2019 Year-End Tax Guide

THE MARCUM 2019 YEAR-END TAX GUIDE | www.marcumllp.com

INVESTMENT EXPENSES The suspension of miscellaneous itemized deductions until 2025 has impacted typical investment expenses previously required to be reflected on Schedule A. This inability to deduct investment expenses effectively reduces taxpayers’

Payoff All or Portion of the Mortgage: For taxpayers who will not get the benefit of the deduction (due to taking the standard deduction), consideration should be given to paying off or paying down the home mortgage debt. EMPLOYEE BUSINESS EXPENSES The suspension of miscellaneous itemized deductions has caused the loss of tax benefit for those employees who are responsible for paying expenses related to their employment. Accountable Plans: This change in the law has caused increased interest in accountable plans instituted by employers to cover employee business expenses. This is a nontaxable benefit to the employee, and the employer will generally reduce the employee’s income to account for this additional nontaxable benefit. This type of plan must comply with three rules: (i) advances made must be designated for expense incurred in the course of normal business; (ii) expenses must be accounted for within a reasonable amount of time; and (iii) excess reimbursements or allowances must be returned within a reasonable period of time. One additional benefit is that since this amount is a nontaxable benefit, the employer is relieved of withholding responsibility on these amounts as well as for the employer’s share of FICA taxes. Existing plans should be reviewed to insure compliance. Conversion to Self-Employed Status: There is a major difference between how business expenses are treated for a taxpayer who is self-employed (deductible) and for an employee (nondeductible under the suspension rule). Self- employed status has become more popular due to the new section 199A deduction on qualified business income. This status conversion is not free from potential IRS attack to recharacterize the taxpayer’s activities as those of an employee. This creates risks for both the taxpayer (as a service provider) and the service recipient (who would be treated as an employer). There are several potential negatives involved in this plan. The self-employed person must now pay what was previously the employer’s share of payroll taxes (through self-employment tax). This can be compensated for through a gross-up of payments. More significantly, there are a number of non-tax issues to consider, including (a) the inability to participate in other employee benefits, including possibly health insurance and pension plans; and (b) unemployment compensation.

overall investment returns. IRA/SEP Plan Expenses

The IRS allows certain IRA and Simplified Employee Plan (SEP) expenses to be paid either from the plan or by the owner. In the past, the rule of thumb was that it was better to pay the fees personally and allow the fund to grow tax- deferred. However, the elimination of the deduction for plan expenses warrants a reconsideration of this strategy. An analysis should be made comparing the expected rate of tax to be paid on future distributions from the IRA/SEP vehicle, the potential growth of assets inside the fund and the value of investments outside of the fund. For a traditional IRA or SEP, where growth in the plan will ultimately be taxed as ordinary income, consideration should be given to paying the fees out of the plan. This effectively generates a deduction by reducing the amounts ultimately subject to tax in the future. The potential harm is the loss of the tax-deferred growth (versus growth on the retained funds). Roth IRAs require a different analysis since future payments will generally be nontaxable. It may still makes sense for the individual to pay the fees; consult your tax advisor. MORTGAGE INTEREST LIMITATION The TCJA reduced the amount of home mortgage acquisition debt (an amount to purchase, construct, improve or reconstruct the property) -- from $1 million to $750,000 – on which interest can be deducted, for tax years 2018 through 2025. The TCJA also eliminated the ability to deduct as home mortgage interest amounts paid on up to $100,000 of non- acquisition debt. While this latter amount is commonly referred to as “home equity debt,” it does not refer to the mortgage product but to the use of the funds. If funds are borrowed through a home equity loan and are used for acquisition debt purposes, they are subject to the $750,000 deduction limit. If the loan is secured by the residence, it falls under these mortgage interest rules. Under a grandfather rule, for acquisition debt in place before December 15, 2017, the $1 million limit continues to apply.

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