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Impact of New Tax Law, Part I of III on year-end tax planning

New Tax Law

The Tax Cut and Jobs Act made substantial changes to tax rates, deductions and credits for individuals, corporations and other entities. It also affected changes to estate taxes. For a summary of all changes, please see our post from December in 2017 year-end tax planning – a year of uncertainty.

The purpose of this post is to get you started on year-end planning to take advantage of those changes.

What is the Impact of New Tax Law?

We have been reviewing the impact of the new law with projections in our CCH ProSystem Fx tax software. While many individuals lose deductions in 2018 that they were previously allowed, that does not mean that their taxes increase as much they feared. Here are some reasons why:

  • They probably do not owe the AMT as they have in the past.
  • The change in rates lowers total taxes for many.
  • The passthrough deduction discussed below can make a big change.

If you want us to review the impact on your taxes, please let me know.

Clarifications on New Tax Law

Mortgage interest remains deductible even on an equity line of credit (ELOC), provided proceeds from the ELOC were used to purchase or substantially improve your home. However, if the proceeds were used for consumption, then the interest is not deductible.

The deduction for state and local income taxes (SALT) and property taxes is capped at $10,000. However, property taxes for rental properties are still fully deductible against rental income on Schedule E. And farmers and self-employed taxpayers can still deduct the business portion of the taxes on Schedules F and C. Finally, you may be able to use a trust to share ownership of a property with beneficiaries so that they can deduct a portion of the property taxes.

Change for Small Businesses

One of the biggest changes is the qualified business income deduction (“QBID”) under section 199A, also know as the pass-through deduction. This deduction reduces taxable income from qualifying businesses by 20% for taxpayers under the income limitations. This is, net profits form the business after any W-2 salary paid to the owners is reduced.

Pass through businesses include sole proprietors, S corporations, LLCs and partnerships. They also include real estate investment trusts (“REITs”) and certain publicly traded partnerships (“PTP”). But there are income limits and thresholds that eliminate the QBID service companies. Here is a good chart on that may help you see if you qualify for the 20% deduction. Also, watch for more in our next post.

Planning under 199A for QBID

If you have a pass-through business and your year-end planning shows that you may hit the income limits that reduce or eliminate the deduction, you can move income and deductions for Schedule A to change that. Push income into next year and bring any deductions from next year into this year. If you succeed in getting back under the income the limitation, you get a 120% benefit for the right offs – that is, 100% deduction value on Schedule A and 20% QBID value.

The income limits are toughest on service companies. If your small business is a service company, you may want to break out any non-service business to get the benefit of QBID. A professional office that does billing, debt collection or operates a professional building may be able to put those activities in separate entities that qualify for QBID. Furthermore, if your small business is considering buying an office, keep that in a separate entity from the business.

Conclusion

Watch for Part II coming soon. In the meantime, please contact us if you have any questions.

Getting unbiased advice on your finances

Unlike many sources of financial planning guidance, we do not charge a fee based on your assets or a commission for purchasing investments or insurance. We will help you set up investments and find the insurance that you need. For all our help, we simply charge for our time.

Why pay for financial advice when you can get it on the internet for free

(she’s thinking about the question)

Many investment firms have websites offering free advice on managing your finances. However, nothing on the internet is truly free. The advice may direct you to investments from which the firm receives a commission or the website may be a lead generation site.

What is lead generation?

Awhile back, I did a post on how a website that provides “free” use of a gamified retirement calculator. Using the calculator was fun and free. However, when you delved deeper, reading the company’s ADV disclosure, you learned that the website may receive referral fees from vendors for referring users to financial products, such as lenders for a user who needs to refinance her mortgage or Schwab, Fidelity or TD Ameritrade for users who want to rollover a 401(k). In other words, the site generates leads for which it gets paid. That hardly sounds free!

When to pay

If free is not the answer, that means you pay for advice. That can be good, because when you are the sole source of compensation, then planner has no hidden agenda – she serves your needs only.

I know finances are not fun and planning sounds like bad homework, so paying only makes it worse. At the same time, I see how spending the time to plan can make peoples lives so much better.

I hope you contact me and let me know what you think.

2017 year-end tax planning – a year of uncertainty (updated)

(as also seen online at IRIS)

The Republican Congress is in the process of passing the Tax Cut and Jobs Act, a new tax law. President Trump is expected to sign it by Christmas.

The law was created and passed hastily and affects many aspects of the federal tax code, so many details are still not clear. Furthermore, regulations have yet to be issued. Also, while the provisions affecting corporations are permanent, most affecting individuals expire in 2026. Thus, tax planning is complicated.

How do you plan? Very carefully – you need to augment your traditional year-end planning by anticipating the impact of the many changes.

Note: many proposed changes did not make the final law, so be sure you are referring to the final version when making your planning decisions!

Planning steps

First, be practical:

  • Determine what income and deductions you can move from 2017 to 2018 or vice versa.

Second, review the impact:

  • What happens if you shift any of these amounts of income and deductions to the other year?

Finally, watch for the impact of the Alternative Minimum Tax (“AMT”):

  • The exemption for the AMT and the threshold above which that exemption gets phased out both rise next year, so some deductions lost to the AMT in 2017 could have value in 2018. Others simply vanish next year, so you need to plan carefully!

Income

The new law lowers the tax brackets, so income will be generally subject to less tax in 2018.

Conclusion: You probably want to move income to next year if you can.

Exemptions and standard deduction

The new law eliminates personal exemptions and raises standard deductions to $12,000 for single filers and to $24,000 for married couples. These amounts will be indexed for inflation. The increased standard deduction may offset deductions that you lose, as discussed below. If you have children and others who are dependents, those tax credits are increased, which may help as well.

Conclusion: You probably want to move itemized deductions to 2017.

Itemized Deductions and Credits

The deduction for property taxes and for state and local income taxes is capped at $10,000.

Mortgage interest on new home purchases is deductible only for loans of up to $750,000 used to purchase your primary residence. Interest on home equity loans will not be deductible. (It is not clear if converting any part of home equity indebtedness that was used to purchase or improve your primary residence to a mortgage would make that interest deductible, subject to the cap.)

All miscellaneous deductions are eliminated. This includes investment and tax preparation fees, safe deposit box charges and unreimbursed employee expenses.

The casualty loss deduction is also eliminated and the bike to work exclusion ends.

Moving expenses will no longer be allowed (except for military personnel in certain cases).

The deduction of alimony will be eliminated for divorces occurring after 2018.

What survived? The deduction of student loan interest and medical expenses survived. The latter is subject to a 7.5% rather than a 10% floor. And, the new law repeals the reduction applied to itemized deductions for high-income taxpayers, which may help with some deductions.

Here are several items that were considered for limitation or elimination that remain unchanged:

Dependent care accounts, adoption expenses, tuition waivers and employer paid tuition, capital gains on the sale of your personal residence, the teacher deduction, electric car credit, Archer medical accounts and designating shares of stock or mutual funds sold.

Conclusion: you will want to move any of the eliminated deductions that you can prepay into 2017.

Note: a last-minute provision added to the new law makes prepaying 2018 income taxes in 2017 non-deductible.

Pass-through businesses

If you have income from a sole proprietorship, LLC, partnership or S Corporation, you may be able to deduct 20% of that income, subject to certain rules on wages and a phaseout beginning at $157,500 for singles and $315,000 for married taxpayers. These rules are designed to avoid abuse seen when Kansas enacted a similar law.  (Watch for a post on this soon.)

Conclusion: read the fine print (e.g. rules for personal service firms) to see if there are any opportunities you can exploit.

Estate taxes

The credit before estate or gift taxes are due is doubled to $10,000,000, indexed for inflation.

Conclusion: you may want to postpone your year-end gift planning.

Summary

Carefully review any income and deductions that you can still shift to see if moving will lessen the total taxes you pay for 2017 and 2018.

Good luck and best wishes for the holidays!

If you have any questions, please contact me.

Holiday Planning Series with the Squash Brothers, part III, debt management

Watch our Holiday Planning Series, Part II, as Steven and the Squash Brothers discuss debt management so you do not overspend and end up with credit card debt you can’t pay off.

Thanks for watching our series!