Our Year End Tax Planning Strategies for 2019
November 22, 2019 Author: Tess Downing, MBA, CFP®, Complete View Financial
Though you may not believe it, or at least want to believe it, 2019 is almost gone. We’re about to plunge headlong into the holiday season, and if you’re honest with yourself, you know that all the time and effort that goes into creating a joyous holiday season for your family means not much else will get done. But if you could eke out a bit of spare time, surely you would want to spend that on… year-end tax planning.
So before Thanksgiving passes and you find yourself hip-dip in December, take a little time (just a little, we promise) to get things in order for tax season.
Things Are the Same…Except the Ones that Changed
This is Year 2 under the Tax Cuts and Jobs Act of 2017 (TCJA), which took effect beginning with tax year 2018. Since you can be forgiven if you don’t recall all the important changes from last year, here are the highlights.
- The state and local tax deduction is limited to $10,000. “State and local” covers income, property, and sales taxes.
- The casualty and theft loss deduction has been eliminated, unless you are in a declared disaster area. (We suspect you’ll probably know if that’s the case. If you’re not sure, however, FEMA has a handy directory here.)
- The miscellaneous expense deduction has also been eliminated, which practically speaking for most individual taxpayers means unreimbursed employee expenses. On the upside, some reimbursements you receive from your employer may now be non-taxable.
- The mortgage interest deduction was modified, but for most taxpayers it has not changed significantly in practice. Also, interest on home equity loans is now not deductible unless the funds were used for the improvement or purchase of the home.
- On a less cheerful note, alimony payments are no longer deductible for the payer, and are no longer included in income by the recipient, for divorce agreements that are executed after 2018.
The major change is that the deductibility threshold for medical and dental expenses goes back to 10% of adjusted gross income (AGI) in 2019, up from 7.5%. Also, the standard deduction adjusts each year for inflation, and for 2019 is $12,200 for single filers and $24,400 for those filing jointly.
Tis the Season for Giving
While many deductions were reduced or eliminated under the TCJA, one area in which deduction limits increased was charitable donations. The annual limit went from 50% to 60% for 2018 until 2025, when the TCJA sunsets. Amounts in excess of the limit can be carried over up to five years. Note that you are now required to have some form of written receipt or acknowledgment from the charity for any donation over $250, and of course, keeping detailed records of charitable giving is always advisable should an auditor later come knocking. (There are some special rules and different limits for donations of property, but those are uncommon and beyond the scope of this discussion.)
As a reminder, charitable gifts and other deductions such as medical and dental expenses only apply if you are itemizing deductions. Now is a good time to estimate your taxable income and expenses for 2019 and decide whether you are likely to benefit more from taking the standard deduction or itemizing. If it looks as though you will probably take the standard deduction, delay your charitable giving until after the first of the year to shift the tax benefit into 2020. If, on the other hand, you will benefit from a donation in 2019 but can’t make the full amount in cash right now, you can deduct a donation made in 2019 via credit card even though the bill is not paid until 2020.
Reading, Writing, and Arithmetic = Tax Benefits
If you have a child or children in college, you’ll be glad to know that the TCJA preserved both the Lifetime Learning Credit ($2,000 per family) and the American Opportunity Tax Credit ($2,500 per student). If you pay tuition for the spring semester before year-end, it will be eligible for the credit. Bear in mind, however, that both credits phase out based on modified AGI.
Another positive change under the TCJA was the expansion of Section 529 plan rules to include K-12 tuition (up to $10,000); previously only college expenses were eligible. Speaking of 529 plans, you may now make a one-time gift into a 529 of up to $75,000 (single) or $150,000 (married) with no gift tax liability.
Naturally, the same advice that applies every year still applies this year: Make sure that all of your tax-related financial records are gathered in one place, that you still remember where that place is, and that they are at least somewhat organized. You certainly don’t want to be scrambling on April 14 to present your accountant with the proverbial shoebox full of receipts. At least you can relax and wait until after Christmas to start watching the mail for tax-related documents — but if you take a few minutes now and elect to receive those documents electronically, you won’t even have to do that, and maybe the Tax-Elf-on-a-Shelf will make sure Santa puts something nice in your stocking.
In closing, we must remind you that every taxpayer’s individual situation is different, and you should seek individualized advice from a tax professional before making any year-end tax planning decisions.
For more tips on planning taxes at the start of the year, check out our post here.