2019 Year-End Tax StrategiesSubmitted by Desmond Wealth Management, Inc. on December 6th, 2019
Here are some important strategies to consider in your year-end tax planning.
2019 Last-Minute Section 199A Strategies That Reduce Taxes
Remember to consider your Section 199A deduction in your year-end tax planning.
If you don’t, you could end up with a big fat $0 for your deduction amount. We’ll review four year-end moves that (a) reduce your income taxes and (b) boost your Section 199A deduction at the same time.
First Things First
If your taxable income is above $160,700 (or $321,400 on a joint return), then your type of business, wages paid, and property can reduce and/or eliminate your Section 199A tax deduction.
If your deduction amount is less than 20 percent of your qualified business income (QBI), then consider using one or more of the strategies described below to increase your Section 199A deduction.
1. Harvest Capital Losses
Capital gains add to your taxable income, which is the income that:
- Determines your eligibility for the Section 199A tax deduction,
- Sets the upper limit (ceiling) on the amount of your Section 199A tax deduction, and
- Establishes when you need wages and/or property to obtain your maximum deductions.
If the capital gains are hurting your Section 199A deduction, you have time before the end of the year to harvest capital losses to offset those harmful gains.
2. Make Charitable Contributions
Because the Section 199A deduction uses taxable income for its thresholds, you can use itemized deductions to reduce and/or eliminate threshold problems and increase your Section 199A deduction.
Charitable contribution deductions are the easiest way to increase your itemized deductions before the end of the year (assuming you already itemize).
3. Make Retirement Contributions
Any retirement contributions you make directly reduce your taxable income — and you still have the money inside the retirement account, growing free of taxes until you take it out of the account.
If you are a sole proprietor, your retirement contributions don’t reduce your QBI. Therefore, as long as your QBI is the basis for your Section 199A deduction, you can put away as much as you want using a traditional IRA, a SIMPLE IRA, a SEP-IRA, or an individual 401(k) without damaging your Section 199A deduction.
If you are an S corporation owner, your retirement strategy can achieve the same result as the sole proprietor’s if you make an employee salary or wage contribution (and no contribution by the S corporation) to the retirement plan.
4. Buy Business Assets
Thanks to 100 percent bonus depreciation and Section 179 expensing, you can write off the entire cost of most assets you buy and place in service before December 31, 2019.
This can help your Section 199A deduction in two ways:
- The big asset purchase and write-off can reduce your taxable income and increase your Section 199A deduction when it can get your taxable income under the threshold.
- The big asset purchase and write-off can contribute to an increased Section 199A deduction if your Section 199A deduction currently uses the calculation that includes the 2.5 percent of unadjusted basis in your business’s qualified property. In this scenario, your asset purchases increase your qualified property, which in turn increases the deduction you already depend on.
2019 Last-Minute Year-End Medical and Retirement Deductions
When you get busy with your business, it’s easy to forget about your retirement accounts and medical coverages and plans. However, year-end is approaching, and now’s the time to take action.
Here are the six strategies that you can implement before the end of the year. Five of the strategies increase your tax deductions, and one (the Roth) strategy increases your retirement benefits.
- Put your retirement plan in place no later than December 31 so you are absolutely sure that you have a plan. Be sure to make a contribution to the plan before December 31.
- Convert your traditional IRA to a Roth IRA. The long-term savings here can be huge. Make sure to leave the converted funds in the Roth for at least five years.
- If you have a Section 105 plan in place and you have not been reimbursing expenses monthly, do a reimbursement now to get your 2019 deductions, and then put yourself on a monthly reimbursement schedule in 2020.
- If you have not implemented your qualified small employer health reimbursement account (QSEHRA), make sure to get that done properly now. If you have not yet put a QSEHRA in place and you plan to do so on January 1, do that now and just suffer that $50-per-employee penalty should you be found out. Alternately, consider implementing an individual care HRA (ICHRA) in 2020.
- If you operate your business as an S corporation and you want an above-the-line tax deduction for the cost of your health insurance, you need the S corporation to (a) pay for or reimburse you for the health insurance and (b) put it on your W-2. Make sure that the reimbursement happens before December 31 and that you have the reimbursement set up to show on the W-2.
- Claim the tax credit for the group health insurance you give your employees. If you provide your employees with group health insurance, see whether your pay structure and number of employees put you in a position to claim a 50 percent tax credit for some or all of the monies you paid for health insurance in 2019 (and possibly in prior years).
If we can help you answer any questions you have about the best strategies for your year-end tax planning, please give our office a call.