Pro tips for cutting tax bills in the final weeks of 2019

If your clients are self-employed or small business owners they may be eligible for a 20% deduction off their business income. But it can be subject to lots of limitations depending on the field, the amount they invest in equipment, or how much they pay employees. If they’re below certain thresholds — $321,400 for a couple or $160,700 for an individual in 2019 — they automatically get the tax break.

For clients above those limits, there are several ways to legally reduce their taxable income to get under the caps, which is particularly important for doctors, lawyers and accountants who can’t claim the deduction at all if they are above those levels.

Of course, make sure they’re maxing out any tax-deferred retirement accounts and health savings accounts, if possible.

Self-employed individuals can also reduce their taxable income by as much as $225,000 if they make contributions to a defined benefit retirement plan.

“The next three weeks are really, really key to getting those plans drafted,” said Ed Reitmeyer, a regional partner at accounting firm Marcum.

Business owners could also increase employee wages by paying one-time bonuses to boost their payroll levels enough to qualify for the 20% deduction, said Grethell Anasagasti, a principal at accounting firm MBAF. If the company is structured as an S corporation, a closely held company, those bonuses can also be paid to the officers (or owners) of the company, she said.

If your clients are in a field that doesn’t qualify for the 20% small business deduction — including health, law, consulting, athletics, financial and brokerage services — there are still ways to potentially claim the deduction on some of their earnings.

If part of their income stems from sources that do qualify for the deduction, separate that potion of the business into a new entity to put a barrier between the profits that can get the tax break and those that can’t.

For example, an optometrist won’t qualify for the tax break from the work they do seeing patients, but profits from selling glasses and contact lenses would qualify. Ditto for a technology consultant who also sells hardware.

Tax professionals are seeing a large uptick in the use of donor advised funds.

The 2017 tax law increased the standard deduction to about $24,000 for a couple and limited some deductions, including one for state and local taxes. The result is that many clients have to donate much more than in the past to get above that $24,000 limit and file an itemized return. But the right timing of the donations can lead to big tax savings.

“It’s really tough for people to get over that $24,000 hurdle,” said Brad Sprong, head of family office and private client services at accounting firm KPMG. He’s advising clients to bunch all their donations to a donor-advised fund in one year to get the tax benefit for those contributions, and then take the standard deduction for the next few years.

What you donate also matters, Sprong says. He advises clients to look for alternatives to cash, such as appreciated securities, because the deduction amount is what the asset is worth, not necessarily what you paid for it. And in a low-interest rate environment, donating borrowed money can also have benefits if the tax breaks outweigh the loan costs.

Those who are 70 1/2 and older must start taking distributions from their individual retirement accounts, which generate a tax bill for the recipient. However, those taxpayers can donate as much as $100,000 directly from their IRAs in lieu of a distribution — avoiding the tax on that money.