Planning for the 2019 Year-End and Upcoming Changes in Tax Law
by Christopher Nuss Maggie Simonson
Thursday, November 21, 2019
The end of the 2019 taxable year is quickly approaching, which means there are only a few weeks left for certain tax planning. This article discusses potential tax planning strategies for 2019, recaps some of the more significant changes that occurred in 2019, and also addresses upcoming changes you should be aware of for the 2020 taxable year.
Certain Tax Planning for the 2019 Year-End:
Prepay Deductible Expenses: If you plan to itemize or are close to exceeding the standard deduction for individual taxpayers, you may want to consider the timing of your expenses and prepaying deductible expenses to maximize deductions and reduce taxable income for the 2019 taxable year. For cash method business taxpayers, now could be a good time to acquire property to depreciate or stock up on items you know you will need next year.
Harvest Losses: If you are subject to capital gains tax or will receive capital gains distributions at year end, consider selling certain investments with unrealized losses to offset gains. Remember there are specific rules about how gains and losses must be netted for tax purposes and repurchases of similar securities, so be sure to talk to your financial or tax advisor before selling investments for these purposes.
Bunch Charitable Contributions: After the increase in the standard deduction, to take advantage of charitable contributions by itemizing, you may want to consider bunching your charitable contributions previously made over two or three taxable years all into one taxable year. If you are considering bunching your charitable contributions, you may also want to consider setting up a donor-advised fund.
Alternatively, qualifying donors age 70 ½ and older may want to consider making IRA charitable rollovers of up to $100,000 annually to public charities as qualified charitable distributions are excluded from gross income and may also qualify for the Endow Iowa Tax Credit.
Contribute to College Savings Iowa - 529 Plans: Consider contributing to a 529 college savings plan to take advantage of the Iowa income tax deduction. Note that Iowa taxpayers can make contributions after December 31 but on or before the deadline for filing an Iowa individual income tax return, excluding extensions, and elect to have those contributions made in 2020 deducted on the taxpayer’s 2019 Iowa individual income return.
Contribute to Retirement Savings Plans: Consider making any additional pretax contributions left within your contribution limit to retirement savings to reduce your taxable income. This also applies to retirement plans for self-employment income. Note that certain types of retirement contributions can be made into 2020 for the 2019 taxable year.
Take Advantage of Energy Credits: The residential energy efficient property credit is available for qualified purchases through 2021, although the credit is in effect at reduced rates. The business energy investment credit is also available for qualified solar and other types of property. Note that the credit rate may be reduced.
Invest in Qualified Opportunity Zones (“QOZs”): For taxpayers with eligible capital gains, Qualified Opportunity Zones provide an investment vehicle with tax incentives for taxpayers to invest in communities designated as economically distressed QOZs. See our previous articles discussing the tax benefits and general rules for QOZs as well as our update on the IRS' most recently issued guidance. Since our last update, the IRS has also issued a draft of the revised Form 8996 used for reporting Qualified Opportunity Fund data. Although Final Regulations are still forthcoming, the clock is ticking to maximize tax incentives.
Complete Like-Kind Exchanges: Eligible like-kind exchanges of personal property must be completed during the 2019 taxable year to take advantage of the tax-deferred treatment for Iowa tax purposes. Note that like-kind exchanges of personal property were already repealed for federal tax purposes and will no longer be allowed for Iowa tax purposes after 2019.
Tax Cuts and Jobs Act (“TCJA”): As a general reminder, the TCJA resulted in many changes for taxpayers. Some of the most notable changes include: an increase in the standard deduction, modification of itemized deductions, a deduction for qualified business income under Section 199A, a limit on the business interest deduction under Section 163(j), and “global intangible low-taxed income” for owners of controlled foreign corporations. Be sure to consider or discuss with your tax advisor how all of the recent tax law changes could impact your tax return for the 2019 taxable year (and beyond).
Qualified Business Income (“QBI”) Deduction – Rental Income: Previously, it was unclear whether interests in rental real estate were a “trade or business” eligible for the QBI deduction under Section 199A. The IRS recently issued Revenue Procedure 2019-38 providing certain safe harbor requirements that, if satisfied, allow certain interests in rental real estate to be treated as a “trade or business” for purposes of the QBI deduction. If the safe harbor requirements are not met, it still may be possible to qualify for the QBI deduction if certain other definitions of a “trade or business” are met. We can assist taxpayers with interests in rental real estate review the safe harbor requirements to determine qualification and what documentation is necessary to maximize the benefit from this deduction.
Recap of Recent Tax Law Changes:
Sales Tax Reform - Wayfair: The U.S. Supreme Court issued its landmark decision in South Dakota v. Wayfair, Inc., on June 21, 2018. Since the decision, many states, including Iowa, have or are in the process of implementing online sales tax laws similar to South Dakota. Now that it has been over a year since the Wayfair decision, it is only a matter of time before states start enforcing their new tax laws. Iowa’s “marketplace facilitator” and out-of-state retailer collection requirements became effective for qualifying sales on January 1, 2019. For more information about sales tax reform, see our previous article.
The Affordable Care Act: The individual mandate was effectively repealed as of January 1, 2019. Previously, the IRS extended certain due dates for filing ACA-related information returns. It is currently unclear if or how reporting requirements for the 2019 taxable year could differ from prior years, so be sure to keep an eye out to maintain ACA compliance.
Upcoming Tax Law Changes for 2020:
Form 1099-NEC: Beginning with the 2020 taxable year that is reported in 2021, the IRS is bringing back a separate Form 1099-NEC to report nonemployee compensation, which is currently reported on Form 1099-MISC. The IRS has released a second draft of Form 1099. This new form is expected to resolve confusion caused by different filing deadlines depending on which boxes are being reported on the current Form 1099-MISC.
Conformity with the Internal Revenue Code: Iowa is slowly conforming to changes in tax law resulting from the TCJA. For tax years beginning during the 2019 calendar year, Iowa adopts the Internal Revenue Code of 1986 as amended and in effect on March 24, 2018, unless otherwise provided. For tax years beginning on or after January 1, 2020, Iowa is switching to rolling conformity such that it will adopt the Internal Revenue Code of 1986, as amended. The biggest change for Iowa businesses is that the Federal TCJA limits for Section 179 deprecation will be fully phased in for tax years beginning in 2020, although Iowa will still not conform for bonus depreciation.
Withholding: The IRS and the Iowa Department of Revenue both provide withholding estimators/calculators to make sure you are withholding the right amount of tax from your paycheck next year. I recommend using these resources and updating your Form W-4 as necessary. Be sure to take into account non-wage income and self-employment income.
Health Reimbursement Arrangements (“HRAs”): Two new types of HRAs have been created, “Individual Coverage HRAs” (“ICHRAs”) and “Excepted Benefit HRAs” (“EBHRAs”). Employers can begin offering these on January 1, 2020.
This article was written for general informational purposes and summarizes the tax laws. As such, it should not be relied upon for compliance with the Internal Revenue Code or Iowa tax law.
For more information about year-end tax planning or upcoming tax law changes and what they mean for you or your business, please contact your BrownWinick attorney, any BrownWinick attorney in the tax practice group, or one of our tax attorneys listed below.