As the filing season for tax year 2018 draws to a close with the October 15th extension deadline, taxpayers across the country can breathe a sigh of relief knowing their obligation to Uncle Sam has been satisfied for the year. The 2019 season, however, is just around the corner and the April 15th filing deadline will be here before you know it. The following are just a few different approaches to consider as you start your end-of-year tax planning for 2019 and beyond.
In 2016, former Governor Nathan Deal signed into law a program aimed at “Helping Enhance Access to Rural Treatment” – the Georgia HEART Hospital Program. This program allows Georgia taxpayers to route their tax dollars to an eligible rural hospital of their choice by means of a charitable contribution to the hospital. Through a pre-approval process with the Georgia Department of Revenue, taxpayers can obtain a dollar-for-dollar state tax credit of up to $5,000 ($10,000 for married filing jointly). Essentially, every dollar you contribute to the hospital reduces your state tax liability by the same amount. Donations are capped statewide at $60 million. If the limit is not reached by June 30th of each taxable year, taxpayers can then make unlimited contributions for the remainder of the year until the cap is reached, and claim their contributions fully as a state tax credit. It is important to note that these pre-approved credits have generally been exhausted shortly after the application process begins each year. The application process usually begins in October for the following tax year, which means the application process for 2020 should begin shortly!
For the first year enacted, these credits were also fully deductible as a charitable contribution on Schedule A of the federal tax return. The Tax Cuts and Jobs Act (TCJA), however, would eliminate this federal deduction entirely for Georgia taxpayers once signed into law at the end of 2017. One of the elements of the act limited the deductibility of state and local taxes to a maximum of $10,000. To try to bypass this limit, many states began credit programs similar to the Georgia HEART Hospital Program as a way to afford their taxpayers a federal deduction for state taxes paid, since the charitable contribution would also reduce their state income tax liability. Via regulations effective August 11, 2019 (and applicable to contributions made after August 27, 2018), the US Treasury Department ruled that taxpayers can only deduct the net value of the donation as a charitable contribution. Because Georgia taxpayers receive a 100% tax credit for each dollar contributed, $0 of the donation is deductible on the federal return. This should not dissuade taxpayers from utilizing the credit, however, as it is a good way for you to specifically determine where your tax dollars go to work!
Another element of the TCJA increased the standard deduction for taxpayers, which is $12,200 for single individuals in 2019 and $24,400 for couples filing a joint return. For many individuals, this increase was enough to force them to take the standard deduction rather than itemizing their expenses, as their itemized deductions were far less than these standard amounts. Though the increase is favorable to the federal return, it can be somewhat less beneficial on the Georgia return. Taxpayers who take the standard deduction on the federal return must also take the standard deduction on the Georgia return. This amount is far lower than its federal counterpart: $4,600 for single taxpayers and $6,000 for couples filing jointly. A couple that could previously deduct $20,000 on the federal return and $20,000 on the state return by itemizing would now deduct $24,000 on the federal return and only $6,000 on the Georgia return. Taxpayers may consider bunching certain itemized deductions, such as medical expenses and charitable contributions, into alternating years, if this would push them over the threshold to itemize. Of course, the taxpayer would have to take the standard deduction in the alternate years, but would at least see a greater benefit with these expenses every other year. Through the use of donor-advised funds, taxpayers can make one large donation and take the charitable deduction in the year of contribution, but distribute the funds to one or more organizations over multiple years.
For most taxpayers, bunching medical expenses is not very practical. Though we always hope to live in good health, we cannot always control our medical needs as they arise. Life happens. For this reason, taxpayers may want to consider the use of health savings accounts. Contributions to these accounts (a maximum $3,500 for individuals and $7,000 for families in 2019) are deducted from gross income, a.k.a. pre-tax dollars, and can be used to pay for out-of-pocket medical expenses in the future. Withdrawals for qualified medical expenses are also tax-free and without penalty. However, withdrawals made for expenses other than qualified medical expenses before age 65 are subject to both tax and a 20% penalty. Individuals 65 and older can make withdrawals for expenses other than medical without penalty, but this income is still subject to income tax.
It is never too early to start thinking about tax planning for the future, and your trusty CPA can help! For more information about these and other year-end planning strategies, be sure to contact your tax preparer. For more information on the Georgia HEART Hospital Program, visit www.georgiaheart.org.
Ethan is a licensed CPA with KRT, CPAs and is chock-full of useless pop culture trivia.