2019 Year-End Tax Planning – For Individuals

Dear Friends,

Paying your individual income taxes likely represents one of the largest outlays of the year, but it also offers an opportunity for significant savings. Whether you have paid individual income taxes through employer withholding or quarterly estimates, thoughtful planning before the calendar turns to 2020 can reduce your total tax liability and help retain more of your earnings. If you devote substantial research and forethought to how you invest your money, then you should take a similar approach to how that income will be taxed.
With numerous changes to the federal tax code, this 2019 Year-End Tax Planning for Individuals Letter can help identify specific opportunities to reduce or defer your annual tax obligation. And the sooner you start the conversation around tax planning, the more time you’ll have to carefully consider all applicable factors. This process requires a projection of your estimated income, deductions and tax liability for both 2019 and 2020 to determine your anticipated marginal tax rate. Reviewing the actual amounts from 2018 will help with those projections.
You should determine the extent to which you can control the timing of income and deductions, and then optimize your planning for the lowest overall tax in both 2019 and 2020. Important considerations include charitable gifts, capital losses, retirement contributions, potential gifts to children or grandchildren, and using trusts. If you can’t reduce your overall tax liability, then it’s generally best to defer as much tax liability as possible to 2020.
Individuals should also consider the tax implications for any businesses conducted directly or indirectly by the individual owners. To understand the important details that apply to those areas, you can review our 2019 Year-End Tax Planning for Businesses Letter. Because some guidance and regulations are still pending, we also suggest you consult our website regularly for additional updates and insights while you continue the planning process.
This letter was written prior to the release of the inflation-adjusted tax rate schedules and other key tax figures for 2020. See IRS Revenue Procedure 2019-44 and Notice 2019-59 for updates on the figures discussed in this letter for 2020.
This tax letter discusses planning for federal income taxes, but state income taxes must be considered as well, so you should consult your client service professional regarding applicable factors for state taxes.
We hope you enjoy this edition of the GJC Advisor. Wishing you a Happy Holidays and a Happy New Year! As always, if you have any questions, feel free to contact us.
2019 Versus 2020 Marginal Tax Rates

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.

The highest marginal tax rate for 2019 is 37 percent, with an additional 3.8 percent tax on the net investment income of high-income taxpayers. The tax rates for 2019 are included in this Tax Letter. Projections of your 2019 and 2020 income and deductions are necessary to estimate your marginal tax rate for each year.
Recognizing Income and Deductions into the Most Advantageous Year

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.

Planning Suggestion: The time value of money should be considered when deciding to defer income or accelerate deductions. Comparative computations should be made to determine and evaluate the net after-tax result of these financial actions. Moreover, you should consider whether you expect to be subject to the AMT for either or both years.
Sale of Principal Residence
For sales of a principal residence, up to $500,000 of gain on a joint return ($250,000 on a single or separate return) can be excluded. To be eligible for the exclusion, the residence must have been owned and occupied as your principal residence for at least two of the five years preceding the sale. The exclusion is available each time a principal residence is sold, but only once every two years. Special rules apply in the case of sales of a principal residence after a divorce and sales due to certain unforeseen circumstances. If a taxpayer satisfies only a portion of the two-year ownership and use requirement, the exclusion amount is reduced on a pro rata basis.
Read more…
Installment Sales of Depreciable Property by Non-Dealers
A sale of depreciable personal property at a gain generates ordinary income to the extent of any depreciation recapture. This ordinary income is fully taxable in the year of sale even if no sales proceeds are received in that year.
Planning Suggestion: If possible, an installment seller of depreciable personal property should structure the transaction to receive enough cash by the due date of the tax return to meet the first year’s tax on the installment sale. In the above example, T should negotiate to receive an installment payment of at least $296,000 by April 15, 2019. Please consult your client service professional for further guidance.
Moving Expenses
Before 2018, individuals could deduct qualified moving expenses paid or incurred in connection with

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 Expense

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.

A full regular tax deduction is allowed for interest on home acquisition debt used to acquire, construct, or improve a principal or secondary residence to the extent this debt does not exceed $750,000 for joint filers ($375,000 for single filers or married taxpayers filing separate returns). Home acquisition debt incurred on or before December 15, 2017, is grandfathered under the previous $1,000,000 limitation for joint filers ($500,000 for single filers or married taxpayers filing separate returns).
Foreign Earned Income Exclusion and Housing Allowance

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.

State and Local Deduction

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.

Passive Activities, Rental and Vacation Homes
Losses from passive activities (which, as discussed below, generally include the rental of real estate) are deductible only against passive income. Passive losses cannot be used to reduce non-passive income, such as compensation, dividends, or interest. Similarly, credits from passive activities can be used only to offset the regular tax liability allocable to passive activities. Unused passive losses are carried over to future years and can be used to offset future passive income. Any remaining loss is deductible when the activity, which gave rise to the passive loss, is disposed of in a transaction in which gain or loss is recognized.
Read more…
Excess Business Loss Limitation

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.

Additionally, non-corporate NOL rules now limit deductible NOL carryforwards to the lesser of the carryforward amount or 80 percent of taxable income. Taxpayers are no longer permitted to carry back their NOLs to the previous two taxable years, but they may carry forward their NOLs indefinitely.
Section 199A

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.

Alternative Minimum Tax

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.

Stock Options

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.

Nanny Tax Reporting

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.

Estate and Gift 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.

Estimated Taxes
Generally, all individuals must make quarterly estimated tax payments if they have income that is not subject to withholding. This includes individuals who are self-employed or retired or who have investment income, such as interest, dividends, and capital gains. It also includes partners and S corporation shareholders.
Year-end and Other Gifts; Portability
The end of the year is the traditional time for making gifts. For 2019, you may give up to $15,000 to a person without incurring any federal gift tax liability. The $15,000 annual limit applies to each donee. Thus, you may make $15,000 gifts to as many people as you like. If you are married, you and your spouse can give a combined $30,000 to each donee, if your spouse consents to splitting the gift or if you give community property. To qualify for this annual exclusion, the property must be given outright to the donee or put into a trust that meets certain conditions.
Opportunity Zone Program
The opportunity zone program was created under tax reform to promote investment in economically distressed communities. There are now over 8,700 certified QOZs in all 50 states, the District of Columbia, Puerto Rico and the Virgin Islands. Investors must invest in a qualified opportunity fund (QOF) within 180 days after the sale or exchange of a capital asset. If the capital gain is received through a Schedule K-1 and the pass-through entity has not elected to defer the gain, then the 180-day period with respect to the taxpayer’s eligible gain begins on the last day of the pass-through’s taxable year.
Like an annual physical examination is important for maintaining good health, an annual financial examination that includes year-end tax planning can enhance your financial well-being. Your client service professional is available to help you achieve your tax and financial objectives. As always, give us a call if you have any questions.
2019 Federal Tax Rates
* Establish a Simplified Employee Pension (SEP) Plan by the due date of your 2019 return, including extensions. The contribution to the plan must be made by that due date. For 2019, the maximum allowable contribution to a SEP an employee can make independently of an employer is $6,000 ($7,000 if a catch-up contribution is included). However, the maximum combined deduction for an active participant’s elective deferrals and other SEP contributions is $56,000 for 2019.


GJC Annual Nonprofit Organizations & Foundations Seminar
It was such a pleasure to host the GJC Annual Nonprofit Organizations & Foundations Updates Seminar at The Corner Ballpark this past November. Our returning keynote speaker Lee Klumpp, National Assurance Partner – Nonprofit & Government Industries, at BDO USA, LLP discussed the latest trends and topics including current accounting developments affecting the nonprofit industry.

We also invited guest speakers, Mark Rogers and John Rogers, from Graystone Consulting, a business of Morgan Stanley, to share some insight about their work related to nonprofit organizations. They spoke about “Helping to Structure Impactful Philanthropy: Investing, Spending and Impact Considerations for Nonprofit Organizations.”
 Here are a few photos we wanted to share from our event.


If you are interested in attending future events, please contact Rodelyn Frijas at, to be added to the GJC listing.


2019 America’s Thanksgiving Day Parade – November 28, 2019
The Parade Company’s festivities of the America’s Thanksgiving Day Parade is one of Detroit’s highly anticipated annual traditions.
This year marks Gloria Zhao’s eighth year serving as a Distinguished Clown Corps Member! Gloria was one among 2,000 clowns
entertaining the crowds and passing out beads and goodies to spectators down Woodward Avenue.
The Parade Company’s festivities of the America’s Thanksgiving Day Parade is one of Detroit’s highly anticipated annual traditions.
This year marks Gloria Zhao’s eighth year serving as a Distinguished Clown Corps Member! Gloria was one among 2,000 clowns
entertaining the crowds and passing out beads and goodies to spectators down Woodward Avenue.