Life after Tax Reduction Act is possible! But, life has changed! What we have been doing to reduce our taxes mostly won’t work anymore. You used to itemize and save many taxes on your return, but now most of those deductions you are used to are gone.
THERE IS A WAY TO SAVE TAXES, HOWEVER! But to do so, you will need to add something to your tax planning strategy – A PROPERLY CRAFTED BUSINESS OR BUSINESS ENTITY. The current administration desire to bring businesses back to the US and so are allowing, sometimes, even better deductions and credits than before. You can reap the benefits from these changes if you are smart.
I would suggest you read the blog so you can see why it important for you to DO SOMETHING now if you don’t want to be shocked by your tax bill next year, however, if you desire, feel free to skip down to the end for your FREE OFFERS to take advantage of them now!)
First, let’s talk about some of the changes you may need to make in your tax strategy to save taxes for 2018 and beyond. Then we will touch on some methods to save some taxes by using a business entity.
Individual Taxpayer Deductions
First, you need to understand that the Standard Deduction (the amount you can make before having to pay taxes) is increased to $24,000 (up from $12,700) for taxpayers filing jointly and $12,000 (up from $6,350) for taxpayers filing single. The increased deduction is effective for 2018 through 2025.
The Standard Deduction
“Under United States tax law, the standard deduction is a dollar amount that non-itemizers may subtract from their income before income tax is applied. Taxpayers may choose either itemized deductions or the standard deduction, but usually choose whichever results in the lesser amount of tax payable.” Thus, it would seem that the Federal Government is monetarily “encouraging” personal tax payers to not itemize deductions.
So what deductions have been eliminated or changed? Well, here a sampling:
State and local income taxes, sales tax, real estate and personal property taxes are all grouped together and deductible up to $10,000 per year in total. Previously there was no limit to the deductions.
For mortgage debt on personal residences originating after December 15, 2017, interest is deductible on principal up to $750,000. Mortgages in place prior to that date retain deductions for interest on up to $1,000,000 of principal. Be aware that Mortgages on up to two personal residences can still be deducted, but only under the total principal limits. Additionally, deduction for any home equity debt interest is suspended.
Medical expenses are deductible as an itemized deduction only for any portion that exceeds 7.5% of adjusted gross income, regardless of the taxpayer’s age.
Cash charitable donations are limited to 60% of adjusted gross income, increased from 50%.
No deduction is allowed for donations to higher education institutions when, in exchange, the payor receives the right to purchase tickets or seating at an athletic event.
Qualified Charitable Distributions, which are distributions from a qualified retirement accounts directly to a charity by taxpayers over 70.5, remains unchanged and available only up to $100,000. I believe that this method of charitable donation will become more and more valuable as more and more of us are forced to itemize our deductions and are unable to deduct cash or property donations.
Miscellaneous itemized deductions are suspended. These include tax preparation fees, unreimbursed employee business expenses, investment expenses, professional and union dues.
Deductions for casualty losses disallowed unless originating from federally declared disaster areas.
Expenses for a work related move are no longer deductible, neither are qualified moving expenses, even if paid by an employer, nor are they excluded from the employee’s gross income.
Overall limitations to itemized deductions are repealed by the Tax Deduction Act.
Payment of alimony pursuant to a divorce decree is not deductible by the payor for divorce or separation agreements executed after December 31, 2018. Income and deductions related to agreements exiting prior to that date will not be affected.
Deduction’s for activities which are considered entertainment or recreation are no longer deductible. Previously 50% of these costs were deductible.
The Child Tax Credit will increase from $1,000 to $2,000 per child under age 17, with up to $1,400 being refundable. However, the credit begins phasing out when income is at $400,000 for joint tax returns, $200,000 for single taxpayers, and is completely phased out when income is $440,000 and $240,000, respectively.
Conversions of one type of IRA to another type, often traditional IRA’s to Roth IRA’s, can no longer be re-characterized back to their original account type beginning with conversions occurring January 1, 2018.
These are few of the personal changes that will govern our personal Taxes for 2018 and for coming years.
SO, if we will not be allowed to take deductions personally, what can we do? The answer is to take legal business deductions. Here are a few suggestions that should be in your business planning to maximize deductions for your business or business entity.
- Corporate Taxes are LOWERED: The top corporate tax rate for C-Corporations has been lowered from 35% to 21% beginning January 1, 2018. There are different rules for a Service Corporate, so having the right entity set up correctly, or amended if you already have an entity, is essential here.
- The Alternative Minimum Tax is REPEALED for corporations.
- Qualified business income that is taxable on individual income tax returns, including General and Limited Partnerships, (FLP’s) LLC’s, Sole-Proprietors and S-Corporation income, will receive a deduction of 20% of business income, subject to certain limitations. (by the way, Qualified business income does not include wages or guaranteed payments paid from the business to the owners.). There are some rules of phase out on this deduction which should be looked at when planning on using one of these type entities.
- Specified service businesses, which are any businesses which involve the sole performance of services, are eligible for the deduction only up to the phase out levels. These include the fields of health, law, consulting, athletics, financial services, or any business where the reputation or skill of the employees and owners is a principal asset, and no product is sold in some cases.
- Taxpayers with average annual gross receipts less than $25 million are exempt from the Business Interest Expense.
- Additional first year depreciation, or bonus depreciation, is expanded to be 100% of the cost of qualified assets placed in service September 27, 2017 through December 31, 2022. Beginning in 2023 the allowable bonus depreciation is reduced by 20% per year, making 80% bonus depreciation apply in 2023 and 0% bonus apply in 2027. Also, all property will now be eligible even if the original use does not commence with the taxpayer, previously only new assets qualified for bonus depreciation.
- Section 179 expensing is increased to $1,000,000 and the phase out is increased to begin at $2,500,000 of total assets placed in service. Expensing of sport utility vehicles is still limited to $25,000. All numbers are now indexed for inflation beginning in 2019.
- Passenger automobiles held by businesses have been subject to only $3,160 in depreciation. The limits are increased to $10,000 the first year, $16,000 in the second year, with changing limits thereafter.
- Section 199 deduction for domestic production activities is repealed.
- (Note) The drafter of your Corporate documents must understand that Corporations with net operating loss deductions are now limited to 80% of taxable income for any losses arising after December 31, 2017, in order to reduce the impact of this rule on current and new business entities.
- Spreading income to family members, even our children is still a viable tax deduction, but now must be governed under specific rules. If done incorrectly, the tax on income from that portion transferred to a child could be taxed at 37% on any income over $12,500. Thus, your planner needs to understand how to limit, if necessary the income on the gift.
- The penalties for not having health insurance, which were a part of the Affordable Care Act, are eliminated beginning in 2019.
- By using some or all of the increased exemption amount to make additional tax-free lifetime gifts of business entities that you can control, but is owned by family children or others, you can shield that wealth — together with any future appreciation in value — from taxation in your estate, even if smaller exemptions have been reinstated when you die.
There is so much that can be done to accomplish tax planning now, not on your personal return but on your Business Return. Unfortunately, the fill in the blank Entities that are available on line or from some “Non-legal” sources, ie an Accountant or CPA or Financial Planner, if they do this type of work, or even many Legal sources that think the same documents they have used for years will still work in this changed environment, will not give you your maximum tax savings opportunities.
What if your documents now allowed the deduction of medical expenses that you can no longer take off of your Personal Tax Return? What are educational expenses could be deductible under your business where they cannot now be deducted from your current business structure or personal returns. What if you got to keep more of what is yours, instead of paying it out to the county, or state, or IRS. Well, you probably can. You just need to work with someone who understands your needs and the possibilities out there.
Because this is an informational Blog, I do not usually suggest who you should work with as you try to protect your assets from Excess Taxes, Greedy Creditors, Unknown Relatives or The State in case of a Catastrophic Illness.
HOWEVER, this time, I have to suggest, under full conscience, that IF YOU ARE SERIOUS ABOUT KEEPING WHAT IS YOURS, INCLUDING REDUCING TAXES, AS WELL AS THE REST, CONTACT OUR OFFICE.
I personally will meet with you and see what we can legally do to help you in your business and asset protection needs, in an affordable, timely and effective manner, without over-complicating your life. Can we do it? This is what we do!
~ Attorney Gregory R. Beyer
Beyer, Pongratz, and Rosen can help you formulate a plan to move forward with professionalism and confidence. Request an appointment or contact us directly at 916-369-9750. We look forward to working with you!