Facebook icon Twitter icon Forward icon

Mid Year Tax Planning

Mid Year Tax Planning

It’s hard to believe that about 18 months have passed since President Trump signed into law the Tax Cuts and Jobs Act (TCJA)—the largest major tax reform in over three decades. As the IRS continues to release guidance on the new law, we discover tax planning opportunities that could put more cash in your pocket. Some of these opportunities may apply to you, some to family members, and others to your business. Here are some ideas to evaluate this summer while you have time to think.

Individual Income Tax Opportunities

Here are some strategies that may lower your individual income tax bill for 2019.

  • Consider Adjusting Your Tax Withholding or Estimated Payments. If you owed taxes for 2018, you may want to decrease the number of allowances claimed on Form W-4. To help determine the number of allowances you should report, consider using the IRS’s “Withholding Calculator” available at www.irs.gov. Also, if you pay estimated tax payments throughout the year (you’re self-employed, for example), we can take a closer look at your tax situation for 2019 to make sure you’re not underpaying or overpaying.
  • Take Advantage of Lower Tax Rates on Investment Income. Income from an investment held for more than one year is generally taxed at preferential capital gains rates. Those rates are 0%, 15%, and 20% for most investments. The rate that applies is determined by your taxable income. If possible, you should get your income low enough to qualify for the 0% rate. If your income is too high to benefit from the 0% rate, try gifting investments (like appreciated stock or mutual fund shares) to children, grandchildren, or other loved ones. Chances are these individuals will be in the 0% or 15% capital gains tax bracket. If they later sell the investments, any gain will be taxed at the lower rates, as long as you and your loved one owned the investments for more than one year.
  • Find Ways to Defer Income. If you expect to be in the same or lower tax bracket in 2020, it might be beneficial to defer some taxable income until next year. For example, if you own a business and use the cash method of accounting, you can wait until the end of the year to send out some client invoices. That way, you won’t receive payments until early 2020. Also, you can postpone taxable income by accelerating some deductible expenses this year.
  • Invest in a Qualified Small Business Corporation. A Qualified Small Business Corporation (QSBC) is generally a domestic C corporation whose assets don’t exceed $50 million. In addition, 80% or more of the corporation’s assets must be used in the active conduct of a qualified business. By far the biggest benefit of owning QSBC stock is the ability to shelter 100% of the gain from a stock sale. Another major benefit is the ability to roll over (defer) the gain on a stock sale to the extent you acquire replacement QSBC stock within 60 days of the original sale.
  • Invest in a Qualified Opportunity Fund. Qualified Opportunity Funds (QOFs) are entities that invest in certain low-income communities (known as qualified opportunity zones). There are two major tax benefits of investing in qualified opportunity zones. The first one is an election to temporarily defer gain from the sale of property if such gain is reinvested in a QOF. The second benefit is an election to permanently exclude from income post-acquisition capital gains on the disposition of QOF investments held for ten years.
  • Re-evaluate Your Deduction Strategy. It’s best to itemize your deductions if you have significant personal expenses. However, don’t rule out the standard deduction. For 2019, joint filers can enjoy a standard deduction of $24,400. The standard deduction for heads of household is $18,350, and single taxpayers (including married taxpayers filing separately) can claim a standard deduction of $12,200. If you’re able to itemize, please note that the TCJA suspended or limited many of the itemized deductions. However, we have some planning techniques that may help.
  • Set up a Qualified Tuition Plan. Qualified Tuition Plans (QTPs) generally allow parents and grandparents to set up college savings accounts for children and grandchildren before they reach college age. Once established, QTPs qualify for favorable federal (and often state) tax benefits, which can ease the financial burden of paying for college. QTPs may be particularly attractive to higher income parents and grandparents because there are no income-based limits on who can contribute to these plans.
  • Bunch deductions into a year such as charitable donations and use donor advised funds (see our article below).

Planning for Small Business

If you own a business, consider the following strategies to minimize your tax bill for 2019.

  • Maximize Your Qualified Business Income Deduction. Thanks to the TCJA, business owners may deduct up to 20% of their qualified business income from sole proprietorships and pass-through entities (such as partnerships, LLCs, and S corporations). The deduction, however, is subject to various rules and limitations based on your taxable income, the type of business you operate, and your business’s W-2 wages and property. The good news is that there are certain planning strategies that can be considered now to maximize your deduction.
  • Acquire Assets. Your business may be able to take advantage of very generous Section 179 deduction rules. Under these rules, businesses can elect to write off the entire cost of qualifying property rather than recovering it through depreciation. The maximum amount that can be expensed for 2019 is $1.02 million. This amount is reduced (but not below zero) by the amount by which the cost of qualifying property exceeds $2.55 million. Above and beyond that, the TCJA established a 100% first-year deduction for qualified property acquired and placed in service after 9/27/17 and before 1/1/23 (1/1/24 for certain property with longer production periods). Unlike under prior law, this provision applies to new and used property.
  • Employ Your Kid. If you’re self-employed, you might want to consider hiring your child as an employee. Doing so shifts income from you to your child, who normally is in a lower tax bracket or may avoid tax entirely due to the standard deduction. There also can be payroll tax savings since wages paid by sole proprietors to their children age 17 and younger are exempt from Social Security, Medicare, and federal unemployment taxes. Employing your children has the added benefit of providing them with earned income, which enables them to contribute to an IRA.

Please Contact Us

As we said at the beginning, this letter is to get you thinking about tax planning moves for the rest of the year. Even though the IRS continues to publish guidance on the TCJA, there are things you can do now to improve your tax situation. Please don’t hesitate to contact us if you want more details or would like to schedule a tax planning session.

Charitable Giving Strategies In Light of Tax Reform

Charitable Giving Strategies In Light of Tax Reform

Charitable donations are still deductible in 2019, however fewer Individual taxpayers will itemize in 2019 due to the increase in the standard deduction.

The standard deduction for married couples filing a joint return is $24,400. Furthermore, the deduction for state, local, and real estate taxes is capped at $10,000 in 2019 and there is no longer a deduction for investment fees, unreimbursed employee business expenses, and other deductions formerly deductible when you itemized.

Taxpayers who expect to have total itemized deductions below $24,400 but make substantial charitable contributions do have other options in order to receive a tax benefit for charitable giving.

Donor Advised Funds

Timing deductions so they are bunched in one tax year is a strategy often used. One effective way to do this is to utilize a Donor Advised Fund (DAF) for charitable giving. Typically these funds are set up through an investment firm such as Schwab or Fidelity. The taxpayer transfers funds to the DAF and receives a tax deduction for the fair market value of the assets transferred in the year of the transfer. The taxpayer then can direct the fund manager to distribute the funds to qualified charities of the taxpayer’s choice over time in future years.

  • Transfer cash and/or appreciated stock and receive a deduction of the fair market value
  • Receive a deduction in the year of transfer
  • Direct funds to be distributed to charities in subsequent years’
  • There are annual fund fees including management and investment fees
  • The fund sets minimum initial contributions to set up the fund and minimum disbursements to charities. These vary, depending on the investment firm.
  • DAF are best for donors who are committed to giving in future years and can afford to give up the use of the assets in the current year.

Qualified Charitable Distributions

For taxpayers over age 70 ½ and receiving required minimum distributions (RMD’s), Qualified Charitable Distributions (QCD’s) may be a more advantageous way to give to charities. The taxpayer directs their IRA trustee to make a direct gift to a qualified charity from the IRA. This transfer is considered part of the RMD for the year however it is not taxable.

The QCD strategy works best for seniors if:

  • Taxpayer will not be itemizing deductions – using a QCD for charitable giving reduces your taxable income even if you cannot itemize
  • Taxpayer itemizes but charitable donations are delayed due to the60% -of-AGI limitation
  • The annual limit is $100,000 of QCD’s per taxpayer

Both of these strategies must be in place by 12/31/19 to benefit taxpayers in 2019. If you are interested in learning more about these tax saving giving strategies for 2019 and beyond, please contact our office at 253-852- 8500.

By Lois Vankat, CPA Senior Manager

Selling Or Transferring Real Estate in Washington State

Selling Or Transferring Real Estate in Washington State

Washington’s new real estate excise tax (REET) brings major changes for traditional property sales and transfers of controlling interest in an entity that owns real property. Changes are effective January 1, 2020.

Overall, taxes will be the less for transactions under $500,000. The rate remains at 1.28% for transactions from $500,001 to 1.5 million. Transactions over $1.5 million will see a rate increase. The most expansive changes come with the transferring of a controlling interest in entities that own real property. Anyone engaging in these types of transactions should carefully consider these changes and plan accordingly.

REET will no longer be a flat rate of 1.28%, but will have a graduated rate structure, as follows:

  • 1.1% of the selling price below $500,000;
  • 1.28% of the selling price between $500,000 and $1,500,000;
  • 2.75% of the selling price between $1,500,000 and $3,000,000; and
  • 3.0% of the selling price over $3,000,000.

Local REET rates, usually 0.5%, are added to the state rate, making the combined total rates range from 1.15% to 3.5%.

The new rate structure will not apply to timberland or agricultural land, which will remain subject to the current rate of 1.28%.

The legislation has failed to address whether the new brackets are assessed on a parcel-by-parcel basis or transaction-by-transaction basis. Nonetheless, the legislation gives the Department of Revenue broad powers to levy tax based on the substance of the transaction and disregard the form of the transaction.

Transferring or acquiring a controlling interest (50%) or more from an entity that owns real property in Washington is now measured over a 36-month period, versus, a 12-month period under prior law. In these types of transactions REET is assessed on the value of the real property owned by the entity, not the selling price of the interest in the entity. This can put minority interest holders at risk for being subject to REET for transactions 3 years before or after their sale. In addition, under certain circumstance, tax can result in more than 3.5% of the consideration received for their ownership interest.

For example, in January 2020, member A sells her 25% interest in an LLC that owns $12 million of real property in Washington to Member C for $3 million. At this time, no REET applied because over 50% of ownership has not changed. Then, in December 2022, member B sells her interest of 25% in the LLC to member C for $3 million. REET now applies to member A and B for a total of $335,550, 5.59% of the consideration received.

In conclusion, transactions under 1.5 million will have a tax decrease and transactions over 1.5 million will have a tax increase. In any case, those selling their ownership interest in an entity owning real property, regardless of ownership percentage, should carefully consider and make provision for REET tax assessed up to 3 years after their transaction.

By Eric Lee, CPA

Shannon & Associates

is proud to be an independent member of Nexia International, a worldwide network of independent auditors, business advisors and consultants. Nexia International is the 10th largest network of accounting firms in the world, with member firms in over 100 countries. This global representation with Nexia enables us to offer our expertise in international taxes and accounting around the world and provide top quality service to our clients with foreign and domestic financial needs.