GMS SURGENT 2018 YEAR-END TAX SAVING TIPS

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Jasmin Russell
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1 GMS SURGENT 2018 YEAR-END TAX SAVING TIPS Previusly we wrte t yu regarding the Tax Cuts and Jbs Act (TCJA) that was signed int law at the end f The TCJA has brad implicatins fr bth individual and business taxpayers. As the year-end quickly appraches, it is time t revisit year-end tax planning ideas and suggestins. INDIVIDUAL TAX The TCJA changed the individual incme tax rates. Overall, the rates are lwer fr mst taxpayers. While the lwest rate remains at 10%, the highest rate has been decreased t 37%. Planning Pint: If yur incme is prjected t be higher in 2019 vs. 2018, cnsider accelerating incme int 2018 t take advantage f lwer marginal tax brackets. Similarly, if yur incme is prjected t be lwer in 2019, cnsider deferring incme int 2019 t take advantage f lwer marginal tax brackets. The standard deductin is increased t $24,000 fr married taxpayers filing jintly, and $12,000 fr married filing separately r single filers. This means that mre taxpayers will take the standard deductin each year. Planning Pint: Depending n yur situatin, it might make sense t bunch certain types f deductins (such as charitable cntributins, and real estate/incme tax payments up t the $10,000 limit belw) int ne year t increase yur itemized deductins abve the standard deductin amunt. Persnal exemptins are eliminated. The increased standard deductin, mentined abve, may ffset this fr many taxpayers. Nte that thugh persnal exemptins are eliminated, dependency is still imprtant fr purpses f determining filing status and claiming child tax credits. Certain itemized deductins are limited r eliminated altgether. Real estate and state and lcal incme tax deductins are capped at $10,000 cmbined. This means that nce a taxpayer is ver the threshld fr a given year, there is n rush t make further payments, and any remaining payments may be deferred int the subsequent year if pssible. Nte that fr a business/rental prperty, real estate and certain ther taxes are still deductible as business expenses against the incme f the business/rental. Planning Pint: Cnsider bunching tax payments in a year when yur ttal tax deductin wuld therwise be less than $10,000. Mrtgage interest is deductible n up t tw hmes n ttal qualifying debt up t $750,000. Existing mrtgages incurred n r befre December 14, 2017 are grandfathered under the ld tax laws. Mrtgage debt that is refinanced is als grandfathered under the ld laws t the extent that the resulting debt des nt exceed the amunt refinanced. Interest expense incurred n hme equity debt is nw disallwed; hwever, if the hme equity lan is used t buy, build, r substantially imprve the taxpayer s hme that secures the debt, the interest n the debt is still deductible.

2 Miscellaneus itemized deductins, such as unreimbursed business expenses, tax return preparatin fees, investment advisr fees, etc. are eliminated. Planning Pint: T cntend with the lss f the deductin fr investment advisr fees, reassess whether it is better t pay IRA fees frm the IRA vs. frm amunts utside the IRA. Planning Pint: Emplyees that incur jb-related expenses shuld cnsider requesting that their emplyer reimburse them. The medical expense deductin is allwed t the extent f 7.5% f AGI in 2017 and 2018, then t the extent f 10% f AGI fr years thereafter. Planning Pint: Cnsider bunching medical deductins in a year t ptentially result in a tax benefit. Charitable cntributins remain deductible; the threshld based n adjusted grss incme is increased t 60% frm 50% (fr cash cntributins made t public charities.) Planning Pint: Cnsider bunching charitable cntributins, perhaps via a cntributin t a dnr-advised fund, in ne year if ding s will increase yur ttal deductins abve the standard deductin amunt fr that year. Planning Pint: Cnsider making a dnatin f highly appreciated securities t receive the tax deductin at the fair market value and avid the tax n the capital gains. Planning Pint: Cnsider making a cntributin thrugh a state-spnsred tax credit prgram such as Pennsylvania s EITC/OSTC prgrams. Planning Pint: Cnsider making a qualified charitable distributin frm an IRA. If ver age 70 ½, individuals can instruct that up t $100,000 frm an IRA be sent directly t a charity. This cunts tward the RMD requirement and it als excludes the RMD as incme. This strategy reduces taxable incme while still allwing the same standard deductin. Planning Pint: Remember t get cntempraneus acknwledgement letters frm the charitable rganizatin fr all charitable cntributins. The phase-ut n itemized deductins is eliminated. Previusly, when adjusted grss incme exceeded a threshld, ttal itemized deductins began t phase ut. The ability t deduct business lsses against ther incme is limited t $500,000 fr a married taxpayer filing jintly. An verall business lss is the net amunt f lss frm partnerships, S crpratins, and sle prprietrships. Any verall business lss that exceeds $500,000 fr a married taxpayer filing jintly cannt ffset ther incme surces and must be carried frward t each subsequent year where it will be cnsidered part f the verall business lss in that year. The deductin fr alimny payments made is eliminated fr divrces entered int after December 31, Alimny received is n lnger taxable fr divrces entered int after this date as well. The child tax credit is increased t $2,000, f which $1,400 is refundable. There is als a $500 nnrefundable credit fr qualifying dependents ther than children. The adjusted grss incme level at which these credits are subject t phase-ut increases t $400,000 fr married taxpayers filing jintly.

3 Balances in Sectin 529 plans have histrically been available t be used fr pstsecndary educatin expenses. The benefits f Sectin 529 plans have been enhanced t allw up t $10,000 (per student, per year) t be used fr K-12 educatin. Many states als allw a tax deductin against the state taxable incme fr cntributins t a Sectin 529 plan. The alternative minimum tax (AMT) is retained with higher exemptin amunts. In additin, the exemptin phase-ut range increases significantly. This, tgether with the significant reductin in the amunt f deductible real estate and state and lcal incme taxes and miscellaneus itemized deductins will reduce the number f taxpayers subject t the AMT. Planning Pint: Under the TCJA, as under the ld law, it is ften advantageus t recgnize additinal rdinary incme in a year when AMT applies because the AMT rate is ften less than the taxpayer s marginal tax rate. BUSINESS TAX A deductin f 20% f the net incme frm certain pass-thrugh businesses and sle prprietrships is created, subject t significant limitatins. Click here fr a link t ur prir alert n the mechanics f the deductin. New regulatins issued in August prvide generally favrable definitins n the types f incme qualifying fr the deductin, and prvide the pprtunity t aggregate certain businesses t maximize the deductin. The regulatins als clarify that certain rental real estate businesses qualify fr the deductin as well. The ability t utilize this deductin is cmplex in nature, and is impacted by many intertwining variables, such as the type f incme, level f wages and qualified business incme, taxable incme, cst basis in prperty, etc. Planning Pint: At the entity level, review cmpensatin structure prir t year-end, and revisit partnership agreement allcatins. Planning Pint: At the entity r individual level, cnsider increasing retirement plan funding levels and ther tax strategies fr certain business types t fall belw incme limits. Planning Pint: At the individual level, cnsider whether aggregatin electins are available r beneficial; and if nt available, whether factrs can be changed t allw fr aggregatin. The deductin fr entertainment expenses is eliminated. In additin, the deductin fr certain meals prvided t emplyees is reduced t 50% until 2025, and then eliminated after Click here fr a link t ur prir alert n the changes t the deductin fr meals and entertainment. Planning Pint: Cnsider creating separate general ledger accunts t separate the 0%, 50%, and 100% deductible amunts t achieve the maximum tax deductin. The immediate expensing (via enhanced bnus depreciatin rules) f certain types f assets, including used prperty, placed int service in a trade r business is enhanced. Fr qualifying business prperty acquired and placed int service between September 28, 2017 and December 31, 2022, 100% f the cst f prperty is deductible. Fr years beginning after December 31, 2022, the amunt f the deductin is decreased.

4 The Sectin 179 expensing electin is nw available fr nnresidential building imprvements such as rfs, HVAC equipment, fire prtectin and alarm systems, and security systems; and is nw available fr tangible persnal prperty used t furnish ldging, such as residential rental prperty r a htel. The Sectin 179 electin is mdified t increase the maximum value that may be deducted up t $1,000,000, with a phase-ut that begins at $2,500,000 f prperty placed int service. Planning Pint: Cnsider a cst segregatin study t split ut the cst f the purchase f a building, fr example, int assets with shrter depreciable lives. Planning Pint: Cnsider accelerating incme int a year in which there are significant depreciatin deductins available. Click here fr a link t ur prir alert n changes t depreciatin. The maximum allwable deductin f interest expense fr certain businesses cannt exceed 30% f the business EBITDA (earnings befre interest, taxes, depreciatin, and amrtizatin). Many businesses with average annual grss receipts f less than $25 millin are nt subject t this limitatin. Hwever, an entity that is defined as a tax shelter (i.e. mre than 35% f lsses are allcated t limited partners) is subject t the limitatin even if grss receipts d nt meet the $25 millin threshld. Planning Pint: This 30% limitatin can be avided by an electin available t real prperty trades r businesses that by definitin are engaged in: leasing, cnstructin, develpment, acquisitin, peratin, management, r brkerage f real prperty. Such an electin wuld necessitate the use f a less favrable depreciatin methd (i.e. n bnus depreciatin and lnger depreciable lives). The threshld under the three-year average annual grss receipts test t determine whether the accrual methd is required fr small businesses is increased t $25 millin frm $5 millin. The C crpratin rate is reduced t 21% and the C crpratin AMT is repealed. This may make a C crpratin appear mre attractive t certain businesses but the duble taxatin f C crpratin earnings still applies. In additin, state crprate incme taxes may make the C crpratin ptin remain unattractive t businesses in many states, as the C crpratin tax rate may be higher than the pass-thrugh rate. Starting in 2018, taxpayers may be able t receive very favrable tax treatment n the sale f currently held investments if the prceeds are reinvested in business prperty and/r real estate lcated in a Qualified Opprtunity Zne within 180 days. Planning Pint: The Federal QOZ prgram is intended fr prjects with lng-term hld (greater than 10 years) cnsideratins. The prgram has limited impact n shrt hlding perid prjects (under 5 years). Click here fr a link t ur prir alert n the mechanics f the prgram. ESTATE AND GIFT TAX The basic exemptin fr federal estate and gift tax purpses is dubled t $11.2 millin per individual, up frm $5.6 millin per individual in Nte that many states have a much lwer threshld fr filing and/r paying state death tax. The annual exclusin amunt is $15,000 per dnr, per dnee, up frm $14,000 in 2017.

5 Bth the Federal estate and gift tax exemptins are indexed fr inflatin. GENERAL CONSIDERATIONS Alng with the abve, d nt frget abut the fllwing general tax-saving ideas: Max ut n retirement plan cntributins. This strategy applies t bth emplyees and selfemplyed individuals. If yu are lking t reduce the size f yur taxable estate, cnsider utilizing the annual exclusin fr making gifts. Tax lss harvesting Cnsider selling stcks and ther investments t generate capital lsses that can be utilized t ffset capital gains. Cnsider dispsing f a passive investment befre year end in rder t utilize prir suspended passive lsses. Fr certain businesses and individuals, cnsider these ther ways t defer incme r accelerate deductins: Use a credit card t pay tax-deductible expenses in The date an item is charged t a credit card is the date that the item is deductible fr tax purpses. Manage bills and receipts. State tax business cmpliance has becme mre cmplex as states are increasingly lking fr additinal revenues. The recent Wayfair case rendered by the U.S. Supreme Curt in June f 2018 ruled in such a way as t ptentially require ut-f-state sellers t cllect and remit sales tax in states in which they d business, even if the ut-f-state seller des nt have physical presence in the state. Click here fr a link t ur prir alert n this issue. Fr state incme tax purpses, many states are adpting ecnmic presence standards, which may require the filing f tax returns in a given state fr certain businesses that direct business activities int the state, even if the ut-f-state seller des nt have any physical presence in the state. Planning Pint: Many states ffer vluntary disclsure prgrams where taxpayers can vluntarily revel themselves. In additin, sme states ffer amnesty prgrams that may prvide enhanced benefits such as reduced r eliminated penalty waivers assessed n tax amunts due. Abut Us GMS Surgent is a mid-sized, full service, certified public accunting and advisry firm serving business and individual clients lcated primarily (but nt limited t) the Greater Philadelphia area. We warmly invite yu t click arund ur website t learn a little mre abut ur firm, ur clients and the ways in which ur services culd benefit yu. "Persnal Attentin Valuable Results, is the principal cmpnent f ur missin statement. It highlights the GMS Surgent cmmitment t frging strng relatinships and ensuring cnstructive cmmunicatin while earning cnsistently effective results fr ur clients. It plays an essential rle thrughut every aspect f ur firm, guides ur actins and acts as a benchmark fr the services we prvide. This infrmatin is f a general nature. It may mit many details and special rules and is current nly as f its published date. Please cntact us fr mre infrmatin and hw it pertains t yur specific tax r financial situatin.

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