GEORGE JOHNSON & COMPANY
2019 Year-End Tax Planning – For Individuals
Whether you should defer or accelerate income and deductions between 2019 and 2020 depends to a great extent on your projected marginal tax rate for each year. You should analyze your anticipated marginal tax rates for 2019 and 2020 and determine which of the two years is projected to have a higher marginal tax rate.
You can recognize taxable income between 2019 and 2020 by controlling the receipt of income and the payment of deductions. Generally, income should be received in the year with the lower marginal tax rate, while deductible expenses should be paid in the year with the higher marginal rate. If your top tax rate is the same in 2019 and 2020, deferring income into 2020 and accelerating deductions into 2019 will generally produce a tax deferral of up to one year. On the other hand, if you expect your tax rate to be higher in 2020, you may want to accelerate income into 2019 and defer deductions to 2020.
starting work in a new location if specific distance and length of service requirements were met that were not reimbursed by an employer. For taxable years 2018 through 2025, tax reform generally eliminates employees’ deductions on their personal income tax returns for unreimbursed moving expenses. Moreover, during this period, employers are required to report any moving expenses they pay to moving vendors or to employees as taxable wages to the employee. Thus, moving expense reimbursements are no longer tax-free to employees, even though employers can still deduct such reimbursements as ordinary and necessary business expenses. An exception applies to military members on active duty who move pursuant to a military order related to a permanent change of station that continues to allow tax-free moving expenses.
Interest is not deductible on tax deficiencies, car loans, personal credit card balances, student loans (except for taxpayers eligible for the above-the-line deduction for interest paid on qualified education loans), or other personal debts.
United States citizens must calculate their foreign earned income exclusion and housing allowance each year. The base housing amount used in calculating the foreign housing cost exclusion is 16 percent of the amount of the foreign earned income exclusion limitation. Reasonable foreign housing expenses in excess of the base housing amount remain excluded from gross income, but the amount of the exclusion is limited to 30 percent of the taxpayer’s foreign earned income exclusion. Income excluded as either foreign earned income or as a housing allowance is included for purposes of determining the marginal tax rates applicable to non-excluded income.
The foreign earned income exclusion for 2018 was $103,900. The IRS has announced that the foreign earned income exclusion for 2019 will be $105,900.
In 2017, tax reform introduced the state and local deduction cap, which places a limitation on the deductibility of state and local property and income taxes from federal taxable income of $10,000, starting with taxable years beginning in 2018 and before 2026. While the limitation impacts all individual taxpayers, it will especially impact taxpayers who will file returns in states with high income and property taxes, including New York, New Jersey, Connecticut, California, Maryland, and Oregon, and on married couples (regardless of whether they file jointly or separately). The cap limits taxpayers’ state and local tax (SALT) deductions to $10,000 per return, and married taxpayers who file separately can only deduct up to $5,000 each, for itemized deductions. The cap does not apply to deductions resulting from a trade or business.
Under Section 461(l), a taxpayer will only be able to deduct net business losses of up to $250,000 ($500,000 in the case of a joint return) for taxable years beginning after December 31, 2017, and before January 1, 2026. Excess business losses are disallowed and added to the taxpayer’s NOL carryforward.
Tax reform lowered the corporate tax rate to a flat rate of 21 percent. In turn, under the new law (under Section 199A), for taxable years beginning after December 31, 2017, taxpayers other than C corporations with taxable income (before computing the QBI Deduction) at or below the threshold amount are entitled to a deduction equal to the lesser of:
1. The combined QBI amount of the taxpayer, or
2. An amount equal to 20 percent of the excess, if any, of the taxable income of the taxpayer for the taxable year over the net capital gain of the taxpayer for such taxable year.
A taxpayer must pay either the regular income tax or the AMT, whichever is higher. The AMT tax system is parallel to the regular tax, but it treats some items of income and deduction differently.
The established exemption amounts for 2019 are $71,700 for unmarried individuals and individuals claiming the head of household status, $111,700 for married individuals filing jointly and surviving spouses, and $55,850 for married individuals filing separately. With the introduction of the SALT deduction cap and end of miscellaneous itemized deductions for 2018 through 2025, the likelihood that an individual taxpayer will be subject to AMT is low compared to that of pre-2017 tax reform filing years.
An incentive stock option (ISO) is an option issued to an employee that allows all increases in value to be subject to long-term capital gain treatment if the taxpayer disposes of the option shares more than two years after the date the option is granted and more than one year after the date the option shares are purchased. Former employees can exercise an ISO within three months after termination of employment (or within one year after termination due to disability). If these rules are not met, a portion of the gains from ISOs is treated as ordinary income.
During 2019, if you paid $2,100 or more to a person 18 or over for household services, you are required to report his or her social security and federal unemployment taxes on your personal tax return. These amounts are reported on Schedule H.
These employment taxes must be paid by the due date of the return, April 15, 2020, without extensions. Inasmuch as these taxes are part of your tax liability, your estimated taxes or withholding must be sufficient to cover them.
Planning Suggestion: As the $2,100 amount applies to each household employee, if possible, try to keep payments to each person below $2,100 per year. In 2019, you can also give your household employee up to $265 per month for expenses to commute by public transportation without this amount counting toward the $2,100 threshold or being included in the employee’s gross income.
Caution: Payments to household employees may also be subject to state unemployment and other state taxes.
Tax reform increased the applicable estate and gift exemption for individual taxpayers and doubled the generation-skipping transfer tax exemption amounts for taxable years beginning after December 31, 2017, and before January 1, 2026. These amounts will be adjusted for inflation each year. Further, inflation will be measured using the Chained-Consumer Price Index, a lower rate of inflation. The Chained-Consumer Price Index is estimated once in February and is finalized the following February. For 2019, the gift exemption and generation-skipping transfer tax exemption increased to $11,400,000 ($22,800,000 for married couples).
Planning Suggestion: Affluent families should consider developing a lifetime gifting strategy to use some or all of their increased exemptions prior to December 31, 2025. The spousal limited access trust is an oft-used, time tested strategy that can help such taxpayers to do so.