Year-end Planning Moves for Individuals

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

• Maximize Deductions. For 2019, the standard deduction amounts are $12,200 for singles and those who use married filing separate status, $24,400 for married joint filing couples, and $18,350 for heads of household. If your total annual itemizable deductions for 2019 will be close to your standard deduction amount, consider making additional expenditures before year-end to exceed your standard deduction. That will lower this year’s tax bill. Next year, you can claim the standard deduction, which will be increased a bit to account for inflation. One example is bunching charitable deductions into one year.
   
• Carefully Manage Investment Gains and Losses in Taxable Accounts. If you hold investments in taxable brokerage firm accounts, consider the tax advantage of selling appreciated securities that have been held for over 12 months. The maximum federal income tax rate on long-term capital gains recognized in 2019 is only 15% for most folks, although it can reach a maximum of 20% at higher income levels. The 3.8% Net Investment Income Tax (NIIT) also can apply at higher income levels.
   
• Take Advantage of 0% Tax Rate on Investment Income. For 2019, singles can take advantage of the 0% income tax rate on long-term capital gains and qualified dividends from securities held in taxable brokerage firm accounts if their taxable income is $39,375 or less. For heads of household and joint filers, that limit is increased to $52,750 and $78,750, respectively. While your income may be too high to benefit from the 0% rate, you may have children, grandchildren, or other loved ones who will be in the 0% bracket. If so, consider giving them appreciated stock or mutual fund shares that they can sell and pay 0% tax on the resulting long-term gains. However, if you give securities to someone who is under age 24, the Kiddie Tax rules could potentially cause some of the resulting capital gains and dividends to be taxed at the higher rates that apply to trusts and estates.
   
• Donate Winner Shares or Sell Loser Shares and Give away the Resulting Cash. Don’t give away loser shares (currently worth less than what you paid for them) to relatives. Instead, you should sell the shares and book the resulting tax-saving capital loss. Then, you can give the sales proceeds to your relative. On the other hand, you should give away winner shares to relatives. These principles also apply to donations to IRS-approved charities.
   
• Convert Traditional IRAs into Roth Accounts. The best profile for the Roth conversion strategy is when you expect to be in the same or higher tax bracket during your retirement years. The current tax hit from a conversion done this year may turn out to be a relatively small price to pay for completely avoiding potentially higher future tax rates on the account’s earnings.
   
• Take Advantage of Principal Residence Gain Exclusion Break. Home prices are on the upswing in many areas. More good news: Gains of up to $500,000 on the sale of a principal residence are completely federal-income-tax-free for qualifying married couples who file joint returns ($250,000 for qualifying unmarried individuals and married individuals who file separate returns). To qualify for the gain exclusion break, you normally must have owned and used the home as your principal residence for a total of at least two years during the five-year period ending on the sale date.
   
• Don’t Overlook Estate Planning. Thanks to the Tax Cuts and Jobs Act (TCJA), the unified federal estate and gift tax exemption for 2019 is a historically huge $11.4 million, or effectively $22.8 million for married couples. Even though these big exemptions may mean you’re not currently exposed to the federal estate tax, your estate plan may need updating to reflect the current tax rules and the impact of state taxes on estates. Washington State currently taxes estates over $2,193,000.
   
• Consider Available Federal Tax Credits. There are a number of federal tax credits available that can help reduce your tax liability. The TCJA changed many of these credits and/or the qualifying factors, so make sure you are not missing any potential tax savings! The Child Tax Credit is available to parents with qualifying children and is worth up to $2,000 for each qualifying child. There is also a Credit for Other Dependents that may be claimed for qualifying dependents (other than qualifying children) up to $500 each. The Child and Dependent Care Credit is available to working parents who incur expenses for dependent care for qualifying children under age 13 and is 20-35% of the costs incurred, capped at $6,000 total expenses (or $3,000 per qualifying child, up to 2). Additionally, education credits, such as the American Opportunity Tax Credit (up to $2,500) and Lifetime Learning Tax Credit (up to $2,000) are available to qualifying students and can potentially offset some of those costs! These may apply to education costs incurred for a qualifying dependent (under age 24). Individual circumstances vary and limitations apply, so please contact us with any questions.

Year-end Planning Moves for Small Business

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

• Establish a Tax-favored Retirement Plan. If your business doesn’t already have a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant deductible contributions. Contact us for more information on small business retirement plan alternatives, and be aware that if your business has employees, you may have to cover them too.
   
• Take Advantage of Generous Depreciation Tax Breaks. 100% first-year bonus depreciation is available for qualified new and used property that is acquired and placed in service in calendar year 2019. That means your business might be able to write off the entire cost of some or all of your 2019 asset additions on this year’s return. So, consider making additional acquisitions between now and yearend. Note that the assets must be placed in service in 2019 to get a deduction in 2019.
   
• Cash in on Generous Section 179 Deduction Rules. For qualifying property placed in service in tax years beginning in 2019, the maximum Section 179 deduction is $1.02 million. The Section 179 deduction phase-out threshold amount is $2.55 million.
   
• Time Business Income and Deductions for Tax Savings. If your business is conducted via a pass-through entity, the traditional strategy of deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or lower tax bracket next year. On the other hand, if you expect to be in a higher tax bracket in 2020, take the opposite approach. Accelerate income into this year (if possible) and postpone deductible expenditures until 2020.
   
• Maximize the Deduction for Passthrough Business Income. For 2019, the deduction for Qualified Business Income (QBI) can be up to 20% of a pass-through entity owner’s QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owner’s taxable income. Because of the various limitations on the QBI deduction, tax planning moves (or non-moves) can have the side effect of increasing or decreasing your allowable QBI deduction.
   
• Watch out for Business Interest Expense Limit. Thanks to an unfavorable TCJA change, a taxpayer’s deduction for business interest expense for the year is limited to the sum of (1)  business interest income, (2) 30% of adjusted taxable income, and (3) floor plan financing interest paid by certain vehicle dealers. Fortunately, many businesses are exempt from this limit. We can help you determine if an exemption applies.
   
• Claim 100% Gain Exclusion for Qualified Small Business Stock. There is a 100% federal income tax gain exclusion privilege for eligible sales of Qualified Small Business Corporation (QSBC) stock that was acquired after 9/27/10. QSBC shares must be held for more than five years to be eligible for the gain exclusion break. Contact us if you think you own stock that could qualify.

Please Contact Us

This covers some of the year-end tax planning moves that could potentially benefit you, your loved ones, and your business. Please contact us if you have questions, want more information, or would like us to help in designing a year-end planning package that delivers the best tax results for your particular circumstances.

Per the IRS, supporting documents (receipts) provide the information necessary to generate business expenses in the accounting system of your company. If your company is audited and is not able to provide back-up for claimed expenses, those expenses could be disallowed and your company will incur penalties/interest. Additionally, expenses must be submitted within 60 days to be tax deductible.

How Important is it to Save Receipts for Meals & Entertainment?

The 2017 Tax Cuts and Jobs Act changed the deductibility of meals & entertainment. While meals are still 50% deductible, no portion of entertainment is deductible. It is imperative that receipts are kept to ensure the company is deducting the correct expenses. Please document:

• The name of the parties present at the meal
• The food or beverage must not be considered lavish or extravagant. Only meals appropriate for your industry will be deductible.
• Business purpose of meal.

What Details Are Required to Substantiate Trade Spending?

Supporting documentation needs to show the amount paid and the purpose of the expense. Please be sure receipts show product/item purchased and the name of the customer.

Gifts

• Gifts to customers/vendors are deductible up to $25 per person, per year. Business records (receipts) must be kept to prove the business purpose and amount of the gift.
• Tangible gifts from the company to employees are deductible up to $25 per employee per year.
• Cash and gift cards of any amount from the company to employees are treated as additional compensation, subject to withholding.

Penalties

Fines and penalties a business pays for any violation of a law are never deductible. Parking tickets, fines, tax penalties, etc. are included in this category.

By Lois Vankat, CPA Senior Manager

Please remember USE TAX when preparing your final excise tax returns of 2019. Any goods you purchase for use in your business here in Washington are subject to sales tax, even if purchased from a state that does not charge sales tax or has a sales tax rate lower than Washington’s. Some examples of often overlooked purchases subject to use tax include items purchased from a classified ad or website such as Offer Up or from an individual collector. Also, double check your software licenses purchased from an online site; be sure you paid sales tax when you purchased your downloaded, streamed, or remote access software.

To report and pay use tax, enter the value of your purchases on your excise tax return. The use tax rate is the same as your sales tax rate. Differentiating between what is a taxable purchase and what isn’t can be tricky. Please remember we are here to help! Contact us with any questions you may have regarding how to file or what is subject to use tax.

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 $500,001 and $1,500,000;
   
• 2.75% of the selling price between $1,500,001 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 circumstances, 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 provisions for REET tax assessed up to 3 years after their transaction.

By Eric Lee, CPA

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.