Although many taxpayers have just completed and filed their 2018 tax returns, it is already time to take steps to reduce your 2019 tax bill. Since 2018 was the first year that most provisions of the Tax Cuts and Jobs Act (TCJA) were in effect, you may have a better understanding of how the new tax law impacted you and will continue to affect you for the 2019 tax year and beyond.
Tax Deductions: Choosing Between Standard and Itemized
One of the biggest changes for 2018 individual filers was the reduced state and local income tax deduction which is now capped at $10,000. This change along with the increased standard deduction led to many filers not itemizing deductions in 2018. If there is a chance that you won’t itemize deductions in 2019 and will instead claim the standard deduction of $24,400 for married taxpayers filing jointly or $12,200 for single filers, consider the impact of this decision on other deductions.
Charitable contributions are only deductible to taxpayers who itemize. You may want to consider “bunching” your charitable contributions to take full advantage in years when you will itemize deductions. Donor advised funds may be a consideration for taxpayers who want to make a larger contribution in a given year but still have the charities benefit over several years. Also take a look at your mortgage if you will no longer itemize. Since interest rates are still low, you can likely still earn more by investing assets in the market than what you are paying in mortgage interest, even if you don’t get a tax deduction for the mortgage interest.
Possible Double Deduction for Practice Owners
Many of you found out the hard way that your pass-through business did not qualify for the new Section 199A Qualified Business Income (QBI) deduction. Owners of medical and professional practices whose individual taxable income was above certain threshold amounts were ineligible for the deduction since their business is a specified service trade or business. Depending on how close your income was to those threshold amounts, you may be able to reduce your income below the threshold by implementing a qualified retirement plan (QRP) or enhancing your current QRP. This can result in not only a deduction for the contribution to the QRP but also the 20% QBI deduction. The combination of the two deductions often pays for much of the QRP cost.
The final regulations for Section 199A did contain an example in which an outpatient surgery center was not a specified service trade or business. In the example, no physicians, nurses or medical assistants were employed by the surgery center, and patients were only billed a facility fee by the surgery center. If you feel that your surgery center might fit this example, discuss with your CPA whether you can take the QBI deduction this year or whether there are steps your surgery center can take to become eligible for the deduction.
Is Your Investment Portfolio Designed for Tax Savings?
Your investment portfolio provides ample opportunities for tax planning. Having a tax efficient portfolio can save you thousands of dollars in taxes over the years. Consider the timing of sales; a holding period of greater than 12 months allows you to pay long term capital gains rates on the realized gain from a sale with a maximum rate of 20% vs. a maximum rate of 37% on an investment which was held for less than a year. Be proactive in realizing losses to offset capital gains and vice versa. A temporary dip in the stock market may be the time to realize some losses that can be used to offset capital gains. If you find that you have net realized losses this year, sell some of the investments that have had tremendous gains over the past few years and re-purchase them at their higher price in order to both offset your losses and increase your basis in the stocks you currently hold.
It is also a good time to evaluate which stocks you hold in which accounts. Brokerage accounts, Roth IRAs, and qualified plans are subject to various forms of taxation. It is important to utilize the tax advantages of these tools to ensure they work for you in the most productive manner possible. Investment vehicles paying qualified dividends are preferred in a brokerage account, while it is generally preferable for qualified accounts to own high yield bonds and corporate debt taxed at ordinary income rates. Have a discussion with your investment advisor to make sure your portfolio is properly positioned for tax efficiency.
Estate Planning Considerations
You may also want to think about your estate planning as the year draws to a close. The TCJA made the federal estate tax exemption $22.8 million for a married couple in 2019, but that exemption amount is due to sunset at the end of 2025. Before then, it might make sense to transfer some of your wealth to a trust for the benefit of your heirs. Assets that you know you won’t need in your lifetime can thus be protected against future estate tax increases and exemption reductions.
As Benjamin Franklin said, “Failing to plan is planning to fail.” Act now to protect your wealth and utilize tax savings opportunities in 2019. The authors welcome your questions.