Here are ten important choices that individuals and small business owners can make this tax season.
1. Tax Filing Status
Tax filing status has numerous ramifications, so it’s important to discuss your options with your tax professional. If you’re married, you must decide whether to file 1) a joint return with your spouse, or 2) separate returns. Usually, you’ll come out ahead by filing a joint tax return — but not always.
For example, medical expenses can be claimed as an itemized deduction in 2019 only to the extent that they exceed 7.5% of adjusted gross income (AGI). So, if one spouse incurs a disproportionately high amount of the couple’s medical expenses, a greater combined medical expense deduction might be claimed by filing separate returns.
Likewise, some single individuals may be eligible for the head of household (HOH) status. Compared to single filers, HOH filers are entitled to wider tax brackets and bigger standard deductions. So, using HOH filing status can save significant taxes, if you meet the IRS requirements.
2. Itemized Deductions
This election is basic: You can choose to deduct the greater of 1) the standard deduction based on your filing status, or 2) your itemized deductions on Schedule A. Under the TCJA, the standard deduction has been substantially increased, while certain itemized deductions have been reduced or scaled back. As a result, more taxpayers are now claiming the standard deduction.
For 2019, the standard deduction allowances are as follows:
Standard Deduction Amounts for 2019
|Single or married filing separately||
|Married joint filers||
|Head of household||
After 2025, standard deductions are scheduled to return to pre-TCJA levels.
Examples of itemized deductions include:
- Charitable contributions,
- Home mortgage interest,
- Medical expenses above the 7.5% AGI threshold, and
- State and local taxes (SALT), subject to the TCJA limitations.
These deductions are subject to various restrictions and limitations. The TCJA also suspended itemized deductions for miscellaneous expenses, including investment expenses, fees for tax advice and preparation, unreimbursed employee business expenses, and union dues.
3. SALT Deductions
Under the TCJA, the SALT deduction is limited to $10,000 annually ($5,000 if you’re married and file separate tax returns). This deduction is generally composed of:
- State and local property taxes, and
- State and local income taxes or general sales taxes if you elect to deduct sales taxes instead of income taxes.
In other words, you can elect to deduct state and local sales tax in lieu of deducting state and local income taxes. Usually, you’ll fare better by including income taxes in the SALT deduction. However, if your sales tax figure is higher, you can opt for this amount supported by your actual receipts. Alternatively, you can choose to claim the sales tax deduction from an IRS table based on your state of residency and family size, plus actual sales taxes paid in 2019 on certain “big-ticket items,” such as vehicles and boats.
4. College Tuition Breaks
Parents with children in college can potentially claim one of two higher education tax credits, if they qualify. These credits are:
- The American Opportunity Tax credit (up to $2,500 per student), or
- The Lifetime Learning credit (up to $2,000 per tax return).
Both credits are subject to phaseouts based on modified adjusted gross income (MAGI).
Alternatively, parents can elect to deduct tuition expenses and certain mandatory fees, instead of claiming a credit. The tuition and fee deduction was just extended through 2020 by the new spending legislation.
The tuition and fee deduction, which also has a MAGI phaseout, is either $2,000 or $4,000 or zero, depending on your income. You need not itemize to claim the deduction.
Typically, an education credit will provide greater tax savings than the tuition and fee deduction, because it reduces taxes dollar for dollar. The deduction reduces only the amount of income that’s subject to tax. But the eligibility requirements for these education breaks vary. Review all the relevant factors with your tax advisor before determining which break to claim.
5. Child’s Tax Return
If your child has taxable income, he or she may be required to file a return, even if the child is a minor. Furthermore, the “kiddie tax” is triggered if a dependent child under age 24 has unearned income exceeding $2,200 in 2019.
Under the new spending measure, the excess unearned income is taxed at the top marginal tax rate of the child’s parents. The TCJA had changed the kiddie tax calculation to one based on the tax rates in effect for estates and trusts, but this provision has been repealed.
If all of your child’s income is from interest, dividends, and mutual fund capital gain distributions and certain other requirements are met, you can simplify matters by electing to report the child’s income on your own return, instead of filing a separate return. But be aware that combining income on one return could have other tax return repercussions.
6. Investment Interest Deductions
The tax law allows you to deduct investment interest expense up to the amount of your net investment income for the year. For these purposes, the definition of “net investment income” — not to be confused with the term used to calculate the 3.8% tax on investment earnings — normally doesn’t include capital gains. For 2019, the tax rate for such gains is usually 15% (or 20% for higher-income investors).
But you can elect to include long-term capital gains in the net investment income total to the extent you forgo the favorable tax rate for those gains. So, making the election can increase your deduction for investment interest expense.
7. Installment Sales
If you sell assets, such as real estate or business ownership interests, in installments spanning two or more tax years, the tax liability is spread out on a pro-rata basis over the years you receive the payments. In effect, you postpone the tax due on a sale, as well as possibly reducing the overall tax hit.
The installment sale tax treatment is automatic. However, if it suits your personal needs, you can “elect out” of installment sale reporting and pay the entire taxable gain in the year of the sale. This might be preferable on a 2019 return if you expect to be in a higher tax bracket in future years.
8. Home Office Deductions
Typically, a self-employed individual who runs his or her business from home may qualify for a home office deduction. He or she may be entitled to deduct expenses directly attributable to the home office, plus a portion of the entire home’s expenses based on the percentage of business use of the home.
Instead of keeping detailed records, you can elect to use a simplified method and deduct $5 per square foot of home office space, up to a maximum of $1,500. In most cases, the actual expense method produces a bigger deduction than the simplified method. So, keeping track of actual costs could be worth the extra work.
9. Standard Mileage Rate
Self-employed individuals who drive a personal vehicle for business purposes can write off a portion of the vehicle’s actual expenses based on business use, plus a bigger depreciation allowance under the TCJA. But tracking actual expenses requires detailed recordkeeping for every business trip and documentation of all expenses.
Alternatively, you can use the IRS-approved standard mileage rate and keep fewer records. For 2019, the rate is 58 cents per business mile traveled, plus any related tolls and parking fees.
Important: The standard mileage rate isn’t available if you previously claimed accelerated depreciation for the vehicle or for certain other taxpayers (for example, fleet operations).
10. Filing for an Extension
If it looks like your 2019 tax return won’t be completed on time, you can elect to request an extension. Approval of the extension, until October 15, 2020, is automatic — no questions asked by the IRS.
But be aware that this is only an extension to file your tax return, not an extension to pay tax. In other words, the IRS expects you to make a reasonable estimate of your tax liability and pay in that amount by no later than April 15. (Even if you comply with that requirement, you could still be subject to an interest charge penalty if you didn’t pay in sufficient tax throughout the year via withholding and/or estimated tax payments.)
What’s Right for You?
Before making any of these 10 elections, contact your tax advisor to compare your options and discuss the pros and cons. That way, you can make a fully informed decision.
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Any accounting, business, or tax advice contained in this communication, including attachments and links to outside sources, is not intended as a thorough analysis of specific issues, nor a substitute for a formal opinion, nor was it written to be used to avoid tax related penalties.