BY JOE KRISTAN, CPA, Partner, Eide Bailly
We get together to catch up with our families at Thanksgiving. When we get back from the long holiday weekend, we get together with our financial advisors and give thanks we still have some time to fix our mistakes and improve tax returns due in April.
The time between now and New Year’s Day is when tax planning gets serious. It’s late enough to know pretty much how the tax year will come about, but early enough to change this year’s tax story. before the turn of the calendar sets it in stone.
What’s your income? You can’t know where you want your tax planning to go until you know where it is now. Individuals should gather their pay stubs and their most recent brokerage statements. Taxpayers with businesses need their most recent financial information available. You also need to have your year-to-date estimated tax payments in hand. These items help you and your tax adviser estimate your 2019 taxable income and whether you owe, or if you are already sitting on a refund.
Then it’s time to plan.
Common planning items for individuals include:
Capital loss harvesting. Unless you are working with commodities, taxpayers control the timing of capital gains and losses. If you have capital gains in taxable accounts when you do your 2019 tax planning, scour your taxable accounts for losers. Capital losses, whether long-term or short-term, can offset capital gain income for the year, plus (for most taxpayers) $3,000 of ordinary income. For everything but short sales, the tax law uses the “trade date as the date of your gain or loss. You can sell loss positions out of your taxable accounts on any trading day remaining in 2019 and offset the losses against your 2019 capital gains.
But watch out for the “wash sale” rules. If you buy back a stock you sold at a loss, within 31 days of the loss sale, the loss is disallowed. The same rule applies if you purchased additional shares of the loss position within 31 days of the sale. The unallowable loss is added to the tax basis of the stock that was purchased.
Charitable contributions. If you are feeling charitable, you have time to get your deductible contributions in before December 31. Keep in mind:
- Contributions by check are considered made when mailed, so if it’s a big number, document timely mailing using certified mail.
- Contributions made by credit card are considered made when you charge them; you don’t have to wait until you settle the credit card charge.
- Appreciated securities are a great charitable gift. If you have held the position for over a year, you can deduct a contribution of publicly-traded stock at fair value, without ever having to pay tax on the appreciation. If you are doing this, don’t wait until the last minute, as some charities may need a few days to process a stock gift. If it is a marketable security, no appraisal is needed.
- Make sure you get the appropriate documentation from the charity. For gifts over $250, no receipt means no deduction.
- Contributions of property other than marketable securities may need an appraisal to get the deduction. That appraisal needs to be completed before you file, and the appraisal has to meet IRS standards. You definitely should consult your tax advisor if you are looking to give property valued at over $5,000 to protect your deduction.
- The standard deduction has gone up. For 2019 it is $24,400 for joint filers, $12,200 for single filers. That means your itemized deductions – for most people mortgage interest and charitable contributions, plus up to $10,000 in state and local taxes – have to exceed those thresholds to provide a tax benefit. Some taxpayers will benefit by making donations in alternate years exceed the standard deduction.
The Solo-K plan. If you have a successful Schedule C or Schedule F business and have no employees, consider setting up your very own 401(k) plan. Assuming you have the business income to cover it, you can deduct a lot – 100% of the first $19,000 of taxable income ($25,000 if you are 50 years old). With more income, you might be able to deduct up to $56,000. But don’t dawdle. While you don’t have to actually put cash into the plan until the date you file your 2019 return, the plan needs to be in place by year-end. Talk to your tax pro before setting up a Solo 401(k), especially if you have multiple business interests or are participating in another retirement plan.
Estimated taxes. The $10,000 cap on deductions for state and local taxes has made pre-paying your state balance due by year-end pointless for many filers. But Iowans can still deduct federal tax payments on their Iowa 1040, so prepaying your 2019 federal balance due can still make sense. This is especially useful if you had an unusual gain in 2019 – a sale of a business, a big capital gain, a lucky lotter ticket. If you wait until 2020 to pay that big federal balance due, you might find you have more of a deduction for taxes paid than you can use, wasting part of your tax benefit.
Evaluate fixed asset needs. If you are adding fixed assets to your business, get them placed in service by year end. Most personal type property used in a trade or business, but not buildings, can be deducted 100% in the year they go into service using “bonus depreciation” or “Section 179” deductions. Remember – “placed in service” means on-site and ready to go, not “paid for” or “in crates on the shipping dock”
If you have a partnership or S corporation, make sure you have enough tax basis to cover your business distributions and deductions. If you run out of basis, you can’t deduct losses, and you may have taxable distributions. The IRS is taking extra interest in tax basis this year, so be careful. If you aren’t sure, check with your tax pro.
If you have a cash basis business, pay your bills. If the check for a deductible expense is the mail by December 31, or charged to a credit card, the deduction should be good for this year.
There’s still time to change the story of your 2019 tax return if you get started to now. If you wait until 2020, it gets a lot harder.
Still looking for some additional information to help you get your thoughts organized for year-end? Eide Bailly’s year-end planning page has a multitude of resources for both businesses and individuals.
| Joe Kristan