Dear Valued Clients and Friends,
For centuries, civilization like the Greeks, Egyptians, and Romans taxed their citizens to pay for services delivered to their communities. Paying taxes represents an important way we contribute to sustainable and shared prosperity by funding national defense and safety, infrastructure, technology, education, and public programs like Medicare, Medicaid, and Social Security.
“Taxes, after all, are dues that we pay for the privileges of membership in an organized society.” – Franklin D. Roosevelt
Taxes are classified as regressive if they affect poor people more than wealthy people and as progressive if they affect the wealthy people more than the poor. Progressive taxes have been popular throughout history. Ideally, enough taxes should be paid to ensure that everyone receives equal benefits from their communities. Taxation and the distribution of tax is complex and many factors drive tax rates up and down. As Jean-Baptiste Colbert said,
“The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing.”
In 1913, Congress passed the 16th Amendment to allow the U.S. Government to tax income. Up to that point, the main source of government funding was tariffs. Today, many people feel our tax rate is high but in 1916 the top tax rate increased from 15% to 77% mostly to finance World War I. During the roaring 20s, the top rate decreased to 25%. In 1932, the top tax rate increased to 63% during the Great Depression. During the 40s, World War II caused the top rate to increase to 94%. During the 50s, 60s, and 70s, the top tax rate stayed above 70%.
Source: IRS.com and Wikipedia
As the chart shows above, in the 80s, the top rates decreased to 50% and then 28%. In the 90s, taxes rose to 39.6% and then down to 35% during the early 2000s. In 2012, the top tax rate increased to 39.6% with an additional 3.8% for the Affordable Care Act. In December 2017, Congress passed the Tax Cuts and Jobs Act and lowered the top tax rate to 37%. By comparison, Sweden’s top income tax rate is 61.85%; Japan is 55.95%; Israel is 50%; Ireland and Portugal is 48%; Germany is 47.5%; Australia, China, France, Greece, South Africa, Spain, Taiwan and United Kingdom is 45%; Canada is 33%; Russia is 13%; and Saudi Arabia and the Cayman Islands is 0%.
In this issue of The Financierge, we focus on the maze of new tax law provisions and provide several planning strategies for 2019. We also include a podcast with Michael Klarin, CPA. Michael runs a leading boutique tax advisory and consulting firm and has an affiliation agreement with our firm to provide tax preparation and advisory services to our clients. This is a critical component of our comprehensive and holistic delivery of wealth management services. Also, as legal fiduciaries, our affiliation is a pure value-add for clients with no revenue generation for The Bahnsen Group.
The Financierge AUDIO Podcast
with Michael Klarin, CPA*******
20 Tax Planning Strategies for 2019
Source: David Coverly
“This is the season of the year when we discover that we owe most of our success to Uncle Sam.” – The Wall Street Journal
In December 2017, Congress approved the largest overhaul of the U.S. tax code in three decades – the Tax Cuts and Jobs Act (TCJA). The TCJA made changes for individuals and businesses. For individuals, changes included new tax brackets and rates, new rules for deductions, alternative minimum tax, child-tax credits, and estate and gift taxes. For corporations, the top tax rate was cut from 35% to 21, and the corporate alternative minimum tax was eliminated. Below are ten tax strategies to consider for 2019.
1. Maximize Your Retirement Plans – Whether you have access to a company-sponsored retirement plan, you own small business, or you are self-employed, set up the right plan and contribute the maximum amount allowable. 401(k) plans allow you to contribute a maximum of $19,000 and another $6,000 catch-up if you are over age 50. A company match makes it even more beneficial and helps the company reduce taxable income while possibly increasing employee performance and retention.
2. After-tax 401(k) contributions – If your employer allows after-tax contributions to your 401(k), you also get the advantage of the $56,000 limit for 2019. It’s an overall cap, including your $19,000 (pretax or Roth) salary deferrals plus any employer contributions (but not catch-up contributions).
3. Contribute to an IRA – Depending on your income, you may be able to get a tax deduction for your contribution to a traditional Individual Retirement Account (IRA) of up to $6,000 for those age 49 and under, and $7,000 for those age 50 and older. Your IRA deduction may be limited if you contribute to a company-sponsored retirement plan, the type of income, and the amount of income. For 2019, if you participate in any company retirement plan, your ability to deduct your IRA contribution phases out if you have between $64,000 and $74,000 of adjusted gross income (AGI) and are a single filer, or $103,000 and $123,000 if filing jointly or if you are a qualified widower. The deduction is phased out between $193,000 and $203,000 of adjusted gross income for married filing jointly when one spouse is a company retirement plan participant. Note: you must have earned income to make an IRA contribution – for example, investment income does not count but rental income does.
4. Use Roth IRA – In 2019, the AGI phase-out range for making contributions to a Roth IRA is $193,000 to $203,000 for married couples filing jointly. For singles and heads of household, the income phase-out range is $122,000 to $137,000. If you earn too much to open a Roth IRA, you can open a nondeductible IRA and convert it to a Roth IRA as Congress lifted any income restrictions for Roth IRA conversions.
5. Don’t Forget SEP IRAs and Solo 401(k)s – For the self-employed and small business owners, the amount you can save in a SEP IRA or a solo 401(k) is $56,000 in 2019. That’s based on the amount you can contribute as an employer, as a percentage of your salary. The compensation limit used in the savings calculation is $280,000 in 2019.
6. Open a Defined Benefit Plan – The limitation on the annual benefit of a defined benefit plan goes up from $220,000 in 2018 to $225,000 in 2019. These are powerful pension plans if you are a high-earning, self-employed individual.
7. Sell Depreciated Holdings – For those who have depreciated holdings, you might want to consider selling these positions and using the losses to offset taxable gains.
8. Manage Your Marginal Tax Rate – Watch the tax rate you pay on the next dollar of income you earn as you move to higher income brackets with higher taxes. For example, it might be better to defer income like bonuses, self-employment income, retirement plan distributions, and U.S. T-Bill income until next year.
9. Distribute Your Roth IRA Wisely – Roth IRA withdrawals are tax-exempt and it may help you avoid jumping to a higher tax bracket versus other income alternatives. Also, if you are getting Social Security before your full retirement age, it may prevent an increase in taxable income as a result of the Social Security earnings test.
10. Alternate Years Between Standard and Itemized Deductions – You may have itemized in the past and now the standard deduction may be a better choice.
One option may be to alternate every year between the standard deduction allowance and itemized deductions to get the greatest deduction. This can be accomplished by bunching expenses in one year together. For example, if you bunch expense items like charitable contributions, medical expenses, property taxes, and mortgage interest into one year, you may be able to get a higher itemized deduction.
11. Bunch Charitable Giving – It may be helpful to combine your charitable deductions every other year to exceed the new higher standard deduction. If you want to get the deduction but haven’t decided who or when you want to distribute, you can contribute to a donor-advised fund (DAF) and decide later. Also, deductions for cash donations to public charities has increased to 60% of adjusted gross income. One other idea to keep in mind is that you can make gifts to charities, donor advised funds, charitable remainder trusts, and family foundations with appreciated assets. For example, you can gift stock with high gains instead of selling them, paying taxes, then making a donation. It’s a win-win for you and the charity.
12. Bunch Medical Expenses – Medical expenses can be deducted if they exceed 10% of your adjusted gross income. It may be worthwhile to bunch these expenses.
13. Give a Gift – Besides making you feel good, you can give a gift of up to $15,000 per person without paying a gift tax. As an example, you and your spouse could give your children and/or your grandchildren $30,000 each into their trust, IRA ($6,000 limit each), 529 Plan ($75,000 one-time limit each), or you can make an unlimited gift directly to educational institutions and/or medical facilities.
14. Harvest Tax Losses – Harvesting tax losses is the practice of selling a security that has a loss to offset taxes on both gains and income. The sold security is replaced by a similar security so that the optimal asset allocation and expected returns are maintained.
15. Donate Your RMD – If you and your spouse are age 70 1/2, you both may be able to make a direct donation to a qualified charity from your retirement account up to $100,000. The required minimum distribution (RMD) will still count, but the donation will be excluded from taxable income. Remember you will not be able to also use this for a charitable deduction.
16. Pay Yourself, or Not – If you are an owner of an S corporation, make sure you pay or defer compensation by December 31st.
17. Review Trust Distributions – You should review distributions of income from trust accounts and estate accounts to lower your tax liability.
Estates and trusts are taxed at the highest income tax rate (and a lower threshold at which the 3.8 % Medicare surtax applies). Therefore, it may be worth distributing income to beneficiaries with a lower income tax rate.
18. Remember Capital Gains and Qualified Dividends in Your Planning – Long-term capital gains are taxed using different brackets and rates than ordinary income and can provide significant tax savings. In addition to the rates listed in the table below, if you are a higher-income taxpayer, you may also have to pay an additional 3.8% net investment income tax.
19. Consider a Health Savings Accounts (HSA) – To qualify to contribute to a HSA in 2019, you must have a health insurance policy with a deductible of at least $1,350 for single coverage, or $2,700 for family coverage. You can contribute up to $3,500 to an HSA if you have single coverage or up to $7,000 for family coverage. If you’re 55 or older anytime in 2019, you can contribute an extra $1,000. Note: you cannot contribute to an HSA after you enroll in Medicare.
20. Review Estate Planning – It’s also important to remember that most of the provisions of the TJCA will be temporarily in effect through December 31, 2025. For that reason, it is important to review and take advantage of estate planning as the TCJA substantially increased the unified gift ($15,000 per person) and estate tax exemption ($11.4M per person), as well as the generation-skipping transfer tax exemption ($11.4M per person). Non-grantor trusts, dynasty trusts, grantor retained annuity trust (GRAT), and spousal limited access trusts (SLAT) may be viable estate and tax planning options.
These are only a few tax strategies. There are other strategies like optimizing the Qualified Business Income Deduction (Sec. 199A), reducing capital gains by using qualified opportunity zone investments, using installment sales to lower income over a time period, and using qualified small business stock exclusions.
Bottom Line and Action Steps
For 2018, you may still be able to contribute to a traditional, Roth and or SEP IRAs by April 15, 2019.
For 2019, consider tax planning strategies like managing income and tax rates, bunching, and contributing to retirement accounts.
Meet with your private wealth advisor to see what 2019 tax strategies make sense for your goals. Also, please reach out with any questions, comments, or if there is anything we can do to serve you.
Don B. Saulic, CFP® CPA
Partner, Private Wealth Management
HighTower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary based on the client’s individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor.
Select Financierge Topical Index (by Publish Date)
Business Entity Structures and New Tax Law Considerations (Aug 20, 2018)
Five Charitable Planning Perspectives to Know Before You Sell Your Business (Aug 20, 2018)
Two Estate Planning Tips for Your Businesses (Aug 20, 2018)
Four Strategies to Preserve Your Business’ Future (Aug 20, 2018)
Five Ideas about 529 College Savings Plans (Nov 2, 2017)
Dividend Stock Investing (Feb 14, 2018)
Six Items to Keep in Your Vault (Nov 16, 2017)
Twelve Proactive Tips to Fight Identity Theft (Nov 16, 2017)
Twelve Ideas to Guard Your Family in a Digital World (Nov 16, 2017)
Is Your Lifestyle Balanced and in SHAPE? (Nov 20, 2018)
Real Estate Planning
Four Points to Ponder Before Buying or Leasing a Home (Jun 22, 2018)
Six Considerations About Mortgages, Refinancing and Taxes (Jun 22, 2018)
Five Elements of Reverse Mortgages (Jun 22, 2018)
Four Perspectives to Consider in Deciding to Move to a State with Lower Taxes (Jun 22, 2018)
Risk Management and Insurance Planning
Starting Social Security Benefits – Ready, Set, Hold!? (Nov 2, 2017)
Nine Considerations to Maximize Social Security Benefits (Nov 2, 2017)
Lifestyles of the Affluent and Exposed (Nov 16, 2017)
Eight Benefits of Health Savings Accounts (Mar 16, 2018)
Seven Ideas for Life Insurance (Mar 16, 2018)
Six Considerations About Long-Term Care Insurance (Mar 16, 2018)
Starting Social Security Benefits – Ready, Set, Hold!? (Nov 2, 2017)
Ten Things to Know About IRAs and Saving for Retirement (Feb 14, 2018)
Cheers to Your Health, Wealth and Wisdom (Jan 15, 2019).