Last-minute tax planning Ideas
Updated November 2019
Tax planning 101: If your tax bracket is expected to be lower in 2020, defer income and accelerate deductions in 2019. If you expect to be in a higher bracket next year, do the opposite. If your income level will stay the same, paying taxes later is always better. Of course, this is an OVERLY SIMPLIFIED rule. With the new TCJA tax bill, AMT tax traps, benefit phase-outs, etc., there is much to be considered.
The following are some simple tax planning ideas from your San Francisco CPA, your trusted online accounting and tax advisor. It’s worth going through them. Sometimes by just considering using one or two of these ideas, you can cut a big chunk from your tax bill.
Alternate Between Itemized Deduction and Standard Deduction
Because of the TCJA tax bill, the standard deduction amount increases for all taxpayers. Many taxpayers can't take advantage of the itemizing deductions anymore. But if your itemized deductions are close to standard deduction amount, it makes sense to bunch expense to have itemized deduction one year and standard deduction in another.
•Packaged payment: Pay upfront to get the deduction. For example, pay dental braces upfront. (especially to bundle expenses to reach the threshold of deduction, see below)
•Pay 4th quarter estimated state taxes in December.
•Pay property taxes early.
•Donate earlier. Bunch two year's charitable donation in one year.
If you has large medical bills but do not exceed 10% of your adjusted gross income( or you will not qualify for itemized deduction), an HSA account would be a great alternative. Even you do not have large medical expenses, If you are eligible for HSA, make a fully deductible contribution. Establish an HSA account that offers investment features. HSA is like a deductible ROTH account. Contributions are deductible. You can withdraw right away for eligible expenses or grow it tax-free. with 2019 $7000 deduction(family coverage), this can result in significant tax saving.
Home Office Expenses
After the new TCJA tax bill, employees can no longer deduct home office expenses. Property taxes are limited to $10,000 on Sch A. However, self-employed taxpayers can still file a Schedule C and take a home office expense deduction if part of the home is used for that business. Mortage, interest, Utility, depreciation etc allocated to the home office is deductible. This deduction not only saves you income taxes but also saves you on self-employment taxes(15%)
Rental Real Estate
Do real estate activities qualify as business trade and can rental real estate income treated as "qualified business income"? The IRS states that there are many factors to consider including the type of rented property (commercial rental vs. residential rental), the number of properties rented, taxpayer's day-to-day involvement, services provided under the lease; and the terms of the lease.
It can be quite difficult to determine whether the rental real estate activity is trade or business(under IRS Code sec. 162). IRS has issued a safe harbor rule in Rev. Proc. 2019-38:
Under a safe harbor issued by the IRS, a rental real estate activity will be treated as a business eligible for the special deduction if certain requirements are satisfied, including the followings:
(1) separate books and records are maintained to reflect the income and expenses for each rental real estate enterprise. If a rental real estate enterprise contains more than one property, this requirement may be satisfied if income and expense information statements for each property are maintained and then consolidated;
(2) for rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed per year with respect to the rental real estate enterprise;
(3) contemporaneous records have been maintained and ready for IRS inspection. This requirement will not apply for the 2019 tax year but will apply for 2020 and later years.
(4) Compliance requirement including detail of how to report on the tax returns.
For taxpayers that may be eligible for this deduction, it's important to determine if the safe harbor is met and, if not, determine whether it can be met by year-end.
Education-Related Deductions and Credits
Although the tuition and fee deduction has expired and employee work-related education expenses deduction disappeared with miscellaneous itemized deduction, there are still a few education-related tax benefits such as the deduction for student loan interest; and a lifetime learning credit of up to $2,000 for tuition and fees. One thing worth mentioning is now you can distribute up to $10,000 tax-free from your 529 plan to pay for the elementary or secondary school tuition.
IDEAS to Accelerate Income and Defer the Deduction
•If you receive restricted stock, elect to be taxed right away.
•Harvest gain from stock, mutual fund.
•If you receive ISO, exercise options and sell the stock.
•Sell appreciated assets.
•Take IRS distribution before the year-end.
•Settle any outstanding lawsuits or insurance claims before the year-end.
•If you have installment contracts, sell to a third party for a sum.
•Convert IRA to Roth and recognize income this year.
•Calling clients to collect payments on receivables for self-employed taxpayers.
•Postponing any donation, property tax payments, medical payments
•Postponing sale any loss stocks
IDEAS to Defer Income and Accelerate the Deduction
•Ask the employer to pay your bonus after the year-end.
•Consider the installment sale option when you sell an appreciating asset.
•Consider putting money in deferred annuities.
•Harvest loss on investment
•Paying property tax, state tax, medical payment, donation before year-end.
•Review retirement plans. Some retirement plans need to be set up before year-end to qualify.
•Set up an HSA account if qualify.
IDEAS to Avoid Underpayment Penalties on estimated taxes
•Withholding is considered to have been paid through the year. If you are a salaried employee, have an extra amount withheld from your last couple of payroll checks.
•Take a rollover distribution from a qualified retirement plan before year-end. Income tax will be withheld from the distribution. You can then timely roll-over the gross amount of the distribution right after the new year.
Don't Ignore Saver's Credit
Not only you can deduct the contribution to the retirement plans, saver's credit gives you a better incentive. This is often ignored great credit when you have a really low-income year. This credit can be as much as 50% of your contribution up to $4000. Remember credit is different from the deduction. In the best scenario, you put up to $4000 into IRA, SIMPLE, 401K or even Roth, you get $2000 back. Definitely worth mentioning.
IDEAS not to Forget
•Consider your tax bracket when you have capital gains. The long-term capital gains rate is 0% 15% 20% depends on your income level. Keep your income below the threshold.
•Marital status is decided based on a person's marital status on December 31. A divorce or marriage before (or after) December 31 can change your tax bill. Run the numbers to see which way is better.
•Retirement savings account: Withdraw excess contributions before year-end to minimize the excise tax of 6-10%.
Don't wait for the last minute to start your tax planning. Time is running out. Call your San Fransico virtual CPA today.
Circular 230:The articles are for general information only. In accordance with IRS Circular 230 they are not considered tax opinions for purposes of relying on such statements in any challenge of the reporting of the above transaction by the IRS. If a full tax opinion is required certain procedures must be met . Also there is a significant cost for a full tax opinion to meet the requirements of Circular 230.
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