Tax Tips

Contents At A Glance

  • Year End Tax Planning
  • 2020 Tax Law Updates
  • Commonly Missed Business Tax Deductions
  • Late Filer Q&A

Year End Tax Planning

For additional IRS news, tips and updates, visit our blog site1. Know whether your client will take the standard deduction

It’s critical for your clients to know whether they expect to take the standard deduction before making decisions about year-end spending that would normally generate itemized deductions. Tax reform doubled the standard deduction while repealing or limiting numerous itemized deductions, leaving millions fewer taxpayers claiming actual itemized deductions.

If your clients' itemized deductions are unlikely to total at least $12,200 (or $24,400 if married and filing jointly), they will not get any deduction for things like charitable gifts or elective health care procedures.

2.  Make opportunity zone investments before year-end

Opportunity zones were created to encourage investment in specific geographic areas by offering generous tax incentives. If your clients have sold or are considering selling assets this year that would generate large capital gains, keep in mind the gain can be deferred if they invest an equal amount in an opportunity zone fund within 180 days of the sale. If they hold the investment for 10 years, they won’t recognize any gain on the new investment itself. They still have to recognize the original gain they have deferred by Dec. 31, 2026, at the latest, but if they make their investment by the end of the year, an extra 5 percent will be forgiven.

They can get up to 10 percent of the deferred gain forgiven entirely if they hold the investment for five years or 15 percent if they hold it for seven years, meaning 2019 presents the last opportunity to qualify for the extra 5 percent step up in basis. There are more than 8,000 opportunity zones throughout the U.S. in areas ripe for investment, and numerous funds are soliciting investors.

3. Defer tax

Deferral remains a cornerstone of good tax planning. Why pay tax today when you can put it off until tomorrow and enjoy the time value of money? Deferring tax is about accelerating deductions and postponing income. Your clients may be able to control the timing of items of income and expense. Consider deferring bonuses, consulting income or self-employment income.

On the deduction side, they may be able to accelerate state and local income taxes, interest payments and real estate taxes, but remember the $10,000 cap on deducting tax.

4. Maximize “above-the-line” deductions

Above-the-line deductions are especially valuable because so many taxpayers will no longer itemize deductions. They also reduce the taxpayer's adjusted gross income, and AGI affects whether they’re eligible for many tax benefits.

Common above-the-line deductions include traditional individual retirement account and health savings account contributions, self-employment taxes, certain health insurance costs and any bank penalties clients may have had to pay for early account withdrawals.

Note that tax reform repealed some popular above-the-line deductions, such as moving expenses (except for members of the military) and alimony payments (for divorces finalized after 2018).

5. Leverage retirement account tax savings

It’s not too late for your clients to maximize contributions to a retirement account. Traditional retirement accounts like 401(k)s and IRAs still offer some of the best tax savings in the Tax Code. Contributions reduce taxable income at the time a taxpayer makes them, and they don’t pay taxes until they take the money out at retirement.

The 2019 contribution limits are $19,000 for a 401(k) and $6,000 for an IRA (not including catch-up contributions for those 50 years and older). Remember that 2019 contributions to an IRA can be made as late as April 15, 2020.

6. Make up a tax shortfall with increased withholding

Many taxpayers were unpleasantly surprised by smaller refunds or unexpected bills when they filed their 2018 returns because of changes to tax rules and withholding schedules. This year, make sure your clients' withholding and estimated taxes align with what they actually expect to pay while they have time to fix a problem.

If your clients find themselves in danger of being penalized for underpaying taxes, they can make up the shortfall through increased withholding on their salary or bonuses. A larger estimated tax payment at the end of the year can still expose them to penalties for underpayments in previous quarters, but withholding is considered to have been paid ratably throughout the year, so increasing it for year-end wages can save them on penalties.

7. Don’t squander the gift tax exclusion

Your clients can give up to $15,000 to as many people as they wish in 2019, free of gift or estate tax. They get a new annual gift tax exclusion every year, so they shouldn't let it go to waste. If they combine gifts with their spouse, they can use their exemptions together to give up to $30,000 per beneficiary each year. So if they have three married children, they could give each couple $60,000 and remove $180,000 from your estate in a single year. They can give even more tax-free if they have grandchildren.

8. Plan around the changing “kiddie tax”

The so called “kiddie tax” has gone on a wild legislative ride that makes planning tricky. Tax reform originally repealed the old version, which generally taxed the unearned income of children at parents’ marginal rates. Under the Tax Cuts and Jobs Act of 2017, a child’s unearned income was taxed at trust and estate rates. This change cut both ways. For some low- and middle-income families whose children receive unearned income like scholarships or military survival benefits, the trust and estate rates are much less favorable than their parents’ tax brackets. For some high-income families, the ability to use the trust tax brackets allowed more capital gains and qualified dividends to qualify for the zero and 15 percent brackets. But Congress just passed a law repealing the TCJA change and reverting back to the original “kiddie tax.” This change isn’t mandatory until 2020, but for 2018 and 2019 you can elect either version of the law. You should consider whether your clients may benefit from the TCJA version by transferring assets earning investment income to children before 2020, but keep in mind there will be little benefit next year. If a client would do better under the original “kiddie tax” for 2018 and 2019, keep an eye on forthcoming IRS procedures for how to make the election.

9. Don’t count on charitable gift state and local tax workarounds

Your client's state may be one of several to enact charitable giving laws designed to circumvent the $10,000 cap on the state and local tax deduction enacted as a part of tax reform. These laws offer state tax credits in exchange for contributions to charitable programs that provide state services, essentially turning state tax payments into charitable contributions for federal tax purposes. But the IRS has shut the door on these workarounds. If your clients have made such a contribution, new rules negate any potential benefit by requiring them to reduce their charitable deduction by the tax credits received in return. However, there is some relief. They can treat the contributions as state tax payments so that they can continue to deduct them up to the $10,000 cap.

10. Leverage low interest rates and generous exemptions

The historically low interest rates and lifetime gift and estate tax exemption presents a powerful estate planning opportunity. Many estate and gift tax strategies hinge on the ability of assets to appreciate faster than the interest rates prescribed by the IRS. There’s a small window of opportunity to employ estate-planning techniques while interest rates are still low and the lifetime gift exemption is at an all-time high. Tax reform doubled the gift and estate tax exemptions, but like the rest of the individual provisions, this change is set to expire in a few years.

2020 Tax Law Updates

In summary, several new changes will be in effect for tax year 2020. These changes are being made because of inflation and will have an impact on nearly every taxpayer in the country.Changes for tax year 2020 include:

1. No individual mandate penalty

Most of the tax code changes stemming from the Tax Cuts and Jobs Act of 2017 took effect in 2018. One exception is the change to the shared responsibility payment, which takes effect this year.

The shared responsibility payment — commonly referred to as the individual mandate penalty — has applied to folks who are required to have health insurance under the Affordable Care Act but who didn’t get coverage and didn’t qualify for an exemption.

If you owed the penalty, it was due when you paid your taxes.

Starting with this tax year, however, there is no penalty. The Tax Cuts and Jobs Act zeroed it out effective in 2019. So, folks who don’t have health insurance this year will not owe the penalty when they file their taxes in 2020.

2. Higher medical expense deduction threshold

Another way in which the Affordable Care Act impacted taxes was by raising the threshold for deductible medical and dental expenses from 7.5% to 10% of adjusted gross income.

That made it harder to qualify for the deduction. If you itemized your tax deductions, you could deduct eligible out-of-pocket medical expenses if they exceeded 10% of your income, rather than the previous 7.5%.

The Tax Cuts and Jobs Act gave taxpayers a brief reprieve from that change, lowering the threshold back down to 7.5%, but only for the 2017 and 2018 tax years. Starting this year, it returns to 10%.

3. No alimony deduction

Elimination of the alimony deduction is another Tax Cuts and Jobs Act change that took effect in tax year 2019 rather than 2018. For divorce and separation agreements made or modified this year or thereafter, alimony payments will not be deductible, says IRS Publication 5307.

4. Higher retirement account contribution limits

This year, you can stash more cash in various types of retirement accounts, as we detail in “Limits for 401(k), IRA and Other Retirement Plans to Rise in 2019.”

Contributions that you make in 2019 to such accounts — including traditional 401(k) plans and traditional individual retirement accounts (IRAs) — could be deductible on your next tax return.

5. Higher HSA contribution limits

Health savings accounts are another type of tax-advantaged account for which the contribution limits generally increase as the years roll along.

The 2019 contribution limits for people who are eligible for an HSA and have the following types of high-deductible health insurance policies are:

  • Self-only coverage: $3,500 (up from $3,450 last year)
  • Family coverage: $7,000 (up from $6,900)

HSA limits also will rise again for tax year 2020.

6. Higher standard deductions

Standard deductions are somewhat higher this year on account of inflation. The IRS reports that they are:

  • Married filing jointly: $24,400 (up $400 from last year)
  • Married filing separately: $12,200 (up $200)
  • Head of household: $18,350 (up $350)
  • Single: $12,200 (up $200)

The standard deduction reduces the amount of your income that’s subject to federal taxes. So, if a married couple filing a joint tax return is eligible for and chooses to take the standard deduction on their next return, they would not be taxed on the first $24,400 of their taxable income from 2019.

7. Higher income brackets

Income tax brackets are also somewhat higher in 2019 than they were last year on account of inflation.

The IRS reports that the tax rates and corresponding income brackets for 2019 are as follows for folks whose tax filing status is single:

  • 37% tax rate: Applies to incomes of more than $510,300
  • 35%: More than $204,100 but not more than $510,300
  • 32%: More than $160,725 but not more than $204,100
  • 24%: More than $84,200 but not more than $160,725
  • 22%: More than $39,475 but not more than $84,200
  • 12%: More than $9,700 but not more than $39,475
  • 10%: $9,700 or less

Commonly Missed Business Tax Deductions

  • Auto Expenses - While the cost of commuting to and from work is not deductible, business miles are deductible. Be aware of luxury auto limitations, and do the math when deciding whether to lease or buy.Bad Debts - Bad debts are only deductible for businesses that employ an accrual basis of accounting. Personal bad debts, such as loaning money to a family member, may be deductible if you made an unsuccessful attempt to collect.Start-up Expenses - Your business should reimburse you at fair market value, for items that you contributed to start the business.Education Expenses - The IRS helps subsidize your education, as long as you can prove that the education helps your business.Meals and Entertainment - Documenting expenses, and keeping good records is instrumental in proving your entertainment deductions.
  • Home Equity Loans - Interest on home equity loans of less than $100,000 is deductible as an itemized personal deduction. This is so regardless of how the money is spent.

Late Filers Q&A

We never filed our state tax return last year. Can we still do it this year?

If you are required to file a state tax return, you must do so even if it is late.

I can't believe that I forgot to file a return last year. What's the best way for me to proceed? What kind of penalties can I expect to see from the IRS? What if I am due a refund?

First of all, get the tax forms for last year and file your return as quickly as you can. If you have a balance due, late-filing and late-payment penalties will be imposed. If you have a refund, there should be no penalties or interest. Some states impose a penalty for late filing even if you have a refund. If you have specific tax questions, you can visit a Diamond Tax Consultants office and let one of our tax consultant’s help.

What kind of penalty should I expect for filing 1day late? I'm single and will be filing Form 1040EZ with wages of about $4,000.

Because your income is below the filing requirement for single individuals, there is no penalty for late filing. If you had tax withheld, you will receive a refund of the entire amount. You also may be eligible for the Earned Income Credit. Note: If you are required to file a state return, the state may impose a penalty for late filing even if you are getting a refund.

I am self-employed and did not make estimated tax payments. Can I file for an extension?

Yes. Your extension must be postmarked by midnight April 15. You must pay at least 90% of the tax shown on your return by April 15 to avoid a late-payment penalty. Form 4868 gives you an extension of time to file, not time to pay. If your tax is $1,000 or more, you generally will owe a penalty for underpayment of estimated tax. See Form 2210 and its instructions for more information.

If it's already after April 15, it's too late to file an extension. Instead, file your return as soon as possible to minimize your penalties.

I electronically filed my state tax return but am unable to deliver the payment to the post office by midnight on the due date of the return. What will happen?

The state taxing authority may impose a penalty and/or charge you interest on the late payment.

Immediately after mailing my return I realized I forgot to sign the return! Will it be treated as filed late? I am expecting a refund.

When the IRS receives your return, they will contact you about your failure to sign it. Because you are receiving a refund, you do not have to worry that the return is technically late. However, you will not receive your refund until the IRS receives your signature.

I didn't file my return by the due date and I didn't file for an extension. What should I do?

You need to file your tax return as soon as possible. If you owe any tax, pay it with your return to minimize any penalty and interest.

I didn't file my return by the due date. I'm expecting a refund. Will a late-filing penalty be charged?

If there is a refund due to you, no penalty for late filing or late payment will be charged. The penalty is based upon the amount of unpaid tax as of the due date of the return. However, some states impose a late-filing penalty even if you have a refund.

Can I still file a tax return after April 15?

Yes. If you are required to file, you must file the return even if it wasn't filed on time. If you owe the IRS, penalties and interest will be imposed. If you have a refund coming, penalties and interest will not be imposed. To get the refund, you generally must file the return within 3 years of the due date of the return.