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.
The home office tax deduction is a tricky area of the tax code. Some taxpayers are so wary of the deduction that they simply opt not to take it. If you’re in this group, read the common mistakes and then get help. Don’t miss out on this tax benefit if it applies to you.
If you operate a business out of your home, you may be able to deduct a wide variety of expenses. These may include part of your rent or mortgage costs, insurance, utilities, repairs, maintenance, and cleaning costs related to the space you use.
It can be a tricky area of the tax code that’s full of pitfalls for the unwary. Here are some of the top mistakes people make:
Not taking it. This is probably the biggest mistake those with home offices make. Some believe the deduction is too complicated, while others believe taking a home office deduction increases your chance of being audited. While the rules can be complicated, there are now simple home office deduction methods available to every business.
Not exclusive or regular. The space you use must be used exclusively and regularly for your business.
Exclusively: If you use a spare bedroom as a business office, it can’t double as a guest room, a playroom for the kids, or a place to store your hockey gear. Any kind of non-business use can invalidate you for the deduction.
Regularly: It should be the primary place you conduct your regular business activities. That doesn’t mean that you have to use it every day nor does it stop you from doing work outside the office, but it should be the primary place for business activities such as recordkeeping, billing, making appointments, ordering equipment, or storing supplies.
Mixing up your other work. If you are an employee for someone else in addition to running your own business, be careful in using your home office to do work for your employer. Generally, IRS rules state you can use a home office deduction as an employee only if your employer doesn’t provide you with a local office to work at.
Unfortunately, this means if you run a side business out of your home office, you cannot also bring work home from your employer’s office and do it in your home office. That would invalidate your use of the home office deduction.
The recapture problem. If you have been using your home office deduction, including depreciating part of your home, you could be in for a future tax surprise. When you later sell your home you will need to account for this depreciation. This depreciation recapture rule creates a possible tax liability for many unsuspecting home office users.
Not getting help. There are special rules that apply to your use of the home office deduction if:
You are an employee of someone else.
You are running a daycare or assisted living facility out of your home.
You have a business renting out your primary residence or a vacation home.
The home office deduction can be tricky, so be sure to ask for help, especially if you fall under one of these cases.
Things to remember
Recognizing the home office deduction complexity, the IRS created a simplified “safe harbor” home office deduction. You simply take the square footage of your office, up to 300 square feet, and multiply it by $5. This gives you a potential $1,500 maximum deduction. However, your savings could be much greater than $1,500, so it’s often worth getting help to calculate your full deduction.
Finally, if you are concerned about a potential future audit, take a photo or two of your home office. This is especially important if you move. That way if you are ever challenged, you can visually attempt to show your compliance to the rules.
The cost of a college education keeps increasing, so the prospect of paying for it is daunting both to the college student and to parents. So who should take on this responsibility? Weigh both sides of the argument before you make the decision.
Should you pay for your child’s college education? Or should your child find the financing? There are compelling arguments for both sides, but ultimately, your family needs to do what’s best for your financial situation. Most families find that a combination of both works the best.
Parents should pay.
Arguments in favor of shelling out your hard-earned cash for a son’s or daughter’s higher education can be compelling. For one thing, college is a very expensive proposition these days. A year of undergraduate study at a private university can easily top $30,000 and public in-state schools can run over $12,000. Of course, if your student decides to get an advanced degree or go to medical or law school, he or she can run up a bill exceeding the cost of your home mortgage. Advocates of this point of view ask, “Do you really want to saddle your kid with that kind of debt so early in life?”
They add that if your child ends up working to pay for college, that’s less time available for study and making friends. And, of course, friendships built in college can generate a wealth of opportunities for a future career. Also, by investing in tax-deferred 529 plans, parents can withdraw funds free from federal and some state income taxes when it’s time for college.
The child should take the responsibility.
Others argue that covering the cost of your child’s college education should not be your priority. After all, they reason, your kid has a lifetime to pay back student loans, and making loan payments can generate a positive credit history. Advocates of this position also argue that kids who have to pay for their own tuition, books, and living expenses learn responsibility and value the investment that college represents. They also point to available tuition reimbursement plans provided by some companies or the military service option as a way to get a college education without breaking the bank.
Those on this side of the debate often argue that 529 plans are overrated as a savings vehicle because investment options can be limited and tax rules are likely to change, undermining future tax benefits. Finally, they reason that a parent’s own retirement savings should take precedence over saving for a child’s education.
Making the decision.
Of course, your family’s dynamics, the importance you place on a college education, and your personal financial priorities will factor into this decision. If you’d like help looking at the pros and cons of this important issue, give us a call.
The IRS has just announced that the amount Taxpayers will be able to contribute to their HSA accounts in 2018 will be increased. The contribution limit for those with self-only coverage will increase from $3,400 to $3,450. Taxpayers with family coverage will see their contribution limit increase from $6,750 to $6,900.+
As an executor of an estate, it’s your responsibility to make sure all the necessary tax returns are filed. This overview will help you make sure you don’t miss any.
Your role as an executor or personal administrator of an estate involves a variety of tasks. Did you know that part of your responsibility involves making sure the necessary tax returns are filed? It’s true, and there might be more of those than you expect.
Here’s an overview:
Personal income tax. You may need to file a federal income tax return for the decedent for the prior year as well as the year of death. Both are due by April 15 of the following year, even if the amount of time covered is less than a full year. You can request a six-month extension if you need additional time to gather information.
Gift tax. If the individual whose estate you’re administering made gifts in excess of the annual exclusion ($14,000 per person for 2017), a gift tax payment may be required. Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, is due April 15 of the year following the gift. The filing date can be extended six months.
Estate income tax. Income earned after death, such as interest on estate assets, is reported on Form 1041, Income Tax Return for Estates and Trusts. You’ll generally need to file if the estate’s gross income is $600 or more, or if any beneficiary is a nonresident alien. For estates with a December 31 year-end, Form 1041 is due April 15 of the following year.
Estate tax. An estate tax return, Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, is required when the fair market value of all estate assets exceeds $5,490,000 (in 2017). One thing to watch for: Spouses can transfer unused portions of the $5,490,000 exemption to each other. This is called the “portability” election. To benefit, you will need to file Form 706 when the total value of the estate is lower than the exemption.
Form 706 is due nine months after the date of death. You can request a six-month extension of time to file.
Give us a call if you need more information about administering an estate. We’re here to help make your task less stressful.
Common errors have helped to make the Earned Income Tax Credit (EIC) a major source of what the IRS calls “improper payments.” The agency estimates that of the $66 billion in EIC funds paid in 2015, nearly a quarter were collected by filers who didn’t qualify to receive them. To help combat this problem, the IRS now requires additional confirmation of information regarding the EIC and three new credits beginning in 2016.
Now if you claim the EIC, the Child Tax Credit (CTC), the Additional Child Tax Credit (ACTC) or the American Opportunity Tax Credit (AOTC), additional information may be requested.
For the CTC and ACTC, you may be asked how long your children lived with you over the past year, or whether they lived with an ex-spouse, relatives, or other guardian.
If you are eligible for the AOTC, which is a credit to defray as much as $2,500 in higher education costs for you or your children, you will need to provide Form 1098-T from the college or university. You will also need receipts for related expenses.
You may also be asked to double-check the social security numbers and dates of birth for the dependents on your return, as these are two common sources of error.
If you get more questions than usual or are asked for additional documents, be aware that it’s just a new reporting requirement implemented by the IRS.
