Planning Strategies and Techniques Available Through End of Year

Over 2018 and 2019, tax professionals have been grappling with the new landscape of taxation under the Tax Cuts and Jobs Act. Laptop batteries have drained, reams of paper have been used, and eyes have gone dry all across the country in researching ways to help clients maximize their tax savings. As was said last year, many of the old strategies for advising clients at year-end have been blunted by the landmark tax reform act. However, there are still numerous steps to take in late 2019 and early 2020 to boost the refund, or reduce the amount due, on returns filed in 2020. Many of the classic deferral and acceleration tactics can still produce results, but in new and different ways. And there is still time to take care of them, if you act fast!

The key to any year-end planning strategy is to minimize taxes. This is done by either reducing the amount of income received or increasing the amount of deductions, which is all easier said than done. However, there are a few simple things that can be done in the waning weeks of 2019 to accomplish this. Delaying/Reducing Income and Gains Ordinary income is taxed at seven rates, depending upon the amount of income. Taxes on capital gains also apply at different rates depending upon the amount of taxable income. For 2019, the long-term capital gains rates are as follows:

2019 Long-Term Capital Gains and Qualified Dividends Rates

0% 15% 20%
MFJ/SS $0 – $78,750 $78,751 – $488,850 over $488,850
MFS $0 – $39,375 $39,376 – $244,425 over $244,425
HoH $0 – $52,750 $52,751 – $461,700 over $461,700
Single $0 – $39,375 $39,376 – $434,550 over $434,550
E&T $0 – $2,650 $2,651 – $12,950 over $12,950

As discussed below, there is little chance of legislation during 2020, so tax rates are not likely to increase in 2020. Thus, there is little advantage to postponing ordinary income to 2020, as rates are not likely to go lower. Further, given the political landscape, tax rates are likely to not ever be lower than they are now. Thus, it may be more expeditious to maximize the amount of income now in anticipation of rates increasing in the future, either because a new Congress and President may increase tax rates, or simply allow the rate reductions under the Tax Cuts and Jobs Act to expire.

Many of the classic deferral and acceleration tactics can still produce results, but in new and different ways.

That said, for taxpayers whose income tends to fluctuate from year to year, it would be wise to examine the impact of sales of investment items. For taxpayers who think they may have lower income in 2020, it would be smart to hold off on a sale of a capital gains item if their income is at or near a threshold for a higher capital gains bracket. This type of consideration is not limited to capital gain taxes, but also applies to the net investment income (NII) tax. The 3.8% NII tax kicks in at $200,000 of modified adjusted gross income for single and head-of-household filers, $250,000 for joint filers, and $125,000 for married taxpayers filing separately.
IMPACT. Since the NII thresholds fall right in the middle of the 15% capital gains bracket, a taxpayer to whom the NII applies because of a sale of a capital item would likely not be able to reduce the tax to 0%. But, a taxpayer who is barely in the 20% bracket could defer a sale and get into the 15%, meaning a sale of a capital item would only be taxed at 18.8% instead of 23.8%.

Maximizing Deductions

The Tax Cuts and Jobs Act nearly doubled the amount of the standard deduction; for 2019, the inflation adjusted amounts are $24,400 for joint filers, $18,350 for heads of households, and $12,200 for all other filers. Further, the amount of state and local taxes that can be claimed as an itemized deduction is capped at $10,000. The result is a drastic reduction in the number of taxpayers who itemize deductions, as it is difficult to have
enough itemized deductions to exceed the standard deduction amount.

One of the best ways to maximize the amount of deductions is to develop a bunching strategy. This involves accumulating charitable contributions, or even medical expenses, from two or more years into one year. For example, a taxpayer may have not made any of his or her normal charitable contributions in 2018, and then made double the normal amount in 2019 in order to help surpass the standard deduction amount.

The same strategy can be employed for deductible medical expenses where the timing is somewhat flexible, such as for elective procedures (remember that purely cosmetic procedures are not deductible). However, the floor for deductible medical expenses in 2019 is 10%, whereas the floor was 7.5% in 2018, so any medical expenses may have already been accelerated at the end of 2018, making the timing of bunching critical. It is much easier to use a bunching strategy to beat the standard deduction amount if both medical expense deductions and charitable contributions are bunched into the same year, so working out a plan that maximizes both is crucial.

IMPACT. Bunching can be a very worthwhile strategy, but it has to be effectively used, and potentially planned out two or three years in advance to maximize the benefit.

Other Year-End Strategies
A number of other traditional year-end strategies may still apply even after the Tax Cuts and Jobs Act. These include:

  • Maximizing Education Credits – Individuals can claim a credit for tuition paid in 2019 even if the academic period begins in 2020, as long as the period begins by the end of March (but, see below for a possible benefit to delaying payment if the tuition and fees deduction returns)
  • Increasing 401(k) Contributions – Adjusted gross income (AGI) can be reduced if individuals increase the amount of their 401(k) contributions
  • IRA Contributions – Individuals eligible for deductions for IRA contributions can claim deductions, and thus reduce AGI, for amounts contributed through April 15, 2020
  • Teacher deductions – Educators can claim a deduction for up to $250 of classroom expenses (such as books, supplies, computer equipment), and should maximize those expenses by year-end.