income. Many IRA custodians, such as Schwab, now provide checkbooks that the IRA owners can use to write checks to charities. This makes it easier than ever to redirect your RMD to charity.
Estimated payments / Withholding
Now is a good time to prepare a tax projection to get an estimate of what you will owe next April and make any adjustments to your withholding and/or estimates to avoid an underpayment penalty, or alternatively, avoid overpaying.
Harvesting capital losses
If you are invested in mutual funds, many pay sizable capital gain distributions in December. In addition, if you have capital gains, you should harvest losses in your taxable brokerage accounts to offset the gains and up to $3,000. Any unused capital losses carry forward.
Roth IRA conversions
If your 2019 taxable income is unusually low or you have an overall loss, now may be the time to convert some or all of a traditional IRA to a Roth IRA. This will eliminate having to start taking required minimum distributions at age 70 1/2. If you do convert to a Roth and the value of your account subsequently drops, you cannot undo the conversion. Under the TCJA, recharacterization of that conversion back to a traditional IRA is no longer permitted.
Arizona tax credits
Unfortunately, the TCJA no longer allows Arizona taxpayers to deduct Arizona tax credits as charitable contributions on Federal Schedule A. However, the Arizona tax credits are still a great way for you to reduce your Arizona state taxes dollar for dollar. For more information on all of the 2019 Arizona tax credits, check out our new article.
If you want to make year-end gifts, you can gift any individual up to $15,000 ($30,000 if you are married) without having to report the gift on a gift tax return. Also, if you have children or grandchildren, consider making a gift to a Section 529 plan. Arizona allows a subtraction up to $2,000 single or $4,000 married filing joint which saves about $200 – $400 in Arizona tax. See blogs on Annual Exclusion Gifts and Section 529 Plans for additional details.
Thanks to the TCJA, the unified federal estate and gift tax exemption for 2019 is a historically huge $11.4 million, or essentially $22.8 million for married couples. These amounts are expected to sunset on December 31, 2025 (if not sooner depending on the elections), so you may want to make taxable gifts now to take advantage of the increased exemptions.
Contact your professional tax advisor to get started on your year-end planning and to avoid surprises come early next April.
Jennifer A. Ward, Senior Manager, specializes in the taxation of estates, gifts, trusts and individuals. She can be reached at (480) 483-1170 or JenniferW@hhcpa.com.