With the 2017 Tax Cuts and Jobs Act (TCJA) changing the playing field in the tax realm, there are several approaches you may want to consider before year-end to help minimize your tax burden. Below are some of the most frequent that individuals and businesses should consider. Note that every taxpayer’s situation is different, so contact your BMF Advisor to help evaluate your position so you can decide the best moves for your situation.

 

Individuals

With so many changes in the tax law, it is strongly recommended to have a tax plan in place. Even though most laws are the same for 2019 as they were for 2018, your income and deductions may have changed which will make your tax results very different. The best way to start is by identifying any changes in your personal tax situation.

Postponing Income
As in the past, many people want to postpone income until 2020 given the chance. Postponing income is typically desirable for those taxpayers who anticipate being in a lower tax bracket next year due to a change in their financial circumstances. In the past, postponing income went hand in hand with accelerating deductions; however, accelerating deductions into 2019 may not be advisable due to the increased standard deduction. Instead, you may want to consider bunching your deductions (see bunching deductions discussion below).
Capital Gains and Losses
If you currently have large realized capital gains, you should consider harvesting capital losses. You can realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, the original holding can be sold, then buy back the same securities at least 31 days later. Minimizing the net capital gains will also help lower the 3.8% surtax on net investment income and the QBI deduction described below. If you are in a lower tax bracket, your long capital gains tax rate might be 0% so make sure to analyze your situation before you sell stocks at a loss.
Retirement Savings
Another way to lower your 2019 income is through retirement plans. Employees wishing to defer income to future years should take advantage of maximizing the amount contributed to their employer-sponsored retirement plan. For 401(k) plans, the maximum deferral for 2019 is $19,000 with an additional catch-up contribution of $6,000 for those over 50 years old as of December 31, 2019.
Qualified Business Income (QBI) Deduction
The rules for the new QBI deduction are very complex. Adding to this complexity are taxable income limitations, wage limitations, and/or asset limitations. If you are in a specified trade or business (most service businesses), the taxable income limitations are critical and will likely make the difference in getting the QBI deduction or not. For these business owners, lowering your taxable income may help you take full advantage of this new deduction. Lowering your taxable income can be done in various ways, including postponing income into 2020, increasing itemized deductions such as charitable contributions, and increasing retirement plan contributions. You can also elect to aggregate several businesses together potentially allowing you a larger 20% deduction.
Home Office Deduction
Expenses for your home office are deductible if your office is used regularly and exclusively. The deduction can be a percentage of the actual expenses or an IRS safe-harbor of $5 per square foot can be used. This deduction is only allowed to offset your self-employment income and can no longer be used as a miscellaneous itemized deduction.
Alimony
For divorces finalized on or after January 1, 2019, alimony is no longer deductible for the payer or taxable to the payee. For divorces finalized on or before December 31, 2018, the old rules still apply.
Required Minimum Distributions
Don’t forget to take your required minimum distributions (RMDs) from your retirement accounts. These include your IRA, 401(k) or other employer-sponsored retirement plans. RMDs from IRAs must begin by April 1 of the year following the year you reach age 70 ½. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn.
Education planning
Consider funding a 529 Plan for educational purposes. There is no current-year federal deduction for 529 plan contributions, but Ohio doubled the state tax deduction to $4,000 per beneficiary. In addition, 529 Plan distributions can now be used for grades K-12 tuition (up to $10,000 per year) making them even more advantageous. If you have kids in college, you may be eligible for some tuition tax credits, even if they are working on their master’s degree.
Verify Your Withholding
The IRS allows taxes to be paid via several methods: payroll withholding, retirement withholding, and quarterly estimates. The IRS has two safe-harbors to avoid underpayment penalties. The first is by paying 100% of your prior-year tax amount (110% if your prior-year adjusted gross income was over $150,000), and the second is paying 90% of your current year tax amount. Because the payroll withholding tables have changed again, it is likely that your payroll withholding changed even if your income stayed that same. It is important to verify that you will meet one of these safe-harbors to avoid penalties.
Maximize Above-the-Line Deductions
Health Savings Accounts (HSA) If you become eligible in or before December 2019 to make HSA contributions, you can make a full year's worth of deductible HSA contributions for 2019. Simplified Employee Pension (SEP) Contribution If you have self-employed income, consider putting money into a SEP. This option is available to you even if you have already deferred the maximum amount into your employer-sponsored 401(k) plan. By contributing money to a SEP, you can typically avoid both current year federal and state taxes on the amount contributed. The maximum SEP contribution for 2019 is $56,000 and it can be funded as late as the due date of your federal tax return, including extensions. Student Loan Interest You may be eligible to take an above-the-line deduction for student loan interest paid up to a maximum of $2,500. Self Employed Health Insurance | Partners and S-Corp shareholders owning more than 2% of the entity stock and self-employed individuals are permitted a deduction for their health insurance for themselves and their dependents. This is different than the Schedule A itemized deduction as it is above-the-line and not subject to the 10% AGI limitation.
Bunching Itemized Deductions
With the TCJA, many itemized deductions were either eliminated or severely limited. Bunching deductions may be a way to preserve deductions that would otherwise be wasted or lost due to the higher standard deduction. The deduction for state and local taxes and real estate taxes is limited to $10,000. If your mortgage is paid off and you don’t have any high medical expenses, your only other itemized deduction would be charitable contributions. It may be worth your while to fund several years’ worth of charitable contributions in one year to accelerate the deduction into that year, and then use the standard deduction in the subsequent years. One good way to do this is through a Donor-Advised Fund. This vehicle allows you to donate the money one year and get a tax deduction while keeping the money in the fund until you distribute it to the various charities in subsequent years. Medical Expense Deduction For 2019, medical expenses are only deductible to the extent that they exceed 10% of your adjusted gross income (AGI), even for taxpayers over age 65. Medical expenses include health insurance premiums, Medicare premiums, amounts paid to doctors for medical care, prescriptions, etc. Unless you have a high amount of medical expenses, you most likely will not qualify for this deduction. State and Local Tax Deduction The TCJA limited the total deduction for state and local income taxes and real estate taxes to $10,000. If you can itemize your deductions and have not reached the $10,000 limit, you may want to consider paying your 2019 real estate taxes in December as opposed to January 2020. If you have already met the $10,000 limitation, then there is no benefit to pre-paying these taxes. Mortgage Interest Deduction Interest you pay on your home is typically deductible to the extent that the average mortgage balance does not exceed $750,000. For mortgages placed in service prior to December 15, 2017, the limit is $1,000,000. Home equity loan interest is only deductible if the loan was used to buy, build or improve the home. The old rule allowing a deduction for the first $100,000 of home equity interest was eliminated. Also, don’t overlook mortgage points paid upon purchase or refinancing as these may be deductible as well. Charitable Contribution Deduction Consider making charitable contributions before year-end either in cash or non-cash such as highly appreciated stocks. If you donate highly appreciated stock, you can get a donation deduction for the fair market value of the stock and avoid capital gains tax. You can also make contributions at year-end using your credit card, even if the credit card is not paid until 2020. You can write a check to charity and mail it on December 31, 2019, and take a 2019 tax deduction even if the check doesn't clear your bank until January 2020. Non-cash donations valued over $5,000 (except publicly-traded stock) require a written appraisal and a letter from the charity acknowledging the donation to be deductible. If you are over age 70 ½, you can make a charitable contribution up to $100,000 directly from your IRA to satisfy the required minimum distribution requirement. Miscellaneous Itemized Deductions | Employee business expenses, investment expenses, tax preparation fees, and certain legal fees are no longer deductible. These deductions were eliminated as part of the TCJA.
Gifting
Take advantage of the annual gift tax exclusion. Make gifts sheltered by the annual gift tax exclusion before the end of the year to save gift and/or estate taxes. The exclusion applies to gifts of up to $15,000 made in 2019 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. The transfers might also save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax. Although the estate tax exemption is now $11,400,000 and is indexed for inflation, there is a sunset clause after December 31, 2025. After this date, the estate tax exemption will revert back to the pre-TCJA amount of roughly $5.5 million. The IRS has recently confirmed that it will not retroactively “clawback” gifts made during this temporary increase in the exclusion amount.

Businesses

Businesses were greatly impacted by the TCJA. While the rules for 2019 are the same as in 2018, it is imperative that the TCJA rules are part of your tax plan. Failure to do so can result in needless additional taxes. Corporate tax rates were cut to a flat 21% (previously 35%), and the addition of the QBI deduction (20% business income deduction) for other taxpayers (noted above) is the most profound. Is your structure the most optimal under the new rules? The TCJA also expanded the small business gross receipts threshold to $25 million, which allows businesses to elect or remain eligible for various accounting methods, such as utilizing the cash method of accounting and treating inventory as non-incidental materials and supplies, or to avoid the uniform capitalization rules for resellers and manufacturers. Your business’ taxable income could be much lower under the cash method of accounting or through various other method changes allowed for small businesses.

Accelerated Depreciation
Take advantage of generous depreciation rules for assets such as computers, software, equipment, furniture, or certain property improvements purchased in 2019. Section 179 Allows you to expense otherwise depreciable property if placed in service in 2019. You may elect to expense up to $1,020,000 of fixed asset costs (with a dollar-for-dollar phase-out for purchases greater than $2,550,000). If the cost of your Section 179 property placed in service during 2019 is $3,550,000 or more, you cannot take a Section 179 deduction. Additionally, the deduction is limited to business income. Certain real estate improvements can be "Qualified Improvement Property" and be eligible for the Section 179 deduction. Bonus | In addition to the Section 179 deduction, your business can also deduct first-year bonus depreciation equal to 100% of the cost of most fixed assets with a tax life of 20 years or less. Under the TCJA, the law has eliminated the requirement that eligible property must be new to qualify for bonus depreciation (if the property was not acquired from a related party). The 100% first-year bonus depreciation will remain in effect through 2022, in which the applicable percentages will then be phased-out through 2026.
De Minimis Safe Harbor Election
The “de minimis safe harbor election” (also known as the book-tax conformity election) allows businesses to expense lower-cost assets, materials and supplies, keeping in mind these amounds still need to be reviewed for capitalization under Code Section 263A uniform capitalization (UNICAP) rules. To qualify for the election, the unit of property cost cannot exceed $5,000 if the taxpayer has an applicable financial statement (e.g., a certified audited financial statement along with an independent CPA's report). If there’s no applicable financial statement, the cost of a unit of property can’t exceed $2,500. If the UNICAP rules aren’t an issue, consider purchasing qualifying items before the end of 2019.
Tax Credits
There are numerous tax credits that can help lessen the tax burden for a business and its owner. R&D Credit Businesses that incur certain research and development (R&D) costs, such as wages, supplies, and contract research, are eligible for this general business R&D tax credit. Eligible small businesses, $50 million or less in gross receipts, may also be able to claim the R&D credit against the employer’s payroll tax (i.e. FICA) liability under TCJA rules. Work Opportunity Tax Credit | Businesses that hire individuals from targeted groups (i.e. qualified veterans, long-term unemployment recipients, ex-felons) are eligible for a tax credit equal generally to 40% of up to $6,000 of the individual's first-year wages paid (per employee).
Accounting Method
Review your methods of accounting for tax purposes to determine if you are using the optimal methodologies to maximize tax deductions. Deducting certain prepaid items, accruing for company payroll or bonuses (must be paid within 2.5 months of year-end) and reviewing all depreciation methods are common areas to analyze. As mentioned earlier a change to the cash method of accounting may now be available even for businesses with inventory. (see below)
Cash Method
Many businesses, especially service-based business utilize the cash method of accounting. These businesses should accelerate deductions into the current year by bunching expenses to the extent possible. Under the TCJA, more businesses are eligible if they are considered 'small' (<$25 mill. gross receipts).
LIFO (Last-in First-Out) Inventory
While not new, this method allows, in periods of rising inflation, for deductions for Cost of Goods Sold to be maximized, substantially reducing taxable income.
State and Local Taxes
We are seeing an increase in changes to state tax laws and regulations, as well as their approach to tax audits. Most states are becoming increasingly aggressive in trying to capture tax revenue from out-of-state businesses. The Wayfair decision, in particular, will require increased sales tax filings for most out-of-state sellers of goods. Make sure your business is not caught off guard. Specific state and local tax areas to be mindful of include income tax, sales and use tax, payroll tax, and property tax. 
Tax Basis
If you own an interest in a partnership or S corporation where losses may be limited due to basis limitations, consider whether you need to increase your basis in the entity to deduct a loss from it for this year.
Meals & Entertainment
The TCJA brought stricter limitations on deductions for both meals and entertainment expenditures, which includes no longer permitting a deduction of entertainment, amusement or recreation expenses. Business activities that include a meal and an entertainment component should be broken out and tracked as separate line items or purchased as separate transactions (as meal expenditures may still be 50% or 100% deductible). Businesses should consider categorizing meals and entertainment expenses into three categories: entertainment/nondeductible expenses, 100% deductible items, and 50% deductible items. Note that meals for employees are no longer 100% deductible in most cases now.
Interest Deductions
If your business is not 'small' (as defined above), deductions for interest under the TCJA rules can be suspended. The rules in this area are complex and wide-ranging but, proper planning can insure that deductions are not missed unexpectedly.
Passive Losses
To reduce 2019 taxable income, consider disposing of a passive activity in 2019 if it will allow you to deduct suspended passive activity losses.
IC-DISC
If your business has foreign sales, consider utilizing an IC-DISC. A business that has export sales and utilizes an IC-DISC can create a tax benefit in which a portion of its income is taxed at the long-term capital gains rate.
Foreign Reporting
The foreign reporting requirements are very comprehensive and complex for businesses with activities outside of the U.S. Business owners and employees who have any financial interest in or signature authority over a foreign financial account exceeding $10,000 at any time in a calendar year must file a Report of Foreign Bank and Financial Accounts (FBAR). The Foreign Account Tax Compliance Act (FATCA) requires businesses to report and possibly withhold on payments made to foreign entities. Investments, assets, and legal entities outside the U.S. may subject the business to various reporting requirements.

These are some of the year-end approaches that can be taken to help minimize your tax burden. We can help tailor a customized plan that will work best for your tax planning goals. Additional ideas and information may be found in our 2019 Tax Planning Guide.

Please contact your BMF Tax Advisor if you would like to review any of the items mentioned, schedule a tax planning strategy session or discuss potential implications of the various tax law changes.

About the Authors

Cindy H. Mitchell

CPA
Senior Manager, Taxation Services

Michael Hydell

CPA, MTax
Senior Manager, Taxation Services

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