Tax Planning

Tax Planning

Tax reform has been a topic of discussion for several years, but this past year was when most of us finally saw the true impact of the changes in the tax rules for individuals and businesses. Tax planning for 2019 and beyond continues to be shaped by these changes.

Below are some key strategies and items to consider. Additional information on these and other planning techniques can be found in our full 2019-2020 Tax Planning Guide.

Income deferral is a key tax planning strategy in any year. If you anticipate being taxed in 2020 at more favorable rates delaying income and accelerating expenses when practical can save tax dollars.

If you are thinking of converting a regular IRA to a Roth IRA, postpone the change until next year. However, delaying conversion could result in higher income if the investment appreciates.

The new tax law increased the standard deduction that is available to all taxpayers and significantly reduced number of taxpayers who can benefit from choosing to use itemized deductions.

Additionally, starting in 2019, medical expenses can only be deducted to the extent that they exceed 10% of AGI (the threshold for 2018 was 7.5%).

One strategy to obtain maximum benefit from your itemized deductions is to bunch your deductions into a single year. For example, make two years’ worth of charitable contributions this year, instead of spreading out donations over 2019 and 2020. This could allow you to take a large itemized deduction in one year and the standard deduction in the other. Where practical, elective medical procedures and purchases can also be bunched into a single year.

The use of direct charitable contributions from Required Minimum Distribution (RMD) is another way to get a tax break for giving. Taxpayers who must take RMD’s from their retirement accounts will want to consider this option.

Consider donating appreciated assets to charity. This provides a way to increase your deduction and avoid the capital gains tax on the transfer.

If you are a business owner, the deduction for Qualified Business Income could provide significant tax savings. This deduction is based on 20% of Qualified Business Income. For 2019, if taxable income exceeds $321,400 for a married couple filing jointly, $160,700 for single/head of household taxpayers, and $160,725 for a married couple filing separately, certain limitations will apply. These limitations are based on type of business, W-2 wages, and basis of assets. Business owners will want to look at whether they can do anything to avoid these limitations or otherwise increase their deduction.

Additional opportunities for business owners to consider include expanded provisions for expensing assets and greater access to the cash method of accounting. But they must also be wary of the elimination of the deductions for entertainment expenses and certain employee benefits.

As in previous years, higher-income earners must be wary of the 3.8% surtax on certain unearned income and 0.9% additional Medicare tax. Individuals who may be subject to these taxes should consider additional strategies to mitigate these taxes and may need to increase their withholding or make estimated payments to avoid underpayment penalties.

An additional change for 2019 is the effective repeal of the penalty for individuals without health insurance (“individual shared responsibility payment).

Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. In addition to the changes in the tax law, it is important for you to consider the effect that various life-cycle events could have on your tax situation. Events such as birth of a child, purchase of a home, or a change in marital status call for a review of your tax withholding and may also present other planning considerations. Please contact us at info@hertzbach.com so we can tailor these strategies to your unique situation.

Read The Tax Planning Guide

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