2019 Year-End Tax Planning Letter
Dear Clients and Friends:
Year-end tax planning in 2019 remains as complicated as ever. Notably, we are still coping with the massive changes included in the biggest tax law in decades — the Tax Cuts and Jobs Act (TCJA) of 2017 — and pinpointing the optimal strategies. This monumental tax legislation includes a myriad of provisions affecting a wide range of individual and business taxpayers.
Among other key changes for individuals, the TCJA reduced tax rates, suspended personal exemptions, increased the standard deduction and revamped the rules for itemized deductions. The impact on businesses was just as significant: the TCJA imposed a flat 21% tax rate on corporations, doubled the maximum Section 179 “expensing” allowance, limited business interest deductions and repealed write-offs for entertainment expenses.
I. Individual Tax Planning — Itemized Deductions. For 2019, the inflation-indexed standard deduction is $12,200 for single filers, $18,350 for heads of households, and $24,400 for joint filers. The deduction for state and local taxes (SALT) is limited to $10,000 annually. The deduction for casualty and theft losses is eliminated (except for disaster-area losses), and the deduction for miscellaneous expenses is eliminated.
Charitable Donations. Itemizers can deduct amounts donated to qualified charitable organizations. The TCJA increased the annual deduction limit for monetary contributions from 50% of AGI to 60% for 2018 through 2025. For donations of appreciated property owned longer than one year, you can generally deduct an amount equal to the property’s fair market value.
Alternative Minimum Tax. The AMT is a complex calculation made parallel to your regular tax calculation. The two AMT rates for single and joint filers for 2019 are 26% on AMT income up to $194,800 ($97,400 if married filing separately) and 28% above that threshold.
Education Tax Breaks. The TCJA allows you to use Section 529 plan funds to pay for up to $10,000 of K-12 tuition expenses tax-free.
Estimated Tax Payments. No estimated tax penalty is assessed if you meet one of three “safe harbor” exceptions: annual payments equal at least 90% of your current liability; annual payments equal at least 100% of the prior year’s tax liability (110% if prior-year AGI exceeded $150,000); or you use the “annualized income” installment method.
II. Business Tax Planning — Depreciation. Under the TCJA, a business may benefit from a combination of the Section 179 deduction, “bonus” depreciation, and regular depreciation (MACRS). The TCJA doubled the previous 50% first-year bonus depreciation deduction to 100% for property placed in service after September 27, 2017, gradually phasing out after 2022.
Travel Expenses. You can still deduct expenses for travel and meal expenses while away from home on business. The standard mileage rate for 2019 is 58 cents per business mile.
QBI Deductions. The TCJA authorized a deduction of up to 20% of the “qualified business income” (QBI) earned by a qualified taxpayer, claimed by owners of pass-through entities and sole proprietors, subject to income thresholds and “specified service trade or business” (SSTB) rules.
Business Repairs are currently deductible, while improvements must be written off over time. A safe harbor rule allows a business to currently deduct costs of $2,500 or less ($5,000 or less for a business with an “applicable financial statement”).
Business Interest. The TCJA generally limits the deduction for business interest to 30% of adjusted taxable income, though the limit does not apply to a business with average gross receipts of $25 million or less for the three prior years.
III. Financial Tax Planning — Securities Transactions. Long-term capital gains from sales of securities owned longer than one year are taxed at a maximum rate of 15% (20% for high-income investors); short-term gains are taxed at ordinary rates up to 37% in 2019.
Net Investment Income Tax. A special 3.8% tax applies to the lesser of your “net investment income” or the amount by which modified AGI exceeds $200,000 (single) or $250,000 (joint).
Required Minimum Distributions. You must receive RMDs from qualified retirement plans and IRAs after reaching age 70½, or face a penalty equal to 50% of the required amount.
Estate and Gift Taxes. The TCJA doubled the federal estate tax exemption from $5 million to $10 million, inflation-indexed to $11.4 million in 2019. You can give each recipient up to $15,000 in 2019 without paying federal gift tax ($30,000 for joint gifts by a married couple).
IV. State Taxes — Mississippi Returns. Mississippi does not allow the federal 20% QBI deduction, does not follow federal bonus depreciation provisions, and has its own NOL carryback/carryforward rules (2 years back, 20 years forward). Mississippi allows a business interest deduction with no limitation, unlike the federal 30%-of-ATI cap.
This year-end tax planning letter is based on the prevailing federal and Mississippi state tax laws, rules and regulations. Please remember that this letter is intended to serve only as a general guideline. Your personal circumstances will likely require careful examination. Should you have any questions, please do not hesitate to contact me at (601) 981-6336.
With kindest personal regards, I am, Very Truly Yours, Barnes Law Firm, P.A., Harris H. Barnes, III