The Aftermath of the 2018 New Tax Law: 2019 Tax Planning

Amie Vanderpool, CPA (Jul, 2019)

Are you breathing a sigh of relief now that you have finished your 2018 taxes?  Maybe you filed an extension and are just wrapping up your tax returns for 2018.  Either way, the 2018 filing season has been an interesting one with the Tax Cuts and Jobs Act (TCJA) signed into law December 22, 2017. This law enacted sweeping tax legislation that impacted every tax return.  While a few individuals and corporations saw their 2018 returns become more straightforward, most had layers of complexity added to an already complex tax law. Now that the 2018 filing season is behind us, it is the perfect time to look ahead to 2019, and implement some early tax planning strategies to ensure that both your business and personal tax bill is as low as possible.

During the 2018 tax season, the news was filled with stories of below average tax refunds and individuals who owed money for the first time in years.  While there were many factors that contributed to this, a big culprit was the withholding for W-2 wage earners.  When the IRS issued new withholding tables in February 2018, the majority of people assumed that if they previously had enough withheld under the old tax law, they should be covered with the new tax withholding schedules without having to make any changes to the number of exemptions they were claiming.  These individuals found themselves enjoying a bump in their take home pay as the amount withheld from their paychecks went down under the new withholding tables.  But when filing their tax return, many found that they had not paid in enough federal tax. 

If you found yourself in a situation for 2018 where you were under-withheld and owed with your tax return, you should file an updated IRS Form W-4, Employee's Withholding Allowance Certificate, with your employer to ensure that you pay in the proper amount of tax.   The IRS intends to issue major changes to the W-4 for 2020 in an effort to make the form mirror the changes under the TCJA more closely.  In the meantime, it would still be worthwhile to update the form now to head off any potential tax liabilities for 2019.  This is especially true if you previously itemized your deductions, but took the standard deduction for 2018, have dependents, have multiple incomes, or recently underwent a major life event (such as marriage, divorce, had a child, changed jobs, purchased a house, etc.). 

Itemized deductions versus the standard deduction seemed to be a point of confusion for many individuals for 2018.  The $10,000 limitation on state and local income taxes (frequently referred to as the SALT deduction) was well broadcasted, along with the increased standard deduction.  While this led many individuals to assume that they would no longer be able to itemize their deductions, some were surprised to learn that they were still able to receive a tax benefit by itemizing.  In addition, many filers were able to itemize for New York State even if they took the standard deduction on their federal return.  In addition to allowing the full deduction for any real estate taxes paid, New York also allowed taxpayers to take miscellaneous itemized deductions in excess of 2% of adjusted gross income - which is now disallowed on the federal return.  These deductions include unreimbursed employee business expenses, tax preparation fees, investment fees, and other miscellaneous deductions.  Keep this in mind for 2019 - it is still important for you to track your mileage and other employee expenses, and keep contemporaneous records of charitable contributions, including noncash donations of property, in case it is to your advantage to itemize on your return.

If you have a required minimum distribution (RMD) from your traditional or ROTH IRA for 2019 and are looking for a way to save some money on taxes, consider making a qualified charitable distribution (QCD).  A QCD is simply a charitable contribution that is made directly from your IRA to the charitable organization by the IRA's trustee.  The QCD counts as part of your RMD for the year, but reduces the amount of the RMD that is taxable.  For example, if your RMD is $25,000 and the QCD is $5,000, you would only report the $20,000 as income on your tax return.  You can't "double dip" by also picking this up as a charitable deduction on your return.  This makes a QCD a great option if you plan to contribute to a charity during the year, but will likely not have enough deductions to itemize for 2019.

Corporations were in for some pleasant surprises when filing for 2018.  In general, there were several provisions that simplified returns for C Corps.  For example, the graduated tax rate was changed to a flat tax rate of 21% and corporate AMT was repealed.  However, that doesn't mean that businesses were unscathed by the complexity of the new tax law.  Pass-through entities such as partnerships and S Corps, as well as sole proprietorships had to unravel the Qualified Business Income Deduction (QBID).  In its simplest form, the QBID was a way to give owners who are taxed on their share of business income a similar reduction in tax rates to the C Corp's new 21% rate, by giving them a 20% deduction on their return for Qualified Business Income.  However, numerous thresholds, phase-outs, and special rules that were included in the legislation to prevent abuse of the deduction meant a lot of complex calculations, and even determining what constituted "qualified business income" was a challenge for 2018.  In an effort to clarify these complex new rules, the IRS issued regulations in January 2018 that detailed how to determine the QBID in a variety of situations.  Although time consuming to calculate, many individuals enjoyed a nice reduction in their tax liability for 2018 as the result of the QBID, and should be able to enjoy a similar deduction for 2019 going forward as well. 

Depreciation has historically been one of the simplest tax planning methods for business entities to use when trying to manage potential tax liabilities.  Thanks to the new TCJA, businesses now have even more options and flexibility when it comes to depreciating fixed assets.  One of the options is to take the Section 179 deduction for depreciation.  This provision allows a business to expense up to $1,000,000 of the cost of certain business assets placed in service during 2019, as long as the total qualifying property purchased is less than $2,500,000.  The amount of section 179 deduction that you can take is reduced dollar for dollar by the amount of assets placed in service over the $2,500,000 - meaning that you can qualify for section 179 as long as you purchased less than $3,500,000.  Examples of qualifying assets include furniture, equipment, machinery, off-the-shelf computer software, and some qualified real property, like roofs, HVAC, and security systems.  One caveat with the section 179 deduction is that the deduction can only be used to bring taxable income to zero, with any excess deduction being carried forward to future years.   

Bonus depreciation is another option for reducing taxable income.  There used to be several limitations with bonus that made it difficult to use in tax planning.  First, the deduction could only be used on new (not used) assets.  Second, the bonus depreciation was a provision in the tax law that expired every year, and was usually extended by Congress in December - hardly enough time for businesses to purchase equipment and place it in service before year end.  The TCJA not only raised the bonus depreciation deduction from 50% to 100%, it also allowed it to be used for both new and used assets.  In addition, it extended bonus through December 2022, with the deduction being reduced by 20% each year from 2023 through 2026.  These provisions will allow companies to budget fixed asset purchases for the next 7 years without having to guess what tax savings will be available to them.  Bonus depreciation is generally available for any assets with a tax life of 20 years or less, and can be used regardless of taxable income.  While Section 179 is available for both federal and New York State, bonus depreciation is only available on the federal return.  Therefore, bonus cannot be used to offset New York tax liabilities.

These are just some of the many ways that you may be able to get a jump start on reducing your tax liabilities for 2019.  The sooner you start your tax planning for this year, the more opportunities you will have to take advantage of some of the new tax provisions under the TCJA.  If you have any questions, or if you would like to speak with one of our tax professionals regarding the subject, please contact us at (315) 471-9171.

 

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.

 

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