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Tax Planning Letter 2019

November 9, 2019

 

Dear Clients and Friends :

Greetings! Welcome to our annual tax planning letter, where we share important information to be mindful of as the end of the year approaches.  Once the New Year's ball drops, it is often too late to take advantage of most tax-savings ideas for 2019.

Welcome and Farewell: Before we get to the really good stuff, we want to introduce you to Ryan Cook, CPA, who joined us this month as a senior manager. Ryan has served individual and business tax clients locally for the last 16 years. Ryan was looking for a firm just like ours to join, and we were looking for someone just like Ryan to join us, particularly as we bid a sad farewell with great thanks to Doyle Williams, who left last month to return to his home town. Ryan is a client favorite who fits in perfectly with our philosophy of serving clients with technical excellence, forward thinking, integrity, humor and friendship. He very much looks forward to meeting and working with each of you. See our website for more details about him.

2018 was the first year to be impacted by the Tax Cuts and Jobs Act of 2017 (TCJA) . While there was no significant new legislation in 2019 affecting small business and individual taxes, situations do change from year to year, thus requiring a fresh look at how to approach year-end tax planning.

One of the best changes in the new tax law is the potential to receive up to a 20% deduction of the income from a trade or business. Clients want to take advantage of this whenever possible. Most, but not all businesses other than rental real estate generally qualify. Rental real estate can qualify, too , but there are additional hoops to go through to get it, which became clearer with guidance that came from the IRS this year.

Many of our clients own rental real estate that generates income. Some real estate activity qualifies as a trade or business for the 20% deduction, and some does not. It depends on how much work the owner or the owner's helpers, whether a management company or contractors or whoever works for the owner on the property, puts into actually working on the property during the year. For example, an owner with a long-term tenant in a rental , where the owner does nothing more than collect rent checks and pay the taxes, does not have a trade or business . If the owner or the owner's helpers put on a new roof, find and qualify a tenant, hire someone who does lawn and snow maintenance (those maintenance hours count), and those hours spent by the owner and/or the helpers can be documented (best with a contemporaneous log of time spent by date), the owner can qualify for a trade or business and get the 20% deduction. If you own rental real estate, please review your records, and document the time spent by you and your contractors and/or property manager over the year, because we will need to discuss it when we prepare your tax return . However, if your real estate activity shows a tax loss, the 20% deduction, which is calculated on taxable trade or business positive income, will not give a benefit .

There is also a new safe harbor that real estate owners can elect on the tax return to get the 20% deduction. If an owner can meet the rigorous requirements of the safe harbor, which requires among other things 250 hours of documented time spent by the owner or helpers (a contemporaneous log is required), then the IRS will allow the deduction.

We have put many details of all these rules that real estate owners need to follow to qualify for the 20% deduction on our website . We also will be happy to discuss them with you before year-end if you want to meet or call. This is a big deal.

If you own a business, and have assets that you are going to acquire in the next few months, consider whether you should acquire them and place them in service before year-end to help your 2019 tax situation . The depreciation rules for newly acquired vehicles are much improved with the new law. We are here to talk over the pros, cons and strategies if that would help.

Bunching deductions is an area where many individual clients can help lower their tax liability. TCJA significantly increased the standard deduction for all taxpayers. This means that many individuals who previously received a tax benefit by itemizing deductions no longer do, because taking the standard deduction is better for them. For 2019, the standard deduction is $12,200 for single taxpayers, $24,400 for married taxpayers filing a joint return, $18,350 for taxpayers filing as head of household, and $12,200 for married taxpayers filing separately. More if you are over 65.

If the total of your itemized deductions in 2019 will be close to your standard deduction amount, alternating between bunching itemized deductions into 2019 and taking the standard deduction in 2020 (or vice versa) could provide a net-tax benefit over the two-year period. Bunching mostly relates to the bunching of charitable contributions into one year instead of being spread over two. You might also bunch income or property taxes if you do not believe you will exceed the $10,000 cap on itemizing taxes.

Medical expenses continue to be a factor for many of our clients. For 2019, your medical expenses are only deductible as an itemized deduction to the extent they exceed 10 percent of your adjusted gross income . Depending on what your taxable income is expected to be in 2019 and 2020, and whether itemizing deductions would be advantageous for you in either year, you may want to accelerate any optional medical expenses into 2019 or defer them until 2020. The right approach depends on your income for each year, expected medical expenses, as well as your other itemized deductions.

However, health saving accounts (HSAs) present an attractive alternative. If you are eligible to set up such an account (it requires a high-deductible health plan), you can deduct the amount you contribute to the account in computing adjusted gross income. Thus, the contributions are deductible whether you itemize deductions or not. Distributions from an HSA are tax free to the extent they are used to pay for qualified medical expenses (i.e., medical, dental, and vision expenses.) For 2019, the annual contribution limits are $3,500 for an individual with self-only coverage and $7,000 for an individual with family coverage. 2019 contributions can be made as late as April 15, 2020 as long as the HSA account is set up by December 31, 2019. If you have an HSA at work that your employer contributes to, and your employer does not max out your allowable HSA contribution for this year, you can add to it yourself and get a 2019 tax deduction with your contribution, plus you have until April 15, 2020 to do it.

The TCJA changed rules regarding the deduction of mortgage interest. If you sold your principal residence during the year and acquired a new principal residence, the deduction for any interest on your new mortgage could be limited. There are new limits related to total loan balance and limits related to new home equity lines and loans. In general, interest deductions for new mortgages are limited to the first $750,000 of mortgage debt.

While the TCJA eliminated the personal and dependent exemption deductions that applied to tax years before 2018, it increased the child tax credit and greatly increased the income level at which taxpayers are eligible for the credit. The credit is worth $2,000 per qualifying child. However, in the year a child reaches age 17, the credit is no longer available. That makes a big difference in your tax total, so be aware.

Be aware also that there is a $500 credit available for other dependents, so we want to talk about dependent parents and children over age 16.

Additionally, if you paid someone to take care of your child or a dependent so you can work or look for work, you may be entitled to the child care credit for up to 35 percent of the expenses paid. The amount of child care expense used to calculate the credit is generally limited to $3,000 for one child or $6,000 for two or more children. There are qualifications that must be met in order to be eligible for the credit, but be sure to tell us about those expenses.

Additionally, if you paid someone to come to your home and care for a child or dependent, you may be a household employer subject to employment taxes. The rules for household employees are complicated. Please call to talk about them if this situation may apply to you. If you have a household employee, you need to provide a W-2 by January 31.

If you have a flexible spending plan at work for child care reimbursement, please consider enrolling. Generally, the flex plan is much more valuable than the childcare credit. A flex plan at work for medical expenses is also valuable - consider that too. We are here to help with details if you want some individual guidance for your situation.

As a result of the increase in the standard deduction, some taxpayers are no longer getting a benefit from itemizing their deductions, such as charitable contributions, as they once were. However, as noted above, you can still help charities and get a tax benefit if you contribute enough to get over the standard deduction amount or bunch itemized deductions that would otherwise be spread over multiple years into one year.

Consider donating appreciated assets, such as stock, to a charity. Generally, the higher the appreciated value of an asset, the bigger the potential value of the tax benefit. Donating appreciated assets not only entitles you to a charitable contribution deduction but you also avoid the capital gains tax that would otherwise be due if you sold the stock.

Finally, taxpayers 70 1/2 years old and older who own an individual retirement account (IRA) are required to take minimum distributions from that account each year and include those amounts in taxable income. If you are in this category, a special rule allows you to make a charitable contribution directly from your IRA to a charity. This allows you to reduce your taxable income for the contributions whether you itemize deductions or not, and it also reduces Michigan tax.

By investing in a qualified retirement plan, you'll not only receive a current tax deduction, thereby reducing current year income tax, but you can sock away money for your retirement years. If your employer has a 401{k) plan and you are under age 50, you can defer up to $19,000 of income into that plan. Catch -up contributions of $6,000 are allowed if you are 50 or over.

If you have a SIMPLE IRA or a SIMPLE 401(k), the maximum pre-tax contribution for 2019 is $13,000. That amount increases to $16,000 if you are 50 or older.

There are other qualified plans available if you have a business. Often the allowable contributions are larger. Please call if you would like to discuss your retirement contribution possibilities further. Some plans need to be set up by year-end. A SEP plan can be set up by the due date of the return, including extensions.

If certain requirements are met, contributions to an individual retirement account (IRA) may be deductible. If you are under 50, the maximum contribution amount for 2019 is $6,000. If you are 50 or older but less than 70 1/ 2, the maximum contribution amount is $7,000. Even if you are not eligible to deduct contributions, contributing after-tax money to an IRA may still be advantageous as earnings will grow tax-free, and converting the after-tax IRA contribution to a Roth IRA may make sense for you, depending on the size of your other IRA accounts.

If you already have a traditional IRA, it may be appropriate to convert some or all of it to a Roth IRA this year. You'll have to pay tax on the amount converted as ordinary income, but subsequent earnings will be free of tax and the decrease in tax rates that are effective this year makes such a conversion less costly than it would have been in previous years. Of course, this option only makes sense if the tax rates when the money is withdrawn from the Roth IRA are anticipated to be higher than the tax rates when the traditional IRA is converted. And if you have a traditional 401(k), 403(b), or 457 plan that includes after-tax contributions, you can generally rollover these after-tax amounts to a Roth IRA with no tax consequences. A rollover of a SIMPLE IRA or 401(k) into a Roth IRA may also be available. As with all tax rules, there are qualifications that apply to these rollovers that we should discuss before any actions are taken.

The IRS has become increasingly aggressive at tracking down individuals who have not reported foreign bank accounts. If you own any foreign bank and/or brokerage accounts, we are required to say so on the tax return. If these accounts have a combined value greater than $10,000 on any day of the year, you are required to report them on an FBAR, in addition to disclosing their existence on the tax return. The penalties for failure to file the forms are beyond stiff - more in the "unbelievable" category. Please tell us if this applies to you. Also, be sure to tell us about any income generated by these foreign accounts, even if no 1099 is issued.

We urge everyone to review their IRA beneficiary forms to make sure that they are up-to-date. Please be aware that upon your death the IRA beneficiary form controls where the IRA goes, not your will or trust, so making sure these forms are accurate is essential. Beneficiary forms for other retirement plans and insurance policies should also be reviewed.

Trust as Beneficiary: Yes, your trust can be your IRA beneficiary. But we are finding some practical difficulties with that upon implementation, particularly in the case of multiple trust beneficiaries.  The trust may have to remain open as long as the IRA exists, for example. The life of the oldest beneficiary has to be used for minimum required distributions and this can be another drawback. Having individual beneficiaries for IRAs seems to work much better in many cases. You may want to reconsider whether the practical consequences of having your trust as your beneficiary are what you really intend.

Inherited IRAs have required minimum distributions, just as regular IRAs do when you turn age 70 1/2. If you want to take inherited IRAs over your lifetime, then distributions must begin in the year following the date of death of the account owner, no matter how old you are. Be sure to call us if you have inherited an IRA to be certain you know the particulars. You don't want to pay tax on the account prematurely because you were unaware.

For Business Owners, Landlords and Trusts: If you are a business owner, landlord or trustee and you paid $600 or more to any sole proprietors , LLCs, partnerships, trustees or attorneys through your business, then you need to prepare and file Forms 1099 for them. In order to do that, you need their name, address and tax ID#, as well as what you paid them. Forms 1099 and W-2s are due to the IRS, as well as the payees, January 31. The penalty for not filing a required 1099 form has been increased to $500 per form. We will prepare your 1099 forms for you if you would like, and we can efile them for you. Please get that information to us right away in January.

Talk to us! We find over and over that the more we know about our clients, the more we can help them. We need you to tell us about new businesses, marriages, second homes, new babies, children in college, how many months a year you spend in Florida (where there is no income tax} and so on. If you have a life event and you wonder if it might affect your taxes, shoot us a quick email, or give us a call. This is planning season, and if you are concerned about your tax circumstances for 2019 and don't want to be surprised in April or pay potential underpayment penalty, let us look at it and see where you are. There are actions we can take now to help.

Be sure to send us any correspondence you get from IRS or Michigan. It is not payable until we say it is. The mistakes IRS makes on these notices are numerous.

Our 2019 tax organizer will arrive in January. Returning clients will receive a personalized organizer which will contain information from last year's return. We hope the organizer will make it easier to collect your information.  New clients will receive a generic organizer for their use.

Thank you for allowing us to be your tax professionals.  We would be delighted to provide a free 30-minute initial consult to any friends or relatives if they are looking for people like us to help them. We meet some of the nicest people that way.

Have a wonderful Holiday Season! We look forward to hearing from you soon.

Very truly yours,

Mary, Ryan, Rainie and Sue