The Tax Cuts and Jobs Act (TCJA) of 2017 reduced tax rates for most individuals, introduced a new deduction for owners of sole proprietorships and pass-through entities, increased the standard deduction and, among other things, significantly increased the Alternative Minimum Tax (AMT) exemption and either limited or eliminated many other tax deductions. While the IRS continues to release guidance and update forms to reflect the changes, we offer the following tax planning guide that includes significant opportunities to minimize individual tax obligations.
Income from an investment held for more than one year is generally taxed at preferential capital gains rates. For 2019, the long-term capital gain and qualified dividend rates remain unchanged at 0%, 15% or 20%, based on statutory income brackets and adjusted for inflation. For example, the 20% rate applies when taxable income exceeds $488,850 (married filing joint), $461,700 (head of household) or $434,550 (others).
In addition to income tax, individual taxpayers with modified adjusted gross income (MAGI) of more than $200,000 per year ($250,000 if married filing joint; $125,000 if married filing separately) may be subject to net investment income tax. NIIT equals 3.8% of the lesser of (a) net investment income or (b) the amount by which MAGI exceeds the applicable threshold. Net investment income includes interest, dividends, capital gains, rental income (unless derived from ordinary business activities) and passive activities, less deductions properly allocated to net investment income.
If you own a business, consider the following strategies to minimize taxes:
For 2019, medical expenses can be deducted to the extent the expenses exceed 10% of adjusted gross income (increased from 7.5% in 2018). Eligible expenses include health insurance premiums (if not deducted elsewhere on your income tax return), long-term care insurance premiums (subject to limitations), medical and dental services and prescription drugs. You may also deduct expenses paid for medical care of a child for whom you provide more than half of total support.
For tax years 2018-2025, the TCJA reduces the limit on mortgage debt incurred after December 15, 2017, from $1 million to $750,000. Interest on debt incurred prior to December 15, 2017, but refinanced later, is deductible to the extent the new debt does not exceed the original debt. The TCJA also suspends the prior provision that allowed up to $100,000 of interest on home equity debt to be treated as deductible qualified residence interest.
Year-end is a great time to make donations to qualified charities. Generally, cash donations to public charities are fully deductible up to 60% of adjusted gross income (AGI), and gifts of appreciated property or gifts for use by public charities are deductible up to 30% of AGI. This benefit only applies if you itemize deductions. For donations made during the year, be sure to get acknowledgment letters from the qualified charities for both cash and property (including stock donations) over $250. If you are not certain if a particular charity is qualified, you can consult the IRS website at http://apps.irs.gov/app/eos/ to search for the organization in question.
Contributions to a traditional employer-sponsored defined contribution plan are typically pretax, therefore reducing taxable income. If you are an employee and your company offers a 401(k) plan, you should try to maximize your contribution to boost your retirement savings and save current year taxes. The maximum contribution to a 401(k) plan increased to $19,000 in 2019 (from $18,500 in 2018) and is scheduled to increase to $19,500 for 2020. Employees age 50 or older can also make an additional “catch-up” contribution of up to $6,000 (scheduled to increase to $6,500 in 2020.)
If you are self-employed, consider setting up a self-employed retirement plan (SEP) or some other type of retirement plan in order to maximize the allowable contribution each year.
Taxpayers who have reached age 70½ can donate up to $100,000 of traditional and Roth IRA distributions directly to qualified charities. The donation satisfies the minimum distribution requirement and is excluded from taxable income. A charitable deduction cannot be claimed for the contribution.
If you are covered by a qualified high-deductible health plan, you can either contribute pretax income to an employer-sponsored Health Savings Account (HSA) or make deductible contributions to an HSA you set up yourself. For 2019, the maximum contributions are $3,500 for single taxpayers (increased from $3,450 in 2018) and $7,100 for family coverage (increased from $7,000 in 2018). Taxpayers aged 55 or older as of the end of the tax year can contribute an additional $1,000. (This means HSA holders can contribute and reduce income by $9,000 if both spouses are over 55.) There is no “use it or lose it” provision with HSAs, as you can carry over unused balances from year to year. Consider paying for qualified out-of-pocket medical expenses with personal funds rather than HSA funds. You can leave funds invested in your HSA to grow on a tax-deferred basis creating a pool of money to use for medical expenses later in life.
Amounts contributed to a healthcare Flexible Spending Account (FSA) are not subject to federal income, Social Security or Medicare taxes. For 2019, the maximum contribution is limited to $2,700 (increased from $2,650 in 2018). Historically, the “use it or lose it” provision applied to amounts contributed to a flexible spending account. However, there is a carryover provision which allows participating employees to carryover up to $500 of unused funds to the following year if your employer offers this option. Some employers may offer a grace period to incur eligible medical expenses, generally two-and-a-half months after year-end. Check with your employer for the rules on the established FSA plan.
If you wish to discuss tax planning strategy for the new rules that are generally going into effect for the 2019 tax year, please contact your professional at SVA.