Year-end Tax Planning After TCJA

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The Tax Cuts and Jobs Act (TCJA), now almost two years old, blunted many long-standing year-end tax strategies. Still, there remain steps taxpayers may take to boost the refund (or reduce the amount due) on tax returns filed in 2020. The tried-and-true techniques of deferring income and accelerating deductions still produce results, but in new and different ways. Most steps here need to be taken quickly, in the waning weeks of 2019. Further information on TCJA techniques suggested below are discussed in prior LMC Tax Cuts and Jobs Act Alerts, all available on the Updates page of our website.


Ordinary Income


Individual tax rates are unlikely to go lower than they are now (the current maximum rate on ordinary income is 37%). The political landscape in Washington suggests little chance of significant tax legislation in 2020. Should a new president and Congress be in power in 2021, rates could increase - or the higher pre-TCJA tax rates may simply return when TCJA sunsets after 2025. Since rates are unlikely to go lower, there is limited advantage to postponing ordinary income from 2019 to 2020.


Capital Gains and Dividend Income


The tax rates on capital gains and qualified dividend income is lower than on ordinary income. There is no tax (0% rate) on these types of income if taxable income is otherwise under $78,750 in 2019. The rate then rises to 15% until it tops out at 20% above $488,850. These amounts apply to married taxpayers; a single's threshold is half. An extra 3.8% applies to higher-earning taxpayers. Knowing one's expected income level can allow a taxpayer to time the sale of capital gain property for best tax advantage.


The traditional technique of harvesting year-end losses to offset capital gains realized during the year still applies. A new deferral strategy, investing capital gains in an Opportunity Zone fund, was enacted under TCJA and may be appropriate for some taxpayers.


The 20% Pass-through Deduction


TCJA introduced a 20% pass-through deduction for most business income earned by individuals. Taxpayers should review the requirements and limitations of this benefit to determine if any actions to optimize their tax savings may be taken before year-end.


Itemized Deductions


The use of itemized deductions was drastically reduced under TCJA, because the standard deduction was doubled and many popular write-offs (like state and local taxes) were curtailed. Bunching deductions (e.g., not making charitable contributions in 2019 but doubling the normal amount in 2020) may allow the use of the higher itemized deduction in some years while the standard deduction is taken in others. To effectively maximize bunching, planning two or three years in advance may be necessary.


An old rule that has seen new life under TCJA is the ability to make charitable contributions directly from IRAs. Taxpayers receiving IRA income such as Required Minimum Distributions who are charitably inclined may gain a tax advantage by donating to charity this way even when they no longer benefit from itemized deductions under TCJA.


Other Year-end Strategies


Other available 2019 year-end tax strategies include taking education credits for Spring 2020 tuition paid in 2019, increasing 401(k) contributions, and making IRA contributions (which may be funded for 2019 until April 15, 2020). But these benefits are not available to all taxpayers - education credits phase out above certain income levels, and IRA deductions may not be allowed when a taxpayer or spouse participates in a pension plan at work.


Contact your LM Cohen professional to discuss year-end planning opportunities available to you. All our prior Alerts are available on the Updates page of our website.


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