Dedicated to making your life less taxing Winter 2017-2018 Compliments of: Davis Tax & Financial 99 Abington Road Danvers, MA 01923 O: (978) 777-4645 C: (617) 962-1563 taxpro@davistaxandfinancial.com www.davistaxandfinancial.com/ The 2017 Tax Cuts & Jobs Act A brief summary The major changes take effect for tax returns filed in 2019 although taxpayers may see a change in their withholding starting in February of 2018. Many of the changes are not permanent but instead planned to revert back to the 2017 levels in 2026. 1. 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 Personal exemptions have been repealed.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 Some itemized deductions have been limited or repealed.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 2017. 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 All job expense and other miscellaneous deductions subject to a 2% limit have been repealed. Some of the more common deduction repealed are unreimbursed employee expenses, tax preparation fees, safe deposit box fees, job search expenses and union dues.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. The Child Tax Credit is increased to $2,000. Up to $1,400 of this will be refundable even with no tax liability. There will also be a new qualifying dependent tax credit of $500 for dependents who do not qualify for the Child Tax Credit. This is a non refundable credit. The phase out for the credit now starts at an AGI of $400,000 for married filing joint returns and $200,000 for all others. 6. Alimony will no longer be deductible from income or reported as income. This only applies to divorce or separation documents executed after 12/31/2018. 7. The individual mandate penalty for no health insurance coverage remains in place for 2018 but will be repealed in 2019. 8. 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. 9. 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. 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, 2022. 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. 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. 20 percent tax deduction for select pass-through entities Will your business operation create the 20 percent tax deduction for you? If not, and if that is due to too much income and a lack of (a) wages and/or (b) depreciable property, a switch to the S corporation as your choice of business entity may produce the tax savings you are looking for. To qualify for the full 20 percent deduction on your qualified business income under new tax code Section 199A, you need defined taxable income of less than $157,500 (single) or $315,000 (married). If your taxable income is greater than $207,500 (single) or $415,000 (married), you don t qualify for the Section 199A deduction unless you have wages or property. Example: Sam is single, not in the out-of-favor specified service trade or business group (doctors, lawyers, consultants, etc.), operates a sole proprietorship that generates $400,000 of proprietorship net income, and has taxable income of $370,000. In this condition, Sam s 20 percent Section 199A tax deduction is zero. Here s how the S corporation helps Sam. The S corporation pays Sam a reasonable salary; let s say that s $100,000. With this salary, Sam s pocketed tax savings are 1.$10,871 on his self-employment taxes, and 2.$17,500 on his new-found 20 percent deduction under new tax code Section 199A. Is this something you and I should talk about for 2018? If so, you know how to find me.
New Tax Law Wipes Out 50% Business Entertainment One Less receipt you need to worry about in 2018 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, 2018. For example, during 2017, you could take a prospect or client to a business dinner followed by the theater or a ballgame and deduct 50 percent of all the monies spent, providing you passed some tax law tests on business discussion and associated entertainment. Now, in what you and I thought was a business-friendly tax reform package, you find that lawmakers exterminated a big chunk of business entertainment. You can no longer deduct entertainment that has as its mission the generation of business income or other specific business benefit. The 2018 tax reform prohibition against deductible entertainment is true regardless of your business discussion, negotiation, business meeting, or other bona fide transaction. Here s a short list of what died on January 1, 2018, so you can get a good handle on what s no longer deductible: That s the bad news. Business meals with clients or prospects Golf Skiing Tickets to football, baseball, basketball, soccer, etc., games Disneyland The good news is that tax code Section 274(e) pretty much survived the entertainment bloodletting. Under this section, you continue to deduct entertainment, amusement, and recreation expenses you treat as compensation to employees and that are included as wages for income tax withholding purposes; expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees (other than employees who are highly compensated employees); expenses that are directly related to business meetings of employees, stockholders, agents, or directors (here, the law limits expenses for food and beverages to 50 percent); expenses directly related and necessary to attendance at a business meeting or convention such as those held by business leagues, chambers of commerce, real estate boards, and boards of trade (here, the law also limits expenses for food and beverages to 50 percent); expenses for goods, services, and facilities you or your business makes available to the general public; expenses for entertainment goods, services, and facilities that you sell to customers; and expenses paid on behalf of nonemployees that are includible in the gross income of a recipient of the entertainment, amusement, or recreation as compensation for services rendered or as a prize or award. When you are considering using the above survivors of tax reform s entertainment cuts, you will find good strategies in the following: 1.Renting your home to your corporation. 2.Taking your employees on an employee party trip. 3.Partying with your employees. 4.Making your vacation home a deductible entertainment facility. 5.Creating an employee entertainment facility. 6.Deducting the entertainment facility, because facility use creates compensation to users.
Substantiating Business Expenses Don t forget to save those receipts As a business owner, one of the most important things you should do is keep good records. Without them, the IRS may disallow some of the expenses you incur if it chooses your return for a closer look. Maintaining good records should be done throughout the year. Keeping receipts, credit card statements, bank statements, and canceled checks is a must. Set aside a spot in your office for expenses and sort through them periodically. Group similar expenses together and total them. Keep receipts for large purchases, such as equipment or capital improvements, separate because they are reported differently on your tax return. Staying organized will give you a better idea of the expenses you are incurring and what your bottom line will be. An added benefit is that when it comes time to file your tax return, you ll be more prepared. Automobile Expenses Which is better, deducting the standard mileage rate or claiming actual expenses? With the standard mileage at 53.5 cents per mile for 2017, it might be time to revisit what yields the more substantial deduction the standard mileage rate for each business mile, or your actual car expenses. If this is the first year you have business use of an automobile, you don t have to decide which method yields the better result until you file your return. If this is not the first year you have business use of an automobile, you cannot switch to the standard mileage rate in a later year if you started with deducting the actual expenses. On the other hand, if you started with deducting automobile expenses using the standard mileage rate, you can switch to the actual expense method. Admittedly, claiming the standard mileage rate is a lot easier for most of us. All we have to do is keep track of our business miles and multiply them by the current rate. In addition, you may also deduct your costs for parking and tolls and, if you are self-employed, the interest on your car loan. Claiming actual expenses requires a bit more diligence in your recordkeeping. Doing so, however, may pay off in the end by giving you a larger deduction. First, you must keep receipts for all expenses in excess of $75 including your gasoline and oil, repairs, tires, licensing and registration fees, insurance, garage rent, lease fees, parking, tolls, and rental fees. If you are self-employed, you may also take the business portion of any interest you are paying on a car loan. Luxury and sales taxes are not deductible under any circumstance, although the amounts you pay can be added to your cost and recovered through depreciation. Regardless of the method you choose, the expenses are limited to your business-use percentage. This percentage is calculated by dividing your total business miles by your total miles driven for the year. It s wise to make note of your odometer reading on January 1 and again on December 31. Not All Income is Taxable Have you received any of this income? There are certain types of income that are not taxed and do not have to be reported on your tax return. These include child support, military allowances, veteran s benefits, welfare benefits, Social Security Supplemental Income benefits (SSI), and workers compensation. Also, a cash rebate that you received for purchases, such as a new car or appliances, is not considered taxable income.
Working with Your Spouse Is your spouse your employee? One of the advantages of operating your own business is hiring family members. However, the employment tax requirements for family employees can vary from those that apply to other employees. There are a couple of different ways a married couple can operate a business together. If you operate a sole proprietorship and you hire your spouse as an employee, you have an employee/employer relationship. This means one spouse substantially controls the business in terms of management decisions and the other spouse is under his or her direction and control. If such a relationship exists, then the non-owner spouse is an employee subject to income tax withholding, social security and Medicare tax, but not to FUTA tax. If this type of arrangement exists, you can provide benefits to your spouse and deduct them on your business return. One of these benefits can be health insurance. If your spouse is a bona fide employee and is paid a reasonable wage for the services that he or she performs, you can provide health insurance to your spouse with a policy that covers both of you. This way you are allowed a deduction for the coverage on your business return and, in turn, reduce your selfemployment tax. You can also provide retirement benefits to your spouse. If your spouse is your only employee then you have the option of using the section 105 Medical Plan as the sole source of remuneration. This is a wonderful tax strategy that many of my clients have used. For further information on this strategy contact me. On the other hand, if your spouse has an equal say in the business affairs, provides substantially equal services to the business, and contributes capital to the business, then a partnership relationship exists and the business s income should be reported on Form 1065. When spouses carry on a business together and share in the profits and losses, they are partners in a partnership regardless of whether they have a formal partnership agreement. They should not report the income on a Form 1040, Schedule C, in the name of one spouse as a sole proprietor nor should they file a joint Schedule C. In a partnership, each spouse reports their separate share of the partnership income and pays their own self-employment tax. This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based. 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 2018 are: 54.5 cents per mile for BUSINESS USE 19 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 $18,000 in 2017 ($24,000) if age 50 or over).your maximum contribution to an individual 401(k) plan is the lesser of $53,000 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 2017 was $5,490,000. It doubles to $10,980,000 in 2018. 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). In 2017 the income thresholds are $418,401 for individuals ($470,701 for marrieds). 8. If you turned age 70 on July 1, 2017 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, 2018. 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.
New Tax Law Eliminates Tax Benefits for Business Vehicle Trade-Ins Tax reform no longer allows Section 1031 exchanges on personal property such as your business vehicle. The trade-in was the most common 1031 exchange of a business vehicle. Now, because of tax reform, the vehicle trade-in is simply the sale of the old vehicle to the dealer and the purchase of a new vehicle. The sale to the dealer creates gain or loss on the sale just as it would on an outright sale. But having a taxable event does not necessarily mean that you are going to pay more taxes. There s more than one nifty silver lining for many business taxpayers in this lost ability. For example, if you pay self-employment taxes, you usually come out ahead if you use the sell and buy strategy rather than the trade-in strategy (Section 1031 exchange).with the sell-and-buy strategy, you save self-employment taxes because You don t pay self-employment taxes on the sale of your existing business vehicle, and You deduct depreciation and Section 179 expensing on your new vehicle (even when you use IRS mileage rates, you benefit). Owners of S and C corporations don t generate any self-employment tax savings on the sales and purchases of new vehicles. They just have gains and losses. If you operate as a corporation and the sale or trade-in of your existing vehicle is going to produce a big taxable gain, why do it? Before tax reform, when you could avoid taxes with the trade-in, you could easily justify the newer vehicle. Not so after tax reform. Perhaps now, more than ever, you should have me calculate your tax result before you sell or trade in a vehicle or other personal property. A Final Word from Charlie I hope your holiday season was enjoyable. As 2017 came to a close, I received quite a few emails and calls regarding ideas on how to reduce taxes for the year especially with tax reform beginning in 2018. Speaking of 2018, there will be quite a bit of additional planning that may be necessary for some of you. I will reach out to those of you who I feel need to take some action. 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. Feel free to contact me with your specific questions. Remember, your 4 th quarter Federal estimated tax payment is due on Tuesday, January 16 th. For those of you who have to pay estimates to the state, I hope you mailed them by December 31, 2017. If not, they re also due on January 16 th. 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 help you accomplish your retirement goals. 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.