Automatic Updates as Laws Change
The opportunities and challenges of the Tax Cuts and Jobs Act (TCJA) continue to be pivotal to a taxpayer’s planning. Ongoing proposals for massive reform, as a contentious presidential election cycle heats up, require that taxpayers remain flexible in both their long- and short-term planning. With that said, there are steps that can be taken to protect and enhance one’s financial position.
Berdon’s 2019-20 Tax Planning Guide can be a valuable resource to do this — helping taxpayers take advantage of tax savings opportunities, while also helping them stay nimble and adjust as changes present themselves. Key to leveraging the advantages is to work closely with a tax advisor to identify which strategies apply as well as how best to maximize savings and minimize any negative tax ramifications.
This valuable reference tool is available in electronic form — which updates as tax laws change — and in hardcopy. The guide is segmented into important areas of interest such as Income & Deductions, Family & Education, Investing, Business, Retirement, and Estate Planning. The guide provides charts and case studies to clarify complex concepts and help identify opportunities to pursue.
Among the areas covered in the guide are:
State and Local Tax Deduction Limitation. Through 2025, a taxpayer’s entire itemized deduction for state and local taxes — including property tax and the greater of income or sales tax — is limited to $10,000 ($5,000 for married filing separately).
Mortgage Interest Deduction Limitation. Taxpayers generally can deduct interest on mortgage debt incurred to purchase, build, or improve their principal residence and a second residence. Points paid related to one’s principal residence also may be deductible. Through 2025, the TCJA reduces the mortgage debt limit from $1 million to $750,000 for debt incurred after December 15, 2017, with some limited exceptions.
Home Sale Gain Exclusion. When taxpayers sell their principal residence, they can exclude up to $250,000 of gain ($500,000 for married couples filing jointly) if they meet certain tests.
Important: Gain that’s allocable to a period of “nonqualified” use generally isn’t excludable.
Charitable Donations – Consider Bunching. Donations to qualified charities are generally fully deductible — but only if itemized. If itemizing no longer saves tax because of the increased standard deduction, the taxpayer won’t get a federal income tax benefit from charitable gifts. Alternative: Taxpayers might benefit from “bunching” donations into alternating years if their total itemized deductions in those years would then surpass their standard deduction. You can then itemize just in those years.
Alternative Minimum Tax. Before timing deductions, consider the AMT — a separate tax system that disallows some tax deductions, such as for state and local taxes, and treats certain income items differently, such as incentive stock option exercises. Taxpayers must pay the AMT if their AMT liability exceeds their regular tax liability. Important. The TCJA substantially increases the AMT exemptions through 2025. Combined with other TCJA changes, the result is that very few taxpayers will be at AMT risk. Consult a tax advisor for more information.
“Kiddie Tax”. This generally applies to most unearned income of children under age 19 and of full-time students under age 24 (unless the students provide more than half of their own support from earned income). Important. Before 2018, unearned income subject to the kiddie tax was generally taxed at the parents’ tax rate. Through 2025, the TCJA makes the kiddie tax harsher. Now a child’s unearned income beyond $2,200 (for 2019) will be taxed according to the tax brackets used for trusts and estates, which for 2019 are taxed at the highest marginal rate of 37% once taxable income exceeds $12,750. In contrast, for a married couple filing jointly, the 37% rate doesn’t kick in until their 2019 taxable income tops $612,350.
Loss Carryovers. If net losses exceed net gains, taxpayers can deduct only $3,000 ($1,500 for married taxpayers filing separately) of the net losses per year against other income (such as wages, self-employment and business income, dividends and interest). A taxpayer can carry forward excess losses until death. Loss carryovers can be a powerful tax-saving tool in future years if taxpayers have a large investment portfolio, real estate holdings, or a closely held business that might generate substantial future capital gains.
Mutual Funds. Mutual funds with high turnover rates can create income that’s taxed at ordinary-income rates. Suggested Option: Choose funds that provide primarily long-term gains can save you more tax dollars because of the lower long-term rates.
Section 199A Deduction for Pass-through Businesses. Through 2025, the TCJA provides the Section. 199A deduction for sole proprietorships and owners of pass-through business entities, such as partnerships, S corporations, and LLCs that are treated as sole proprietorships, partnerships or S corporations for tax purposes. The deduction generally equals 20% of qualified business income (QBI), subject to limitations that can begin to apply if taxable income exceeds the applicable threshold — $160,700 or, if married filing jointly, $321,400 ($160,725 for separate filers). The limits fully apply when taxable income exceeds $210,700 and $421,400, respectively. Consult a tax advisor for more information.
Section 179 Expensing Election. This allows taxpayers to deduct (rather than depreciate over a number of years) the cost of purchasing eligible new or used assets, such as equipment, furniture, off-the-shelf computer software and, under the TCJA, qualified improvement property, certain depreciable tangible personal property used predominantly to furnish lodging, and for the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems.
Bonus Depreciation. This additional first-year depreciation is available for qualified assets, which include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, and water utility property. Important: Due to a drafting error in the TCJA, qualified improvement property will be eligible for bonus depreciation only if a technical correction is issued. This is still pending so checking with a tax advisor for the latest information is suggested.
Interest Expense Deduction. Generally, under the TCJA, interest paid or accrued by a business is deductible up to 30% of “adjusted taxable income.” Taxpayers (other than tax shelters) with average annual gross receipts of $25 million or less for the three previous tax years are exempt from the interest expense deduction limitation.
C corporation Net Operating Losses (NOLs). For NOLs that arise in tax years starting after Dec. 31, 2017, the maximum amount of taxable income that can be offset with NOL deductions is generally reduced from 100% to 80%. In addition, NOLs incurred in tax years ending after Dec. 31, 2017, generally can’t be carried back to an earlier tax year but can be carried forward indefinitely (as opposed to the 20-year limit under pre-TCJA law). Important: Congress might make a technical correction to address the difference in effective dates. Consult a tax advisor for more information.
“Back Door” Roth IRAs. If the income-based phaseout prevents a taxpayer from making Roth IRA contributions and they don’t have a traditional IRA, they should consider setting up a traditional account and making a nondeductible contribution to it. Once done, a taxpayer can then immediately convert the contributed amount to a Roth account with minimal tax impact.
Valuation Discounts. Business owners can leverage gift tax exclusions and exemption by gifting ownership interests, which may be eligible for valuation discounts. Example: If the combined discount is 25% in 2019, taxpayers can gift an ownership interest equal to as much as $20,000 tax-free because the discounted value doesn’t exceed the $15,000 annual exclusion. Another way to potentially benefit from valuation discounts is to set up a family limited partnership (FLP). A taxpayer can then fund the FLP with assets, such as public or private stock and real estate, and gift limited partnership interests. Important: The IRS may challenge valuation discounts so we recommend obtaining a professional, independent valuation.
Berdon’s 2019-20 Tax Planning Guide is a valuable resource for tax planning ideas and tax savings opportunities. After identifying potential opportunities, contact a tax advisor to review the specifics and/or discuss other opportunities that may result in significant benefits to you, your family, and your business. Berdon professionals are always available to assist. If you are interested in connecting with one of our tax specialists, please email email@example.com.
Follow the links below to download or request a hardcopy of the tax planner.