The 2017 Tax Cuts & Jobs Act

Transcription

1 Dedicated to making your life less taxing Winter Compliments of: Davis Tax & Financial 99 Abington Road Danvers, MA O: (978) C: (617) The 2017 Tax Cuts & Jobs Act The major changes take effect for tax returns filed in 2019 although taxpayers may see a change in their withholding starting in February of Many of the changes are not permanent but instead planned to revert back to the 2017 levels in Tax rates have been lowered especially if your income is $157,500 or less if single and $315,000 if married filing jointly. The seven tax brackets under the old law were 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent. The new rates are now 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent 2. Personal exemptions have been repealed. Previously there was a deduction of $4,050 for yourself and each of your dependents. This has been offset by an increased standard deduction and an increase in child tax credit. 3. Standard deductions have been raised. Previously the standard deductions would have been $13,000 for married filing joint, $9,550 for head of households and $6,500 for others. The standard deductions under the new law are almost twice the original. $24,000 for married filing joint, $18,000 for head of households and $12,000 for others. 4. Some itemized deductions have been limited or repealed. The deduction for state and local taxes has been limited to $10,000. The limit is half for married filing separate taxpayers. Taxpayers can choose to deduct sales tax instead of state and local income taxes. There was a lot of discussion about limiting the mortgage deduction on higher mortgage amounts but in the end the limit was left at $1,000,000 of indebtedness for existing mortgages and lowered to $750,000 for mortgages after The mortgage interest deduction is only allowed for home acquisition (and improvement) debt not for equity debt. Medical deductions are allowed in excess of 7.5% of AGI. Previously they were only allowed in excess of 10% of AGI. Charity deductions are unchanged except now they are limited to 60% of AGI instead of 50% under the old rules. Only casualty losses in a federally declared disaster area will be allowed. All job expense and other miscellaneous deductions subject to a 2% limit have been repealed. Some of the more common deduction repealed are unreimbursed employee expenses, tax preparation fees, safe deposit box fees, job search expenses and union dues. One more change to itemized deductions is the allowed deductions are no longer phased out for higher income taxpayers. 5. Pass through income and income attributable to a sole proprietorship will be taxed at individual tax rates less a deduction of up to 20% to bring the rate lower. This attempts to even out the taxes on these types of income with the new lower corporate rate of 21%. The rules and calculations for this are complicated. Read more on this below.

2 6. The Child Tax Credit increases to $2,000 per qualifying dependent child age 16 or younger at the end of the calendar year. This is a huge benefit because a credit reduces your tax bill dollar-for-dollar! Also, up to $1,400 of the credit could create a refund if you have at least $2,500 of earned income. Once you earn more than $200,000 ($400,000 if married filing jointly), the credit decreases. A qualifying child must be a U.S. citizen, U.S. national or resident alien. The child must be your son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, grandchild, niece, nephew, adopted child or foster child. Also, don t forget that you must provide at least half of the child s support during the year and the child generally must have lived with you for at least half of the year. The child cannot file a joint return (or file it only to claim a refund) and you must provide a Social Security number for the child on your tax return. New this year is a $500 nonrefundable credit, also known as the family credit, for qualifying nonchild dependents and qualifying children aged 17, 18, or under 24 if a full-time student. A nonchild dependent must be a close relative or live with you. Their taxable income must be less than $4,150 for the year, and you must provide over half of their support. The non-child dependent also must be a U.S. citizen, U.S. national or U.S. resident; however, the Social Security requirement does not apply, though you ll still need a taxpayer identification number. 7. Alimony will no longer be deductible from income or reported as income. This only applies to divorce or separation documents executed after 12/31/ The individual mandate penalty for no health insurance coverage remains in place for 2018 but will be repealed in The Alternative Minimum Tax has been retained but the exemption has been increased and the phase out level for the exemption has been increase. The exemptions increase to $70,300 for individuals and $109,400 for married taxpayers filing jointly. The exemption phase-out will be $1,000,000 for married taxpayers filing jointly and $500,000 for individuals. 10. Depreciation changes: Bonus depreciation has been increased to 100% for any qualifying asset place in service after September 27, 2017 and before December 31, The annual depreciation limit on passenger autos placed in service after December 31, 2017 (luxury auto depreciation) has been increased to $10,000 for the 1st year, $16,000 for the 2nd year, $9,600 for the 3rd year and $5,760 for each remaining year. If you acquire and place into service a new or used passenger vehicle in 2018 and use it over 50% for business, you can depreciate up to $18,000 if you elect to claim first-year bonus depreciation. This is a dramatic increase from last year s amount of $11,160. Even if you choose not to claim the bonus, the first-year deduction is $10,000 ($3,160 for 2017). The new law also adds the ability to take the bonus depreciation for a used automobile as long as you or your business has never used it previously. You should also note that the above vehicle depreciation caps do not apply to trucks, vans or SUVs that are rated at 6,000 pounds loaded gross vehicle weight. For example, if you purchase an SUV costing $70,000 and use it 60% for business, you could potentially deduct $42,000 of depreciation for that first year! For property placed in service in tax years beginning after Dec. 31, 2017, the maximum amount a taxpayer may expense under Code Sec. 179 is increased to $1 million, and the phase-out threshold amount is increased to $2.5 million.

3 Choosing a Business Entity What type of business is best? The best option for you will depend on your personal and business goals and how they align with what each type of entity has to offer. The idea of starting a business is scary enough; then comes the difficult decision of what type of business entity to establish. You ll need to consider your financial needs, risk and ability to grow. Choosing correctly at the start is critical because it can be difficult to change your legal structure after you have registered your business. A sole proprietorship is quick and inexpensive to form. You have complete control over your business. You are entitled to all profits from the business. Nonetheless, you are also liable for all business debts and have an unlimited personal liability, which may be undesirable. This type of entity may also make it difficult to raise capital if needed. A partnership has several options: (1) a general partnership with overall equal division of profits, liability and management or (2) a limited partnership with one partner controlling the operations and other partners with limited roles. Partners must file taxes twice, once for the partnership and once for the individual. Also, if disputes arise between partners, there could be some drama. Similarly, with this type of business, you could be held liable for actions made by your business partner. A multi-member limited liability company (LLC) is a hybrid between a partnership and a corporation, and it can be taxed as either. This entity provides options for the actual business structure with the limited liability of a corporation and the operational flexibility and tax structure of a partnership. If liability and outside funding are your main con-cerns, then a C corporation might be your best fit. A C corp-oration provides limited liability. Other pros of a C corporation are the ability to generate capital. Plus, the current tax rate is capped at 21%. Conversely, C corporations are subject to double taxation once when the corporation makes a profit and again when it pays dividends to shareholders. In addition, a C corporation can require a large initial investment of time and money for start-up and administrative costs. An S corporation is also a good option for limited liability; yet, an S corporation has stricter operational processes including shareholder compensation requirements. Also, foreign ownership of shares is prohibited. On a positive note, this type of corporation eliminates any double taxation since the income is passed through to the shareholders to report on their personal returns. Temporary Rental of Your Home Some tax-free income never hurts Many taxpayers often leave town when a local festival or event draws in tourists. If you re one of them, you might be able to rent out your house for a few days and earn tax-free income. Taxpayers who rent out their own homes for fewer than 15 days per year receive tax-free income from the rental. To qualify for this tax-free treatment, you must rent out your home for 14 days or less and personally use the home for 15 days or more during the year. Please note, no deduction is allowed for any rental-related expense, such as getting your house professionally cleaned before or after your visitors arrive. However, deductions of mortgage interest and property taxes are allowed on Schedule A for the entire year.

4 Employee vs. Independent Contractor Which is best for your business? All business owners hope to succeed at scoring good talent. Now, should that accomplishment come from hiring an employee, enlisting the services of an independent contractor, or both? An employee is a smart choice if you want complete control over that person. You decide the hours of work, tools and equipment used, training provided and more. Hiring an employee could be the better choice if the job is essential to your business and not a peripheral job, such as a cleaning crew. On the other hand, employees come with an abundance of legal and regulatory responsibilities on your end. Both the federal and state governments regulate the payment of wages, salaries, overtime and other work-related rules. You also must comply with payroll tax, unemployment insurance and worker s compensation insurance requirements. You can assign duties to an independent contractor, impose a deadline and work product; nevertheless, you cannot tell that person how to get the job done. Independent contractors can work for others, usually set their own hours and often provide their own tools or equipment. This type of arrangement could be ideal if the work can be done by a professional who doesn t need much supervision. An independent contractor could also be a good choice when the work is a short-term project that will be completed in a defined period of time. Oftentimes, your only financial responsibility is providing the independent contractor with a Form 1099-Misc each year. The decision to hire an employee or an independent contractor is done on a case-by-case basis; many businesses use a mix of both. Be aware that the IRS considers a worker to be an employee unless you can prove otherwise. Charitable Contributions Donate via your IRA With the larger standard deduction amounts beginning this year, many people could lose the tax benefit of making charitable contributions. To reduce tax liability, certain taxpayers could use a qualified charitable distribution (QCD). A QCD allows anyone age 70½ or older to donate up to $100,000 annually from their IRA account directly to one or more charitable organizations without the distribution counting as income. In addition, if a spouse qualifies, he or she could also make another QCD up to $100,000 from his or her own IRA. It s imperative that the distribution goes directly to the charity and not to the taxpayer; otherwise, it will be taxable. The charity must be a 501(c)(3) organization eligible to receive tax-deductible contributions. Private foundations, supporting organizations and donor-advised funds do not qualify. Also, when making a QCD, you must receive the same type of acknowledgment of the donation that you would need to claim a deduction for a charitable contribution. However, since a QCD is not taxable, it is not deductible as a charitable contribution. Any money you transfer to charity in this manner will reduce the amount you must take in required distributions for the year. The best part is that this charitable giving strategy will reduce your AGI, which could, in turn, lower the amount of any Social Security income subject to income tax! The QCD could also decrease the amount of your Medicare premiums for the following year. Since Roth IRAs do not require minimum distributions during your lifetime, and their distributions are generally tax-free, it is generally not advisable to make a QCD from a Roth IRA. Currently, your IRA custodian is not required to specifically identify the QCD on your annual Form 1099-R. Make sure you inform me if you take advantage of this tax saving strategy to ensure it is properly reported on your tax return.

5 New Tax Law Wipes Out 50% Business Entertainment Deduction for entertainment expenses no longer allowed Lawmakers finally did it. First, they reduced the directly related and associated entertainment deductions to 80 percent with the 1986 Tax Reform Act. Later, in 1993, they reduced that 80 percent to 50 percent. And now, with the newest tax reform, lawmakers simply killed business deductions for directly related and associated entertainment effective January 1, Starting in 2018, deductions for activities that are generally considered to be entertainment, amusement or recreation expenses, or with respect to a facility used in connection with such activities, are disallowed. Forget front row concert tickets or box seats at the MLB game on another company s dime. Before the new law, if you took a potential client golfing to discuss a future relationship, this cost was 50% deductible as entertainment associated with the active conduct of a trade or business, but only if adequate records were kept. Now there is no such deduction. The government likes this provision because it eliminates the subjective determination of whether such expenses are sufficiently business-related. However, if you reward an employee with an expense-paid vacation, you can still deduct this type of entertainment since it is treated as compensation to the employee. If you gave the same type of reward to a contractor, you would have to issue a 1099-Misc in order to gain a deduction. Celebrations like holiday parties and annual picnics are still fully deductible because they are for the primary benefit of employees. Yet membership dues for any club organized for business, pleasure, recreation or other social purpose are not deductible and never have been allowed. The good news is that you can still deduct the cost of business meals with clients, prospects and business associates. Out-of-pocket Employee Business Expenses Ask your employer to set up an accountable reimbursement plan instead Beginning in 2018, employees are no longer able to deduct out-of-pocket business expenses, including professional dues and licenses, tools and equipment, uniforms, continuing education, and work-related travel, meals and lodging. Instead of footing the bill for these business expenses, ask your employer to consider setting up an accountable reimbursement plan. If your employer sets up an accountable plan, you can submit proper documentation for required expenses and subsequently receive tax-free reimbursement. In addition, the employer gets a tax deduction for the payment. If your employer does not want to set up an accountable plan, you could request an expense allowance to help cover your costs. The employer will need to include this allowance on your W-2; however, it would help reduce your out-of-pocket total.

6 Is Your Pay Reasonable? Maybe it s time to reexamine Tax laws define reasonable compensation as the amount that would ordinarily be paid for like services by like enterprises under like circumstances. Building a compensation plan into your business right from the start is a good idea. Depending on your business structure, there are many compensation options, including: Standard salary simple, easy to manage Salary and dividends a mix of both wages and dividends (dividends are usually taxed at a lower rate than wages) Stock or stock options Salary with bonus option gives yourself leeway when the business might not have a good year financially It s important to have proper documentation and pay yourself an amount that aligns with the size of your business, the market and related profitability. By not doing so, you are asking for trouble from the IRS in terms of additional taxes, penalties and interest. Reasonable compensation is also a hot topic of discussion because it comes into play for determining the new qualified business income (QBI) deduction. In general terms, the QBI deduction is limited to the lesser of 20% of qualified business income or 50% of the total W-2 wages paid by the business once taxable income exceeds threshold amounts. Rules are in place to deter high-income taxpayers from attempting to convert wages or other compensation for personal services into income eligible for the deduction. The complexities surrounding this deduction can be challenging but we can work through the mechanics to make sure you receive maximum results. QUIK TIPS 1. If by year-end you haven t contributed funds to your IRA, or if you ve put in less than the maximum allowed, don t worry. You can contribute to either a traditional or Roth IRA up until the April due date for filing your tax return. Your employer contributions to a Keogh, SEP, or a SIMPLE plan are due by the time you file your tax return unless you have a valid extension then you have until the extended due date to make the contribution. 2. Are you planning on making any substantial gifts? Talk to me first. For 2018, gifts with values exceeding $15,000 must be reported to the IRS. 3. The standard mileage rates for the use of a car, including vans, pickups, or panel trucks in 2019 are: 58 cents per mile for BUSINESS USE 20 cents per mile for all miles driven for medical or moving purposes; and 14 cents per mile for all miles driven for charitable purposes. 4. Did you know that there is still up to a $7,500 dollar tax credit for purchasing a qualified electric plug-in vehicle like a Tesla? Call me for all the details. 5. As a self-employed taxpayer, you may contribute to a soleowner 401(k) retirement plan as both an employer and as an employee. As an employer, you may contribute up to 25 percent of your total income to your retirement plan. As an employee, you may also contribute up to an additional $18,500 in 2018 ($24,500) if age 50 or over).your maximum contribution to an individual 401(k) plan is the lesser of $63,000 or the sum of the employer and employee maximums. Unlike other retirement plans such as SEPS and SIMPLE IRAs, an individual 401(k) plan allows you to take out loans from plan assets. 6. The Federal Estate Tax exemption for 2018 is $11,180,000. The rate is 40%. Additionally, heirs get to use stepped-up basis to value assets inherited. The exemption in MA, ME & NY is only $1 million with a top tax rate of 16%. 7. In 2018 the tax rate of 37 percent will affect individuals whose taxable income exceeds $500,000 ($600,000 for married taxpayers filing a joint return). 8. If you turned age 70 on July 1, 2018 or later you are not required to begin your required minimum distributions (RMD) from your IRA until April 1, 2019 since you are not considered to be age 70½ until January 1, RMDs must start no later than April 1 of the year following your reaching 70½. Failure to do so results in a 50 percent penalty on the amount you do not take. 9. Long Term Care Premiums may be tax deductible with limits based on your age and whether you itemize deductions. Selfemployeds may include the allowable premiums with their selfemployed health insurance whether they itemize or not.

7 A Final Word from Charlie help you accomplish your retirement goals. I hope your holiday season was enjoyable. As 2018 came to a close, I received quite a few s and calls regarding ideas on how to reduce taxes for the year. Many of you have had a very profitable year however, as I like to say, It isn t about how much you make, but how much you get to keep. So I publish this newsletter to help you keep more of your hard earned money! In addition to preparing your tax return for you I can assist you with all your insurance and retirement income planning. I can help you save for your retirement through a variety of plans that will grow with the market without any risk of losing your money, guaranteed! Don't wait any longer. Contact me today so I can The information contained in this newsletter is not intended to provide specific tax advice or to take the place of either the written law or regulations.