Before 2020 arrives, we would like to provide you with a summary of some helpful reminders & tax planning strategies you can make between now and the end of the year that can have a significant effect on how much tax you have to pay next April.
If you are planning to receive pension distributions; looking for ways to enhance your retirement savings; selling or renting UK or US real estate; planning to terminate or change your U.S. or state residency or have your own business we recommend that you consult with us to ensure you are taking the right steps from a tax perspective.
The areas to focus on are 1) ensuring you pay enough or the minimum amount of tax for 2019 and 2020, 2) consider the timing of receiving income or selling assets, 3) review options for maximising retirement savings and tax-efficient distributions and, 4) minimise tax on businesses and any rental real estate income.
U.S. federal and state tax rules along with foreign tax implications for assets and investments situated outside the United States are complex and it is recommended that you seek professional tax advice.
Payment of Taxes
You should determine whether you have enough taxes paid or withheld to avoid underpayment penalties. In general, you don’t have to worry about a penalty if you owe less than $1,000 after subtracting withholdings and credits, or if you paid at least 90% of the amount of tax due for the current year or 100% of taxes due the previous year, whichever is smaller. You can file a new Form W-4 with your employer and increase the amount of taxes withheld from your pay-check before the end of the year.
If you expect to owe additional state and local income taxes and will be itemising in 2019, consider increasing withholding (or make estimated payments) before year-end to pull the deduction of those taxes into 2019. But remember – state and local tax deductions are limited to $10,000 per year, so this strategy is not a good one to the extent your 2019 state and local tax payments already exceed $10,000.
If you are facing a penalty for underpayment of estimated tax and do not have the option of an employer increase in your tax withholding, you can take an eligible rollover distribution from a qualified retirement plan before the end of 2019. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2019. You can then timely roll over the gross amount of the distribution, i.e., the net amount received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2019, but the withheld tax will be applied pro rata over the full 2019 tax year to reduce previous underpayments of estimated tax.
Higher-income earners should be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, your approach to minimising or eliminating the 3.8% surtax will depend on your estimated income and net investment income for the year.
High-income earners should also consider the 0.9% additional Medicare tax. This tax applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income are in excess of a threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case).
Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where you may need to have more withheld toward the end of the year to cover the tax. For example, if you earn $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, you would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000.
If you are planning to receive a direct distribution from your UK pension plan (employer plan, SIPP, etc.) ensure that you have applied for a UK NT code along with a US residency certification from the IRS.
Timing of Income & Deductions
You can consider postponing income until 2020 and accelerating deductions into 2019 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2019 that are phased out over varying levels of adjusted gross income (AGI). These deductions include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest.
Postponing income is also desirable for those individuals who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2019. For example, if you will have a more favourable filing status this year than next (e.g., head of household versus single filing status), or if you expect to be in a higher tax bracket next year.
U.S. tax rules allow you to sell investments that have fallen below your purchase price and use the resulting loss to offset capital gains in taxable accounts. That’s a compelling reason to consider jettisoning your losing positions. Investments that you’ve held for a year or less are taxed as ordinary income, but investments you’ve held longer are taxed at the long-term capital gains rate, which ranges from 0% to 23.8%. After matching short-term losses against short-term gains, and long-term losses against long-term gains, any excess losses can be used to offset the opposite kind of gain. If you still wind up with an overall net capital loss, you can use up to $3,000 of that loss to offset ordinary income and roll the rest over to the following year. Note that once you sell an asset at a loss, you must wait 30 days before reinvesting in it or buying a substantially identical investment.
You could consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase 2019 deductions even if the credit card bill is paid in 2020.
Due to the high basic standard deduction amounts that apply for 2019 ($24,400 for joint filers, $12,200 for singles and for marrieds filing separately, $18,350 for heads of household), and because many itemised deductions have been reduced or abolished many individuals may not itemise their deductions. No more than $10,000 of state and local taxes may be deducted; miscellaneous itemised deductions (e.g., tax preparation fees and unreimbursed employee expenses) are not deductible; and personal casualty and theft losses are deductible only if they’re attributable to a federally declared disaster and only to the extent the $100-per-casualty and 10%-of-AGI limits are met. Individuals can still itemise: medical expenses, but only to the extent they exceed 10% of adjusted gross income; state and local taxes up to $10,000; charitable contributions; and interest deductions on a restricted amount of qualifying residence debt. These deductions won’t reduce tax liability if they don’t cumulatively exceed the standard deduction amount that applies to your filing status.
You may be able to work around these deduction restrictions by applying a “bunching strategy” to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, if you know that you will be able to itemise deductions this year but not next year, you could benefit by making two years’ worth of charitable contributions this year, instead of spreading out donations over 2019 and 2020.
Donating clothes, kitchenware or furniture you no longer need can also boost your deductions while helping a worthy cause. You can base your deduction on the donated item’s “fair market value” (or what it might sell for at a thrift or consignment shop)—you can use online tools to estimate this value. You will need a written acknowledgment from the organisation if you are claiming a contribution of $250 or more (consider snapping a photo of the donation for your records). For donated items valued at more than $5,000 (art, antiques, etc.), plan on providing a written appraisal.
Individuals who are 70½ or older can transfer up to $100,000 from a traditional IRA tax-free to charity each year, as long as they transfer the money to the charity directly. The “qualified charitable distribution” will count as your required minimum distribution without being added to your adjusted gross income, which can be a boon if you were going to take the standard deduction instead of itemising (you can’t deduct charitable transfers). The transfer could also help keep your income below the threshold at which you’re subject to the Medicare high-income surcharge as well as hold down the percentage of your Social Security benefits subject to tax. Make a QCD well in advance of New Year’s Eve because the money has to be out of the account and the check needs to be cashed by the charity by December 31.
Contribute to a 529 college savings plan. Funding a 529 plan before year-end won’t reduce your federal tax bill, but it could lower your state tax liability. More than 30 states allow you to deduct at least a portion of 529 plan contributions from state income taxes. In most states, you must contribute to your own state’s plan to get the tax deduction, but several states allow you to deduct contributions to any state’s plan. Review your own state’s rules at savingforcollege.com. Many states allow grandparents and others to contribute to your child’s plan, and a few will allow them to deduct those contributions, too.
Consider the amount to be contributed for 2020 in your employer’s health flexible spending account (FSA) to ensure you are able to fully utilise these amounts in 2020.
If you are eligible to contribute to a health h savings account (HSA), you can make a full year’s worth of deductible HSA contributions for 2019 in December.
If you reside in a federally declared disaster area who suffered uninsured or unreimbursed disaster- related losses, can choose to claim these losses either on the return for the year the loss occurred (in this instance, the 2019 return normally filed next year), or on the return for the prior year (2018). Individual’s in a federally declared disaster area may want to settle an insurance or damage claim in 2019 in order to maximise this year’s casualty loss deduction.
Pension Planning & Wealth Preservation
As the year comes to a close, you should ensure that you maximise your contributions to your U.S. qualified pension plans. You can contribute up to $19,000 to a 401(k), 403(b) or federal Thrift Savings Plan in 2019, plus $6,000 in catch-up contributions if you’re 50 or older.
You can also consider making additional (non-deductible) contributions of cash or appreciated assets to your UK SIPP or Malta pension plans (QROPS or QNUPS). These contributions are not limited under U.S. tax rules. UK and Malta pensions have an advantage over U.S. plans in that a lump-sum distribution (ex., PCLS) can be received free of foreign, U.S. federal and in most cases state income tax.
If you are younger than 70½ at the end of 2019 and do not have a traditional IRA, you may be able to establish and contribute as much as you can to one or more traditional IRAs in 2019, if you anticipate that in the year that you turn 70½ and/or in later years you will not itemize deductions. Individuals who already have one or more traditional IRAs, should consider making maximum contributions to one or more traditional IRAs in 2019. Then, when you reach age 70½, you can make charitable donations by way of qualified charitable distributions from your IRA, as described above. Doing all of this will allow you to, in effect, convert nondeductible charitable contributions made in the year you turn 70½ (and later years), into deductible IRA contributions now and reductions of gross income from distributions from your IRAs in those later years.
Individuals interested in converting a traditional IRA to a Roth IRA should consider converting traditional IRA money) into a Roth IRA in 2019 if eligible to do so. Keep in mind, however, that such a conversion will increase AGI for 2019, and possibly reduce tax benefits tied to your income.
Individuals should take required minimum distributions (RMDs) from their U.S. IRA or 401(k) plans (or other employer-sponsored retirement plans). RMDs from IRAs must begin by April 1 of the year following the year an individual reaches age 70½. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Thus, if your client will turn age 70½ in 2019, they can delay the first required distribution to 2020, but if they do, they will have to take a double distribution in 2020 — the amount required for 2019 plus the amount required for 2020. Think twice before delaying 2019 distributions to 2020, as bunching income into 2020 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2020 if you will be in a substantially lower bracket that year.
Individuals who are 50 or 55 years of age are generally eligible to take a lump-sum tax free distribution from their U.K. pension plan or Malta pension plan (QROPS QNUPS). The U.S. early distribution penalty of 10% that is imposed upon U.S. qualified pensions plan distributions before age 59½ is not applicable to foreign pension plans.
Most states tax at least a portion of income from private-sector pension plans. Your state might have a pension exclusion, but chances are it’s limited based on your age and/or income. Bottom line: Make sure you check out a state’s overall tax environment for retirees before relocating there for your golden years. The states that generally do not tax pension income or do not impose an income tax are Alabama, Alaska, Florida, Hawaii, Illinois, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington and Wyoming.
Small Businesses and Rental Real Estate
If you are currently renting a home in the U.K. or U.S., ensure that you consider all deductible expenses such as repairs, utilities, bank fees, insurance, council tax and any travel costs (airfare, hotel, etc.) to look after the property.
If planning to sell U.K. real estate foreign currency/exchange rate factors should be reviewed to determine the tax implications in US dollars. The determination of the taxable capital gain for U.S. tax purposes can be minimised by reviewing the foreign currency exchange rules found under U.S. tax regulations.
Individuals may be entitled to a deduction of up to 20% of their qualified business income. For 2019, if taxable income exceeds $321,400 for a married couple filing jointly, $160,700 for singles and heads of household, and $160,725 for marrieds filing separately, the deduction may be limited based on whether you are engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased in–for example, the phase-in applies to joint filers with taxable income between $321,400 and $421,400 and to single taxpayers with taxable income between $160,700 and $210,700.
Individuals may be able to achieve significant savings with respect to this deduction by deferring income or accelerating deductions to be below these thresholds (or be subject to a smaller phaseout of the deduction) for 2019. Depending on the business model, an individual may be able to increase the new deduction by increasing W-2 wages before year-end. The rules are quite complex, so tax advisors play a significant role in year-end tax planning for those business owners looking to claim this deduction.
Businesses also can claim a 100% first-year bonus depreciation deduction for machinery and equipment purchased used (with some exceptions) or new—if purchased and placed in service this year. The 100% deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the deduction is available even if qualifying assets are in service for only a few days in 2019.
If you use a portion of your home as a dedicated office or storage space you are able to deduct all costs of your home (mortgage interest, utilities, insurance, repairs, rent, real estate taxes, repairs, maintenance, etc.) attributable to the portion of the home (based upon square feet) used exclusively for business.
For any tax questions, please contact:
James Cassidy, CPA
Cassidy & Guilfoyle CPA
115 Broadway 5th FL.
New York, NY 10006