2019 US Year-End Tax Planning
The US tax year ends on 31 December 2019. As always, the final months of the year provide an opportunity to focus on 2019 year-end tax planning opportunities available to optimize US tax for the 2019 tax year.
Effective year-end tax planning starts with understanding both current circumstances and subsequent year issues that may affect a tax position. In any planning, other tax jurisdictions should be taken into account. For example, we often see that items tax-deductible outside the US are sometimes not tax-deductible in the US.
INCOME TAX RATES
For 2019 (and potentially 2020), the top federal tax rates are unchanged from the previous year, with a top rate of 37%. This rate applies to individuals with adjusted gross income as outlined below:
ACCELERATING OR DEFERRING INCOME OR EXPENSES
Consider the potential benefits of deferring income receipts. For example, employees might choose to defer receipt of any 2019 year-end bonus to 2020 or those who are self-employed might be able to delay collection of payment for services and business debts until early 2020. The deferral of this income from 2019 to 2020 will postpone payment of any related tax liability from the current tax year to the next. Additionally, if there is a chance that circumstances could change, such that 2020 taxable income is likely to be lower than that of 2019, then any income deferred to the 2020 year may be taxed at the lower rate.
Conversely, consider opportunities to accelerate deductions or tax credits of the 2020 year into the 2019 year. For instance, for itemized deductions, making payment of mortgage interest, medical expenses, state and local taxes or other Schedule A deductible items before the end of 2019 (rather than during early 2020) will increase 2019 deductible expenses and, therefore, reduce taxable income for the year. Also, if claiming the standard deduction in one year and itemizing deductions in the other then deferring or accelerating Schedule A deductible items may enable the benefit of deductions that might otherwise be lost in a year in which the standard deduction is claimed.
Alternatively, if circumstances are such that that the 2020 tax rate will be higher than that of 2019 (i.e. as a result of increased salary or intended sale of an asset that will result in a large gain) then consider accelerating income into 2019 and deferring payment of Schedule A deductible items to 2020, when these deductions would offset income subject to tax at higher rates than in 2019.
Health Savings Account:
Consider a contribution to a Health Savings Account (HSA) before the end of 2019 as the income tax deduction for contributions to an HSA Plan is also available to US expatriates. An HSA is a trust account into which tax-deductible contributions can be made by qualified taxpayers who have high deductible medical insurance plans. This deduction is separate from the general Schedule A expense deductions available for medical costs which are subject to restrictions based on the level of adjusted gross income. The 2019 HSA deductible contribution limits are $3,500 (single, plus $1,000 if age 55) or $7,000 (family, plus $1,000 if age 55 and older).
Accelerate Payment of Tax:
If the “paid basis” is utilized for foreign tax credit purposes, consider increasing the foreign tax credit available to reduce 2019 tax liability by making a payment towards foreign income tax liability before the end of the 2019 year. In addition, making early payment of any real estate taxes and state income taxes that are due in early 2020 prior to the end of 2019 will increase available Schedule A deductions. Of course, keep in mind, under the new rules (from 2018), real estate and state taxes are limited to a maximum combined deduction on Schedule A of $10,000.
2019 taxable income may be further reduced by contributing to a traditional IRA or a SEP IRA (self-employed pension).
For 2019 a contribution of up to a maximum of $6,000 ($7,000 if age 50 or older) to a traditional IRA plan or $56,000 to a SEP IRA. Depending on the circumstances, the traditional IRA contribution may be a deductible or non-deductible. A tax advisor can confirm the availability of an IRA or SEP IRA contribution and the amount that can be contributed. It should be noted that there are potential penalties if the allowable contribution limits to an IRA plan are exceeded and the contribution is not withdrawn within the prescribed time limit.
Contributions to IRA plans for 2019 can be made up to April 15, 2020.
For those reaching age 70½ during 2019 who have a qualified retirement account (IRA accounts, 401ks, 457 plans or other tax-deferred retirement savings plans like a TSA, SEP or SIMPLE) the IRS requires that you start taking withdrawals from such retirement plans. The Required Minimum Distributions (RMD) is the minimum amount that must be withdrawn from the account each year. The first RMD for those reaching 70½ years during 2019 must be taken by April 1, 2020. Any amount withdrawn will form part of the taxable income (except those amounts previously taxed) or that can be withdrawn tax-free (i.e. qualified distributions from designated Roth accounts). Depending on the situation, it may be prudent to compare the potential tax advantage of timing the first RMD to occur prior to the end of 2019 or alternatively deferring it to 2020 (by April 1st at the latest).
POTENTIAL PITFALLS TO YEAR-END TAX PLANNING
Alternative Minimum Tax (AMT):
The consideration regarding acceleration or deferral of income and/or expenses outlined above should be made with caution if subjected to Alternative Minimum Tax (AMT). AMT is a tax levied in addition and separate to regular federal tax that may nullify the benefits of year-end planning strategies or in some cases result in negative tax consequences.
Annual Gift Tax Exclusion:
The annual gift tax exclusion is a tax-efficient way of giving to others. For 2019, individuals may make gifts of up to $15,000 per donee without paying any federal gift tax. Furthermore, the annual exclusion amount is doubled to $30,000 per donee for joint gifts made by US citizen or resident spouses. Utilizing this annual gift tax exclusion year on year is an efficient way of reducing the gross estate for estate tax purposes. Note: There is no carryover of unused gift exclusion.
Gifts made to an individual donee exceeding the annual exclusion amount must be reported by the donor on a gift tax return. The gift amount in excess of the annual exclusion can be offset by the lifetime gift tax exemption to reduce/eliminate any potential gift tax. For 2019 the lifetime gift exemption is $11.4 million, however, it is important to note that any part of the lifetime gift exemption utilized against 2019 gifts reduces the amount of the exemption available to reduce your potential estate tax later.
It should be noted that there is an unlimited marital deduction for any gifts made between US citizen spouses. This means that any assets gifted by a US person to their US spouse are free of gift tax. However, if a gift is made by a US citizen to a non-resident alien spouse then the unlimited marital exemption is not available and is instead replaced by an annual exclusion which is $155,000 for the 2019 year. Any gift over this amount to a non-resident spouse is required to be reported on a gift tax return by the US spouse.
Other Year-End Planning Considerations:
Hold appreciated assets for 12 months or more, prior to sale, to take advantage of the lower long-term capital gains tax rates.
Sell loss-producing assets to set against any capital gains arising during 2019. Be sure to avoid the “wash sale” rules. These rules apply if a purchase is made of the same or similar assets which were sold at a loss within 30 days before or after the sale.
Consider making charitable donations that also qualify for tax relief in the country of residence. Caution must be taken here, as to qualify as a deduction for US tax purposes the donation must be made to charitable entities registered with the IRS as a US qualified charitable organization.
Avoid or limit penalties/interest by making estimated tax payments. This will limit the potential interest on balances due or penalties for late-filed returns or late tax payments.
2019 REPORT OF FOREIGN BANK & FINANCIAL ACCOUNTS (FBAR)
As most US taxpayers are aware, if an individual has a financial interest in or signature authority over a foreign financial account (i.e. a bank account, a brokerage account, mutual funds, trusts, or other types of foreign financial account) and the aggregate value of all such accounts exceeds $10,000 at any time during a calendar year, the Bank Secrecy Act requires the reporting of all such account(s) to the Department of Treasury by electronically filing a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR).
For the 2019 and later tax years, the enactment of Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 modified the FBAR filing deadline date from 30 June following the end of the tax year to 15 April following the end of the tax year. However, there is an automatic extension allowed to October 15th.
As always, those who must file FBARs must be mindful of the potential penalties for non-compliance (i.e. up to $10,000 per account for a non-willful violation, and up to the higher of $100,000 per account or 50% of the balance of the account for a willful (or intentional) violation).
The year-end planning suggestions outlined above are complex and the related benefits are dependent on personal circumstances so advice should be taken by one of our Enrolled Agents or CPAs to discuss the available options that may help reduce US tax liability depending on personal circumstances.
Individuals living outside of the US should also take advice on any non-US tax implications, such as exchange rate gains or losses, relating to any of the above as well as general non-US financial advice. However, non-US resident individuals should also be aware that tax planning considering resident jurisdiction alone is not always beneficial. In many cases, any taxes saved in the resident jurisdiction are just an additional tax owed on the US return. Careful planning is required to avoid this trap.