Monthly Archives: November 2017

NOVEMBER, 2017 FALL/WINTER

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NOVEMBER, 2017 FALL/WINTER TAX NEWSLETTER

For clients of: HENRY C KULIK, JR CPA LLC

November, 2017

As the end of year 2017 approaches, it’s time to think of planning moves that will help lower your tax bill for this year, and possibly the next. In many cases this will involve the usual year end planning ideas we have asked everyone to consider in the past:

  • Deferring income to the 2018 tax year, where we expect taxes to be lower (at some point)
  • Accelerating deductions into this year to reduce 2017 taxable income.

The tax code and tax rates are now some at of the highest in history. They have increased, in some form, almost every year over the last 7 years. Many new “phase-outs” and high sur-tax rates were tied directly to the ACA (affordable care act). When that wasn’t enough, every year the words came forth… “it’s time for the “rich” to pay their fair share.” What was not mentioned that “rich” included couples earning about $140,000 and singles about $70,000! These weren’t the $ millionaires and $ billionaires that were the supposed target shown on television.

Cautionary tale

Our reports show that IRS audits are pointing to form 1065 Partnerships, and form W-2 wages vs/ 1099-MISC where agents are finding companies misclassifying employees as subcontractors. A finding can result in severe interest and penalties, plus the employer gets to pay the income tax that should have been withheld along with FICA and Medicare. Then the State wants their piece of the pie. 3+ years of this, nicely wrapped under the tree. Fewer agents, but higher audit tax findings along with collection revenues from past due taxes are helping the treasury.$$$$$

New tax plans

It appears that all of the tax plans being talked about would take effect 1/1/18. (The bill even shows 2018 start date) Depending on the specific rules passed, most everyone will pay less in tax. Corporate taxes, including pass-throughs such as S-Corporations, and Schedule Cs could see the largest breaks in an effort to help businesses create new jobs through growth. The confusing part is what will the great sausage machine in D.C. finally turn out in the wrapper? Below I have illustrated just a few of the differences in the 3 plans: a) the original Trump plan (found at www.whitehouse.gov), b) the House of representatives plan (www.house.org)  and  c) the Senate plan (www.senate/gov)

*Married Filed Jointly* examples

Tax range on TaxRate Capital Gains Exemptions Itemized
Trump plan: $0 to $50,000 0% 0% no changes 100%
$50,000-$100K 10% 0% no changes 100%
$100K-$300K 20% 15% income based 50% (est)
$300K-and up 25% 20% phase-outs 75% (est)

Notes:  NO AMT; Charity and mortgage interest remains; No Estate Tax
Business tax changes to promote bringing offshore cash and jobs back to USA

House plan $0 to $90,000 12% 0% None Limits;$24K std
$90K-$260K 25% 15% None Limits;$24K std
$2600K-$1M 35% 20% None Limits;$24K std
$1M and up 39.6% 28% None Limits;$24K std

Notes: NO AMT; $10K limit on Home taxes; no adoption credits, no itemized for medical; mortgage interest won’t affect most people; debt cannot exceed $500K.Child Credit $1,600 Capital gain exclusion on personal residence limited/reduced;5/8 years instead of 2/5 removes moving expenses, form 2106, student loan interest. Any/all employer benefits taxable on W2.

Senate plan $0 to $19,050 10% 0% None Limits;$24K std
$19,051-$77,400 12% 0% None Limits;$24K std
$77,401-$120K 22.5% 15% None Limits;$24K std
$120K – $290K 25% 15% None Limits;$24K std
$290K – $390K 32.5% 24% None Limits;$24K std
$390K – $1M 35% 24% None Limits;$24K std
$1M and up 38.5% 28% None Limits;$24K std

Notes: NO AMT; Child Credit $1,650;$500 non-child dependent. Same itemized deduction as the House plan; NO Misc itemized. NO moving expense, NO casualty losses (same as House); business $2M Sect 179,) New business pass-thru deduction of 17.4% of business income (Phase-out $150K AGI)

NO business losses allowed; carryover instead. NO Professional tax rates (1120

Of course, all of this is just proposals and what, if anything, actually gets passed could be very different.  Much like other recent years if they fail to pass something very soon it could delay the start of the 2018 filing season and refunds being issued while the IRS updates their software, forms and instructions. So stay tuned and I promised to keep you posted!

Economic Outlook

There are a few predictions about the economy that could impact your taxable income. The stock market has been booming and is on track to close out 2017 with record highs. This could mean higher interest and dividend income on your investments plus a greater potential for capital gains on any stock sales. Check those year-end investment statements so you aren’t surprised when April rolls around.

The predicted 2.2% total economic growth for 2017 is making 2018 look really good at this point, with expected growth of at least 2.6%. Even if our friends in Washington fail to pass any kind of tax reform the 2.2% growth from 2017 is expected to continue.

Tax planning – Individuals

The Obamacare surtax of 3.8% is still in effect for 2017 on higher-income earners. If you estimate your modified adjusted gross income to be $250,000 MFJ, $125,000 MFS or $200,000 single or HOH or more you might want to look at deferring some of your income at the end of the year to reduce the impact of the NII tax.

A similar strategy could be used by those same earners with respect to year end wages or bonuses which could/would be subject to the 0.9% additional Medicare tax.

Consider increasing your deductible expenses by prepaying them or paying them with a credit card before year end. If you think you’ll owe state income taxes when you file in 2018 consider paying them ahead before the end of the year. This strategy could be most beneficial if the deduction(s) go away for 2018 as some of the tax reform models are suggesting. Do watch out for AMT though. If you are subject to AMT this strategy won’t help you.

If you have a pending insurance or damage claim, try to get it settled in 2017 to maximize your casualty loss deduction.

Avoid penalties by being sure to take your Required Minimum Distribution (RMD) from your IRA or 401K. If you turn 70 ½ in 2017 you need to take your first RMD by April 1, 2018. However, you’ll still need to take your RMD for 2018 before the end of 2018 so unless you will be in a much lower tax bracket in 2018 it could be most beneficial not to defer the RMD.

Tax Planning- businesses

If your business has done well in 2017 and you need new equipment or to invest in infrastructure it would be a good idea to get that in place before the end of 2017 to maximize your business deductions and minimize taxable income.  The expensing limit for 2017 is $510,000 and applies to most purchases that are depreciable (computers, off the shelf software, A/C and heat units, etc.) in addition qualified leasehold improvement, restaurant or retail improvement property are also eligible. Better still this deduction is NOT pro-rated which means that you can wait till December to make your purchase and still take the full deduction.

You can also take advantage of the 50% bonus depreciation on purchased assets (also not pro-rated) and the bonus drops to 40% in 2018.

If Congress manages to get tax reform through without too many changes Corporations may want to consider deferring some year-end income until 2018 if they will likely in a lower tax bracket.

If you aren’t sure about what your best strategy is you can always contact the office and I would be happy to discuss your particular situation. Now is also the best time for a face-to-face review of everything before the end of the year is here!

Happy Thanksgiving

Merry Christmas

May everyone have a blessed warm Holiday season!

Henry C. Kulik, Jr., CPA LLC

TAX OVERHAUL MAY TAKE EFFECT 01/01/18 WOW!

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Tax Overhaul Is Planned for 2018, Leaving Just a Few Weeks to Prepare
Most provisions in the House and Senate GOP tax bills would take effect in 2018, meaning people could have little time to do crucial year-end tax planning

Most provisions in the Republican tax bills would take effect in 2018, assuming a bill passes.

By Laura Saunders

Nov. 10, 2017 7:00 a.m. Fewer tax breaks for homeowners. No deduction for state income taxes. A higher bar for charitable write-offs. No “personal” exemption. No alternative minimum tax.

Republican leaders in the House and Senate have proposed different bills to overhaul the tax code, but both sweep away or limit many tax breaks for individuals in a bid to boost economic growth and simplify the system.
Both bills also expand credits for children. They increase the “standard deduction” greatly, so that perhaps 30 million filers wouldn’t need to break out deductions separately. Many business owners would get a tax break and owe less than wage earners with similar income. The estate-tax exemption would double, to $10 million a person.
There are so many differences between the two bills that exact outcomes are hard to predict, assuming a bill passes. What is clear is that people could have little time to do crucial year-end tax planning. Most provisions would take effect in 2018.
Here are tax moves to consider, based on current proposals.
Home Buyers and Sellers
The Senate bill preserves current law allowing deductions on a total of $1 million of mortgage debt on up to two homes.
The House bill would allow home buyers taking out mortgages after Nov. 2 to deduct interest only on $500,000 of debt, and only on one home. It appears to prohibit mortgage-interest deductions for all second homes. Both bills end interest deductions for home-equity loans.
If the House version prevails, the Nov. 2 cutoff might be extended in a nod to the Senate. But there are no guarantees, so buyers should beware.
Both bills also restrict the popular exemption of $500,000 of profit on the sale of a first home ($250,000 for singles). The new rules would require sellers to live in a house for five of the prior eight years, rather than two out of five years, to get the benefit.
The House bill reduces the exemption for sellers whose income exceeds $500,000 ($250,000 for singles). Affected home sellers should complete sales before year-end.
Pass-Through Income

Both bills cut taxes on some income earned by so-called pass-through firms such as partnerships and S corporations, but the rates and categories of business owners who would benefit differ.
Stay tuned as the final provision becomes clear. Business owners who would benefit from a lower rate may want to defer income into 2018, says Chris Hesse, a certified public accountant with CliftonLarsonAllen.
State Taxes
The House bill repeals the deduction for state and local income and sales taxes and caps the deduction for property taxes at $10,000. The Senate bill repeals deductions for property taxes, in addition to repealing the others. Exceptions apply for property-sales taxes paid by owners of pass-through firms.
Individuals who won’t owe alternative minimum tax this year may want to prepay 2018 state and local taxes that could be disallowed next year. This move requires careful analysis, as high state and local tax deductions could trigger the AMT in 2017 and eliminate much of the benefit.
Charitable Donations
If the standard deduction greatly increases as proposed, only 10% of filers will need to list write-offs separately compared with 30% now. Taxpayers donating a small percentage of income may want to accelerate donations into 2017 to get a deduction.
These givers should also consider so-called donor-advised funds. Such accounts enable donors to “bunch” several years of smaller gifts into one large amount. A donor can designate charitable recipients later, and meanwhile the assets can be invested and grow tax-free.
Plug-In Cars
Get your Tesla, Chevy Bolt, or similar plug-in vehicles before year-end. The House bill repeals a credit of up to $7,500.

Medical-Expense Deductions
The House bill repeals the deduction for medical expenses, which is highly important for people paying large bills for home health aides and nursing-home care. The Senate bill retains it.
Tax professionals caution against prepaying 2018 medical expenses in 2017. The law allows the IRS to disallow such write-offs entirely, and courts have ruled against the taxpayer on this issue.
There is an exception for some people entering retirement homes. Under current law, part of the entrance fee to such facilities could be deductible for 2017 even if the person doesn’t enter until 2018, says Andy Mattson, a CPA with Moss Adams. This is a complex area, and taxpayers should seek professional help.
Employee Stock Options
Workers who have Incentive Stock Options (ISOs) may benefit if they wait to exercise them until 2018, says Scott Kaplowitch, a CPA with Edelstein & Co. ISOs can trigger the alternative minimum tax, which both bills would repeal.
Alimony
Sign divorce or separation agreements that include alimony before the end of 2017. In the House bill, alimony ceases to be deductible by the payer in 2018.
Carlyn McCaffrey, an attorney with McDermott, Will & Emery, says that for a top-bracket spouse required to provide $250,000 of tax-free income to a bottom-bracket spouse, the tax savings from signing an agreement in 2017 compared with 2018 would be about $43,000.
Write to Laura Saunders at laura.saunders@wsj.com