Tax Planning…sounds so broad and formal. What is tax planning? To me, it’s time set aside to think about your current year tax situation and next year(s) tax situation and ponder if there is a better way to do things to reduce your tax liability. It can be maximizing your 401-K, funding an IRA, funding an HSA, switching from a C-Corp to an S-Corp, analyzing your officer pay, considering end of year purchases, etc. Tax planning is generally making some type of move that reduces your tax liability or puts you in a better position for future taxes:
Below are some ideas for businesses and individuals:
- Step 1 would be to evaluate where you are and analyze the tax impact of deferring income or accelerating income. For example, if you have a business loss and low personal income, you may want to convert a traditional IRA to a Roth IRA to soak up that business loss.
- Consider C-Corp to S-Corp conversion due to the new tax law 20% business deduction for flow-through entities and the C-Corp future double taxation. We have been doing a lot of analysis regarding converting from a C-Corporation to an S-Corporation.
- The usual purchasing of assets is always a popular one, especially with 100% bonus depreciation, however CA FTB still has their much smaller limitations. Expanded bonus depreciation rules allow taxpayers full expensing of both new and used qualifying property placed in service before 2023
- Creating or funding retirement plans; SEP-IRA’s, Simple IRA’s, 401-K’s, Defined Benefit Plans, and After-Tax Contributions, etc.
- Maximizing new Sec. 199(A) 20% deduction. Am I limited due to overall company wages, should I pay myself more wages, am I limited on rental income 199A deduction due to C-Corp structure, should I take bonus depreciation or not, etc.
- Installment Sale, analyze whether a sale should be an installment sale to defer income or a standard sale?
- Analyze projected tax and estimated tax payments to avoid or limit underpayment penalties.
- Analyze impact of sales tax court case South Dakota vs. Wayfair and what it means to have “economic presence” with a state you are selling in.
- Research & Development Credit: For C-Corps, this credit is more valuable now with the repeal of Corporate AMT tax and has always been beneficial for pass-through entities. See blog on the R&D Credit.
- Opportunity Zone (O-Zones) Capital Gain Defer: Similar to a 1031 like-kind exchange, you can defer tax on any capital gains by investing in Qualified Opportunity Funds.
- Analyze impact of Dynamex court case and signed CA Assembly Bill 5 that will take place come January 1, 2020 relating to who is considered an employee vs. independent contractor. Is there some tax planning you can do to continue to have some independent contractors?
- Apply for CA Competes Tax Credit ($20K minimum) for hiring employees in CA over the next 5 years, credit application to open January 2020.
- Analyze business sales or purchase to reduce tax liability? Review C-Corp Qualified Small Business Stock Rules.
- Payment of bonuses for employees or to zero out a C-Corporation.
On the personal side, the ideas are endless, but here are a few popular ones:
- Adjust wage or withholding up or down and/or max out pretax payroll items (retirement contributions including catch-up contributions, HSA contributions, employee reimbursement, etc.). W2 withholding counts as the funds being paid in evenly throughout the year, even if comes in at the end of year (i.e. can help reduce estimated tax payment penalties).
- Reducing income below a threshold to qualify for a credit (Education Credit, Child Tax Credit, Obamacare Credit, etc.)
- Exercise stock options or maximize employee stock purchase
- Max out IRA’s, but you do have until 4/15/20 to max
- Charitable contributions by 12/31, donation of appreciated assets for deduction at FMV (maximizes charitable donation with no tax), or satisfy a required minimum distribution (mandatory distribution over age 70 1/2) by making a qualified charitable distribution up to $100,000 directly from your IRA to a qualified charity. Neither the qualified charitable distribution income nor the charitable contribution is reported on the tax return. This technique protects the charitable donations from the charitable donation AGI limitations or other AGI income limits (Medicare, )
- Analyze capital gains or losses and see if it is prudent to harvest capital gain or loss depending on your situation. Keep in mind that capital losses offset capital gains and if a net loss, only $3K of capital loss is deductible per Losses can be disallowed under the wash sale rule if repurchased within 30 days, but you could re-purchase after 30 days or make similar industry or mutual fund investment within the 30 days.
- Solar installed by 12/31 for 30% credit (applies to business as well), percent of credit does start to drop in 2020.
- Pay in 2019 estimated tax to reduce balance owed
- Filing of Delinquent Tax Returns
- Capital gain planning around 3.8% Net Investment Tax or 15% vs. 20% long-term capital gain.
- Obtain Health Insurance for CA new Jan 2020 law.
- Accelerate income to utilize a zero or low tax bracket, i.e. never let a low tax bracket go to waste.
- Selling of a rental within 3 years of personally moving out to have the gain mostly tax-free.
- Purchase of solar vehicle for IRS credit, double check amount of credit for vehicles at time of purchase (Tesla has dropped from max)
- Make an 83(b) Election: Taxpayers can elect (within 30 days of property transfer) to accelerate recognition of income with respect to the transfer of restricted property (i.e., employer stock). This election allows you to recognize ordinary income on the date of exercise rather than wait until the taxpayer’s rights are vested and transferable. The goal would be to recognize a minimal amount of income at ordinary rates and the majority of income at capital gains rates due to a substantial increase in stock price. A complete analysis of tax implications is needed to make an informed decision.
- Donate Appreciated Assets: If you are considering charitable donations, donate an appreciated asset such as stock and you will receive a deduction on the full FMV and avoid capital gains tax and possibly a 3.8% net investment tax. Deduction is limited to 30% of adjusted gross income, but can be carried forward.
- Gift Appreciated Assets to Children in Lowest Income Tax Brackets: Gifting appreciated assets to children in the lowest two income tax brackets that are not subject to the kiddie tax will be taxed at a 0% capital gains rate. Also, gifting dividend assets to children in lower brackets can provide benefits.
- Distribute Trust Income to Beneficiaries: With the highest tax bracket hitting trust income as low as $12,000 and the 3.8% net investment income tax being applied at this level, consider distributing trust income to beneficiaries who may be in lower effective tax brackets.
- Make Nondeductible IRA Contribution, Then Convert: If one is not eligible to contribute to a ROTH IRA, make a nondeductible contribution to a traditional IRA and then convert that contribution to a ROTH IRA. This is called a backdoor Roth IRA and taxes may be incurred depending on pre-tax assets owned.
- Establish Spouse IRA: For those that qualify, an IRA may be established for a spouse to contribute deductible contributions up to $6,000.
If this blog has prompted a tax question or potential tax planning idea, please connect with us.