As I?ve given more thought to the recent tax law changes, it has become apparent to me that married couples with a small or no mortgage on their homes will have a difficult time itemizing their deductions starting in 2018.? With the standard deduction increasing to $24k in 2018, and the deduction for state and local taxes capped at $10k, a couple would need more than $14k of mortgage interest , charitable donations, and/or medical expenses over 7.5% of their income to itemize.
That means the deduction for charitable donations might be disappearing for many married couples next year.? We?ve already been recommending that our clients consider prepaying charitable donations that they would otherwise make in 2018 prior to 12/31/17. Not everyone is comfortable with that strategy, however, as they don?t want to give that much money to a charity all at one time.
People worried about losing this valuable tax deduction who are also in a position to set aside a few years? worth of donations by 12/31/17 should consider setting up and funding a ?charitable donor advised fund? All the money and securities donated are deductible this year based on the value of the items contributed.? Plus, if you donate appreciated securities, you avoid paying taxes on the appreciation within the securities. And you then get to control when money is disbursed from your donor advised fund to the charities of your choice.
To find out more about this tax saving benevolent opportunity, check out these following popular options:
I hope you find this information helpful.
- For 2017, the standard deduction for a single individual is $6,350 and for a married couple is $12,700. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses. The Standard Deduction jumps to $12k for single individuals and $24k for married couples in 2018.
- For 2017, the personal exemption is $4,050. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. Personal Exemptions are eliminated starting in 2018.
- The?maximum earnings subject to?social security taxes is $128,700 for 2018,?up from? $127,200 in 2017.
- The?standard mileage rate?is $.535 per business mile?as of January 1, 2017, down from $.54 for 2016 and $.575 for 2015.
- The?maximum annual salary deferral?into a?401(k) plan?or a?403(b) plan?is $18,500 in 2018, up from $18,000 in 2015, 2016 and 2017.? And if you’ll be 50 or older by December 31st, you can contribute an extra $6,000 into your 401(k) or 403(b) account this year.
The?maximum annual contribution?to your?IRA?is?$5,500 for 2015 through 2018.? And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.? You have until April 15, 2018 to make your 2017 IRA contributions.
by Richard S Schwartz CPA
Reduced tax rates for individuals. ?Under prior law we saw tax brackets of 10%, 15%, 25%, 28%, 33%, 35% and a top tax rate of 39.6%.? Under the new law the lowered tax rates will be 10%, 12%, 22%, 24%, 32%, 35% and 37%.
Major changes to itemized deductions.? The new law limits taxpayers’ deductions for state income tax and real estate tax payments.? The aggregate amount of state income tax payments plus personal real estate and property tax payments allowed as a deduction will be capped at $10,000 in total per year.? Miscellaneous itemized deductions will no longer be allowed, as well, under the new tax act.? Typical expenses included as miscellaneous deductions are unreimbursed business expenses, tax prep fees, investment expenses, and fees for safe deposit boxes.? And finally, mortgage interest will be capped to only allow a deduction for mortgage interest paid on up to $750,000 of underlying debt on your residence.? The new lower debt limit does not apply to a mortgage on a home purchased prior to 2018. ?Finally, the limitation on itemized deductions based upon income will be suspended as well.
New thresholds for the standard deduction and personal exemptions. ?With the significant reduction of expenses that qualified as an itemized deduction before 2018, more taxpayers will be left taking the standard deduction on their tax return.? The good news is that the new law has increased that amount.? Beginning in 2018 the standard deduction for married taxpayers will be increased from $13,000 to $24,000, for single taxpayers from $6,500 to $12,000, and for head of household filers from $13,000 to $18,000.? However, beginning in 2018 taxpayers will no longer be allowed personal exemptions for themselves and their dependents.? The personal exemption for 2017 is $4,050 per person.? The impact of these two changes on a family of four that qualifies to use the standard deduction is an increase in the standard deduction in the amount of $11,000 but a loss in deductions due to the disallowed exemptions of 4 people in the amount of $16,200.? Net effect in this example is a loss of deductions in the amount of $5,200.
New deduction for pass-through income.?? Taxpayers who have Qualified Business Income (QBI) from a partnership, S-corporation, or sole proprietorship will be allowed a 20% deduction on pass-through income subject to limitations.? With regard to qualified service businesses including healthcare personal services (doctors, dentists, psychologists), joint filers will not qualify if their income exceeds $415,000 and single filers will not qualify once their income exceeds $207,500.
AMT exemption increased.? The new law will increase the alternative minimum tax (AMT) exemption from $86,200 to $109,400 for married filers and from $55,400 to $70,300 for single filers.? However, AMT may become a “thing of the past” for many filers beginning in 2018.? Some of the primary reasons that taxpayers fell into AMT were due to the payments of 1.) significant state income tax and real estate tax, 2.) significant miscellaneous deductions, and 3.) several exemptions claimed on the tax return.? Going forward, all of these deductions will no longer be allowed (except the real estate tax and state income tax deductions which will now be capped at $10,000 combined).
Updated rules for business deductions.? The deductions for section 179 depreciation will now be increased to an annual deduction of $1,000,000.? Additionally, the new law will increase the allowed deduction for bonus depreciation as well as the allowed depreciation deduction for automobiles used in business.? No longer allowed as a business deduction will be entertainment expenses.? Previously entertainment expenses were 50% deductible.
The Kiddie Tax has been modified.? Under prior law, generally a child’s unearned income (investment income) was taxed at the parents’ tax rates.? Beginning in 2018, children who have income will be taxed at two levels.? First, a child’s earned income (wages) will be taxed at single filer rates.? Second, unearned income for the child will be taxed at tax rates applicable to trusts and estates.
The corporate tax rate has been reduced. ?Prior to 2018 corporations were taxed at various tax brackets with the highest tax bracket being 35%.? For tax years beginning after 2017, the corporate tax rate will be reduced to a flat tax rate of 21%.? This new rate also applies to personal service corps, previously taxed at a flat rate of 35%.
Various changes for other items:
- The child tax credit for children under the age of 17 will be doubled to $2,000 with the phase out being increased to an income level of $400,000 for married filers.
- For divorce agreements executed after December 31, 2018, alimony will no longer be a deduction for the payor nor taxable income for the payee.
- The deduction for moving expenses will no longer be allowed as of 1/1/18.
- Recharacterizations will no longer be allowed to undo a Roth conversion.
- The estate tax exemption will be increased from $5,000,000 to $10,000,000
On Friday, December 22nd, President Trump signed the Tax Cuts and Jobs Act of 2017 into law. Here are some 9 steps to consider taking prior to 12/31/17 and then during 2018 to minimize your federal tax liability.
- Prior to 12/31/17, pay all of your 2017 state taxes that will ultimately be due next April as a Q4 estimated tax payment, and prepay your 2018 real estate taxes prior to 12/31/17 as well. Remember, the total you can deduct for state income taxes and real estate taxes is capped at $10k starting in 2018. Please note that this strategy won’t work if you are subject to the Alternative Minimum Tax (AMT).? Take a look at line 45 of your 2016 Form 1040 to see if you paid the AMT last year. If your income and deductions this year will be similar to 2016 and you triggered the AMT last year, paying additional state and local taxes prior to 12/31/17 most likely won’t save you any taxes this year.? It’s like pouring water into a full bucket.
- Prior to 12/31/17, make charitable donations that you would otherwise make during 2018. With the standard deduction for married couples increasing to $24k in 2018 and the state and local tax deduction capped at $10k, only married couples with a high mortgage, who donate a lot to charity, and/or have substantial medical expenses will itemize their deductions going forward. Keep in mind that you need to itemize to save any taxes on the donations made during the year. Single individuals are more likely to itemize under the new rules since their standard deduction is only $12k and like married couples, can deduct $10k in state and local taxes.? (Can you say marriage penalty????) Even so, with tax rates decreasing next year, single individuals will save taxes with this strategy too.
- Pay any and all unreimbursed employee business expenses and your financial planning/investment management fees/tax prep fees before 12/31/17 provided you are not subject to the AMT and these expenses in the aggregate will exceed 2% of your income, as these deductions will be lost in 2018.
- Pay your qualified moving expenses prior to 12/31/17, since the moving deduction is no longer allowed between 1/1/18 – 12/31/25.? Moving expenses include the cost of moving your household items and the cost of traveling to your new home, as long as the distance between your old home and your new job is 50 miles further than the distance between your old home and your old job.
- Pre-pay and pay off your medical bills by 12/31/17 if your total medical expenses exceed 7.5% of your income and you will itemize in 2017. The new tax rules actually reduce the threshold to deduct your medical expenses from 10% of your Adjusted Gross Income (AGI) to 7.5% of AGI for 2017 and 2018.
- Defer any last-minute taxable Roth conversions until 2018, when the tax rates will be lower.? Please note that taxpayers are no longer allowed to recharacterize a Roth conversion back to a traditional IRA beginning in 2018, so be careful to understand how much of the Roth conversion will be taxed.? There are strategies to minimize the tax on a Roth Conversion that we have written about in prior newsletters, including transferring the taxable portion of the IRA account into a 401k or 403b at work, or into a Solo 401k, and then converting the remaining post-tax dollars into a Roth IRA.
- Finalize your divorce by 12/31/18 if you will end up paying alimony, since alimony will no longer be deductible for divorce agreements finalized after 12/31/18.
- If you own a practice and also own the office space used by the practice, consider raising the rent the practice is paying to the absolute highest reasonable amount.? The new 20% deduction on Qualified Business income is not phased out for real estate profits, but is phased out on the income earned from qualified services businesses (including healthcare) for single individuals with income between $157.5k and $207.5k and married couples with income between $315k and $415k.? Another option might be to set up a separate entity to own the equipment for your practice and then lease the equipment back to the practice.? We’ll have to wait to see how these regulations are written to figure out what makes the most sense for practice owners.
- Practice owners should purchase sports and theater tickets used for marketing prior to 12/31/17 since money spent for business entertaining is no longer tax deductible in 2018.? Purchasing these these items by credit card before 12/31/17 still counts, even if the credit card is not paid off until 2018.? Allowable business meals continue to be 50% deductible under the new rules.
As these rules were just signed into law on 12/22/17, there will be a lot of analysis required to fully understand the strategies available to be able to minimize your taxes for the years to come.? Please stay tuned.