I’m not a CPA (and I don’t even want to play one on TV), but we all know that there was a new tax law and it impacts everyone. These are significant changes which means that both individuals and small business owners may want to seek advice this year in evaluating not only their tax situation, but their financial plan.
I’d like to share a few changes and their impact on you and your planning for the next 7 years. That’s right: the individual changes are not permanent. The corporate changes are permanent (whatever permanent actually means these days). By corporate, I mean only C Corporations.
Here is a rundown of some the major changes on the individual and business side as provided by Putnam Investments. This is by no means and exhaustive list – just some that I thought might apply to you. As always, run this by your tax advisor before you make any changes.
Marginal tax rates have reduced so most everyone get a reduction in marginal tax rates. I’m not going to go into detail. If you’d like a copy of the new tax-brackets, let me know and I’ll send one over.
Child Tax Credit has been increased from $1,000 to $2,000 for “qualifying children” under the age of 17 years old at the end of the year. An additional $500 tax credit applies to other qualified dependents who are not qualifying children (e.g. dependent child age 17 or over). This tax credit is phased out as income exceeds $200,000 for an individual and $400,000 for a couple (this is an increase from previous years).
Estate/Gift Tax Exemption has increased to $11.2 million. Watch out! Your state may have another limit. For example Minnesota’s limit for 2018 is $2.4 million as I write this. It is scheduled to increase each year until 2020, but it doesn’t get close to $11.2 million.
Annual Gift Tax Exclusion Amount has increasedto $15,000 up from $14,000 in 2017.
Standard Deduction has nearly doubled to $12,000 for individuals and $24,000 for couples.
Interest on HELOC loans is deductible only in cases where proceeds are utilized to acquire or improve a property. If you use them to buy a car, invest or take a trip, they are not deductible.
State & Local Taxes are deductible, but are limited to $10,000 in aggregate.
Miscellaneous 2% Deduction has been repealed.
Charitable Contributions are still deductible. The deduction for cash gifts to public charities has increase to 60% of AGI (up from 50%)
Student Loan Interest is still deductible. This is the one I hear incorrectly quoted most often.
Moving Expenses areavailable only available to members of the armed forces.
Peace Rule has been repealed. There is no longer an income phase out of itemized deductions.
Personal Strategies to Consider:
- Utilize strategies to reduce or avoid taxable income. Contribute to a retirement plan or IRA. Fund your FSA or HSA (flexible spending account or health savings account). If you own a business, you can set up your own retirement plan and deduct all contributions. Ask me how…
- The loss of the "Miscellaneous 2% Deduction" has made advisors think about how to make their fees deductible again. An earlier version of this BLOG suggested that clients consider paying all investment fees from the IRA to use pre-tax dollars. I have since learned that this practice is a prohibited transaction and can cause the IRA to be disqualified (meaning taxable). The IRA should only pay it's own advisory fees.
- Consider timing strategies for charitable donation. Taxpayers who are committed to regular charitable contributions may see the appeal of “lumping” deduction into one year and itemizing deduction on the tax return for that year. As always, consider donating highly appreciated stock instead of cash.
- Consider funding a Donor Advised Fund that allows you to “lump” charitable contributions as mentioned above. The fund can then make yearly distributions to the charities of your choice. This can also be funded with highly appreciated stock. Let me know if you are interested in more information about Donor Advised Funds.
- Review estate planning documents and strategies. While estate and gift taxes may be less of a concern for most families, careful planning is still needed to transfer wealth efficiently. Most families will still want to plan for probate and incapacity. Don’t wait to get a will, powers of attorney, health care directive and/or trust documents. Please seek the council of an attorney for these documents. If you don’t’ have one I may be able to give you a referral.
- Expanded use of 529 accounts for educational savings. They’re not just for college any more. The new tax law allows families to use up to $10,000 annually for K-12 tuition. If you are a grandparent thinking about your grandchild’s education, ask me about a grandparent 529 plan.
- Last but not least, if you are a retiree, consider the charitable rollover option. IRA & 401K owners (age 70.5 and older) may benefit from directing their required minimum distribution (RMD) up to $100,000 per year directly to a public charity. That means no taxable income for the donor and the use of the higher standard deduction (no need to itemize).
The tax rate for C Corporations was reduced to a maximum of 21%. However, most business in the US are not large C corporations, but are structured as “pass-through” entities such as S-Corps, LLCs, partnerships and even sole proprietors. Here’s what’s new for your small business:
As a business owner, you may benefit from the 20% deduction of qualified business income (QBI). QBI is income allocated to you from your business. Specific business, such as health, law and professional services are limited in claiming this deduction depending on their income. This is not all the detail you will need, so speak with your tax professional about how it applies to your business.
- If your taxable income is below $157,000 for individuals and $315,000 for married filing jointly, you qualify for the full 20% deduction. Between $157,000 and $207,500 ($315,000 and $415,000 for MFJ) there is a phase out. Beyond that income limit, no deduction. The deduction may be subject to wage limitations, so again…talk with your tax professional.
Business Owner Strategies to Consider:
- Evaluate your tax status. You may want to consider a different type of business structure or taxation method. For example an LLC can choose to be taxed as a flow through partnership or as a C Corporation.
- Work with a tax expert to make the most of the new 20% deduction. You should take steps to understand how it works NOW, so you have time to change and adapt – positive or negative as it may be. This is probably more important if you are in the health, law or professional services businesses. Let me know if you’d like to discuss this or if you need a referral to a tax expert.
That was a rundown of some the tax changes in the recent tax law. Many of these changes are significant and we are all impacted by them. You may want to seek advice this year in evaluating not only your tax situation, but your financial plan so you feel confident going forward. Let’s have a conversation.
Some IRA’s have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney. Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.