2018 year-end tax planning – Part III on using the new tax law to save you money

In our first part, we discussed the impact of the new law on personal taxes, and in our second part, we discussed planning for small businesses. In this part, we give you a guide for year-end moves to reduce total taxes between 2018 and 2019. Can you act at all? Review the changes in itemized deductions

Each year, we advise that you be practical, focusing on where you can actually make moves. For many, the new $24,000 standard deduction for married couples, $12,000 for single taxpayers, means you will not itemize (i.e., your total for itemized deductions is less than the standard amount). If you are not itemizing, you have fewer ways in which to affect change in the taxes due in either year (you can also stop collecting receipts for those deductions!).

Some possible deduction strategies

One technique for getting around the limit is to bunch deductions from two or more years into one year. The only deduction that you can really move is charitable donations, because your state, local and real estate taxes are limited to a $10,000 maximum and you cannot accelerate, or delay, significant amounts of mortgage interest.

If you do not want any one charity to receive the full amount in one year, then donate to a donor advised fund from which you may be able to designate donations to particular charities in future years.

If you are 70½ or older, you have the option of distributing up to $100,000 from your IRA or other qualified plan to an IRS- approved charity, and having none of the distribution taxed.

The deduction of unreimbursed business expenses was terminated by the new tax law. One possible strategy is to form an LLC or S Corp., report the business expenses on form 1065 or 1120S, and then take those on Schedule E to offset other income. You will need a valid business purpose to form the LLC or S Corp. and take expenses.

You may also be able to report business expenses on Schedule C as relating to self-employment. Again, you must have a valid business purpose. Also, the IRS could apply the hobby loss rule to disallow the deductions, if you do not show a profit for the business in two out of five years. Thus, it is best to consult with an attorney before trying any of these ideas.

The tax planning steps

If you are able to itemize, determine what income and deductions you can move from 2018 to 2019 or vice versa. You want to minimize total taxes for both years. Make sure your planning includes the 3.8% Medicare tax on high income and review Roth conversions. And review our post on planning under 199A for QBID.

Next, review the impact of moving income and expense to see what happens if you shift any of these amounts from one year to the other year.

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

  • The exemption for the AMT and the threshold above which that exemption gets phased out both rise for 2018, so fewer taxpayers will owe the AMT.

Capital gains

Review your unrealized losses to see if you can shelter gains, reducing your total taxable income. If you have more losses than gains, you can take up to $3,000 of capital losses against other income. If you sell an asset that would prefer to retain, in order to realize gains in 2018, make sure you do not run afoul of the wash-sale rule (any loss on an asset that you repurchase in 30 days will be disallowed, so you have to either wait or buy a similar asset that fits your asset allocation while not counting as a wash sale).

If you have net gains, consider using appreciated stock for charitable donations – that way you avoid the tax on the gain while still getting the full fair market value for your charitable donation.

  • One note of caution: many mutual funds will make capital gains distributions to shareholders in December. Shareholders may be surprised on the amount of taxable gain, even for funds that had little net appreciation.

More on itemized deductions 

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, except when the home equity indebtedness is used to purchase or improve your primary residence.

As you may recall, all miscellaneous deductions were eliminated. This includes investment and tax preparation fees, safe deposit box charges and unreimbursed employee business expenses. And moving expenses are no longer allowed (except for military personnel in certain cases).

Under the new law, medical expenses are subject to a 7.5% threshold before becoming deductible.

More year-end planning

While you review your taxes, consider reviewing your estate plan and beneficiary designations. The federal exemption doubled to just over $11 million in 2018, so fewer people will owe any federal estate tax. However, many states still impose estate taxes on smaller estates. If you have “excess wealth” and want to reduce your taxable estate by gifting assets to children or others, you can give $15,000 per person, per year now. If your spouse joins you, that is $30,000 per person.

If you do review your estate plan documents, also review beneficiary designations to make sure everything is current. And review your medical directive and durable power of attorney.

If you have not maxed-out your 401(k) plan, IRA,Health Savings Account or flex plan account, consider doing so before the end of the year.

Summary

Carefully review any income and deductions that you can still shift to see if moving will lessen the total taxes you pay for 2018 and 2019.

Good luck and best wishes for the holidays!

Business Taxes, Part II of III on year-end tax planning

This is Part II of three parts on year-end tax planning under the Tax Cut and Jobs Act. In our first part, we discussed the impact of the new law on personal taxes. In this part, we focus on small businesses.

Choice of Entity for Small Businesses

One of the biggest changes from the new tax law is the massive reduction in the tax rate for regular or “C” corporations. That may sound very appealing, but does this mean you should convert your S Corp. or LLC into a C Corp.? It could, if you expect to keep net income in your business.

If that is not your plan, i.e., if you want to take out money for yourself and other members, then use a pass-through entity instead of a C Corp. While a C Corp. may only pay taxes of 21% on its income, the amount the C Corp. distributes, via dividends or otherwise, will be taxed again to shareholders. If the shareholders are in the highest bracket, then income that started in the corporation had to pay over 52% in total taxes before getting into shareholders pockets. If you are a pass-through such as an LLC or partnership, then no tax is imposed at the entity level and entity members may qualify for the QBID on their personal returns – see below.

Be clear on your goals: do you want to leave net income in to grow the business for sale or an IPO? Or do you want to distribute net income to business members?  Deciding makes the choice clear.

Section 199A QBID

In our first part, we discussed the qualified business income deduction of 20% for certain pass-entities.. The deduction is complicated and subject to limitation. One such limitation is the total income of the taxpayer reported on her individual or joint tax return. The deduction phases out for high income taxpayers, starting at $157,500 of income for single taxpayers and $315,000 for married taxpayers, and phasing out when income exceeds $207,500 for single taxpayers and $415,000 for married taxpayers. There are wage and capital limits that can bring back a deduction when the phase out is exceeded, but that does not help service businesses as discussed below.

The deduction is “below the line,” so it does not reduce self-employment taxes or any items that are keyed to adjusted gross income (“AGI”). It also does not affect net operating losses.

Another limit is on income from a service business. This is defined as income from the following:

Health, law, accounting, consulting, financial services, performing arts, actuarial science, athletics, brokerage services, investing or trading in securities, or any business where the principal asset is the reputation or skill of its employees (there are now regulations on this last type, but those do not answer all questions).

Architects and engineers were excluded from the list in the final bill.

For those within the definition of service business, QBID drops to zero when the phase out is exceeded.

If you are bumping up against any limits for 2018, you will want to review ways to defer income to 2019 or reduce taxable income in 2018 by increasing your deductions.

Businesses use of Home

The new tax law imposes limits on Schedule A deductions, including state and local income and real estate taxes. If some of your real estate taxes otherwise subject this limit are for a home office or other business use, then the business portion is not limited and can be used to shelter business income.

New Rules on Entity-level Audits

Under the new tax law, LLCs and partnerships face substantial changes for the IRS audit procedures:

  1. Beginning in 2018, the IRS can audit such entities at the partnership or LLC level under the Centralized Partnership Audit Rules or “CPAR.” This gives the IRS new powers, one of which is the ability to impose a tax at the entity level and let the partners sort it all out, rather than the pre-2018 requirement to audit each partner; and
  2. The IRS would contact the Partnership Representative for the entity. If no PR has been designated, then the entity loses by default.

This means (a) updating your operating agreement to designate the PR in place of the tax matters partner and (b) electing out of the CPAR rules on your 2018 tax filing to avoid application of these unfavorable rules.

What is a WISP?

You have probably received e-mails and other notices asking you to review updated privacy policies from various vendors. Many of these were generated in response to adoption of the GDPR (General Data Protection Regulation) by the European Union in May of 2018.

What too few companies know is that there are laws in the US that require implementation of privacy safeguarding. One affecting companies doing business in Massachusetts is the Standards for the Protection of Personal Information of Residents of the Commonwealth in force since 2010.

If you are affected and have not either established or reviewed your company’s WISP (written information security program), please act right away to avoid liability for any potential breach.  Also, check the laws of any other state in which your do business to see what laws apply to your use of personal information.

Conclusion

If any of this raises questions for your year-end planning, let me know. I will be glad to see if can help.

Facebook page for our law firm

We are excited to announce the Facebook page for our law firm.

We hope you use this to keep informed about changes in the tax law and other financial planning issues.

Please check it out and “like” the new page.  Also, feel free to give us feedback.

Thank you

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.

Pan-Mass Challenge update May 2018

 The Pan-Mass Challenge has different meanings for all of us, but the great news for our pedal partner will make anyone happy:

Her scan in May showed that she is cancer free! The trial immunotherapy worked. She had nasty side effects, but we all hope that continued research will improve this treatment, so others don’t suffer.

As for me, I kicked-off to my post-tax season training with a daunting ride:

On May 14th, I rode the 102.7-mile Assault on Mount Mitchell, from Spartanburg, SC, to Mount Mitchell, NC. The elevation change graph below shows why it took me over seven hours! I am thrilled to have made it to the top (not all riders finished).

And I will continue to train so I will be prepared for the PMC in August:

On that weekend, more than 6,000 riders and 4,000 volunteers show our commitment to raising money to battle cancer.

While I have raised over $7,000, I still need your help to reach my goal. Please support my ride so we can help make cancer a bad memory. Read my post “why I ride” and donate.

Victory salute in my Team THANKS jersey

This graph says it all!

 

Why the PMC? The PMC hit a record-shattering $51 million gift last fall. Over the past 38 years, PMC cyclists have ridden to raise and contribute $598 million to the Dana-Farber Cancer Institute (“DFCI”). 100% of every donation to the PMC goes to cancer research and treatment at DFCI.

The Pan-Mass Challenge raises more money than any other athletic fundraising event in the country and 100% what we raise goes to Dana Farber for on-going cancer care, treatment and research, supplying more than 50% of the Jimmy Fund’s annual revenue. It is Dana-Farber’s single largest contributor.

Why DFCI? DFCI combines exceptionally strong commitment to cutting edge research with equally strong commitment to the best, safest and most expert clinical care and a relentless focus on providing the best patient care experience throughout their care. No other cancer center combines all of these as well as DFCI. It is the only cancer center in the world with a top 5 ranking in both pediatric and adult cancer (#1 in pediatric). Also, a recent international survey ranked DFCI #1 in Research Impact.

If your employer has a matching gift program, ask your Human Resources department for a form, and follow the process for matches. To learn more about the Pan-Mass Challenge, please visit www.pmc.org.