November 24, 2019

Look Back on 2018 Tax Filing Season and 2019 Year End Planning

As 2019 has entered its final two months, most taxpayers have already filed their 2018 income tax returns.  Those taxpayers residing in Harris County and surrounding counties were given until January 31, 2020 to file their 2018 returns, due to flooding conditions caused by Tropical Storm Imelda, provided the appropriate extensions were filed back in April of this year.  Since the IRS announcement of this extension was not released until October 7th, many taxpayers complied with the original October 15th extension deadline.

What did taxpayers (and the IRS) discover in filing their first income tax returns since the passage of The Tax Cuts and Jobs Act (“TCJA) in late 2017?  Prominent for many taxpayers was the limitation on the deduction of State and Local Taxes (“SALT”) to $10,000 for those married and filing jointly.  Taxpayers also learned that they could no longer deduct as itemized deductions “miscellaneous business deductions,” such as unreimbursed employee business expenses and investment management fees.  While the TCJA kept in place a dual form of taxation known as the Alternative Minimum Tax (“AMT”), it greatly expanded the exemption amounts and dramatically hiked the income levels in which the exemption amounts start to phase out.  With SALT and miscellaneous business deductions never deductible for AMT purposes, the limitations and elimination of these deductions were not as damaging to most taxpayers.  In fact, the IRS, in statistics published for 2018 return filings through July 25th reported that only 78,328 filers owed AMT totaling $967.6 million, compared to $21.7 billion in AMT reported on 4.07 million returns for the same period in the prior tax filing year.

So, what year-end tax planning should taxpayers consider?  For most taxpayers, the strategy continues to be an acceleration of write offs.  In addition, taxpayers might also consider the following before year end:

  1. Consider accelerating donations to charity planned for 2020 to 2019. The contributions can be in the form of cash, highly appreciated stocks, or shares in mutual funds that one has held over 1 year.
  2. Make the January 2020 mortgage payment in December of 2019.
  3. Examine your investment portfolios; while the stock market has performed at record levels to date, look to see if you have any loss positions, or capital loss carryforwards to use this year to offset some of the gain positions.
  4. A deduction many taxpayers saw for the first time in 2018 was the 20% deduction for not only Qualified Business Income (“QBI”), but also a 20% deduction for those holding interests in Real Estate Investments Trust (“REITS”) and Publicly Traded Partnerships (“PTP”). Since this is calculated separately from the regular 20% deduction for QBI, investing in REITS or PTP’s alone may generate the deduction.
  5. Look at your IRAs. If you are 70 ½ in 2019, you will be required to take a minimum distribution by December 31st, or delay until April 1, 2020, even though the distribution is based on your total IRS balance as of December 31, 2018.  Be wary of taking this delay on your 2019 distribution.  Since the 2020 distribution must be made by December 31, 2020, delaying will cause a doubling up of income in 2020.
  6. If already 70 1/2, also consider transferring up to $100,000 yearly from your IRA directly to a charity. This “Qualified Charitable Distribution” (“QCD”) will count towards one’s required minimum distribution requirement for the year, and is excluded from taxable income.
  7. If one is inclined to make gifts, up to $15,000 can be gifted to each person in 2019, with no resulting gift tax, or using any of your lifetime estate and gift tax exemptions. This per person exclusion is on an annual basis.  Use it or lose it; it does NOT carry forward to the subsequent year.
  8. For those taxpayers with young children, some employers offer Flexible Spending Accounts (“FSA”) for their employees that include coverage of expenditures for dependent care. Frequently such coverage of dependent care through an FSA offers a better tax benefit than the child care credit.

Every taxpayer’s situation is different.  If you would like to explore the income tax effect of your options, we would be happy to assist you.


Joe Thomson