End of Year Tax Planning
It does not seem that long ago we were ringing in the new year and yet here we are facing the end of another year. This means that April 15, 2020 will be here before you know it. There is still time to plan for tax season, but time is quickly running out. Here are some things you can do.
- Calculate your withholding
You are required to pay your taxes throughout the year either through withholding or estimated payments. Failure to pay enough taxes into the system can result in a penalty. (See https://magdaabdogomezlaw.com/need-know-tax-withholding-new-tax-act/)
Although there is not much time left to adjust your withholding, now is the time to check and consider making an adjustment to your withholding or making an estimated tax payment by January 15, 2020.
- Itemized/Standard Deduction (See https://magdaabdogomezlaw.com/itemized-deductions-new-tax-act/)
The standard deduction for 2019 has increased to $12,200 for single taxpayers, $18,350 for heads of household and $24,400 for joint filers. This increase, coupled with the limitation on what constitutes an itemized deduction, will generally result in the standard deduction exceeding the itemized deduction.
You can still itemize deductions if these are higher than your standard deduction. Now is the time to make that determination. If you are close to the limit you can accelerate medical and charitable expenses into 2019 so that the itemized deduction is higher than the standard deduction. Note that only medical expenses in excess of 10% of your adjusted gross income are deductible.
Charitable contributions are deductible up to 60% of your adjusted gross income.
- Harvest your Investment Losses
If you have realized capital gains during the year and are planning to sell stocks/mutual funds determine whether any of these sales will generate losses. If so, sell off the investment in 2019 so that you can offset the capital gains with the capital losses. If you have more losses than gains you can offset $3,000 of other income with the losses. Any additional losses can be carried over to next year.
- Maximize contributions to retirement plans
The contribution limit for a 401(k) plan is $19,000 if you are under the age of 50. If you are over 50 you may contribute $25,000 to a 401(k). The deadline to contribute is December 31, 2019.
The contribution limit for an IRA is $6,000 if you are under the age of 50. If you are over 50 you may contribute $7,000. The deadline to contribute is April 15, 2020.
The contribution limit for a SEP is the lesser of 25% of compensation or $56,000. The deadline to contribute is April 15, 2020. There are no catchup contributions permitted in a SEP.
A self-employed person who maintains a 401(k) may also contribute (separately as employer and employee) up to $56,000 to the plan. In the case of a self-employed 401(k) plan, an owner who is over 50 may contribute an additional $6,000 as a catch-up contribution. The rules for self-employed 401(k) plans are complicated and beyond the scope of this article.
- Qualified Business Income Deduction
The deduction for income from a pass-through entity can be up to 20% of the qualified business income. Note that for certain professionals (lawyer, doctor, accountant, broker, financial services, and several others) the qualified business deduction is subject to an income test.
The income limits have increased for 2019 for professionals. There are no limitations for income below $160,700 (single)/ $321,400 (married), a reduction for income up to $210,700 (single)/$421,400 (married) and no deduction for anything above these limits. If you are close to going over the income limits you ay want to consider deferring income into 2020 if it will result in your qualifying or the deduction. Refer to https://magdaabdogomezlaw.com/overview-qualified-business-income- deduction/ for more specific information.
- Business Deductions
If your business is in need of upgrading equipment this may be the year to make the necessary purchases and take advantage of significant depreciation deductions. A business may expense (write off) up to $1.02 million of new or used equipment purchases so long as the equipment is placed in service by December 31, 2019. This benefit was intended for small businesses and there is an income limitation in order for the business to be eligible for the deduction.
In addition, a business may be able to depreciate 100% of the purchase price of certain new or used equipment. In order to obtain the bonus depreciation the equipment must have been placed in service after September 17, 2017. By reducing the business income, equipment purchases and/or depreciation may also help you qualify for the qualified business income deduction if the business is a pass-through entity.
Nothing contained in this article is intended to be legal or financial advice. The tax laws are complex and whether these laws apply to you depends on your personal circumstances. It is in your best interest to timely explore which laws would apply to you so that you can take any necessary steps prior to December 31.