By: Matt Smith, CPA, CFE | msmith@deandorton.com
If you haven’t already, now is the time to assess your 2019 tax situation. A few items you may want to consider follow:
Penalties for underwithholding or underpaying estimated tax. You should check your income tax withholdings and, if applicable, estimated tax payments—federal and state—to assess whether you may be underpaid to the extent you are subject to penalties. Withholdings are treated as if they occurred ratably throughout the year, so if you are underpaid, you may be able to eliminate or minimize an underpayment by increasing your withholding before year end.
Pre-tax deductions. Determine if you are on track to have 2019 optimal amounts withheld from your paycheck for pre-tax options, such as retirement plan deferrals, HSA contributions, and dependent care benefits. Also, consider increasing these amounts beginning early next year.
Capital gains and losses. If you will have realized net capital gains during 2019, consider realizing capital losses before the end of the year to offset the gains. Remember, net long-term losses can be used to offset net short-term capital gains which otherwise would be taxed as ordinary income. Also, be aware of the “wash sale” rules if you are inclined to reinvest in a security you sell at a loss.
Bonus depreciation. For 2019, 100% of the cost of qualifying property (which now includes most previously-used assets that otherwise qualify) is deductible if the property is placed-in-service by year end. This deduction can create or increase a business loss.
Self-employed retirement plans. If you have self-employment income and don’t have a retirement plan in place to shelter any of it, you may qualify to use a Self-Employed Plan (SEP). A SEP contribution deduction is allowed for 2019, even if the SEP is created and funded at any time up to the due date, including extensions, of your 2019 income tax return. Depending on the amount of self-employment income, you potentially could fund (and deduct) $56,000 for 2019.
Required minimum distributions (RMDs). Individuals with retirement plan accounts (employer qualified plans or IRAs) generally are required to take minimum annual distributions upon reaching age 70 ½. Steep penalties apply to noncompliance, and not all IRA custodians or plan sponsors actively communicate the applicability of the rules to account holders and plan participants. Please note that if you turn 70 ½ during 2019, you have until April 1, 2020 to receive your 2019 RMD. Future year RMDs must be received before the end of the year. If you wait until 2020 to receive your 2019 RMD, both your 2020 RMD and your 2019 RMD received during 2020 will be included in your 2020 taxable income.
Charitable contributions. The standard deductions for 2019 are $12,200 for single and $24,400 for joint filers. Depending on your situation, it may be beneficial to accelerate planned 2020 charitable contributions into 2019 or to defer 2019 contributions into 2020 to bunch them into the same year for greater tax savings.
Annual gifting. You may give your children and others up to $15,000 each in 2019 without any gift tax consequences. This annual exclusion is calculated on a per donee basis, and no carryover is allowed for the unused exclusion. Consider making year end gifts to fully utilize this year’s annual exclusions.
Roth IRA. Consider conversion of traditional IRAs to Roth IRAs. The current tax cost from a conversion done now may turn out to be a relatively small price to pay for completely avoiding potentially higher future tax rates on the account’s earnings. Also consider making a backdoor Roth IRA contribution, if your current income level is too high to make a direct Roth IRA contribution. A backdoor Roth IRA contribution involves making a nondeductible IRA contribution followed by a conversion of the contributed funds to a Roth IRA. The rules regarding this are very particular, so you should consult with your tax advisor before undertaking this strategy.
HSAs and FSAs. Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are separate tools, but each helps convert your dollars spent on medical expenses from post-tax into pre-tax. An HSA is a bank account set up to pay for medical expenses; it must be paired with a high deductible health insurance plan. An FSA allows you to direct some of your wages into a pre-tax account from which your employer will reimburse you for your documented medical expenses. Specific funding rules and limits apply to these accounts.
S Corporation and partnership losses. If your S Corporation will generate a tax loss this year, consider whether you have enough basis in the stock (or in loans you’ve made to the corporation) to take the full loss. If you don’t, additional investments should be considered. Similar considerations can arise in some situations with partnerships expecting tax losses.