Quick Links to Specific Year-End Tax Planning Strategies & Checklists:
– Year-End Tax Planning & Strategies Overview
√ What’s New for 2018 <– YOU ARE ON THIS PAGE
– Year-End Tax Planning Checklist for Individuals
– Year-End Tax Planning Checklist for Businesses
– Year-End Checklist for Payroll & 1099 Reporting
Year-End Tax Planning – What’s New for 2018
NEW TAX REFORM !!! “Tax Cuts & Jobs Act of 2017”
The Tax Cuts and Jobs Act of 2017 was passed late December, 2017 and is considered the most sweeping tax legislation since the Tax Reform Act of 1986. For businesses, it significantly reduced the income tax rate for C-corporations and provides a large business deduction for other businesses (Proprietorships, Farms, LLCs, S-Corporations, Partnships and even Rentals). The changes for individuals are many with some changes being favorable, but with several favorable components removed or suspended from the tax law.
The changes are many and significant. We’ve summarized the changes below, but we are still learning the extent of the impact these changes will have on our client’s tax returns.
Although it has been a year since the reform tax was passed, there are some areas (Section 199A) where we are still awaiting clarification from the IRS. Software vendors that produce tax preparation programs are holding off on releasing their finished programs until they get these final guidelines. I don’t know what might happen if the Government shuts down.
SUMMARY: Here is an overview of the key tax law changes affecting individual and business.
Many of the new tax law changes are temporary, but some are permanent.
Tax Rates & Tax Brackets –
The new tax law maintains seven income tax brackets but temporarily adjusts the tax rates as follows:
The bracket amounts also change. For example, the 2017 top rate of 39.6% started at $418,400 (single) and $470,700 (joint), but the 2018-2025 top 37% bracket doesn’t begin until taxable income of $500,000 (single) and $600,000 (joint). On the other side, the brackets are now to be adjusted for inflation. Where the new brackets are currently lower than the previous brackets, annual inflation adjustments could eventually make them higher. Changes effective 2018-2025.
Family Tax Credits –
Child credit are increased to $2,000 per child under age 17 (previously at $1,000). The refundable portion of these credits is limited to $1,400 each. These credits will phaseout based on the level of income, but at a higher level under the new tax law. Adjusted Gross Income (“AGI”) phase out amounts are $200,000 (single) and $400,000 (others) as compared to the prior tax law amounts of $75,000 (single) and $110,000 (others). Changes effective 2018-2025.
There is also a new credit of $500 each for other qualifying dependents; ie- older children or elderly parents. These new credits are not refundable of the tax credit totals exceed your tax liability. Changes effective 2018-2025.
Personal Exemptions –
No more personal exemptions (suspended for 2018–2025). Taxpayers could claim a personal exemption of $4,050 in 2017 for themselves and each dependents.
Standard Deductions –
In addition, they can either itemize deductions or take a standard deduction based on their filing status: $6,350 for singles and married couples filing separately, $9,350 for head of household filers, and $12,700 for married couples filing jointly.
The new standard deduction amounts is greatly increased to $12,000 (single), $18,000 (heads of household), and $24,000 (joint). The standard deduction amounts will be adjusted for inflation beginning in 2019. Under the prior law, these standard deduction amounts were $6,350 (single) $9,350 (head of household), and $12,700 (married).
You get to take the larger of the standard deduction or your itemized deduction. This new higher standard deduction will help many, and maybe even alleviate the removal of the exemption deductions, but may not help taxpayers with larger itemized deductions at all.
Itemized deductions –
As mentioned above, you get to take the larger of the standard deduction or your itemized deduction. Not only is the new standard deduction higher, the new tax law has limited or suspended many of the itemized deductions you may be used to getting.
- State and Local Tax Deduction –
This deduction is limited to $10,000 and includes state and local property taxes, income or sales taxes.
- Mortgage Interest Deduction –
Mortgage interest expense is limited to interest on mortgage debt of up to $750,000 ($1 million if debt incurred before December 15, 2017). Interest on other debt tied to your home (ie- home equity line-of-credit) is no longer deductible unless the proceeds were used for home improvement and the additional indebtedness is under the $750,000 limit.
- Medical expense deduction –
Qualified medical expenses are deductible only to the extent they exceed the 7.5% of AGI.
- 2% Miscellaneous Itemized Deductions –
This itemized deduction is gone! The old law allowed a miscellaneous itemized deduction for certain expenses to the extent they exceeded 2% of AGI. Examples of these deductions were certain professional fees, investment expenses and unreimbursed employee business expenses. Deduction suspended 2018-2025.
- Personal Casualty & Theft Loss Deductions –
This deduction is also suspended except for losses due to an event officially declared a disaster by the President. Deduction suspended 2018-2025.
- Charitable Contribution Deductions –
The limit on the deduction for cash donations to public charities is raised to 60% of AGI (previously 50%). The deductions for payments made in exchange for college athletic event seating rights have been eliminated. Changes effective 2018-2025.
- Itemized Deductions Phaseout –
The limitation of itemized deductions based on income level has been eliminated. Phaseout suspended 2018-2025.
Alternative Minimum Tax (“AMT”) –
The Alternative Minimum Tax is a separate tax computation that limits or disallows certain “preference” deductions and assesses an additional tax if this alternative computation reaches predetermined levels. It’s purpose was to limit the extent that taxpayers could take advantage of these preference tax items. In reality, more and more taxpayers have found themselves subject to AMT over and above the original intention of the AMT provision.
The new law reduces the number of taxpayers who will be subject to AMT in two ways. The first is an increase in the the AMT exemption amount to $70,300 (single and head-of-household) and $109,400 (married). The second is to increase the AMT exemption phaseout thresholds to $500,000 (single and head-of-household) and $1 million (married). These amounts are subject to an annual inflation adjustment. Changes effective 2018-2025.
“Kiddie” Tax –
Kiddie tax applies to children to limit the technique of shifting income from the parents to the children. The old tax law taxed much of the child’s unearned income at the parent’s marginal tax rate if it was higher. The new tax law increases the effective tax rate to the the highest marginal rate (37% of 2018) for taxable income of $12,500 or more.
Moving Expense –
No more moving expense deduction, except for military ordered moves for active-duty members of the Armed Forces. This deduction has been a “above-the-line” deduction in computing AGI. Deduction suspended 2018-2025.
Related, reimbursement for qualified moving expenses can no longer be excluded from gross income and wages, except for military ordered moves for active-duty members of the Armed Forces. Exclusion suspended 2018-2025.
Alimony Payments –
Alimony payments for divorce agreements executed in or after 2019 are no longer deductible. This deduction is another “above-the-line” deduction in computing AGI. This deduction suspension is permanent.
These alimony payments will also now longer be taxable income to the recipient. This change is also permanent.
Roth IRA Conversions –
Taxpayers who convert a pretax traditional IRA into a posttax Roth IRA from later can no longer change their minds and reverse the conversion (called “recharacterization”). Recharacterization within designated time periods are till allowed for other retirement contributions.
529 Education Savings Plans –
529 Education Plan distributions used to pay qualifying college education expenses (tax-free if distributed per guidelines). The new tax law expands the education expenses that qualify to to include both primary and secondary school expenses. There are annual limits to the amount that can be distributed to these new qualified education expenses.
Obama Care Mandate –
Beginning in 2019, you will not have to pay a penalty if you are not covered by a qualifying health plan as set forth under the Affordable Care Act (“Obamacare”).
Estate Tax Exemption –
The Federal gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption amounts increase to an inflation-adjusted $10 million (single) or $20 million (married couples). Changes effective 2018-2025.
The top corporate income tax rate is now 21% (compared to the previous top rate of 35%).
Personal service c-corporations (PSCs) now pay a flat 21% rate.
Corporate Alternative Minimum Tax (“AMT”) has been repealed. Existing AMT credits that were allowed under prior law can be carried-over for potential use in tax years 2018–2021.
Deduction for corporate dividends is reduced. C-corporations that own at least 20% of the stock of another corporation will get a 65% deduction (previously 80%), and a 50% deduction (previously 70%) for other corporate dividends received.
Qualified Business Income (“QBI”) Deduction (new Section 199A) –
New business deduction based on owner’s Qualified Business Income (“QBI”) generally equal to 20% of QBI. The deduction is subject to restrictions on the type of income and also the taxpayer’s income level.
QBI would include the net amount of qualified items of income, gain, deduction and loss from any qualified business of the noncorporate (C-corporations) owner. It does not include certain investment items, reasonable compensation paid to an owner for services rendered to the business or any guaranteed payments to a partner or LLC member treated as a partner for services rendered to the partnership or LLC.
Owners qualifying for the QBI deduction are individuals, estates and trusts that own the business interest. The QBI deduction reduces the owner’s taxable income. It is not an AGI adjustment item.
W-2 wage limitation: For pass-through entities other than sole proprietorships, the QBI deduction generally can’t exceed the greater of the owner’s share of:
50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or
The sum of 25% of W-2 wages plus 2.5% of the cost of qualified property. Qualified property is the depreciable tangible property (including real estate) owned by a qualified business as of year end and used by the business at any point during the tax year for the production of qualified business income.
Under an exception, the W-2 wage limitation doesn’t apply until an individual owner’s taxable income exceeds $157,500 ($315,000 for joint filers). Above those income levels, the W-2 wage limitation is phased in over a $50,000 range ($100,000 range for joint filers).
Service business limitation: The QBI deduction generally isn’t available for income from specified service businesses (such as most professional practices other than engineering and architecture and businesses that involve investment-type services such as brokerage and investment advisory ser- vices). Under an exception, the service business limitation doesn’t apply until an individual owner’s taxable income exceeds $157,500 ($315,000 for joint filers). Above those income levels, the service business limitation is phased in over a $50,000 phase-in range ($100,000 range for joint filers).
Business Interest Expense Deductions –
Business can only deduct interest expenses in excess of 30% of “adjusted taxable income.” For S corporations, partnerships and LLCs that are treated as partnerships for tax purposes, this limit is applied at the entity level rather than at the owner level.
For tax years beginning in 2018 through 2021, adjusted taxable income is calculated by adding back allowable deductions for depreciation, amortization and depletion. After that, these amounts aren’t added back in calculating adjusted taxable income.
Business interest expense that’s disallowed under this limitation is treated as business interest arising in the following taxable year. Amounts that cannot be deducted in the current year can generally be carried forward indefinitely.
Taxpayers (other than tax shelters) with average annual gross receipts of $25 million or less for the three previous tax years are exempt from the interest deduction limitation. Some other taxpayers are also exempt.
For example, real property businesses can elect to continue to fully deduct their interest, but then would be required to use the alternative depreciation system for real property used in the business. Interest expense from dealer floor-plan financing (for example, financing by dealers to acquire motor vehicles, boats or farm machinery that will be sold or leased to customers) is also still fully deductible.
Bonus Depreciation –
First-year bonus depreciation percentage is increased to 100% (previously 50%). It is now allowed for both new and used qualifying property (previously just new property).
Some business may not be eligible for bonus depreciation: ie- real estate businesses that elect to deduct 100% of their business interest and dealerships with floor-plan financing if they have average annual gross receipts of more than $25 million for the three previous tax years.
In later years, bonus depreciation is scheduled to be reduced as follows:
80% for property placed in service in 2023,
60% for property placed in service in 2024,
40% for property placed in service in 2025, and
20% for property placed in service in 2026.
For certain property with longer production periods, the preceding reductions are delayed by one year.
Section 179 Deduction –
Eligible property has been expanded to include certain depreciable tangible personal property used predominantly to furnish lodging.
The definition of qualified real property eligible for the Sec. 179 deduction is also expanded to include the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems.
Business Passenger Vehicles Expense Deduction –
For new or used passenger vehicles that are placed in service in or after 2018 and used more than 50% for business, the maximum annual depreciation deductions under the new tax law are summarized as follows:
Year 1 $10,000
Year 2 $16,000
Year 3 $ 9,600 and
Year 4 $ 5,760 and thereafter until the vehicle is fully depreciated.
For years after 2018, these amounts will be adjusted for inflation.
The maximum amount that can be deducted in Year 1 are lower under the new tax law, but the vehicle is depreciated over a shorter period.
Meals & Entertainment & Transportation Expense Deduction –
Business-related entertainment expenses are no longer deductible (previously 50% deductible). Meal expenses incurred while traveling on business are still 50% deductible.
On-Premise Meals Expense Deduction –
The 50% disallowance rule for meals will now also apply to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer (previously 100% deductible). After 2025, these expenses will be no longer be deductible.
Meals & Entertainment & Transportation Expense Deduction –
The new law also disallows employer deductions for the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety. It also eliminates employer deductions for the cost of providing qualified employee transportation fringe benefits (ie- parking allowances, mass transit passes and van pooling), but those benefits are still tax-free to recipient employees.
Domestic Production Activities (“DPA”) Deduction (old Section 199) –
The Section 199 “DPA” deduction has been eliminated.
Net Operating Losses (“NOL”s) –
The maximum amount of taxable income that can be offset with NOL deductions is generally reduced from 100% to 80%. In addition, NOLs incurred in those years can no longer be carried back to an earlier tax year (except for certain farming losses). Affected NOLs can be carried forward indefinitely.
A new limitation applies to deductions for “excess business losses” incurred by noncorporate taxpayers. Losses that are disallowed under this rule are carried forward to later tax years and can then be deducted under the rules that apply to NOLs. This new limit kicks in after applying the passive activity loss rules. However, it applies to an individual taxpayer only if the excess business loss exceeds the applicable threshold.
Cash Basis vs Accrual Basis Accounting –
The eligibility rules to use the more-flexible cash method of accounting are liberalized to make them available to many more medium-size businesses. Also, eligible businesses are excused from the chore of doing inventory accounting for tax purposes.
Section 1031 “Like-Kind” Property Exchanges –
The Section 1031 rules that allow tax-deferred exchanges of appreciated like-kind property is allowed only for real estate exchanges completed after December 31, 2017. Beginning in 2018, there are no more like-kind exchanges for personal property assets. However, the prior-law rules still apply if one leg of an exchange has been completed as of December 31, 2017, but one leg remains open on that date.
Executive Compensation Expense Deduction –
Compensation deductions for amounts paid to principal executive officers generally cannot exceed $1 million per year, subject to a transition rule for amounts paid under binding contracts that were in effect as of November 2, 2017.
Research and Development (“R&D”) Expenses –
Specified research and development (R&D) expenses must be capitalized and amortized over five years, or 15 years if the R&D is conducted outside the United States instead of being deducted currently. This goes into effect for tax years beginning after December 31, 2021.
Foreign Business Income –
The new tax law includes many changes related to foreign business operations. In conjunction with the reduced corporate tax rate, the changes are intended to encourage multinational companies to conduct more operations in the United States, with the resulting increased investments and job creation in this country.
Developing Strategies and a Specific Plan to fit Your Situation: While uncertainties exist, there remain many solid planning opportunities and we encourage you to schedule an appointment so that we can discuss your situation with you and develop a specific strategy for you.
Circular 230 Disclosure: This is to advise you that, unless expressly stated, nothing in this communication (including any attachment or other accompanying materials) was intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding any federal tax penalties, or for promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to anyone.