The Tax Cuts and Jobs Act of 2017 (TCJA), which was signed into law on December 22, 2017 and largely became effective in 2018, changed many fundamental tax planning items. While some items in TCJA limit the benefits of year-end planning, other areas provide opportunities. We have included some reminders, along with a checklist, to help plan and organize around year-end planning and some of the tax provisions that may affect you.
Year End Reminders: 2019 Federal Tax Rates, Deductions, Exclusions & Exemption Amounts
Federal Income Tax
- 37%: Highest federal income tax rate
- up to 13.3%: Highest applicable state income tax rate (please refer below for marginal tax rates)
- $10,000 limit: state and local tax (SALT deductions)
- $12,200: Single / married separate
- $18,350: Head of household
- $24,400: Married joint / qualified widow(er)
Caveat: for some clients with a very simple tax scenario, they may no longer itemize since the married joint standard deduction is now $24,000 and the SALT limit is $10,000.
- 20%: Highest capital gains / dividends tax rate
- 3.8%: Surtax on net investment income
- 28%: Highest alternative minimum tax (AMT) rate
AMT Exemption Amounts
- $71,700: Single
- $111,700: Married joint / surviving spouse
- $55,850: Married separate
Federal Transfer Tax
- 40%: Highest federal estate and gift tax rate
- $11,400,000: Lifetime transfer tax exclusion amount
- $15,000: Annual gift tax exclusion amount
Marginal Income Tax Rates Across the Country
This is not an exhaustive or comprehensive list of tax items to consider, but is meant to prompt a discussion with a professional tax advisor to determine how any of these apply to your particular circumstances and what other issues, not disclosed here, may also apply to you and your personal scenario.
Year End Checklist of Items to Review
- Avoiding the wash-sale rule: recognizing capital losses is a common way to lower your current year tax bill. However, if you do not time this carefully or purchase the wrong assets, the wash sale rule could prohibit a loss from being recognized.
Year-End Mutual Fund Distributions
- Mutual funds announce capital gains to be distributed to shareholders at year-end. If you rebalance your portfolio at year-end, this can be problematic.
Utilizing QOZ Investments
- You may elect to defer tax on any capital gains invested in a Qualified Opportunity Fund (QOF), however there are requirements and several timing considerations to review.
Deductions for Pass-Through Entities, Section 199A
- If eligible, you may be able to deduct either 20% of your “qualified business income” or 20% of your taxable income minus capital gains, whichever is less with a few restrictions:
- Income from investments, dividends, interest and capital gains is excluded.
- Income limitations and phase-outs apply.
- Limits apply based upon type of business.
- The deduction will expire in 2025.
Small Business Owners / Self-Employed Individuals
- SEP IRAs: tax deductible contributions are allowed for up to the lesser of 25% of eligible compensation or $56,000 for 2019.
- Defined benefit plans: there is a maximum annual retirement benefit of up to the lesser of $225,000 or 100% of highest average compensation over a consecutive three year period.
Managing Required Minimum Distributions (RMDs)
- You must take required minimum distributions by December 31st (unless it’s your first year of distributions).
Roth IRA Conversions
- It might make sense to convert all or a part of your eligible retirement account, such as a 401(k), traditional IRA, or other non-Roth account, to a Roth IRA before year-end. (*Caveat: This is very specific to the unique circumstances for each IRA owner and hinges mainly upon what expectations are for tax rates in the future).
Charitable Giving & Adjusted Gross Income Limitations on Deductions
- Public charity and Donor Advised Funds: 60% cash gifts, 30% long-term capital gain property (using fair market value “FMV”), and 30% tangible personal property (using FMV).
- Private foundation: 30% cash gifts, 20% long-term capital gain property (using FMV if publicly traded stock), and 20% tangible personal property (using tax basis/cost).
Annual Exclusions for Gifting & Paying Directly for Education and/or Healthcare
- You can give $15,000 each calendar year to as many people as you like without paying any gift tax or utilizing any of your lifetime exclusion amount (currently $11,400,000).
- You can also pay education and healthcare expenses directly on behalf of beneficiaries without the payment being considered a taxable gift.
Funding Section 529 Plans
- You can use funds from 529 plans to pay up to $10,000 for elementary and secondary school expenses.
- You can contribute up to $15,000 per year per beneficiary without it being considered a taxable gift.
- You can also consolidate five years of contributions into a single year, for a total contribution of $75,000 per individual and $150,000 per married couple.
- An additional change was made to IRC section 529 affecting Achieving a Better Life Experience (ABLE) accounts. ABLE accounts allow for tax advantaged funds to help disabled individuals pay for qualified disability-related expenses. (*Caveat: Many states have not conformed their state tax laws with this specific change in federal income tax laws, resulting in a state income tax liability for utilizing 529 plans to cover elementary and secondary school expenses, i.e., specifically classifying them as a “non-qualifying” withdrawal, e.g., there would be a 2.5% penalty tax for such withdrawal in the State of California).