The 100 Changes That Could Impact Your 2019 Tax Return
Both your California and Federal tax returns will require a bit of year-end tax planning. More than 100 changes were implemented in 2019 that could affect your return. The California return changes are less complicated. Your Federal return is more complex. We provide the highlights below: If you suffered a casualty loss in 2019 see #1. Cryptocurrency questions see #2. For changes in home equity debt see #6. If you divorced in 2019, be sure to review #7 for big changes. #8 includes good news for estate and gift exemptions. Changes for businesses are #10 – 12. Disappearing write-offs from past returns are detailed in #14 and watch for next month’s blog on accountable expense reimbursement.
For California Returns:
On January 1, 2020, according to SB 78 (Ch. 19-38) California residents must obtain minimum essential health care coverage to avoid the new California individual health care mandate penalty. This means that most individuals who fail to secure coverage will be subject to an annual penalty of $695 or more when they file their 2020 California return, if they don’t have coverage through their employment, a spouse, Medicare or an individual private insurance plan.
Covered California will accept applications for health care coverage until January 1, 2020. Subsidies are available for individuals and families with income up to 600% of the federal poverty level (with federal subsidies available up to 400% of the poverty level). You can sign up by going to: www.coveredca.com
For Federal Returns:
Back in 2017, Congress passed the Tax Cuts and Jobs Act, stating they’d be making life simpler for the average taxpayer. They didn’t say that over 100 changes could impact most of our clients on their 2019 return.
Let’s go over a few of the changes that stand out for year-end tax planning.
For all Californian’s who live with vivid memories of the recent fires, this first one may give you nightmares.
- From 2018 through 2025 (the year that many of the supposed tax benefits set up to help individuals and families will expire) Personal Casualty Loss is not deductible. That means, unless you are in an area where a Federal Disaster is declared, your personal losses, not covered by your insurance company, will not be allowed as a tax deduction. If you haven’t already, take time to call your insurance agent to see if your current coverage is adequate based on current values.
Surprise, Bitcoin makes its debut
- The IRS classifies all cryptocurrencies as property. Therefore, a question on virtual currency transactions has been added to the 2019 Form 1040, Schedule 1. While most of you may not have virtual currency or foreign assets, you might, so we are responsible for asking you about them. Buying cryptocurrencies like Bitcoin are not taxable but buying something with them or selling them could be, if through the transaction you see a short-term capital gain. If you lose in the transaction, you may have a viable capital loss. In either event, it needs to be tracked and accounted for.
This third one holds good news for parents
- The 529 College Savings Plan has been expanded. Qualified distributions now include a withdrawal of up to $10,000 per beneficiary for elementary or secondary public, private or religious school tuition. If funds saved for college costs seem inadequate, withdrawals for K through 12 tuition may not be appropriate. However, there is no annual contribution limits to the funds.
Standard or itemized?
- If you itemized, rather than taking the standard deduction, you may want to re-think that this year. The standard deduction almost doubled from prior years. So, for instance for 2019, the deduction is $24,400 Married Filing Jointly (MFJ), $18,350 for Head of Household (HOH) and $12,200 for Single (S). That means some year-end strategies that held tax benefit for prior years probably won’t provide tax benefit for 2019.
- Making a charitable contribution before year-end may not provide a tax benefit if total itemized deductions do not exceed the new standard deduction amounts. Doubling up by making 2019 and 2020 charity pledges before year-end could help. An IRA transfer to a charity of at least the amount of the required minimum distribution for the age 70 ½ account holder may be advisable. A contribution to a Donor Advised Fund may help. These options can be discussed.
- Combining medical deductions into one year may help get a deduction above the 2018 10% AGI limitation. However, the increased standard deduction could result in no tax benefit for medical expenses whether they are combined or not.
The next two could make taxpayers unhappy.
- 2019 Schedule A taxes are limited to $10,000. So, prepaying the January installment of state estimated tax before year-end will not provide a benefit if deductions already exceed the $10,000 limit. The same warning applies to prepaying before year-end the March 2020 installment of property tax on personal use property. Taxes on business or rental property are not limited by the new law.
- The home equity debt interest deduction is completely suspended for 2018 through 2025. This means a refinanced first loan, a second loan or a home equity line of credit, where you used the proceeds of the loan for personal purposes (i.e. paying off student loans, credit cards or auto loans), will result in a reduction of the deductible portion of the interest showing on your Form 1098-Mortgage Interest.
- You will need to prepare a worksheet that details the date and the original acquisition loan amount and term of the original loan. The worksheet should also include the date and amount of any additional borrowing that was used to substantially improve your first or second home. Where the appropriate designation was made the interest remains deductible, if the proceeds of additional borrowing were used for business, investment or rental purposes.
Big changes for divorcing couples
- If you are divorcing, you will need special help for the transition to the new law. Alimony is not deductible by the payor, nor, is it includable in the income of the recipient for divorce agreements executed after Dec. 31, 2018. The payor spouse may be particularly stressed to discover that neither child support nor alimony is deductible for 2019 or later divorces.
- For divorces executed before Jan. 1, 2019, the old law is grandfathered in. Alimony paid under an old agreement is deductible and alimony received is taxable. The 2019 Form 1040 now requires that the date of the divorce agreement be entered on the payor’s tax return.
Good news for estate and gift exemptions
- The estate and gift tax exemption is doubled in the new law for 2018 through 2025. The exemption is $11,400,000 for decedents dying in 2019 ($11,580,000 for decedents dying in 2020). While Federal estate tax may not be an issue for many clients, estate planning always is. Probate, blended families, who-gets-what, and business succession are a few items that should be discussed with an estate attorney.
- Search for AMT credit carryovers. Since most of you will not be subject to AMT this year, your carryover credits will be valuable. Form 8801 should show any accumulated AMT credits, but prior year returns need to be analyzed carefully to avoid loss of these valuable credits.
Changes for businesses
- If the taxable income on the Form 1040 is below a 2019 threshold amount of $160,700 ($321,400 for MFJ), fewer limitations apply to the new qualified business income deduction (QBID). We can project 2019 taxable income and advise on ways to reduce taxable income below the threshold amounts. This is especially important for specified service businesses and for businesses with no W-2 wages and little or no depreciable business assets (referred to as UBIA in the regulations).
- Expanded sections 179 and 168 allow huge deductions for equipment placed in service prior to year-end.
- You may need a revised Form W-4 for 2020 as the withholding tables are still a little light. If you provide us with a pay stub we can assist you with preparing the 2020 Form W-4.
- Hobby losses are under attack. Since expenses to the extent of revenue are no longer deductible as miscellaneous itemized deductions, revenue from unprofitable business ventures could end up being fully taxed. Consider forcing profits by capitalizing many costs and being careful to remove personal expenses.
Bearer of bad news.
- Financial planner fees, investment expenses and moving expenses are not deductible for 2018 through 2025. Unreimbursed employee business expenses are not deductible for 2018 through 2025. You will be better off negotiating accountable expense reimbursement arrangements with their employer to avoid paying tax on amounts spent for business expenses.
Some strategies still hold true.
- Year-end planning still includes deferring income, accelerating deductions, purchasing and placing in service depreciable business assets before Dec. 31, maximizing elective deferral contributions, and harvesting capital losses (up to the $3,000 annual limit for net Schedule D losses). These “tried and true” year-end planning ideas take on a new importance if using any or all of them results in a taxable income below the thresholds for a QBI deduction. See number 6 above.
- Carefully check state tax conformity to the new Federal law. Many states have not conformed. NOTE: California conforms to almost nothing in TCJA and has a much lower standard deduction than federal law. That means, that with the exception of state tax payments, deductions for items 1, 4, 5, and 14 can still reduce California state income tax significantly. In this case, please plan to provide the same information that you gave us for prior years.
We’ve only touched on a selection of the more than 100 changes that could impact your 2019 tax return. Our job is to be educated about all of the changes and be able to advise you as to their impact on your return. Contact our Corte Madera office today by calling 415-924-6240 and schedule an appointment to talk to a professional about the best strategy to take in filing your 2019 return.