Tax Reform 2017

Welcome to "Tax Cuts and Job Act Provision"

by Laurie Kerridge, January 22, 2018

 

While the name could be debated, the new tax reform has been born with the weird name of “Tax Cuts and Job Act Provision.”

Following is a detailed summary of the known impacts and changes. For a breakdown of the new tax rate schedules and a comparison to the 2017 rates, click here here

Standard deduction

The standard deduction is doubling for 2018. Single filers will deduct $12,000 from their adjusted gross income, head-of-household filers $18,000 and joint filers will automatically get $24,000 to knock off their taxable gross income. This means that many people may no longer be able to itemize their deductions, however they will instead get this higher standard deduction.

Personal Exemptions

I can’t believe it. As long as I’ve been alive, we’ve had personal exemptions. But they’re gone, completely. 100% gone. Payroll departments are losing their $^#@ trying to translate the W-4 exemptions into the new tax law.

Child Tax Credit

Starting in 2018, the $1,000 tax credit for each child under age 17 will be doubled to $2000, with $1,400 of the credit refundable to lower income taxpayers. Additionally, the package significantly increases the income phase-out thresholds. The credit begins to phase out for couples with adjusted gross incomes over $400,000 (up from $110,000 in 2017) and $200,000 for all other filers (up from $75,000). 

Mortgage Interest

Lawmakers decided to reduce the amount of mortgage debt homeowners can deduct, from $1,000,000 to $750,000. The limit applies to mortgage debt incurred after December 15, 2017, to buy or improve a principal residence or second home. Older loans are still subject to the $1 million cap.

The law also bans the deduction of interest on home-equity loans. And this change applies to both old and new home-equity debt. Interest accrued on home-equity debt after December 31, 2017, is not deductible. Now is the time to refinance your first mortgage to pay off and close your HELOC (home equity line of credit). What a dramatic change this is.

A proposal to extend the time you must own and occupy a home to qualify for tax-free profit when you sell it was dropped from the final legislation. As in the past, the law allows you to exempt up to $250,000 of such profit, or $500,000 if you’re married, as long as you have owned and lived in the house for two of the five years before the sale. Technically, this means 24 months out of 60 months, and you must wait two tax filing years before using the exemption again.

Affordable Care Act Penalty

The new law does repeal the “individual mandate” – the requirement that demands that you have health insurance or pay a fine. But not until 2019. For 2017 and 2018, the mandate is still in place.

Property Taxes

The deduction for what you pay in state and local income tax, sales tax and property tax has been severely limited. Again, this is a historical deduction we are witnessing the near disappearance of.

Starting in 2018, the new law sets a $10,000 limit on your combined total of state, local and property tax. This will impact many people.

If you were paying attention to the news over the month of November and December, people were racing in to prepay their property taxes for the first quarter of 2018, however congress put a lid on that, informing people, after-the-fact, that unless they had already been billed and assessed, they could not write off a prepayment of 2018 property tax.

Specifically, if your property taxes were accruing throughout the 2017 year, and are due in 2018, you may still deduct them on your 2017 tax return if you paid that installment before December 31, 2017. Also, if you sold your home, or purchased a new home before 12/31/17, the escrow company would have withheld your prorate share, which can also be deducted. Be sure to bring final closing statement (HUD-1) to the tax accountant to take advantage of this amount.

Under the new rules, property and sales taxes will remain deductible for taxpayers in a business or for-profit activity. For example, if you own a residential rental property, you can continue to fully deduct property taxes paid on that property on Schedule E.

Unreimbursed Employed Expenses (Form 2106)

Gone. Pilots, flight attendants, truck drivers and railroad engineers, professional camera operators, certain media broadcasters, mechanics, construction workers and other blue collar employees who are expected to provide their own tools, equipment, travel expenses, meals while out of town, uniforms and cleaning… all used to get a massive deduction for per diem and travel expenses. Not anymore, unfortunately. Basically, the new law also repeals all miscellaneous itemized deductions subject to the 2% of AGI threshold, including the write-off for tax preparation fees, unreimbursed employee business expenses and investment fees. This is to the core, UNJUST!

Section 199A Qualified Business Income Deduction

The new law slashes the tax rate on regular corporations (sometimes referred to as “C corporations”) from 35% to 21%, starting in 2018. The law offers a different kind of relief to individuals who own pass-through entities — such as S corporations, partnerships and LLCs — which pass their income to their owners for tax purposes, as well as sole proprietors who report income on Schedule C of their tax returns. Starting in 2018, many of these taxpayers will be allowed to deduct 20% of their qualifying income before figuring their taxable income. For a sole proprietor in the 24% bracket, for example, excluding 20% of income from taxation would have the effect of lowering the tax rate to 19.2%.

The changes to the taxation of pass-through businesses are some of the most complex provisions in the new law, in part because of lots of limitations and anti-abuse rules. They’re designed to help prevent gaming of the tax system by taxpayers trying to have income taxed at the lower pass-through rate rather than the higher individual income tax rate. For many pass-through businesses, for example, the 20% deduction mentioned above phases out for taxpayers with incomes in excess of $157,500 on an individual return and $315,000 on a joint return. At the end of the day, most individuals who are self-employed or own interests in partnerships, LLCs or S corporations will be paying less tax on their pass-through income than in the past. Yay!!!

529 Plans to Pay for High School

The new law allows families to spend up to $10,000 a year from tax-advantaged 529 savings plans to cover the costs of K-12 expenses for a private or religious school. Previously, tax-free distributions from those plans were limited to college costs.

Medical Expenses

Despite efforts to eliminate the deduction for medical expenses, the new law is actually more generous than the old one. Under the old rules, medical expenses were deductible only to the extent they exceeded 10% of adjusted gross income. For 2017 and 2018, however, the threshold drops to 7.5% of AGI (which is where it’s been for centuries until 2016). Whoopee doo. Come 2019, the 10% threshold returns.

Alimony

A big penalty is on the horizon for those charged with paying alimony. For separation agreements and divorce decrees executed after December 31, 2018, alimony will no longer be a tax deduction for the person paying and the spouse receiving will no longer have to report it as taxable income! This is going to make for some angry divorcees. Child support will continue to be non-deductible and non-taxable.

Roth Conversions

The new law will make it riskier to convert a traditional IRA to a Roth. Under the old law, you could reverse such a conversion — and eliminate the tax bill — by “recharacterizing” the conversion by October 15 of the following year. Starting in 2018, such do-overs are no longer do-overable. Conversions will be irreversible. 

Capital Gains

The new law retains the favorable tax treatment granted to long-term capital gains and qualified dividends, imposing rates of 0%, 15%, 20% or 23.8%, depending on your total income.

In the past, your capital gains rate depended on what tax bracket you fell in. But, with the changes in the brackets, Congress decided to set income thresholds instead. For example, the 0% rate for long-term gains and qualified dividends will apply for taxpayers with taxable income under about $38,600 on individual returns and about $77,200 on joint returns.

Moving Expenses

The new law eliminates a popular deduction. For people who incurred a job-related move to another city, no longer are the associated moving costs deductible. Going forward, only members of the military can claim a deduction of applicable costs over and above what wasn’t coverable by the government.

For a list of expiring tax provisions, see here.  

 

What is Tax Planning?

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Tax planning is the process of looking at various tax options to determine when, whether, and how to conduct business transactions to reduce or eliminate tax liability.

Many small business owners ignore tax planning. They don't even think about their taxes until it's time to meet with their tax advisors but tax planning is an ongoing process, and good tax advice is a valuable commodity. It is to your benefit to review your income and expenses monthly and meet with your tax advisor quarterly to analyze how you can take full advantage of the provisions, credits, and deductions that are legally available to you.

Tax Planning Strategies

Countless tax planning strategies are available to small business owners. Some are aimed at the owner's individual tax situation and some at the business itself, but regardless of how simple or how complex a tax strategy is, it will be based on structuring the strategy to accomplish one or more of these often overlapping goals:

  • Reducing the amount of taxable income
  • Lowering your tax rate
  • Controlling the time when the tax must be paid
  • Claiming any available tax credits
  • Controlling the effects of the Alternative Minimum Tax
  • Avoiding the most common tax planning mistakes

In order to plan effectively, you'll need to estimate your personal and business income for the next few years. This is necessary because many tax planning strategies will save tax dollars at one income level, but will create a larger tax bill at other income levels. You will want to avoid having the "right" tax plan made "wrong" by erroneous income projections. Once you know what your approximate income will be, you can take the next step: estimating your tax bracket.

The effort to come up with crystal-ball estimates may be difficult and by its very nature will be inexact. On the other hand, you should already be projecting your sales revenues, income, and cash flow for general business planning purposes. The better your estimates are, the better the odds that your tax planning efforts will succeed.

Here are three examples where tax planning pays for most small business owners:

Maximizing Business Entertainment Expenses

Entertainment expenses are legitimate deductions that can lower your tax bill and save you money, provided you follow certain guidelines.

In order to qualify as a deduction, business must be discussed before, during, or after the meal and the surroundings must be conducive to a business discussion. For instance, a small, quiet restaurant would be an ideal location for a business dinner. A nightclub would not. Be careful of locations that include ongoing floor shows or other distracting events that inhibit business discussions. Prime distractions are theater locations, ski trips, golf courses, sports events, and hunting trips.

The IRS allows up to a 50 percent deduction on entertainment expenses, but you must keep good records, and the business meal must be arranged with the purpose of conducting specific business. Bon appetite!

Important Business Automobile Deductions

If you use your car for business such as visiting clients or going to business meetings away from your regular workplace you may be able to take certain deductions for the cost of operating and maintaining your vehicle. You can deduct car expenses by taking either the standard mileage rate or using actual expenses (more about this below). In 2017, the mileage reimbursement rate is 53.5 cents per business mile (down from 54 cents per mile in 2016).

If you own two cars, another way to increase deductions is to include both cars in your deductions. This works because business miles driven is determined by business use. To figure business use, divide the business miles driven by the total miles driven. This strategy can result in significant deductions.

Whichever method you decide to use to take the deduction, always be sure to keep accurate records such as a mileage log and receipts. If you need assistance figuring out which method is best for your business, don't hesitate to contact the office.

Increase Your Bottom Line When You Work At Home

The home office deduction is quite possibly one of the most difficult deductions ever to come around the block. Yet, there are so many tax advantages it becomes worth the navigational trouble. Here are a few tips for home office deductions that can make tax season significantly less traumatic for those of you with a home office.

Try prominently displaying your home business phone number and address on business cards, have business guests sign a guest log book when they visit your office, deduct long-distance phone charges, keep a time and work activity log, retain receipts and paid invoices. Keeping these receipts makes it so much easier to determine percentages of deductions later on in the year.

Section 179 expensing for tax year 2017 allows you to immediately deduct, rather than depreciate over time, up to $510,000, with a cap of $2,030,000 worth of qualified business property that you purchase during the year. The key word is "purchase." Equipment can be new or used and includes certain software. All home office depreciable equipment meets the qualification. Some deductions can be taken whether or not you qualify for the home office deduction itself.

Tax Avoidance is Legal, Tax Evasion is not

Although tax avoidance planning is legal, tax evasion - the reduction of tax through deceit, subterfuge, or concealment - is not. Frequently what sets tax evasion apart from tax avoidance is the IRS's finding that there was fraudulent intent on the part of the business owner. The following are four of the areas the IRS examiners commonly focus on as pointing to possible fraud:

  1. Failure to report substantial amounts of income such as a shareholder's failure to report dividends or a store owner's failure to report a portion of the daily business receipts.
  2. Claims for fictitious or improper deductions on a return such as a sales representative's substantial overstatement of travel expenses or a taxpayer's claim of a large deduction for charitable contributions when no verification exists.
  3. Accounting irregularities such as a business's failure to keep adequate records or a discrepancy between amounts reported on a corporation's return and amounts reported on its financial statements.
  4. Improper allocation of income to a related taxpayer who is in a lower tax bracket such as where a corporation makes distributions to the controlling shareholder's children.

Does the IRS really call YOU?

Have you ever received an email or phone call from the IRS, or someone claiming to be? I have as well and it's pretty freaky, making your heart pound as if you've hit the treadmill for an hour. NEVER, ever, ever, ever... REPLY or respond to an email, no matter how legitimate it appears, that asks you to update your information. One of the key ways you can identify a fraudulent impersonator is by looking at the senders email address. No one from a government agency would send an email using a gmail or hotmail address, nor any other suffix other than irs.gov however, the IRS wants people to know they would never contact you by means of cold calling or emailing you.