2019 Year-End Planning – A Special eTax Alert December 9, 2019

2019 Year-End Planning

The Tax Cuts and Jobs Act made more than 100 changes that routinely affect our client’s 2019 tax return. When talking to your clients before year-end, here are a few items to consider in that discussion.

1. A personal casualty loss is not deductible for 2018 to 2025. Remind clients that they should review their insurance coverage with their agent to make sure it is adequate. Federally declared disaster losses remain deductible.
2. The 529 College Savings Plan has been expanded. Qualified distributions now include a withdrawal of up to $10,000 per beneficiary for elementary or secondary public, private or religious school tuition. If funds saved for college costs seem inadequate, withdrawals for K through 12 tuition may not be appropriate.
3. Since the standard deduction is almost doubled from prior years (for 2019, $24,400 MFJ, $18,350 HOH and $12,200 single), some year-end strategies that had tax benefit for prior years may not provide tax benefit for 2019.
   • Making a charitable contribution before year-end may not provide a tax benefit if total itemized deductions do not exceed the new standard deduction amounts. Doubling up by making 2019 and 2020 charity pledges before year-end may help. A contribution to a Donor Advised Fund may help. An IRA transfer to a charity of at least the amount of the required minimum distribution for the age 70 1⁄2 account holder may be advisable.
   • Bunching medical deductions into one year may help get a deduction above the 2018 10% AGI limitation. Again, the increased standard deduction may result in medical expenses providing no tax benefit whether they are bunched or not.
4. 2019 Schedule A taxes are limited to $10,000. Thus, prepaying the January installment of state estimated tax before year-end will not provide a benefit if deductions already exceed the $10,000 limit. The same warning applies to prepaying before year-end the March 2020 installment of property tax on personal use property. Taxes on business or rental property are not limited by the new law.
5. The interest deduction on home equity debt is suspended for 2018 through 2025. Clients need to be reminded that a refinanced first loan, a second loan or a home equity line of credit, where the proceeds of the loan were used for personal purposes (for example, paying off student loans, credit cards or auto loans), will result in a reduction of the deductible portion of the interest showing on their Form 1098-Mortgage Interest.a. Clients should prepare a worksheet showing the original acquisition loan amount, the date and term of the original loan. The worksheet should also include the date and amount of any additional borrowing that was used to substantially improve their first or second home. Where the appropriate election was made, interest remains deductible if the proceeds of additional borrowing were used for business, investment or rental purposes.

6. Fewer limitations apply to the new qualified business income deduction (QBID) if the taxable income on the Form 1040 is below a 2019 threshold amount of $160,700 ($321,400 for MFJ). Project 2019 taxable income and advise on ways to reduce taxable income below the threshold amounts. This is especially important for specified service businesses and for businesses with no W-2 wages and little or no depreciable business assets (referred to as UBIA in the regulations).
7. Many clients will need a revised Form W-4 for 2020 as the withholding tables are still a little light. Be sure to request a pay stub so that you can assist with preparing the 2020 Form W-4.
8. Divorcing clients will need special help for the transition to the new law. Alimony is not deductible by the payor (or includable in the income of the recipient) for divorce agreements executed after Dec. 31, 2018. The payor spouse may be particularly stressed to discover that neither child support nor alimony is deductible for 2019 or later divorces.a. For divorces executed before Jan. 1, 2019, the old law is grand fathered. Alimony paid under an old agreement is deductible and alimony received is taxable. The 2019 Form 1040 now requires that the date of the divorce agreement be entered on the payor’s tax return.

9. The estate and gift tax exemption is doubled in the new law for 2018 through 2025. The exemption is $11,400,000 for decedents dying in 2019 ($11,580,000 for decedents dying in 2020). While Federal estate tax may not be an issue for many clients, estate planning always is. Probate, blended families, who-gets-what, and business succession are a few items that should be discussed with an estate attorney.
10. Expanded sections 179 and 168 allow huge deductions for equipment placed in service prior to year end.
11. Defer or eliminate capital gains. Capital gains will be deferred on the amount invested in a Qualified Opportunity Fund (QOF) within 180 days of a sale generating the capital gain. If the investment is held for more than 5 years 10% of the deferred gain can be excluded, 15% for investments held for more than 7 years. Investments held for at least 10 years receive an increase in basis to FMV on the date of the sale. Clients should be careful to evaluate the quality of the QOF investment.
12. Search for AMT credit carryovers. Since most clients will not be subject to AMT this year, their carryover credits will be valuable. Form 8801 should show any accumulated AMT credits, but prior year returns need to be analyzed carefully to avoid loss of these valuable credits.

13. Hobby losses are under attack. Since expenses to the extent of revenue are no longer deductible as miscellaneous itemized deductions, revenue from unprofitable business ventures could end up being fully taxed. Consider forcing profits by capitalizing many costs and being careful to remove personal expenses.
14. Bearer of bad news. Financial planner fees, investment expenses and moving expenses are not deductible for 2018 through 2025. Unreimbursed employee business expenses are not deductible for 2018 through 2025. Encourage clients to negotiate accountable expense reimbursement arrangements with their employer to avoid paying tax on amounts spent for business expenses.
15. Tried and True. Year-end planning still includes deferring income, accelerating deductions, purchasing and placing in service depreciable business assets before Dec. 31, maximizing elective deferral contributions, and harvesting capital losses (up to the $3,000 annual limit for net Schedule D losses). These “tried and true” year-end planning ideas take on a new importance if using any or all of them results in a taxable income below the thresholds for a QBI deduction. See number 6 above.
16. Carefully check state tax conformity to the new Federal law. Many states have not conformed. For example California conforms to almost nothing in TCJA, and has a much lower standard deduction than federal law. That means, that with the exception of state tax payments, deductions for items 1, 4, 5, and 14 can still reduce California state income tax significantly. Advise clients to provide the same information that they gave you for prior years.
17. A question on virtual currency transactions has been added to the 2019 Form 1040, Schedule 1. While most of our clients don’t have virtual currency or foreign assets, we are responsible for asking.

Hear more about the Tax Cuts and Jobs Act 2019 developments, as well as news from the IRS and the courts, at Western CPE’s Federal Tax Update and Federal and California Tax Update Seminars.