The end of the year is approaching fast and that means it is time to take advantage of year-end tax planning. With the tax law changes from the Tax Cuts and Jobs Act (TCJA) being in effect for a full year, there are a few things to be aware of as we close out 2019 and move into 2020. Below are some useful tax planning tips to help navigate these new tax law changes.
The standard deduction for the 2019 tax year remains nearly doubled since the enacted changes of the TCJA. The standard deduction for 2019 is $12,200 for single filers and $24,400 for married joint filers. Personal and dependent exemptions have been eliminated.
The TCJA has made some significant changes to itemized deductions that remain in effect, mainly the cap on state and local taxes (SALT). The amount of deductible SALT allowed is limited to $10,000 in total. This includes sales, state, and property taxes combined. The percentage of AGI for current year deductible cash charitable contributions has increased. The Pease limitation, which put a cap on the amount of itemized deductions allowed based on income thresholds, has also been eliminated since the 2018 tax year and continues through 2025.
Charitable Contribution “Bunching”
The cash charitable contribution limitation remains increased from 50% to 60% of AGI for 2019. The term “bunching” refers to making a larger charitable contribution in the current year instead of making smaller contributions over the next few years. By making multiple years of contributions in one year, it could push taxpayers over the standard deduction amount and they would have the opportunity to itemize again. This could provide a benefit in a year in which taxpayers will have higher income. More information on charitable “bunching” can be found here.
Medical Expense Deductions
In addition to medical expenses for doctors, hospitals, prescription medications, and medical insurance premiums, you may be entitled to deduct certain related out-of-pocket expenses such as transportation, lodging (but not meals), and home healthcare expenses. If you use your car for trips to the doctor during 2019, you can deduct 20 cents per mile for travel that year. In 2019, the itemized deduction is limited to the extent your medical expenses exceed 10 percent of your adjusted gross income.
Miscellaneous 2% Deductions
Under the TCJA all miscellaneous itemized deductions subject to 2% were eliminated. Some of these deductions include investment expenses, tax preparation fees, and unreimbursed employee expenses. Although nondeductible for federal taxes, we encourage clients to still provide these items for their tax return preparation as they may still be deductible for state taxes.
Maximizing Retirement Contributions
One way to consider lowering taxable income is to make accelerated contributions to a retirement account. If contributions to a retirement account can be maximized by the end of the year, it could result in a decreased tax liability. If a taxpayer will not have enough itemized deductions under the new law, this could be a great way to lower taxable income.
Although year end planning is centered around the 2019 tax year, now is a good time to consider the 2020 benefits you can enroll in now. Open enrollment for health insurance is underway for most employees, with many employers offering Health Savings Accounts (HSA) and Flexible Savings Accounts (FSA), along with other tax-free benefits like retirement accounts. If these benefits are available to you, we encourage you to consider the savings they provide. If you are unsure of which program will benefit you most, your L&B professional can assess each scenario to recommend the best savings for you.
While federal law has significantly changed year-end planning, keep in mind that California has not conformed to many of these changes. It is important that you discuss your financial situation with your L&B team member before the end of the year. If you have any questions or concerns regarding the new tax law changes or how they will affect your taxes, please do not hesitate to call our office at (858) 558-9200.