2019 Year-End Tax Planning

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 the landmark Tax Cuts and Jobs Act (TCJA) changes that many individuals and businesses still haven't fully absorbed. 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 from pass-through entities may be entitled to a special 20% deduction.

Year-End Tax Planning Moves for Individuals

  • Higher-income earners must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer's approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.
  • The 0.9% additional Medicare tax also may require higher-income earners to take year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of a threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case). Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he or she would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don't exceed $200,000.
  • 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. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that it, when added to regular taxable income, is not more than the “maximum zero rate amount” (e.g., $78,750 for a married couple). If the 0% rate applies to long-term capital gains you took earlier this year—for example, you are a joint filer who made a profit of $5,000 on the sale of stock bought in 2009, and other taxable income for 2019 is $70,000—then before year-end, try not to sell assets yielding a capital loss because the first $5,000 of such losses won't yield a benefit this year. And if you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains sheltered by the 0% rate.
  • Postpone income until 2020 and accelerate deductions into 2019 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2019 that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2019. For example, that may be the case where a person will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or expects to be in a higher tax bracket next year.
  • If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA in 2019 if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2019, and possibly reduce tax breaks geared to AGI (or modified AGI).
  • It may be advantageous to try to arrange with your employer to defer, until early 2020, a bonus that may be coming your way. This could cut as well as defer your tax.
  • Many taxpayers won't be able to itemize because of the high basic standard deduction amounts that apply for 2019 ($24,400 for joint filers, $12,200 for singles and for marrieds filing separately, $18,350 for heads of household), and because many itemized deductions have been reduced or abolished. No more than $10,000 of state and local taxes may be deducted; miscellaneous itemized deductions (e.g., tax preparation fees and unreimbursed employee expenses) are not deductible; and personal casualty and theft losses are deductible only if they're attributable to a federally declared disaster and only to the extent the $100-per-casualty and 10%-of-AGI limits are met. You can still itemize medical expenses but only to the extent they exceed 10% of your adjusted gross income, state and local taxes up to $10,000, your charitable contributions, plus interest deductions on a restricted amount of qualifying residence debt, but payments of those items won't save taxes if they don't cumulatively exceed the standard deduction amount that applies to your filing status.

Some taxpayers may be able to work around these deduction restrictions by applying a “bunching strategy” to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, if a taxpayer knows he or she will be able to itemize deductions this year but not next year, the taxpayer will benefit by making two years' worth of charitable contributions this year, instead of spreading out donations over 2019 and 2020.

  • Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2019 deductions even if you don't pay your credit card bill until after the end of the year.
  • If you expect to owe state and local income taxes when you file your return next year and you will be itemizing in 2019, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2019. But remember that state and local tax deductions are limited to $10,000 per year, so this strategy is not a good one to the extent it causes your 2019 state and local tax payments to exceed $10,000.
  • Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70½. (That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire.) Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Thus, if you turn age 70½ in 2019, you can delay the first required distribution to 2020, but if you do, you will have to take a double distribution in 2020—the amount required for 2019 plus the amount required for 2020. Think twice before delaying 2019 distributions to 2020, as bunching income into 2020 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2020 if you will be in a substantially lower bracket that year.
  • If you are age 70½ or older by the end of 2019, have traditional IRAs, and particularly if you can't itemize your deductions, consider making 2019 charitable donations via qualified charitable distributions from your IRAs. Such distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. But the amount of the qualified charitable distribution reduces the amount of your required minimum distribution, which can result in tax savings.
  • If you are younger than age 70½ at the end of 2019, you anticipate that in the year that you turn 70½ and/or in later years you will not itemize your deductions, and you don't have any traditional IRAs, establish and contribute as much as you can to one or more traditional IRAs in 2019. If these circumstances apply to you, except that you already have one or more traditional IRAs, make maximum contributions to one or more traditional IRAs in 2019. Then, when you reach age 70½, make your charitable donations by way of qualified charitable distributions from your IRA. Doing all of this will allow you to, in effect, convert nondeductible charitable contributions that you make in the year you turn 70½ and later years, into deductible-in-2019 IRA contributions and reductions of gross income from age 70½ and later year distributions from the IRAs.
  • Take an eligible rollover distribution from a qualified retirement plan before the end of 2019 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2019. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2019, but the withheld tax will be applied pro rata over the full 2019 tax year to reduce previous underpayments of estimated tax.
  • Consider increasing the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year.
  • If you become eligible in December of 2019 to make health savings account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for 2019.
  • Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $15,000 made in 2019 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
  • If you were in federally declared disaster area, and you suffered uninsured or unreimbursed disaster-related losses, keep in mind you can choose to claim them either on the return for the year the loss occurred (in this instance, the 2019 return normally filed next year), or on the return for the prior year (2018).
  • If you were in a federally declared disaster area, you may want to settle an insurance or damage claim in 2019 in order to maximize your casualty loss deduction this year.

Year-End Tax-Planning Moves for Businesses & Business Owners

  • Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2019, if taxable income exceeds $321,400 for a married couple filing jointly, $160,700 for singles and heads of household, and $160,725 for marrieds filing separately, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased in–for example, the phase-in applies to joint filers with taxable income between $321,400 and $421,400 and to single taxpayers with taxable income between $160,700 and $210,700.

Taxpayers may be able to achieve significant savings with respect to this deduction, by deferring income or accelerating deductions so as to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2019. Depending on their business model, taxpayers also may be able increase the new deduction by increasing W-2 wages before year-end. The rules are quite complex, so don't make a move in this area without consulting your tax adviser.

  • More “small businesses” are able to use the cash (as opposed to accrual) method of accounting in than were allowed to do so in earlier years. To qualify as a “small business” a taxpayer must, among other things, satisfy a gross receipts test. For 2019, the gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts don't exceed $26 million (the dollar amount was $25 million for 2018, and for earlier years it was $5 million). Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments.
  • Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2019, the expensing limit is $1,020,000, and the investment ceiling limit is $2,550,000. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for qualified improvement property (generally, any interior improvement to a building's interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. The fact that the expensing deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is held during the year can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of 2019, rather than at the beginning of 2020, can result in a full expensing deduction for 2019.
  • Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment—bought used (with some exceptions) or new—if purchased and placed in service this year. The 100% write off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year writeoff is available even if qualifying assets are in service for only a few days in 2019.
  • Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs don't have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, consider purchasing such qualifying items before the end of 2019.
  • A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2019 (and substantial net income in 2020) may find it worthwhile to accelerate just enough of its 2020 income (or to defer just enough of its 2019 deductions) to create a small amount of net income for 2019. This will permit the corporation to base its 2020 estimated tax installments on the relatively small amount of income shown on its 2019 return, rather than having to pay estimated taxes based on 100% of its much larger 2020 taxable income.
  • To reduce 2019 taxable income, consider deferring a debt-cancellation event until 2020.
  • To reduce 2019 taxable income, consider disposing of a passive activity in 2019 if doing so will allow you to deduct suspended passive activity losses.

Small businesses: Get ready for your 1099-MISC reporting requirements

A month after the new year begins, your business may be required to comply with rules to report amounts paid to independent contractors, vendors and others. You may have to send 1099-MISC forms to those whom you pay nonemployee compensation, as well as file copies with the IRS. This task can be time consuming and there are penalties for not complying, so it’s a good idea to begin gathering information early to help ensure smooth filing.

Deadline

There are many types of 1099 forms. For example, 1099-INT is sent out to report interest income and 1099-B is used to report broker transactions and barter exchanges. Employers must provide a Form 1099-MISC for nonemployee compensation by January 31, 2020, to each noncorporate service provider who was paid at least $600 for services during 2019. (1099-MISC forms generally don’t have to be provided to corporate service providers, although there are exceptions.)

A copy of each Form 1099-MISC with payments listed in box 7 must also be filed with the IRS by January 31. “Copy A” is filed with the IRS and “Copy B” is sent to each recipient.

There are no longer any extensions for filing Form 1099-MISC late and there are penalties for late filers. The returns will be considered timely filed if postmarked on or before the due date.

A few years ago, the deadlines for some of these forms were later. But the earlier January 31 deadline for 1099-MISC was put in place to give the IRS more time to spot errors on tax returns. In addition, it makes it easier for the IRS to verify the legitimacy of returns and properly issue refunds to taxpayers who are eligible to receive them.

Gathering information

Hopefully, you’ve collected W-9 forms from independent contractors to whom you paid $600 or more this year. The information on W-9s can be used to help compile the information you need to send 1099-MISC forms to recipients and file them with the IRS. Here’s a link to the Form W-9 if you need to request contractors and vendors to fill it out: https://bit.ly/2NQvJ5O.

Form changes coming next year

In addition to payments to independent contractors and vendors, 1099-MISC forms are used to report other types of payments. As described above, Form 1099-MISC is filed to report nonemployment compensation (NEC) in box 7. There may be separate deadlines that report compensation in other boxes on the form. In other words, you may have to file some 1099-MISC forms earlier than others. But in 2020, the IRS will be requiring “Form 1099-NEC” to end confusion and complications for taxpayers. This new form will be used to report 2020 nonemployee compensation by February 1, 2021.

Help with compliance

But for nonemployee compensation for 2019, your business will still use Form 1099-MISC. If you have questions about your reporting requirements, contact us.


Is multicloud computing right for your business?

Cloud computing — storing data and accessing apps via the Internet — has been widely adopted by businesses across industry and size. Like many technological advances, though, new derivatives continue to emerge — including so-called multicloud computing.

Under this approach, companies don’t rely on a single cloud service; rather, they distribute their data and computing needs among several providers. Popular options include Amazon Web Services (AWS), Google Cloud Platform and Microsoft Azure.

Various advantages

The strategy offers various advantages. For example, like any cloud computing arrangement, it provides scalability. As your needs expand or drop, you can readily adjust your storage capabilities to keep a lid on costs.

Multicloud computing also is a way to hedge your bets. Every cloud provider has downtime at some point but, if you use multiple clouds, you can switch critical workloads and applications to a cloud that’s up and running. And it helps you avoid “vendor lock-in,” or getting restricted to a single provider’s infrastructure, add-on services and pricing models.

Improved performance is another factor. Using several providers based relatively close to you geographically means fewer “network hops” between servers. This reduces latency (the delay between a user’s request and the provider’s response), jitter, packet loss and other disruptions.

Many businesses prefer the “a la carte” nature of multicloud computing. Different providers may have different features that you need to meet your technical or business requirements. For instance, you might choose a pricier but more secure cloud for applications with sensitive data and a cheaper alternative for less sensitive data. Similarly, a business that relies heavily on Windows might use Azure for internal operations but tap AWS for its website and Google Cloud for machine learning.

Potential pitfalls

Some companies find themselves engaging in multicloud computing without ever deciding to do so. Unintentional multiclouds can result from “shadow IT,” whereby different departments or business units start using public clouds on their own accord and then one day turn to IT for help.

Whether multicloud computing develops from shadow IT or a conscious strategic decision, it comes with potential pitfalls. Managing multiple clouds can prove complex. You can use integrated suites of software known as “cloud management platforms” to administer multiple clouds. But these platforms tend to take a “least common denominator” approach, treating multiple clouds as a single cloud by focusing on storage, network and computing functions. As a result, you may find it difficult to leverage each cloud provider’s distinctively useful features.

Total costs

Last but certainly not least, you must consider the total cost of ownership of any multicloud strategy. Although the availability of alternative providers may increase your bargaining power, the cost of paying several vendors can go beyond the upfront prices and monthly fees. You may also incur additional fees for items such as licensing and integration. We can help you perform a cost-benefit analysis of any multicloud solution you’re considering.

© 2019


You may be ABLE to save for a disabled family member with a tax-advantaged account

There’s a tax-advantaged way for people to save for the needs of family members with disabilities — without having them lose eligibility for government benefits to which they’re entitled. It can be done though an Achieving a Better Life Experience (ABLE) account, which is a tax-free account that can be used for disability-related expenses.

Eligibility

ABLE accounts can be created by eligible individuals to support themselves, by family members to support their dependents, or by guardians for the benefit of the individuals for whom they’re responsible.

Eligible individuals must be blind or disabled — and must have become so before turning age 26. They also must be entitled to benefits under the Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) programs. Alternatively, an individual can become eligible if a disability certificate is filed with the IRS for him or her.

Here are some other key factors:

  • Distributions from an ABLE account are tax-free if used to pay for expenses that maintain or improve the beneficiary’s health, independence, or quality of life. These expenses include education; housing; transportation; employment support; health and wellness costs; assistive technology; personal support services; and other IRS-approved expenses.
  • Anyone can contribute to an ABLE account. While contributions aren’t tax-deductible, the funds in the account are invested and grow free of tax.
  • If distributions are used for nonqualified expenses, the portion of the distribution that represents earnings on the account is subject to income tax plus a 10% penalty.
  • An eligible individual can have only one ABLE account. Contributions up to the annual gift-tax exclusion amount, currently $15,000, may be made to an ABLE account each year for the benefit of an eligible person. Starting in 2018, if the beneficiary works, the beneficiary can also contribute part, or all, of their income to their account. (This additional contribution is limited to the poverty-line amount for a one-person household.)
  • There’s also a limit on the total account balance. This limit, which varies from state to state, is equal to the limit imposed by that state on qualified tuition (Section 529) plans.
  • ABLE accounts have no impact on an individual’s Medicaid eligibility. However, ABLE account balances in excess of $100,000 are counted toward the SSI program’s $2,000 individual resource limit. Thus, an individual’s SSI benefits are suspended, but not terminated, when his or her ABLE account balance exceeds $102,000 (assuming the individual has no other assets). In addition, distributions from an ABLE account to pay housing expenses count toward the SSI income limit.
  • For contributions made before 2026, the designated beneficiary can claim the saver’s credit for contributions made to his or her ABLE account.

We can help with the options

There are many choices. ABLE accounts are established under state programs. An account may be opened under any state’s program (if the state allows out-of-state participants). The funds in an account can be invested in a variety of options and the account’s investment directions can be changed up to twice a year. Contact us if you’d like more details about setting up or maintaining an ABLE account.

© 2019


IRA charitable donations are an alternative to taxable required distributions

Are you charitably minded and have a significant amount of money in an IRA? If you’re age 70½ or older, and don’t need the money from required minimum distributions, you may benefit by giving these amounts to charity.

IRA distribution basics

A popular way to transfer IRA assets to charity is through a tax provision that allows IRA owners who are 70½ or older to give up to $100,000 per year of their IRA distributions to charity. These distributions are called qualified charitable distributions, or QCDs. The money given to charity counts toward the donor’s required minimum distributions (RMDs), but doesn’t increase the donor’s adjusted gross income or generate a tax bill.

So while QCDs are exempt from federal income taxes, other traditional IRA distributions are taxable (either wholly or partially depending on whether you’ve made any nondeductible contributions over the years).

Unlike regular charitable donations, QCDs can’t be claimed as itemized deductions.

Keeping the donation out of your AGI may be important because doing so can:

  1. Help the donor qualify for other tax breaks (for example, a lower AGI can reduce the threshold for deducting medical expenses, which are only deductible to the extent they exceed 10% of AGI);
  2. Reduce taxes on your Social Security benefits; and
  3. Help you avoid a high-income surcharge for Medicare Part B and Part D premiums, (which kicks in if AGI hits certain levels).

In addition, keep in mind that charitable contributions don’t yield a tax benefit for those individuals who no longer itemize their deductions (because of the larger standard deduction under the Tax Cuts and Jobs Act). So those who are age 70½ or older and are receiving RMDs from IRAs may gain a tax advantage by making annual charitable contributions via a QCD from an IRA. This charitable contribution will reduce RMDs by a commensurate amount, and the amount of the reduction will be tax-free.

Annual limit

There’s a $100,000 limit on total QCDs for any one year. But if you and your spouse both have IRAs set up in your respective names, each of you is entitled to a separate $100,000 annual QCD limit, for a combined total of $200,000.

Plan ahead

The QCD strategy can be a smart tax move for high-net-worth individuals over 70½ years old. If you’re interested in this opportunity, don’t wait until year end to act. Contact us for more information.

© 2019


A shadow board could shed light on your company’s best future

In many industries, market conditions move fast. Businesses that don’t have their ears to the ground can quickly get left behind. That’s just one reason why some of today’s savviest companies are establishing so-called “shadow” (or “mirror”) boards composed of younger, nonexecutive employees who are on the front lines of changing tastes and lifestyles.

Generational change

Millennials — people who were born between approximately 1981 and 1996 — have been flooding the workplace for years now. Following close behind them is Generation Z, those born around the Millennium and now coming of age a couple of decades later.

Despite this influx of younger minds and ideas, many businesses are still run solely by older boards of directors that, while packed with experience and wisdom, might not stay closely attuned to the latest demographic-driven developments in hiring, product or service development, technology, and marketing.

A shadow board of young employees that meets regularly with the actual board (or management team) can help you overcome this hurdle. Ideally, the two boards mentor each other. The older generation shares their hard-earned lessons on leadership, governance, professionalism and the like, while the younger employees keep the senior board abreast of the latest trends, concerns and communication tools among their cohort.

Other benefits

You also can tap the shadow board for their input on issues that directly affect them. For example, would they welcome a new employee benefit under consideration or regard it as irrelevant? Similarly, you can use the board to “test drive” strategies targeting their generation before you get too far down the road.

And your shadow board can serve as generator of new initiatives and innovations, both employee- and customer-facing. Some companies with shadow boards have ended up overhauling their processes, procedures and even business models based on ideas that first emerged from the younger employees’ input.

Another benefit? Shadow boards can keep traditionally job-hopping Millennials from jumping ship. Many are eager to get ahead, often before they’re equipped to do so, and they don’t hesitate to look elsewhere. Selecting younger employees for a shadow board sends them the message that you see their potential and are invested in grooming them for bigger and better things. It also facilitates succession planning, a practice too many businesses overlook.

The right approach

Don’t establish a shadow board just for appearances or without true commitment. That can do more harm than good. Younger generations see lip service for what it is, and word will spread fast if you’re ignoring the shadow board or refusing to seriously consider its input. When done right, this innovative effort can pay off in the long run for everyone involved. Our firm can help you further explore the financial and strategic feasibility of the idea.

© 2019