Sweeping Tax Reform Act Will Affect YOU!

Sweeping Tax Reform Act Will Affect YOU!

WHAT THE TAX REFORM MEANS FOR YOU

Congress has passed a tax reform act that will take effect in 2018, ushering in some of the most significant tax changes in three decades. There are a lot of changes in the new act, which was signed into law on Dec. 22, 2017.

You can use this memo as a high-level overview of some of the most significant items in the new tax reform act. Because major tax reform like this happens so seldom, it may be worthwhile for you to schedule a tax-planning consultation early in the year to ensure you reap the most tax savings possible during 2018.

KEY CHANGES FOR INDIVIDUALS

Here are some of the key items in the tax reform act that affect individuals:

  • Reduces income tax brackets: The act retains seven brackets, but at reduced rates, with the highest tax bracket dropping to 37 percent from 39.6 percent. The individual income brackets are also expanded to expose more income to lower rates (see charts below).
  • Doubles standard deductions: The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filing jointly. To help cover the cost, personal exemptions and most additional standard deductions are suspended.
  • Limits itemized deductions: Many itemized deductions are no longer available, or are now limited. Here are some of the major examples:
    • Caps state and local tax deductions: State and local tax deductions are limited to $10,000 total for all property, income and sales taxes.
    • Caps mortgage interest deductions: For new acquisition indebtedness, mortgage interest will be deductible on indebtedness of no more than $750,000. Existing mortgages are unaffected by the new cap as the new limits go into place for acquisition indebtedness after Dec. 14, 2017. The act also suspends the deductibility of interest on home equity debt.
    • Limit of theft and casualty losses: Deductions are now available only for federally declared disaster areas.
    • No more 2 percent miscellaneous deductions: Most miscellaneous deductions subject to the 2 percent of adjusted gross income threshold are now gone.

Tip: If you’re used to itemizing your return, that may change in coming years as the doubled standard deduction and reduced deductions make itemizing less attractive. To the extent you can, make any remaining itemizable expenditures before the end of 2017.

  • Cuts some above-the-line deductions: Moving expense deductions get eliminated except for active-duty military personnel, along with alimony deductions beginning in 2019.
  • Weakens the alternative minimum tax (AMT): The act retains the alternative minimum tax but changes the exemption to $109,400 for joint filers and increases the phaseout threshold to $1 million. The changes mean the AMT will affect far fewer people than before.
  • Bumps up child tax credit, adds family tax credit: The child tax credit increases to $2,000 from $1,000, with $1,400 of it being refundable even if no tax is owed. The phaseout threshold increases sharply to $400,000 from $110,000 for joint filers, making it available to more taxpayers. Also, dependents ineligible for the child tax credit can qualify for a new $500-per-person family tax credit.
  • Expands use of 529 education savings plans: Qualified distributions from 529 education savings plans, which are not subject to tax, now include tuition payments for students in K-12 private schools.
  • Doubles estate tax exemption: Estate taxes will apply to even fewer people, with the exemption doubled to $11.2 million ($22.4 million for married couples).
  • Kiddie tax: Effective 2018, the “kiddie tax” on children’s unearned income will use the estates and trusts tax rate structure, meaning it will be taxed anywhere from 10 percent to 37 percent.
What stays the same for individuals:
  • Itemized charitable deductions: Remain largely the same.
  • Itemized medical expense deductions: Remain largely the same. The deduction threshold drops back to 7.5 percent of adjusted gross income for 2017 and 2018, but reverts to 10 percent in the following years.
  • Some above-the-line deductions: Remain the same, including $250 of educator expenses and $2,500 of qualified student loan interest.
  • Gift tax deduction: Remains and increases to $15,000 from $14,000 for 2018.
Farewell to the healthcare individual mandate penalty
One of the changes in the tax act is the suspension of the individual mandate penalty in the Affordable Care Act (also known as “Obamacare”). The penalty is set to zero starting in 2019, but remains in place for 2018 and prior years.Tip: Retain your Form 1095s, which will provide evidence of your healthcare coverage. Without it, you may have to pay the individual mandate penalty, which is the higher of $695 or 2.5 percent of income. Beginning in 2019, this penalty is set to zero.
NOTICE: The IRS recently granted employers and health care providers a 30-day filing extension for Forms 1095-B and 1095-C, to March 2, 2018. The IRS clarified that taxpayers are not required to wait until receipt of these forms to file their taxes.

New 2018 tax bracket structures for individuals

Single taxpayer

Taxable income over But not over Is taxed at
$0 $9,525 10%
$9,525 $38,700 12%
$38,700 $82,500 22%
$82,500 $157,500 24%
$157,500 $200,000 32%
$200,000 $500,000 35%
$500,000 37%
Head of household
Taxable income over But not over Is taxed at
$0 $13,600 10%
$13,600 $51,800 12%
$51,800 $82,500 22%
$82,500 $157,500 24%
$157,500 $200,000 32%
$200,000 $500,000 35%
$500,000 37%

Married filing jointly
Taxable income over But not over Is taxed at
$0 $19,050 10%
$19,050 $77,400 12%
$77,400 $165,000 22%
$165,000 $315,000 24%
$315,000 $400,000 32%
$400,000 $600,000 35%
$600,000 37%

Married filing separately
Taxable income over But not over Is taxed at
$0 $9,525 10%
$9,525 $38,700 12%
$38,700 $82,500 22%
$82,500 $157,500 24%
$157,500 $200,000 32%
$200,000 $300,000 35%
$300,000 37%
Estates and trusts
Taxable income over But not over Is taxed at
$0 $2,550 10%
$2,550 $9,150 24%
$9,150 $12,500 35%
$12,500 37%
Key changes for small businesses:
Here are some of these key items in the tax reform act that affect businesses:
  • Cuts the corporate tax rate: Corporate tax gets cut and simplified to a flat 21 percent rate, changed from a multi-bracket structure with a 35 percent top rate.
  • Reduces pass-through taxes: Most owners of pass-through entities such as S corporations, partnerships and sole proprietorships will see their income tax lowered with a new 20 percent income reduction calculation.
  • Beefs up capital expensing: Through 2022, short-lived capital investments in such items as machinery and equipment may be fully expensed as soon as they are placed in service, using bonus depreciation. This now also applies to used items instead of only new ones; they just need to be placed in service for the first time in your business. After 2022, allowable bonus depreciation is then lowered incrementally over the next four years.
  • Strengthens Section 179 deduction: Section 179 deduction limits get raised to enable expensing of up to $1 million, and the phaseout threshold increases to $2.5 million. Section 179 may now also be used on expenses related to improvements to nonresidential real estate.
  • Nixes the corporate alternative minimum tax (AMT): The 20 percent corporate AMT applied to businesses goes away entirely.
  • Expands use of cash-method accounting: Businesses with less than $25 million in gross receipts over the last three years may adopt the cash method of accounting.
  • Reforms international taxation: Treatment of international income moves to the territorial system standard, in which foreign investments are generally only taxed in the place in which they operate. The new laws allow tax deductions for certain foreign-sourced dividends, reduced tax rates for foreign intangible income and reduced tax rates for repatriation of deferred foreign income.
  • Repeals business entertainment deduction: Businesses will no longer be able to deduct 50 percent of the cost of entertainment, amusement or recreation directly related to their trade or business. The 50 percent deduction for business-related meals remains in place, however.
  • Modifies several business credits: Several business credits are maintained but modified, including the orphan drug credit, the rehabilitation credit, the employer credit for paid family or medical leave and the research and experimentation credit.
  • Boosts luxury automobile depreciation: Luxury automobiles placed in service after 2017 will have allowable depreciation of $10,000 for the first year, $16,000 the second, $9,600 the third and $5,760 for subsequent years.

This brief summary of the tax reform act is provided for your information. Any major financial decisions or tax-planning activities in light of this new legislation should be considered with the advice of a tax professional. Call if you have questions regarding your particular situation. Feel free to share this memo with those you think may benefit from it.

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Your Year-End Business Health Check

Your Year-End Business Health Check

Just like people, businesses need yearly checkups. Follow these seven suggestions and take some time this December to do a year-end business health check!

Business owners and managers spend most of their time monitoring operations and dealing with everyday problems. But just as an annual checkup from your doctor helps monitor and manage your personal health, an annual checkup can do the same for your business.

Here are seven checkup tasks that you should make time to do every year. These are important for your long-term business health and personal success:

  1. Review your business insurance coverage. Don’t just automatically write a check to renew your insurance policies when they come due. Instead, you should sit down with your insurance agent every year. Review your business operations, focusing on any changes. Discuss types of risk that could arise. And ask about new developments in business insurance.
  2. Look at your business tax strategy. Consider adjusting taxable earnings for the year, perhaps by accelerating expenses or delaying income at year-end. If you’re a cash-basis taxpayer, you could boost 2017 deductions by declaring and paying bonuses in December rather than in early January. Also, you may be able to defer invoices or make early purchases to reduce your 2017 tax bill.
  3. Survey your customers. An annual customer satisfaction survey is a great way to assess performance, get insight on potential new products or services and to let your customers know how much you value their business.
  4. Determine your marketing effectiveness. Are your current methods and channels working well, or are you simply doing what you’ve always done?
  5. Update succession planning for your business. Review your succession planning annually. You should have a specific plan for each key manager position, including yourself. Be prepared for a short-term absence or a permanent vacancy. Your plan may include promoting from within or recruiting externally.
  6. Review your business banking relationships. Every year you should go over your cash balances and banking relationships with your controller, CFO or accountant. Then meet with your banker. Ask about new products or services that could help your company. Address any service concerns or problems you might have had.  And look for ways to boost interest earned and improve cash flow.
  7. Update your personal estate planning (if needed). If you’re a business owner, your company is likely to be a significant part of your estate. Your company, your personal circumstances and the tax laws are continually changing. You should take time each year to make sure your plans are current.

If you are serious about improving your business, consider a yearly assessment of your operation. Contact our office today to learn more about how you can put your business in the best tax position possible for 2018.

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Hawkinson Muchnick & Associates PC

A Time for Mistletoe … and Holiday Shopping Fraud?

A Time for Mistletoe … and Holiday Shopping Fraud?

Don’t let a thief turn you into a festive fool this season. Follow these tips to avoid holiday shopping fraud, whether you’re buying online or at your local mall.

It’s not surprising that identity thieves and con artists love the holidays. More shoppers, more deals and more buying motivation makes the season rife with opportunities to steal. But you don’t have to let the holiday spirit cloud your shopping safety judgment.

Here are a few tips to avoid fraud, whether you’re shopping online or at your local mall:

  • Shop on websites you trust. During the holidays, your e-mail inbox may be filled with unsolicited messages urging you to “click here.” Don’t. Scammers set up websites that mimic legitimate stores. They want your personal information so they can steal from you. Stick to reputable stores and sites and you’ll be better off.
  • Background-check your choice charities. Many legitimate church groups and nonprofit organizations engage in fundraising activities during the holidays. If you’re confident that the group is above-board, go ahead and donate. But if something seems off – hold on to your money.
  • Be attentive — especially at the mall. Large shopping centers offer scammers ample opportunities to steal. Don’t be fooled by someone selling a typically expensive product for way less money than it’s worth. Make sure you keep track of your purse, wallet and shopping bags. And be aware of your surroundings when you leave the mall. If you don’t feel completely safe walking alone through a dark parking lot, ask a security guard to escort you.
  • Purchase gift cards wisely. These little pieces of plastic can be great stocking stuffers, but they’re also prime targets for crooks. Scammers have been known to copy numbers from gift cards hanging in store displays. They then call a toll-free number to learn when the card is activated and use the card number to make purchases. One way to avoid this is to buy from retailers who keep gift cards behind the checkout register.

Contact our office today if you’d like accounting or business and financial planning assistance. We are always here to answer your questions and serve your tax and financial planning needs!

Feel free to follow us on Facebook: https://www.facebook.com/HawkinsonMuchnick

Hawkinson Muchnick & Associates PC

 

Last Minute Tax Moves for 2017

Last Minute Tax Moves for 2017

While the clock is ticking down to 2018, you still have a few weeks left to make some last minute tax moves. Take a look at these five tips and save a little more this year.

  1. Check the amount of 2017 tax you have prepaid through withholding and quarterly estimates ASAP. If you’ve underpaid, consider increasing your withholding before year-end. Withholding is considered to have been paid evenly throughout the year. This is to help prevent you being charged underpayment penalties for 2017.
  2. Make sure you have the correct tax status. If you got married or divorced this year, be aware that your marital status as of Dec. 31 determines your tax status for the whole year. If you are in the process of a marital status change, know that altering the dates of a year-end event to the new year may affect your taxes.
  3. Plan for losses. Check your basis in any S corporation in which you are a shareholder and where you expect a loss this year. Be sure you have sufficient basis to enable you to take the loss on your tax return.
  4. Use this year’s annual gift tax exclusion. If you make annual gifts to family members or others, make sure you complete your gifts for 2017 by Dec. 31.
  5. Consider equipment purchases before Dec. 31. Taxpayers must usually deduct the cost of business property over several years. The Section 179 election allows taxpayers to expense up to $510,000 of new and used property purchased and put into service in 2017. Property such as machinery, equipment and furnishings usually qualify. Be careful with special rules that apply to vehicles and personal computers.

Contact our office today if you’d like more last minute tax moves or have questions about year-end tax savings. We are always here to answer your questions and serve your tax and financial planning needs!

Feel free to follow us on Facebook: https://www.facebook.com/HawkinsonMuchnick

Hawkinson Muchnick & Associates PC

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