NOVEMBER, 2017 FALL/WINTER TAX NEWSLETTER
For clients of: HENRY C KULIK, JR CPA LLC
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.
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%|
|$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|
|$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|
|$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!
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!
May everyone have a blessed warm Holiday season!
Henry C. Kulik, Jr., CPA LLC