Along with the holiday to-do list comes the daunting task of gathering your end-of-year documents. Come January, the IRS will begin to accept tax returns. Experts warn small business owners not to procrastinate until tax day because many tax mistakes may carry hefty fines. Paying your individual income taxes likely represents one of the largest outlays of the year, but it also offers an opportunity for significant savings. Whether you have paid individual income taxes through employer withholding or quarterly estimates, thoughtful planning before the calendar turns to 2020 can reduce your total tax liability and help retain more of your earnings.
Here are 5 tax tips to be considered to implement before 2019 ends:
- Making Charitable Contributions (property) – consider contributing marketable securities that have declined in value to a charity. If you sell the securities first and then donate the sales proceeds, you will obtain both a capital loss and a charitable contribution deduction. Caution: If you are contemplating the repurchase of the security in the future, you need to consider the wash sale rules.
- Defer Tax on Capital Gains through Opportunity Zone Fund Investment – certain investors can defer income tax on Capital Gains through 2026 by investing the gain in an Opportunity Zone Fund. A taxpayer may elect to defer the tax on some or all of a capital gain if, during the 180 day period beginning at the date of sale/exchange, they invest in a qualified opportunity fund. A taxpayer who defers gains through an Opportunity Zone Fund investment receives a 10% step up in tax basis after five years and an additional 5% step up after seven years. In order to take advantage of the 15% step up in tax basis, the taxpayer must invest by December 31, 2019. Planning tip: Remaining in the qualified opportunity fund for at least ten years results in the cost basis of the property being equal to the fair market value on the date of sale/exchange.
- Eliminate Tax on Capital Gains – if you have realized capital gains during 2019, you still have time to harvest capital losses before the end of 2019 to offset your capital gains (especially short term gains that are taxed at ordinary rates). Also, if you do not have capital gains or your capital losses exceed your capital gains, you can deduct up to $3,000 of ordinary income with capital losses. Planning Suggestion: Add up all capital gains and losses you have realized so far this year, plus anticipated year-end capital gain distributions from mutual funds (this amount should be presently available by calling your mutual fund’s customer service number). Then review the unrealized gains and losses in your portfolio. Consider selling additional securities to generate gains or losses to maximize tax benefits. Caution: Do not sell a security simply to generate a gain or loss to offset other realized gains or losses. The investment merits of selling any security must also be considered.
- Recognizing Income and Deductions into the most advantageous year – you can recognize taxable income between 2019 and 2020 by controlling the receipt of income and the payment of deductions. Generally, income should be received in the year with the lower marginal tax rate, while deductible expenses should be paid in the year with the higher marginal rate. If your top tax rate is the same in 2019 and 2020, deferring income into 2020 and accelerating deductions into 2019 will generally produce a tax deferral of up to one year. On the other hand, if you expect your tax rate to be higher in 2020, you may want to accelerate income into 2019 and defer deductions to 2020. Planning tip: The time value of money should be considered when deciding to defer to income or accelerate deductions. Comparative computations should be made to determine and evaluate the net after-tax result of these financial actions. Moreover, you should consider whether you expect to be subject to the AMT for either or both years.
- 2019 Estimated Taxes – if you have underpaid an installment of 2019 estimated taxes, increasing a later installment will not completely eliminate the underpayment penalty. However, increased withholding on year-end salary or bonus payments may be used to make up the underpayment. That is because withholding on compensation is deemed paid evenly over all quarters of the year. Planning tip: Voluntary withholding of income taxes form social security payments and certain other federal payments is permitted. This withholding may eliminate the need to file quarterly estimated payments for certain retired persons.
Source: Fred Davis is a Mitchell Titus partner as well as its Tax Service Leader. He can be reached directly at firstname.lastname@example.org.