Now that the we are half way through the year –– it’s time we turn our attention to tax planning for 2019, and the continuing effects of the Tax Cuts and Jobs Act (TCJA) and its updates.
A recent article at Kiplinger offers some ideas to consider:
The TCJA significantly raised the personal exemption for estate tax – from ~$5.49 million for individuals and ~$11.2 million for married couples to $11.4 million for individuals and $22.8 million for married couples for tax year 2019. This had the effect of reducing the number of estates subject to tax from 6,460 prior to the enactment of the TCJA to 1,890 in 2018.
However, even if your estate now falls into the non-taxable category, you still may want to consider wealth transfer strategies. Because the increased exemptions are set to sunset at the end of 2025. It is possible, in the interim, that the higher exemptions will be made permanent, or that the estate tax will be eliminated altogether. It is also possible that a new Presidential administration and/or Congress would significantly alter the law prior to the sunset provision kicking in.
It’s not usually a bad idea to protect yourself against potential contingencies. If you have substantial assets to pass along to your children, a trust might still be a good idea, even if you don’t think you will owe estate taxes.
Do You Qualify For the 20% QBI Deduction?
Those taxpayers with pass-through business income had to wait until the second half of 2018 for final IRS guidance on the TCJA deduction of 20% of qualified business income (QBI) received from such entities. The deduction is applicable to business which don’t pay corporate income tax, such as sole proprietorships, S Corporations, partnerships, and some trusts and estates.
However, certain specified service trades of businesses (SSTBs) are ineligible for this 20% deduction. SSTBs include those entities engagement in the fields of health, law, financial management, and performing arts, among others. A business entity is regarded as an SSTB if “the principal asset of such trade or business is the reputation or skill of one or more of its employees.”
Under the statute, the deduction is available in full to taxpayers with taxable incomes below $315,000 for joint returns and $157,500 for other taxpayers. It is generally equal to the lesser of 20% of combined QBI plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income, or 20% of taxable income less net capital gain. The final regulations include qualified dividends in net capital gain. The deduction may be limited for taxpayers above these thresholds.
Know the fine points of your pass-through business income – if you are eligible for the 20% QBI deduction, make sure to take advantage of it.
Does It Make Sense to Stagger Charitable Deductions?
While the TCJA raised the limit of charitable donations from 50% of adjusted gross income (AGI) to 60%, other provisions of the new law also impact the tax consequences of charitable giving.
The increase in standard deductions - $12,200 for individuals and $24,400 for married couples for tax year 2019 – means it is in fewer taxpayers’ interests to itemize their deductions. If you don’t itemize, charitable gifts aren’t going to have an impact on your tax liability.
But, if you stagger your charitable donations – give twice as much every other year, for example – you might be able to reduce your income tax liability in those years you do give. Say you are married, and you and your spouse give $30,000 to charity annually, have no mortgage interest, and your only sure tax-deductible expenses are state and local taxes, which deduction was capped by the TCJA at $10,000 annually. If you donate the $30,000 and itemize each year, deducting the $10,000 for state and local taxes, you will over two years have itemized deductions of $80,000.
However, if you save the first year’s planned charitable contributions, take the standard deduction that year - $24,400 – and give $60,000 to charity the second year, you can itemize your deductions at $70,000, for a total two-year deduction of $94,400.
These are just a few of the challenges and opportunities afforded by the TCJA.
If you would like to see how the TCJA potentially affects your own income tax liabilities, please click here to email me directly.
Until next Wednesday –