As we enter 2019, now is an ideal time to focus on tax planning. Many individuals and closely held small businesses use cash-basis accounting, which means taxable events that occur during the calendar year determine taxable income and deductible expenses. Cash-basis filers have some control over the timing of income and deductions and, with thoughtful planning, can often defer taxable income from one year to the next.
One straightforward way to lower taxable income is to contribute more to a retirement plan like a 401(k). If you find extra cash during the year, increase your payroll deferral so more of your earnings go into the plan. Each dollar you contribute reduces your taxable income, and many employers offer matching contributions that effectively add free money to your retirement balance. If your employer does not offer a retirement plan, consider making an IRA contribution to begin setting money aside for the future and reducing current taxable income where applicable.
The 2018 tax law introduced major changes to individual taxation that affect 2019 planning. One of the most significant changes was the increase in the standard deduction: for married couples filing jointly it rose substantially. Because of this higher standard deduction, taxpayers who usually itemize should review their deduction timing. Bunching deductible expenses into a single year can maximize tax benefits when the standard deduction threshold makes itemizing less advantageous in other years.
Businesses can also use timing strategies to manage tax liabilities. Cash-basis businesses can defer income into the following calendar year while accelerating deductible expenses into the current year. For example, near year-end a cash-basis company might delay invoicing to push receivables into the new year or prepay certain expenses now to capture deductions sooner. The new law expanded eligibility for cash-basis accounting: it generally applies to businesses with average annual gross receipts of $25 million or less over three years, increasing flexibility for many small and medium-sized businesses.
Gifting assets remains a valuable planning tool to transfer wealth and remove future appreciation from your taxable estate. The estate and gift tax exemption roughly doubled for married couples under recent law changes, creating substantial opportunities for those who can benefit from lifetime gifting and other estate planning strategies. Properly structured gifts can reduce estate tax exposure while allowing continued family wealth transfer.
Business owners should also pay attention to new opportunities and limits affecting pass-through entities. The Section 199A deduction for qualified business income can provide significant tax relief for many pass-through owners, though its rules are complex and require careful analysis. Additionally, business losses are subject to new limitations: while net operating losses may be carried forward, they generally can no longer be carried back to prior years, and other restrictions may apply.
Your final tax bill for the year is not yet fixed, so take advantage of the remaining time to implement strategies that minimize your liability. Consult your tax advisor or CPA to evaluate the impact of these rules on your specific situation and to tailor planning moves that align with your financial goals.
The content of this article is for informational purposes only and is not a substitute for professional financial or tax advice. Always consult a qualified tax professional, financial advisor, or other trusted expert with questions about your personal financial, investment, or tax matters.