WESTON & GREGORY, LLC
CERTIFIED PUBLIC ACCOUNTANTS
100 La Costa Lane, Suite 100
Daytona Beach, FL 32114-8158
Significant changes were made with the Tax Cuts and Jobs Act of 2017 (TCJA) that were first introduced in 2018. While there was no significant new legislation in 2019 affecting individual taxes, situations change from year to year.
The following are some tax planning opportunities that may benefit you as we move into 2020. We anticipate some of the items discussed may assist you in gathering your 2019 tax information and/or highlight areas that may affect your 2019 personal tax situation.
The TCJA essentially doubled the standard deduction while modifying the itemized deduction rules for 2018 through 2025. This means that many individuals who previously received a tax benefit by itemizing deductions no longer do as the standard deduction is more advantageous. For 2019, the inflation-indexed standard deduction is $12,200 for single filers, $18,350 for heads of households, and $24,400 for joint filers. Some of the reduced tax benefits and elimination of certain itemized deductions were as follows.
The deduction for state and local taxes was limited to $10,000 annually. This includes payments for property taxes and income or sales taxes.
The deduction for mortgage interest expenses was modified, to include only interest on “acquisition debt” (e.g., to purchase your principal residence).
The deduction for home equity indebtedness was modified to include only debt used to buy, build, or substantially improve your home.
The deduction for casualty and theft losses was eliminated (except for disaster-area losses).
The deduction for miscellaneous expenses was eliminated.
The threshold for deducting medical and dental expenses, which was temporarily lowered to 7.5% of adjusted gross income (AGI), reverted to 10% of AGI, beginning in 2019.
If the total of your itemized deductions in one year will be close to your standard deduction amount, alternating between bunching itemized deductions into one year and taking the standard deduction in the next year (or vice versa) could provide a tax benefit over the two year period. For example, if you give a certain amount to charities each year, and if it's financially feasible, you might consider doubling up one year on your contributions rather than spreading the contributions over a two-year period. Similar opportunities may be available for bunching property tax payments and state income tax payments. If these amounts, along with your mortgage interest and medical expenses exceed your standard deduction, then it would benefit you to double up on the expenses in certain years and take the standard deduction in an alternate year.
There are many ways to maximize tax savings opportunities through charitable gifts. Donating appreciated property, such as stock, avoids income taxes on the disposition of the property while receiving a charitable deduction. For donations of appreciated property that you have owned longer than one year, you can generally deduct an amount equal to the property’s fair market value (FMV). Otherwise, the deduction is typically limited to your initial cost. Other special rules may apply to gifts of property.
Individual taxpayers who are at least 70½ years old can contribute up to $100,000 annually to charities directly from their IRAs without having the amount of their contribution included in their gross income. This will allow some taxpayers to reduce their tax liability even more than they would have if they had received the distribution from their IRA and then contributed the amount distributed to charity. A qualified charitable distribution would lower a taxpayer’s adjusted gross income (AGI) which may allow for larger deductions that are subject to AGI limitations, such as medical deductions and charitable contributions. In addition, this allows for a reduced amount of income in computing the amount of Medicare Part B premiums.
Moving Expense Reimbursement
If you received a reimbursement from your employer for moving expenses incurred in 2019, the reimbursement is taxable income. While taxpayers could previously deduct employment-relating moving expenses, this deduction is no longer available for moves taking place in years 2018-2025, unless you are a member of the U.S. Armed Forces on active duty and move pursuant to a military order to a permanent change of station.
Individual Healthcare Penalty (New in 2019)
For 2019, the tax penalty on individuals who fail to carry health insurance, which was enacted as part of the Affordable Care Act (ACA), has been eliminated. However, other aspects of the ACA are still in place for employers.
Income Tax Withholdings (New in 2020)
Taxpayers should consider their withholding on a routine basis and especially with any life changing event or job change. On December 5, 2019, the IRS issued the redesigned 2020 Form W-4 (Employee’s Withholding Certificate). The new form no longer uses withholding allowances. Instead, there is a five-step process and new Publication 15-T (Federal Income Tax Withholding Methods) for determining employee withholding. The IRS is not requiring all employees to complete a 2020 Form W-4. However, employees hired in 2020 and any employee who makes withholding changes in 2020 must use the new 2020 Form W-4.
It is important to review your investment portfolio throughout the year. You may “harvest” capital losses to offset gains realized earlier in the year or identify capital gains that will be absorbed by prior losses, including capital loss carryovers. There is favorable tax treatment for certain long-term capital gains as they are taxed at a rate of 0%, 15% or 20% depending upon your taxable income. Qualified dividend income is taxed at the same favorable tax rates that apply to long-term capital gains. These are most dividends paid by U.S. companies or qualified foreign companies.
Net Investment Income Tax
In addition to capital gains tax, a special 3.8% tax applies to the lesser of your “net investment income” (NII) or the amount by which your modified adjusted gross income (MAGI) for the year exceeds $200,000 for single filers and $250,000 for joint filers. The definition of NII includes interest, dividends, capital gains and income from passive activities, but not Social Security benefits, tax-exempt interest and distributions from qualified retirement plans and IRAs.
To limit net investment income tax, you may consider adding municipal bonds (“munis”) to your portfolio. Interest income generated by munis does not count as NII, nor is it included in the calculation of MAGI. Similarly, if you turn a passive activity into an active business, the resulting income may be exempt from the NII tax. These rules are complex, so please consult with us if this may apply to you.
Solar and Other Renewable Energy
Taxpayers who upgraded their homes to make use of solar or certain other renewable energy in 2019 may be eligible for a tax credit of 30 percent to offset some of the costs. The solar credit is still available in 2020 though the rate is reduced from 30 percent to 26 percent.
Health Savings Accounts
For those that qualify for health savings accounts, you should consider making the maximum contribution allowed to your HSA (generally $3,500 for individual coverage or $7,000 for family) even if you haven’t gotten there yet through your payroll deductions. You have until the due date of your tax return to make a contribution to your HSA from your checking account, then deducting the deposit on your tax return. HSA dollars carry over indefinitely and are yours even if you switch jobs or retire, so maximizing contributions is a great tax savings opportunity that allows you to save for future healthcare costs.
By investing in a qualified retirement plan you'll not only reduce current year income tax, it allows you to set aside funds for your retirement years. If your employer has a 401(k) plan and you are under age 50, you can defer up to $19,500 of income into that plan in 2020. Catch-up contributions of $6,500 are allowed if you are 50 or over. In addition, if your employer offers a 401(k) match, you should consider contributing at least the amount required to get the maximum match.
If certain requirements are met, contributions to an individual retirement account (IRA) may be deductible. If you are under 50, the maximum contribution amount for 2019 is $6,000. If you are 50 or older but less than 70 1/2, the maximum contribution amount is $7,000. Even if you are not eligible to deduct contributions, contributing after-tax money to an IRA may be advantageous because it will allow you to later convert that traditional IRA to a Roth IRA. IRA contributions for a tax year may be made up until the due date of the tax return.
Finally, if you have 2019 qualified retirement savings contributions you may be eligible for a retirement savings credit of up to $1,000 (single or head of household) or $2,000 (joint filers) if your adjusted gross income does not exceed $64,000 (married filing jointly), $48,000 (head of household), or $32,000 (all other taxpayers).
Don't overlook Roth IRAs as a possible way to build family wealth by making all allowable contributions for family members with earned income including children, grandchildren, and even parents. Starting a Roth account as young as possible allows for many years of tax-free growth which occurs when you've had a Roth IRA for at least 5 years and earnings are not withdrawn until after age 59 ½.
For those higher income taxpayers that are unable to take advantage of Roth IRA contributions, the Roth IRA conversion continues to be an effective planning measure for certain taxpayers. Converting assets from ‘traditional to Roth’ creates tax free income in retirement, or for future generations. Although the new tax law does not affect conversions to a Roth IRA, it did end the ability to re-characterize a conversion after the fact.
Revised Kiddie Tax Rules
One of the changes made by the TCJA involves what is known as the "kiddie tax." The kiddie tax applies to a child's net unearned income (e.g., dividends, interest, and capital gain distributions) over $2,200. While such income used to be taxed at the parent's marginal income tax rate and took into consideration the unearned income of any siblings, the TCJA simplified the calculation so that the child's unearned income is taxed at trust and estate tax rates. Although the trust and estate tax rates are similar to the individual tax rates, the tax brackets are much lower, meaning higher rates of tax apply to lower levels of income. In some instances, you may be able to elect to include the child's income on your tax return.
Child-Related Expenses and Credits
While the TCJA eliminated the personal and dependent exemption deductions that applied to tax years before 2018, it increased the child tax credit available for years after 2017 and increased the income level at which taxpayers are eligible for the credit. For 2019, if you file a joint return and your modified adjusted gross income (MAGI) is $400,000 or less, you are eligible for a $2,000 child tax credit for each qualifying child. If you are filing as single, head of household, or married filing separately, the MAGI limitation for claiming a child tax credit is $200,000 or less. For income above those levels, a pro rata credit may be available depending on total MAGI. Taxpayers with income below certain thresholds may be eligible for a refundable child tax credit.
Additionally, if you paid someone to take care of your child or a dependent so you can work or look for work, you may be entitled to a tax credit for up to 35 percent of the expenses paid. The amount of employment-related expenses used to calculate the credit is generally limited to $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals. Various qualifications must be met in order to be eligible for the credit, but if you incurred such expenses, you may qualify. Additionally, if you paid someone to come to your home and care for a child or dependent, you may be a household employer subject to employment taxes.
If you incurred expenses to adopt a child, you may be eligible for a tax credit of up to $13,810 for some or all of those expenses. The determination of the tax year in which qualified adoption expenses are allowable as a credit depends on whether the expenses were paid before the year in which the adoption became final or whether they were paid during or after the year in which the adoption became final.
Education-Related Deductions and Credits
The tax law provides tax benefits for education expenses, within certain limits. These benefits include a choice involving two higher education credits, the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). The maximum AOTC of $2,500 is available for qualified expenses of each student, while the maximum $2,000 LLC is claimed on a per-family basis. Therefore, the AOTC is generally preferable. Both credits are phased out based on modified adjusted gross income (MAGI).
The TCJA also allows you to use Section 529 plan funds to pay for up to $10,000 of K-12 tuition expenses tax-free. Previously, qualified expenses only covered post-secondary schools.
In addition, if your modified adjusted gross income level is below certain thresholds, the following may be available in 2019:
an exclusion from income for education savings bond interest;
a deduction for student loan interest;
Rental Real Estate
If you own rental real estate, you may be eligible for the TCJA's Section 199A deduction, which is based on a percentage of income earned by the rental real estate activity. In order to be eligible for the deduction, the activity must be considerable, regular, and continuous in scope. In determining whether your rental real estate activity meets those criteria, relevant factors include, but are not limited to, the following:
the type of rented property (commercial real property versus residential property);
the number of properties rented;
you or your agent's day-to-day involvement;
the types and significance of any ancillary services provided under the lease; and
the terms of the lease (for example, a net lease versus a traditional lease and a short-term lease versus a long-term lease).
Under a safe harbor issued by the IRS, a rental real estate activity will be treated as a business eligible for the special deduction if certain requirements are satisfied, such as:
separate books and records are maintained to reflect the income and expenses for each rental real estate enterprise;
for rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed per year with respect to the rental real estate enterprise (with slightly less stringent requirements for rental real estate enterprises that have been in existence for at least four years);
contemporaneous records have been maintained, 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; and
certain compliance requirements are met.
Even if you don't meet the safe harbor requirements, you may still be eligible for this deduction if the activity qualifies as a business activity.
In addition, if you rent out a vacation home that you also use for personal purposes, be sure to account for the number of days it was used for business versus personal to see if there are ways to maximize tax savings with respect to that property.
Foreign Bank Account Reporting
The IRS has become increasingly aggressive at tracking down individuals who have not reported foreign bank accounts. If you have an interest in a foreign bank account, it must be disclosed; failure to do so carries stiff penalties. You must file a Report of Foreign Bank and Financial Accounts (FBAR) if: (1) you are a U.S. resident or a person doing business in the United States; (2) you had one or more financial accounts that exceeded $10,000 during the calendar year; (3) the financial account was in a foreign country; and (4) you had a financial interest in the account or signatory or other authority over the foreign financial account. If you are unclear about the requirements or think they could possibly apply to you, please be sure to discuss this with us.
Normally, when you sell real estate at a gain, you must pay tax on the full amount of capital gain in the year of the sale. However, if you receive installment payments over two or more tax years, the tax on a gain is paid over the years in which payments are actually received. This tax deferral treatment is automatic for most installment sales other than sales by “dealers” like real estate developers.
The taxable portion of each payment is based on the gross profit ratio. Not only does the installment sale technique defer some of the tax due on a real estate deal, it will often reduce your overall tax liability if you are a high-income taxpayer by spreading out the taxable gain over several years, you may pay tax on a greater portion of gain at the 15% capital gains rate as opposed to the 20% rate. Taxpayers have the ability to “elect out” of installment sale treatment when the tax return is filed to include the entire amount of tax due on the return for the year of the sale. You might do this in a year that is otherwise a lower tax year.
Small Business Considerations
The impact of the TCJA was just as significant on businesses. This legislation has made a profound impact on many taxpayers and has created new planning opportunities for small businesses. Here are a few items to note:
Choice of entity — With the decrease in the corporation tax rate to 21% and the addition of the qualified business income deduction, it may be time to reconsider your type of business entity. This is a complex decision that has more than tax implications.
Entertainment expenses are no longer deductible. Although that sounds simple, there are many complications. Business meals are still 50% deductible, but there are additional stipulations. This could mean you need to track your expenses differently in your accounting system than you have in the past. It could also mean you need to request more information on invoices that could involve both entertainment and meals.
Purchases of property and equipment — With tax-favorable options available to businesses, many purchases can be completely written off in the year they are placed in service.
Method of accounting — More businesses have the opportunity to use the cash method of accounting. This can be helpful for cashflow purposes and is simpler than the accrual method.
Under the TCJA, a business may benefit from a combination of three depreciation-based tax breaks:
(1) the Section 179 deduction, (2) “bonus” depreciation and (3) regular depreciation. With qualifying purchases, a small business may be able to write off most, if not all, of the cost of qualified tangible property placed in service during the year.
Section 179 deduction: Code Section 179 allows businesses to currently deduct the cost of qualified property placed in service during the year. The maximum annual deduction is phased out on a dollar-for-dollar basis above a specified threshold, $1.02 million for 2019. However, note that the Section 179 deduction cannot exceed the taxable income from all business activities. This could limit the deduction.
Bonus depreciation: The TCJA doubled the previous 50% first-year bonus depreciation deduction to 100% for property placed in service after September 27, 2017. It also expanded the definition of qualified property to include used, not just new, property. The TCJA gradually phases out bonus depreciation after 2022 and is scheduled to disappear completely after 2026.
Regular depreciation: Finally, if there is any remaining acquisition cost, the balance may be deducted over time under the Modified Accelerated Cost Recovery System (MACRS).
Note, “luxury car” limits apply to automobiles. These rules do not apply to certain heavy-duty vehicles. Special rules apply to heavy-duty SUVs or vans limiting the first-year Section 179 deduction of up to $25,000.
Although the TCJA repealed the deduction for entertainment expenses beginning in 2018, you can still deduct expenses for travel and meal expenses while you are away from home on business, subject to certain limits. The primary purpose of the trip must be business-related. If you meet the strict substantiation requirements, you may deduct 100% of your travel costs and 50% of meal costs for amounts paid or incurred during the year.
Wayfair Ruling and Sales and Use Tax
The recent U.S. Supreme Court ruling in the case South Dakota v. Wayfair, Inc. significantly impacted businesses that engage in out of state sales and affects where some businesses must file and pay sales and use tax. States are still making changes to their laws and filing requirements. Businesses are responsible for compliance with applicable rules associated with the collection and remittance of sales and use tax for the various states in which they do business.
Section 199A Passthrough Tax Break
Enacted as part of TCJA, the Section 199A tax break allows a 20 percent deduction for qualified business income from sole proprietorships, S corporations, partnerships, and LLCs taxed as partnerships. If you qualify for the deduction, it is taken on your individual tax return as a reduction to taxable income. The new tax break is subject to some complicated restrictions and limitations, but the rules that apply to individuals with taxable income at or below $160,700 ($321,400 for joint filers; $160,725 for married individuals filing separately) are simpler and more permissive than the ones that apply above those thresholds.
While expenses for business repairs are currently deductible, the cost of improvements to business property must be written off over time. The IRS recently issued regulations that clarify the distinctions between repairs and improvements. As a rule of thumb, a repair keeps property in efficient operating condition while an improvement prolongs the life of the property, enhances its value or adapts it for a different use. For example, fixing a broken window is a repair, but adding a new building wing is an improvement. A safe harbor rule in the regulations allows a business to currently deduct costs of $2,500 or less, or $5,000 or less for a business with an “applicable financial statement” (AFS).
Prior to 2018, business interest was fully deductible. But now the TCJA generally limits the deduction for business interest to 30% of adjusted taxable income (ATI). However, the limit does not apply to a business with average gross receipts of $25 million or less for the three prior years. For these purposes, ATI is defined as your business income without regard to any income, deduction, gain or loss not properly allocable to a business; business interest income and expense; net operating losses (NOLs); the 20% QBI deduction; and, for tax years beginning before 2022, depreciation, amortization or depletion. If the new business interest limit applies, you can carry forward the excess indefinitely until it is exhausted.
Be sure your retirement planning is up to date. There are many retirement savings options in order to make sure that you are taking advantage of tax deductions as well as providing opportunities for owners and employees to save for retirement. In addition, the “Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was enacted on December 20, 2019 and includes a number of provisions that impact employer plans including a new small employer automatic enrollment credit and an increased credit for small employer pension startup costs. Additional information regarding this Act is included below.
The ” Setting Every Community Up for Retirement Enhancement” Act of 2019 (SECURE Act)
The “Setting Every Community Up for Retirement Enhancement” Act (SECURE Act), part of the Further Consolidated Appropriations Act, 2020 (H.R. 1865, P.L. 116-94), was enacted on December 20, 2019. The SECURE Act expands opportunities for individuals to increase their savings and makes administrative simplifications to the retirement system.
Major changes for individuals include the repeal of the maximum age at which traditional IRA contributions can be made and an increase to the age at which required minimum distributions (RMDs) must be taken. The legislation also includes the so-called “goldstar” family provision, which repeals certain changes that were made to the kiddie tax rules by the Tax Cuts and Jobs Act (TCJA, P.L. 115-97) due in part to concerns that these changes unfairly impacted children who received government payments because they are survivors of deceased military personnel.
The Act also includes a number of provisions that impact employer plans, such as liberalized rules for multiple employer retirement plans, a new small employer automatic enrollment credit, an increased credit for small employer pension startup costs, and expanded participation in employer 401(k) plans to include long-term, part-time workers. The Act also allows long-term, part-time workers to participate in an employer's 401(k) plan. There are also several significant administrative changes and revenue-raising provisions, including increases to the penalty amounts for failure to file income tax and retirement plan returns.
This letter is based on the current federal tax laws, rules and regulations. Please remember this letter is intended to serve only as a general guideline and each taxpayer’s circumstances should be considered before any significant opportunities are utilized. Please let us know if you would like to schedule a meeting to assist you with all your tax planning needs.
We appreciate having you as a client.
Very truly yours,
Weston & Gregory, LLC