Plan Now, Save Later! (Part 1)
By: Andy Johnson, CPA, Tax Principal, Cover & Rossiter
As we enter the Fall season, where football is on every weekend and pumpkin-flavored coffees are flying out of stores, another important season has begun, and most people probably don’t even realize it. The season I’m referring to is Tax Planning Season. With year-end rapidly approaching, now’s the time to take steps to cut your 2019 tax bill, before it’s too late.
In Part 1 of our two-part series, we will focus on the timing of your Itemized Deductions (or “Batching”).
Strategically Batch Your Itemized Deductions
The Tax Cuts and Jobs Act (TCJA) almost doubled the standard deduction amounts beginning in 2018. The standard deductions for the 2019 tax year are set at the following levels: $12,200 for those filing single, $24,400 for married couples filing jointly, and $18,350 if you are a head of household. These increased thresholds, along with the changes to itemized deductions also contained in the TCJA (i.e. new limits on deductible taxes and other deductions simply repealed altogether), means that more taxpayers (especially those filing as a married couple) will be utilizing the standard deduction now and potentially into the future.
If you project that your total itemizable deductions for 2019 will be close to exceeding your applicable standard deduction amount, you should consider batching. The goal of batching is to position yourself so that you will have deductions greater than the standard deduction one year with the following year being a standard deduction year. By occasionally being able to itemize your deductions, as opposed to always being limited to the standard deduction, it can mean that over time you are saving a little extra on your tax bill.
Here are a few expenditures (including, but not limited to) that you should consider batching, before year-end, to increase the likelihood that you will itemize your deductions:
- Mortgage Interest – If you have never accelerated your mortgage payment, you have an opportunity to increase your deductions (quite substantially depending on the size of your mortgage), and you only have to accelerate a payment by a few days in order to do so. By prepaying the January 2020 payment by year-end, you will potentially have 13 months’ worth of home mortgage interest which will be deductible on your 2019 tax return.
- State & Local Income and/or Real Estate Taxes – If you are not already a taxpayer who has exceeded the $10,000 cap ($5,000 married filing separately), you should consider prepaying before year-end any state and local income and/or property taxes that are due early next year (i.e. the 4th quarter estimated tax payment which is generally due January 15th for most states).
- Did you know? – Taxes on investment property (for example, vacant land that is held solely for appreciation purposes) are not subject to the $10,000 limitation. So this type of tax payment could be a prime candidate to accelerate into 2019 (if the taxes have been assessed and are due in early 2020).
- Charitable Deductions – For charitable deductions, consider how much you plan to donate and move as much as possible into one year and simply donate less the next year.
- Planning Point – For those who experience a large income event (i.e. a lump sum payout of some type), a donor-advised fund should be a strong consideration to maximize your charitable deduction. With a donor-advised fund, you can take the tax deduction currently (for funds contributed), but then you are able to work with the institution (which maintains the fund) in order to distribute the funds over time to qualified charitable organizations.
- Medical Expenses – In order to deduct your medical expenses, total unreimbursed medical expenses must exceed 10% of the taxpayer’s Adjusted Gross Income (AGI). This can be quite a large number, especially for higher income taxpayers, and is probably a deduction that only a few can take advantage of. Having said that, for those that have a large number of unreimbursed medical expenses (i.e. a taxpayer living in a skilled nursing facility for medical reasons), consideration should be given as to whether accelerating some unreimbursed medical payments will result in an increased tax deduction.
While these recommendations sound easy and straightforward, unfortunately, they are not a “one size fits all” strategy and simply accelerating some deductions is not enough to guarantee tax savings. The tax law can be confusing, and every taxpayer’s situation is different – so what works for one person, may not work for someone else. Let me and my team help you evaluate your situation and, more importantly, help you determine if there is something you can do to lower taxes before 2019 comes to a close. Call us at 302-656-6632 or email your C&R tax professional.
Click here to read Part 2 of the series, where we discuss Maxing Out Your Retirement Account, Qualified Charitable Distributions, and Reducing Capital Gains.
Andy Johnson is a principal in the Tax Department at Cover & Rossiter. Since joining the firm in 2008, he has risen rapidly through the ranks due to his keen attention to detail and problem-solving capability. Andy’s primary focus is serving his clients and helping them navigate the constantly-changing tax landscape. Contact: AJohnson@CoverRossiter.com