SBK Year-End Tax Planning Newsletter: 2019
Reflections at Year-End: Decade Closes with 2019
By Dean Williams, CPA
We planned ahead for the changes brought forth by the Tax Cuts and Jobs Act, but adjusting to the new landscape remains a work in progress. Legislative changes effective for tax year 2019 are minimal but as the election cycle approaches, there is already murmuring of potential policy reform for 2020.
In this letter, we will highlight important deadlines and reminders ahead of year-end. Additionally, we will provide more specific planning related to managing your income thresholds – both overt and covert. We will focus on ways to maximize your charitable deduction and budget for your annual giving simultaneously. To close, we will briefly discuss some of the potential tax reform proposals that have already been tentatively introduced.
Important Deadlines and Reminders
December 31st is fast approaching. Leave yourself plenty of time to process the following actions:
- Finalize all charitable contributions, especially those made by check or gifts of securities
- Consider making full use of the annual $15,000 gift-tax exclusion – reminder: this limit is per recipient
- Make sure any necessary qualified appraisals or trust documents attached to charitable or family gifts are finalized
- If you are self-employed, most qualified plans – including Solo 401Ks – need to be established by December 31st (though contributions can be delayed until your tax return due date)
- Make deferred compensation elections; employer rules and incentives vary, so review your options carefully
- Adjust your withholding to avoid any potential underpayment penalties related to estimated taxes
- Harvest capital losses to offset gains
- Confirm that your RMD has been fulfilled if you are past age 70 ½; if you have any outstanding QCDs that have not been processed yet, you should follow-up with the charity
- Ensure that all intended 529 account funding has occurred
- Determine if it is more valuable to pay any outstanding medical expenses, child care related expenses or education expenses in December or to postpone them until January
Income Threshold Planning: Figures to Follow
Key observations (figures for MFJ filing status):
- At $321,450 of ordinary income, the top rate jumps to 32% from 24%. If you are in this range, you may want to try to keep your earned and ordinary income below $321,450
- Above $488,850 of taxable income, long-term capital gains and qualified dividends are taxed at 20% instead of 15%
- Under $78,950 of total taxable income, long-term capital gains and qualified dividends can be tax-free
- Note: this could apply for early retirees who have not yet reached age 70 (pre-RMDs & pre-Social Security)
Additional surtaxes and thresholds:
- Remember, the Affordable Care Act surtaxes of 0.9% on earned income and 3.8% on net investment income still apply for high earners ($250,000+ for married taxpayers)
- So, the top rates are effectively 37.9% and 23.8%
Qualified Business Income (QBI) thresholds increased:
- Below $321,400 of taxable income, married couples with flow-through businesses can calculate their QBI deduction based on 20% of their business income
- Above $321,400, the calculation changes – while still capped at 20%, the deduction relies on business wages and property
- For specified service businesses, the deduction phases out entirely between $321,400 and $421,400 of income
Impact to Medicare Premiums:
For Medicare recipients, the standard Part B premium for 2019 is $135.50. However, individual premiums are adjusted based on your income. If you’re married and file a joint tax return, the following chart of premium increases applies to you:
Modified Adj. Gross Income* Part B Monthly Premium
$170,000 or less $135.50
$170,000 – $213,999 $189.60
$214,000 – $266,999 $270.90
$267,000 – $319,999 $352.20
$320,000 – $749,999 $433.40
$750,000 or more $460.50
*Note: Modified AGI is your total adjusted gross income + tax-exempt interest income; applicable AGIs for single taxpayers are half of the above figures (except the last threshold = $500,000+)
Strategies to Reduce Your Taxable Income:
High income earners
- Max out contributions to 401ks and IRAs
- Fund your HSAs, if you are eligible to do so
- Bypass capital gains by giving highly appreciated securities to charity (or to family members)
- Can you write off any investments that have been shut down or deemed unsuccessful?
Self-employed individuals, partners, shareholders
- Max out contributions to Solo 401ks or SEP IRAs
- Determine eligibility for deducting SE health insurance premiums (for you and your family)
- Accelerate necessary business purchases and other business expenses into 2019
Charitable Giving: from the SBK Planning Series
The deductibility (or non-deductibility) of charitable contributions has been a topic of focus in many of our meetings and discussions this year. So, how do you continue to satisfy your desired level of annual charitable giving without leaving annual tax deductions on the table?
- Consider pre-funding multiple years of charitable giving into one year
- Vehicles such as a donor advised fund (DAF) or a charitable lead trust can allow taxpayers to spread out disbursements to charity over multiple years rather than all at once
- This pre-funding allows the taxpayer to take an up-front charitable deduction in the year of the gift, provided that the gift amount clears the “hurdle” to itemize, and then intentionally benefit from taking the higher standard deduction over the next few years (ß“What We’re Seeing”)
Additional ways that you may be able to maximize your tax benefit:
- Can you gift appreciated securities or other low basis, non-cash assets?
- Are you eligible to give directly from your IRA?
- Have you researched whether your charities are supported by state tax credit programs?
Reminder: Charitable deductions provide more overall tax benefit in years where the donor faces a higher marginal tax rate. These are the type of events that could inspire taxpayers to consider increasing charitable giving (or pre-funding future years of giving):
- Sale of a business or real estate
- Receipt of a one-time or unusually large bonus
- Upcoming retirement, specifically an early retirement (before Social Security and RMDs)
What We’re Seeing:
After the reconfiguration of Schedule A, many taxpayers are left with only two “fixed” itemized deductions (before consideration of charitable giving):
- state and local taxes
- mortgage interest (& investment interest)
A family with no mortgage now may only have one itemized deduction: $10,000 for state and local taxes. Suddenly, this family has a $14,400* annual “hurdle” to clear before charitable contributions become tax deductible.
*Note: the standard deduction for married couples under ages 65 is $24,400 for 2019.
What Proposals May Be Discussed in 2020?
In absence of any new tax reform, the majority of the changes from the Tax Cuts and Jobs Act will remain in place through 2025.
Given that 2020 is a significant election year, the possibility of more tax reform will be debated. Many of the Democratic candidates for presidential nominee have already outlined some of their visions for reform. Below are a few topics that have caught our attention:
- Repealing the Trump tax cuts and raising the top individual and corporate rates back to 39.6% and 28%
- Keeping and improving Obamacare, which would include adjustments to the Premium Tax Credit
- Eliminating the step-up in basis for inherited capital assets
- Increasing the top marginal tax rate up to 70%, applicable for taxpayers earning more than $10 million per year
- Introducing a “wealth tax” with a progressive rate structure, starting with a 1% tax on net worth above $32 million
- Lowering the estate tax exemption to $3.5 million
- Raising the capital gains rates to match the rates for wages
- Implementing a mark-to-market taxation on capital assets for the wealthiest 1% of households (rather than at sale)
- Introducing a “wealth tax” with a progressive rate structure, starting with a 2% tax on net worth above $50 million
General policy proposal to watch: Some Democrats have introduced the idea of eliminating the income cap on Social Security taxes. Currently, taxpayers (and their employers) pay the 12.4% combined payroll taxes on only their first $132,900 of earned income. Several plans have outlined ways in which earnings above $250,000 would be susceptible to additional Social Security taxes.
Is Anything Imminent from Congress?
The main proposal that we have been keeping our eyes on is the SECURE Act. While the proposed Act seems to carry broad bipartisan support, disagreement on amendments to the bill is blocking unanimous consent.
If passed, the SECURE Act would considerably alter the rules and requirements governing retirement and tax-deferred accounts. We will be sure to provide a more detailed outline when, or if, Congressional resolution looks imminent.
Also, look out for an updated “extenders” bill. Congress let this package lapse last year.
SBK Financial, Inc.
1001 Haxall Point, Suite 705
Richmond, VA 23219