6 Decisions Clients Should Review Before Submitting 2019 Returns

Before your clients cast their votes in the 2020 presidential election, they may have to make certain “elections” on their 2019 returns. These choices can have a significant tax impact, so it’s up to you to provide the guidance they will likely need.

Dec 19th 2019
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Before your clients cast their votes in the 2020 presidential election, they may have to make certain “elections” on their 2019 returns. These choices can have a significant tax impact, so it’s up to you to provide the guidance they will likely need.

What sort of elections are we referring to? The following are six decisions that are commonly made on returns for individuals and small business owners:

1. Joint or Separate Returns: Normally, a married couple will pay less tax by filing jointly rather than as “married filing separately” status, but not always. Take a situation where one of the spouses has a disproportionately higher amount of medical expenses than the other. Due to annual threshold based on adjusted gross income (AGI), filing separately on a 2019 return may produce a sizeable deduction as opposed to a smaller one for joint filers or none at all. Caution: Consider the overall tax implications resulting from this choice.

2. Installment Sales: If you arrange to sell real estate where you receive installment payments over two or more years, you pay tax on a pro-rata basis in the years that payments are received. Not only does this defer tax it may even lower the overall tax bill. While installment sale treatment on your return is automatic, you can “elect out” by paying the entire tax liability in the year of the sale. Why would you do this?  Among other reasons, this may be a low tax year for you or you might expect the next few years to be especially high tax years.  

3. State Taxes: Under the Tax Cuts and Jobs Act (TCJA), the annual deduction for state and local taxes is currently limited to $10,000 per year. This SALT deduction is comprised of (a) property taxes and (b) income taxes OR sales taxes. Thus, you might have to choose between deducting state income taxes paid or sales tax. Note that you can use an IRS-approved table for sales tax based on the appropriate state and size of the family or actual sales tax receipts. If you rely on the table, you can add on sales tax for big-ticket items, like cars and boats, to the listed figure.

4. Home Office Deductions: Typically, a self-employed individual who runs a business from home is eligible for home office deductions based on the business percentage of the home. However, instead of tracking down all the records needed for this method, you can elect to use a simplified method equal to $5 per square foot of the home office, up to a maximum of $1,500. Caveat: Although the simplified method is far more convenient, the actual expense method generally provides a bigger total deduction.

5. Section 179 Deductions: If your small business acquired and placed into service qualified property in 2019, it can elect to claim the Section 179 “expensing” deduction for the property instead of depreciating it over time. In effect, you can currently deduct the full cost of the property, within the allowable limits. The TCJA doubled the maximum Section 179 from $500,000 to $1 million with inflation indexing. For 2019 returns, the indexed amount is $1.02 million. However, the allowance is reduced if the total cost exceeds an annual threshold of $2.55 million in 2019 and the deduction can’t exceed the taxable income from business activities.

6. Business Vehicles: If you use a vehicle for business driving, you can deduct a portion of your actual expenses based on business use, plus a generous depreciation allowance. But this actual expense method requires detailed recordkeeping for every business trip and documentation of expenses. As an alternative, you can elect to use the “standard mileage rate” set by the IRS each year, with less recordkeeping. For 2019 returns, the standard rate is 58 cents per business mile plus related tolls and parking fees. Be aware, however, that the standard mileage rate isn’t available to all taxpayers (e.g., if you previously claimed accelerated depreciation for the vehicle).   

As you can see, these tax return decisions aren’t always cut-and-dried. Point out the best approach for clients based on their particular circumstances.   

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