Overview of tax-saving moves for the rest of 2018.
Hi Everyone and Merry Christmas/Happy New Year!
YES there is still time for 2018 tax planning if you have not scheduled a meeting yet. The tax laws have changed in a very big way.
*Please note that we no longer use the Chelmsford office location. We’ll keep everything at our Leominster, MA location.
We would like to welcome two of our new accounting staff! Manager Terry Neff, EA, and Staff Accountant Madhu Saiprsad. A third new person begins next week. We will now be able to increase our bookkeeping and other work for clients that want it done right!
There are so many tax changes for 2018, it would be impossible to go into detail for each here.
Fortunately, the economy is buzzing ahead at record pace! This helps everyone and helps generate tax revenue for the country (without increasing our taxes).
Year-end tax planning for 2018 takes place against the backdrop of legislative changes that fundamentally alter the tax rules for individuals and businesses. For 2018, the Tax Cuts and Jobs Act (TCJA) does away with many familiar, long-standing tax rules and introduces a host of new ones. For individuals, there are new, lower income tax rates, a substantially increased standard deduction that for some makes up for severely limited itemized deductions and eliminated personal exemptions, an increased child tax credit (extra $1,000 per child under age 17), and a watered-down alternative minimum tax (AMT), among many other changes. For businesses, the corporate tax rate is cut to 21 %, the corporate AMT is gone, there are new limits on certain business interest deductions, and significantly liberalized expensing and depreciation rules. And the domestic production activities deduction (DAPD) is repealed, although there is a new deduction for non-corporate taxpayers with qualified business income from pass-throughs.
Despite this atmosphere of change, the time-honored approach of deferring income and accelerating deductions to minimize taxes still works for many taxpayers, along with the tactic of “bunching” expenses into this year or the next to get around deduction restrictions.
While many taxpayers will come out ahead by following the traditional approach (deferring income and accelerating deductions), others, including those with special circumstances, may want to consider accelerating income and deferring deductions. Most traditional techniques for deferring income and accelerating expenses can be reversed to achieve the opposite effect. For instance, a cash method professional who wants to accelerate income can do so by speeding up his business’s billing and collection process instead of deferring income by slowing that process down. Or, a cash-method taxpayer who sells property in 2018 on the installment basis and realizes a large long-term capital gain can accelerate income by electing out of the installment method.
Some of the key considerations to take into account when formulating a year-end tax saving plan include the following:
Capital gains. Long-term capital gains are taxed at a rate of 0%, 15% or 20%. And, the 3 .8% surtax on net investment income may apply
Low-taxed dividend income. Qualified dividend income is taxed at the same favorable tax rates that apply to long-term capital gains. However, the 3.8% surtax on net investment income may apply, converting investment income taxable at regular rates into qualified dividend income can achieve tax savings and result in higher after-tax income.
Expensing deduction. For qualified property placed in service in tax years beginning in 2018, the maximum amount that may be expensed under the Code Sec. 179 dollar limitation is $1,000,000, and the beginning-of-phase-out amount is $2,500,000. (Code Sec. 179(b))
First-year depreciation deduction. Most new as well as used machinery and equipment bought and placed in service in 2018 qualifies for a 100% bonus first-year depreciation deduction.
New qualified business income deduction. For tax years beginning after 2017, taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income.
For 2018, if taxable income exceeds $315,000 for a married couple filing jointly, or $157,500 for all other taxpayers, the deduction is subject to multiple limits based on the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid with respect to the qualified trade or business, and/or the unadjusted basis of qualified property held by the trade or business. (Nothing is simple here!)
The highest tax rates do not start until you exceed about $600,000 (changes each year for inflation) in taxable income, rather than the old $200,000.
More businesses entitled to use the cash method of accounting. A five-fold increase in a key gross receipts test means many more businesses can choose to use the cash (rather than the accrual) method of accounting. Cash method taxpayers may find it easier to defer income and accelerate expenses!
Changes in individual’s tax status may call for acceleration of income. Changes in an individual’s tax status, due, say, to divorce, marriage, or loss of head of household status, must be considered, see Alternative minimum tax (AMT).
For 2018, the vast majority of individuals no longer have to factor in the AMT when conducting general tax planning or year-end tax planning. That’s because the exemption amounts (and the amounts used to determine the phase-out of the AMT exemption amounts) have been increased, and most of the AMT preferences and adjustments for individuals have effectively been eliminated. And the corporate AMT has been repealed.
Time value of money. Any decision to save taxes by accelerating income must take into account the fact that this means paying taxes early and losing the use of money that could have been otherwise invested.
Estimated tax. For how the estimated tax rules can be affected when taxable income is shifted from one tax year to another, Obstacles to deferring taxable income. The Code contains a number of rules that hinder the shifting of income and expenses. These include the passive activity loss rules, requirements that certain larger businesses use the accrual method, and limitations on the deduction of investment interest.
Charitable contributions. The timing of charitable contributions can have an important impact on year-end tax planning. Individual taxpayers who are at least 70-½ years old can contribute to charities directly from their IRAs without having the amount of their contribution included in their gross income. By making this move, some taxpayers reduce their tax liability even more than they would have if they had received the distribution from their IRA and then contributed the amount distributed to charity. As explained, some taxpayers who could take advantage of this tax break for this year, should consider deferring until the end of the year their required minimum distributions (RMDs) for 2018.
Call the office anytime at 978-514-8829 or FAX at 978-514-8820
All email should go to [email protected] to allow it to be received in properly where it is tagged, scanned, and forwarded appropriately.
PLEASE do not send requested information or any source documents to an individual accountant’s mailbox. We can always ask another accountant to work on your case if need be, or collaborate with the first. The new updated and very qualified staff (plus the others that remain like me and more!) will ensure things will go as smoothly as possible for everyone.
The few appointment slots that remain open with me are mid- January and after April 15. (Plus there always a few cancellations- we still use the call list) Also, other qualified, experienced staff will be available for interviews too. It was truly a blessing to find these people who want to work hard for the benefit of the client. Of course. Clients may mail in everything if you desire, or send in via the online portal system. Either one will result in a telephone call to review and ask questions.
Thank You for letting us serve you, our valued clients! May you enjoy this joyous Holiday season safely and I look forward to hearing from everyone and seeing you soon!
Henry C Kulik, Jr.
Certified Public Accountant, LLC