Considerations for end of year tax planning.

The Tax Cuts and Jobs act created major changes to the tax code for both individuals and businesses. However the way to minimize the taxes you pay still follows the same general approach, which is to defer income and accelerate deductions, but in some situations the opposite may be best. What it all comes down to is your specific situation and planning goals. Nobody wants to pay more taxes than they have to. Here are some important considerations and things to talk to your tax professional about.

    

What situations should high income earners be wary of?

 

     Some higher income earners may be subject to the 3.8% surtax on certain unearned income. This surtax depends on the taxpayers estimated modified adjusted gross income (MAGI) and net investment income (NII) for the year. Your specific tax situation would dictate whether it would be more beneficial to defer NII, reduce MAGI, or consider ways to minimize both in the current year.

     An additional Medicare Tax may also be something you need to consider. This applies to individuals for whom the sum of their employment and self-employment income is in excess of $250,000 for joint filers or $125,000 for married couples filing separately. Employees who earn over $200,000 from one job will have the additional tax taken out automatically by their employer, but employees who earn over $200,000 from multiple jobs would not have the additional tax taken out and would need to anticipate owing the additional tax or withholding more toward the end of the year to cover the tax.

     Lastly, the current long term capital gains tax rates are 0%, 15% and 20%. If you make around $77,200 as a married filing jointly taxpayer and have long term capital gains from sales of assets held over one year consider consulting your tax professional before selling assets yielding a capital loss to offset your gain as you may not have to pay any tax on the long term capital gain as it is. This would then allow you to defer those losses into a future year that may benefit you more. So if your total income (accounting for long term capital gains and wage income) is less than the $77,200 for taxpayers filing as married filing jointly (MFJ) then you would fall into the 0% tax rate for long term capital gains. Even if you make more than the cut off for the 0% tax rate, there may be opportunity to reduce the taxes you pay by taking offsetting capital losses in the current year.

 

Should I postpone income?:

    

     Sometimes postponing income (if possible) may be more beneficial for you. For example, if you are expecting an end of the year bonus you should look at what tax bracket you are currently in. Will that bonus push you into the next bracket (and thus pay higher taxes?) or will you remain in the same bracket? If it will push you into the next tax bracket you may consider asking your employer if they would pay out the bonus in 2019 which would reduce your 2018 taxable income and defers it to the next year. Not all employers have the flexibility to do this, but some may be willing to, it generally doesn't hurt to ask.

 

What about miscellaneous itemized deductions and Health Savings accounts?

 

     In 2018 for many people the amount of documents they need to keep track of may significantly decrease. This is due to the new increased standard deduction of $24,000 for MFJ, $18,000 for heads of household and $12,000 for singles. Also, many itemized deductions have been cut back or eliminated altogether. Examples include: (i) taxpayers will no longer be able to claim a deduction for state and local taxes paid over $10,000, (ii) the tax preparation fees deduction is eliminated and (iii) unreimbursed employee expenses is eliminated.

     Charitable donations, interest on qualifying residence (Mortgage interest) and medical expenses that exceed 7.5% of your AGI are still available as deductions, but unless you have these in excess of your standard deduction then the standard deduction is the best avenue to go.

     If you have a qualifying high deductible health plan, don't forget you can set up a health savings account and deduct your contributions (up to the $3,450 for an individual plan and $6,900 for family coverage) for 2018 if your plan is in place by December of 2018. You can add an additional $1,000 that can be contributed to an HAS if you are 55 or older.

 

What is a required minimum distribution (RMD)?

    

     RMD's concern taxpayers who are 70.5 years of age and older and have either individual retirement accounts (IRA's) or 401(k)'s. RMD is the minimum amount that you must withdraw from your retirement account each year in order to avoid paying a penalty of 50% of the amount of the RMD not withdrawn. This would be throwing your money away! If you turn 70.5 years of age in 2018 you have the option to delay the first RMD until 2019, but if you do you would have to take the 2018 and 2019 RMDs in the same year which could put you into a higher tax bracket for 2019! If taking the RMD would put you into a higher tax bracket and you don't want to pay the extra tax or you don't need the income, you can donate to charities via qualified charitable distributions from your IRAs that can satisfy the RMD. If you go this route you don't take the amount given to charity from your IRA into income nor do you deduct it. The net result is you satisfy the RMD and yet do not have to pay excess taxes. Should this situation be of concern for you it is worth speaking with your tax professional over.

 

Disclaimer: This post has been prepared for general informational purposes only. While we strive to make sure the information is accurate and useful, it is not intended to provide, and should not be relied on for, tax, legal or accounting advice. For advice on your specific tax situation you should seek a tax professional who can sit down with you and examine all the factors to see what is right for you. Should you like one of our tax professionals to sit down with you and review your situation please Click Here.

10/24/18: 2017 Tax Cuts Act: Corporate Tax Rates

The Tax Cuts and Jobs Act calls for a 21-percent corporate tax rate beginning in 2018. The 2017 maximum corporate tax rate topped out at 35 percent. In addition, the 80-percent and 70-percent dividends-received deductions under current law are reduced to 65 percent and 50 percent, respectively. The Tax Cuts and Jobs Act also repeals the alternative minimum tax on corporations.

 

 

21-Percent Corporate Income Tax Rate

For tax years beginning after December 31, 2017, the graduated corporate rate structure is eliminated and corporate taxable income is taxed at a 21-percent flat rate. The new rate is permanent.

 

In 2017, according to taxfoundation.org the United States has the fourth highest statutory corporate tax rates among developed countries. With a worldwide average of just under 23 % the new Tax Act brings the United States to under the median.

 

What this means is that (hopefully) this will encourage companies to locate investment in the United States. The downside with a flat rate is that companies that have had net income of less than $50,000 (taxed at 15% in 2017) will actually pay a bit more in tax. However, as net income increases the more the savings over the previous tax law.

 

Alternative Minimum Tax (AMT) for Corporations

The alternative minimum tax (AMT) for corporations is repealed beginning after 2017. Any unused minimum tax credit of a corporation may be used to offset regular tax liability for any tax year. In addition, a portion of unused minimum tax credit is refundable in 2018 through 2021. The refundable portion is 50 percent (100 percent in 2021) of any excess minimum tax for the year over any credit allowable against regular tax for that year.

 

Repeal of the AMT allows some corporations to use certain tax benefits to effectively pay significantly below the new 21-percent rate.

 

Reduction of Dividends-Received Deduction

The 70-percent dividends-received deduction has been reduced to 50 percent, and the 80-percent dividends-received deduction is reduced to 65 percent.

 

Under present law, a corporation is generally allowed a deduction for dividends received from other taxable domestic corporations. The amount of the deduction is generally equal to 70 percent of the dividend received. Dividends subject to the 70-percent dividends-received deduction are taxed at a maximum rate of 10.5 percent (30 percent of the 35-percent top corporate tax rate).

 

The Tax Cuts and Jobs Act reduces the dividends-received deduction to reflect the new lower corporate tax rate of 21 percent. Dividends subject to the new 50-percent dividends-received deduction will be taxed at a maximum rate of 10.5 percent (50 percent of the 21-percent new corporate tax rate). Dividends subject to the new 65-percent dividends-received deduction will be taxed at a maximum rate of 7.35 percent (35 percent of the 21-percent new corporate tax rate).

 

If you have any questions regarding these modifications to corporate taxation or to tax reform in general, please call our office. We are here to assist you.

How might the new tax cuts and jobs act affect your business? Here are a few notable changes.

7/31/18

President Trump released his new tax reform bill in December of 2017. There are a few notable changes that affect business return filings for 2017, but the primary effect will be seen on the 2018 tax returns. I wanted to list out a few important considerations that may be discussed in further detail in future blog posts. 

1) Section 179 expensing dollar limitation has been increased to $1 million.

2) Net Operating Losses (NOLs) may no longer be carried backwards. However, currently they may be carried forward indefinately, but may only reduce 80% of taxable income for the tax year the NOLs were carried forward to. There are a few exceptions to NOLs not being carried backwards for farmers and insurance companies. 

3) Paid family and medical leave may be eligible for certain employers to claim a credit for paid family and medical leave equal to 12.5% of wages paid to qualifying employee's during the time they are on family or medical leave provided the rate of payment is 50% of the the wages normally paid to the employee. 

4) The qualified business income deduction currently looks to be one of the best aspects about the new tax law as it allows non-corporate taxpayers to deduct up to 20% of domestic qualified business income from an S- Corp, partnership, or sole-proprietorship. There are some exceptions to this as well as limitations based on wages paid that may affect your business. You should speak with a tax professional to see how this will more accurately affect you with your specific situation.