10 Tax Planning Strategies Under the Tax Cuts and Jobs Act

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1 10 Tax Planning Strategies Under the Tax Cuts and Jobs Act It s almost tax time again, and with all the recent changes in the tax law because of the new Tax Cuts and Jobs Act (TCJA), everyone has questions. The important thing is you don t want to be caught sleeping and miss out on thousands of dollars in potential tax savings you can receive if you play your cards right. We ve compiled 10 tax moves you should consider when it comes to your 2018 tax return. Let s get started! 1. Make Sure You Calculate Your Kiddie Tax Correctly Before the TCJA, the Kiddie Tax rate equaled the parent s marginal rate. For , the TCJA left a lot of the Kiddie Tax rules the same, but it did change the rate structure, so it s now very important to pay attention and make sure you re calculating it correctly. Age is the key factor when calculating your exposure. The Kiddie Tax can potentially apply up until the age of 24. For ages at year-end, the Kiddie Tax only applies if the child is a student. A child is typically exposed to the Kiddie Tax when they meet the following four requirements: 1. The child does not file a joint return. 2. One or both parents are alive at year-end. 3. The child s net unearned income is higher than the 2018 threshold of $2, The child or young adult falls under one of the following three age-related rules: a) (Age 17 or Younger): If the child is 17 or younger at year-end, the Kiddie Tax applies if the other three requirements are also met. b) (Age 18): If the child is 18 at year-end and does not have earned income that exceeds half of his or her support, the Kiddie Tax applies if the other three requirements are also met. c) (Age and Student): If the child is age at year-end and (1) is a student and (2) does not have earned income that exceeds half of his or her support, the Kiddie Tax applies if the other three requirements are also met. 2. Good News for Business Owners About Depreciation. The TCJA favorably changed some of the most widely used deductions for purchases of qualified property, including Section 179 which allows for the immediate deduction of part or all of the cost of qualified property. The TCJA increased the deduction for bonus depreciation from 50% to 100% and prolonged the period of phase-out. A 100% first year deduction is allowed for qualified property placed in

2 service after September 27, 2017 and before January 1, The deduction starts phasing out in 2024, going down to 80%, with decreases each year after that until it phases out completely in The TCJA also upped the maximum annual Section 179 deduction from $500,000 to $1 million. This applies to qualified property placed in service after December 31, The new law also increased the annual phase-out threshold from $2 million to $2.5 million. One of the best benefits that came from the TCJA is very favorable first-year depreciation breaks for vehicles used for business. Now, for both new and used passenger vehicles that are placed in service after 12/31/2017 and used over 50% for business, the TCJA dramatically and permanently increases the auto depreciation allowances. Here s the breakdown: $10,000 for year one or $18,000 if you claim first-year bonus deprecation $16,000 for year two $9,600 for year three 5,760 for year four and beyond until the vehicle is fully depreciated If you don t use the vehicle 100% for business, you may still get some benefit. In addition to this change, there are several other tax changes related to your vehicle. If you re using a vehicle for your business, we ll help you figure out the details. Make sure you re depreciating your assets correctly! 3. Don t Get Caught Deducting Unallowable Entertainment Expenses. In the past, your company could usually deduct 50 % of the cost of business meals and business entertainment expenses. For 2018, Congress eliminated the 50 % deduction for most entertainment expenses. Business meals will continue to be deductible at 50% if the following requirements are met going forward: The expense must be ordinary and necessary and paid while engaging in a trade or business. The expense may not be lavish or extravagant. The taxpayer or an employee must be present when the food or beverages are furnished. The food and beverages must be provided to a current or potential business customer, client, consultant, or similar business contact. If the food is provided during an entertainment activity, the separate invoice requirement applies. 4. Get Your Educational Tax Benefits Straight. Education is one area that the TCJA shook up quite a bit. Here s a rundown of what you need to know:

3 You get more tax-free distributions from Section 529 plans - The TCJA changed the Section 529 plan rules to allow federal-income-tax-free withdrawals of up to $10,000 per year to cover tuition at public, private, or religious elementary or secondary schools (K- 12). There are no more deductions for unreimbursed work-related education expenses This is not the best news for employees who want to go back to school. Your cancellation of debt (COD) income remains tax-free in certain cases - The TCJA temporarily expands the tax-free COD income break to cover certain discharges of student loan debt on account of the student s death or disability. Many of the educational breaks didn t change For example, working condition fringe benefits, educational assistance programs, The American Opportunity credit, The Lifetime Learning credit and the deduction for work-related education costs for selfemployed people are still basically the same. At best. the topic of tax breaks for education expenses is confusing. There are multiple breaks with multiple sets of rules. But, don t worry. We ll help you understand what you need to know. 5. Pay Attention to This If You re A Homeowner. The TCJA brought three major changes for homeowners: The first change is the amount of your property tax deduction. Property taxes and state income taxes combined are now limited to $10,000. In layman s terms, that means if your total state and local taxes are over the limit of $10,000, you can t deduct everything you paid. This is not good news for people in highly taxed states and areas like NYC and LA; however tax brackets were lowered and the standard deduction was increased, so it may offset. The second is that the mortgage interest deduction is limited based on lower mortgage loan amounts. The new debt limit is $750,000 for acquisition debt incurred after December 15, That means if your mortgage was in place on or before this date, you have the old limit of $1,000,000. So, that s good news! The third is that the deduction for home equity indebtedness is suspended, unless the debt is secured by the residence and the money is being used for improvements. 6. Understanding the Changes to Retirement and IRA Plans. The TCJA didn t directly impact retirement plans as much as other areas of the tax code, but there are still some notable changes that are worth discussing. The principal change is the elimination of the ability to undo a Roth conversion. Some other changes include an extended rollover deadline for plan loan distributions, additional allowances for "back-door Roth contributions," relief for qualified 2016 disaster distributions, and the elimination of the ability to deduct IRA losses or the payback of small plan overpayments.

4 Understanding what tax benefits are available for you to utilize in the management of your retirement account is a very individualized topic because everyone s situation is so unique. Feel free to call us if you have questions. 7. More Ways for Your Family to Save. The TCJA includes a number of changes that impact your family finances when it comes to tax time. Here are a couple of the notable ones: No more personal and dependent exemption deductions - For , the new law eliminates personal and dependent exemption deductions. Bigger standard deductions - For , the standard deductions are almost doubled! Here s the breakdown: $12,000 for singles (up from $6,350 for 2017) $24,000 for joint-filing married couples (up from $12,700) $18,000 for heads of households (up from $9,350) The two of these together will help some families and hurt others. For example, nonitemizers with no kids could benefit, yet folks with lots of kids who don t benefit from increased standard deductions could lose out. 8. Impact on Partnerships. The TCJA includes several changes that affect partnerships and LLCs that are treated as partnerships for tax purposes. Many of them are good for small business. Here s the skinny: The Technical Termination Rule is repealed. This is a good thing. Under prior law, a partnership or an LLC treated as a partnership was considered terminated for federal income tax purposes if, within a 12-month period, there was a sale or exchange of 50 % or more of the partnership s or LLC s interest in capital and profits. This is now gone. The TCJA also implemented lower tax rates for individual partners and LLC members, and added a new pass-through business deduction. Two more great changes. On the bad side, there are new limits on deducting business losses. 9. The New Pass-Through Income Rules. The TCJA created a new tax deduction of up to 20 % of income from partnerships, sole proprietorships, and other pass-through businesses. There are a lot of factors that play into the size of the deduction such as the nature of the business activity, total income of its owner, how much the business pays its employees and more. This change actually gets quite complicated. Without getting into too many accounting technicalities, if you re running a business, the TCJA s 20 % pass-through deduction is extremely generous. You ll want to make sure you re taking full advantage of it. However, the law s complex phase-outs may limit the benefit for some businesses.

5 10. No More Deductions for Alimony. The old tax laws are still applicable for divorce settlements prior to 2019, but for payments made under post-2018 agreements, the TCJA eliminates deductions for alimony payments. What does that mean? Well, starting in 2019, the loss of the deduction for the spouse making the alimony payments will likely increase that spouse s tax liability. This will have a waterfall effect because the paying spouse will likely seek lower alimony payments, which means there s less money for everyone. If you re in a situation similar to this, it may be a good idea to look further into the details of these changes. Get an Expert in Your Corner and Make Sure You re Covered. Now is the time to make a strategic tax plan that takes full advantage of the provisions in the new tax code. The TCJA creates unfamiliar territory to navigate as you approach year-end tax planning, so be sure to consult with your Klatzkin accountant who can help you understand the rules and minimize your overall tax liability. (609) in Hamilton, NJ or (215) in Newtown, PA. About Klatzkin & Company LLP Klatzkin is an accounting and advisory firm serving Greater New Jersey and Bucks County, Pennsylvania. We have been assisting family-owned and closely held businesses and individuals for nearly 90 years. The firm serves agribusiness, manufacturing, distribution and wholesale, real estate and construction, professional services, technology, nonprofit and educational organizations. Our trusted management advisors provide clients with sound accounting, advisory, estate administration, tax and succession planning advice and strategies. For more information, go to This publication is for informational purposes only and does not constitute professional advice Klatzkin & Company LLP. All Rights Reserved.