InnOvation Capital & Management, LLC
IntelDigest
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
DECEMBER 15 , 2018
Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues. Material may not be reproduced, forwarded or shared without express permission.
We are discussing Year-End matters and financial planning … with relation to both investments and taxes … in the December issues of IntelDigest. The landscape has changed markedly since enactment of the Tax Cuts and Jobs Act of 2017 (TCJA), which passed one year ago.
Some major changes … such as slightly lower tax brackets and a new approach to deductions (standard vs. itemized) … will affect all taxpayers.
Tax Brackets
There are now seven tax rates related to Form 1040 filings, from the base rate of 10% to the top rate of 37% (reduced from 39.6%). The “average” rate for middle-income filers came down from 28% to 24%.
Most taxpayers should have a lower tax liability for 2018 and later years because of the decline in rates. However, many taxpayers will have a rude surprise … for them, lower rates will be counteracted by loss of some tax deductions under the new law!
Standard Deduction
The Standard Deduction has nearly doubled … now $12,000 for single filers and $24,000 for joint filers. Add an extra deduction for taxpayers age 65 or older … $1,600 for single filers, or $2,600 on a joint return.
The higher Standard Deduction, plus higher credits related to support of children and other dependents, is meant to offset the loss of Personal Exemptions. The traditional Exemptions for taxpayers and their dependents have been eliminated.
As a result of these changes, many taxpayers who have itemized their deductions in the past will now use the Standard Deduction. But, using the Standard Deduction disallows any separate deduction for significant household expenses, such as state and local taxes, mortgage interest expense, charitable contributions, and all the other line-item deductions which we have taken on Schedule A over many years.
Taxpayers who have been accustomed to Itemizing their deductions have some work to do NOW with respect to the timing of these expenses.
Planning Point: Bunching Itemized Deductions
Taxpayers should look over their 2018 expenses BEFORE the end of the year.
If the total of Itemized Deductions is already greater than the Standard Deduction amount, then one could “pad” those Itemized Deductions for the 2018 return by making more Charitable Contributions or Student Loan Interest payments in December, or making the January mortgage payment before December ends.
One can bunch up the Charitable Contributions by opening a donor-advised fund in December and making a large contribution to the fund before the year ends. The Donor typically can take several months to then decide on the charities which would receive support under the terms of the fund.
On the other hand, if Itemized Deductions are well short of the Standard Deduction for 2018, it would be best to postpone those same moves until next year. Take the Standard Deduction for 2018 and bunch the Itemized Deductions in 2019.
Planning Point: Plan Ahead for Itemizing Deductions
The new tax law requires planning ahead in order to take the best advantage of tax breaks. Try to get the jump on assembling your 2018 tax return records in January. Add up your 2018 expenses and estimate your expected 2019 expenses there and then.
If your expected Itemized Deductions are close to the Standard Deduction, you can maximize the tax benefit by planning to pay expenses in the year that you expect to itemize, wherever possible. You would be planning ahead to take the Standard Deduction and Itemized Deductions in alternate years.
Changes to Allowable Itemized Deductions
Complicating the matter … the new tax law has placed some specific restrictions on itemized deductions. There is now a $10,000 annual cap on allowable itemized deductions for state and local taxes (including property, sales and income taxes).
There are also new limits on Mortgage deductions. Mortgage Interest is no longer deductible on loans above $750,000 … something to consider when buying a new home or taking out a Home Equity Line of Credit.
Business Tax Matters
Tax reform made major changes to business taxation. Many American corporations have had their maximum income tax rate lowered from 35% to 21%. This applies to C Corporations, those companies in which the business income is taxed separately from owners’ income.
Other businesses which are “pass-through” entities … sole proprietorships, limited liability companies (LLC), partnerships, and S corporations (which have fewer than 100 shareholders and are typically taxed as a partnership) … also benefit from the tax law changes. Many of these business owners will find a new space on their 1040s to reflect a new additional deduction of 20% for qualified “pass-through” business income, also referred to as a Section 199A deduction.
Planning Point: Deduction for Qualified Business Income (Section 199A)
We could devote several issues to the complexities of Section 199A. For example, the deduction is reduced if the owner’s income is more than $157,500 ($315,000 if married filing jointly). The law places restrictions on the deduction for professionals in law, accounting, medical fields, performing arts, athletics, et al … any trade or business where the principal asset of the business is the reputation or skill of employees.
Suffice to say: if you are a business owner of such a pass-through entity, we can discuss your eligibility for the deduction under Section 199A.
Planning Point: Equipment Purchases
The new tax law provides greater possibilities for depreciation deductions. Businesses should review equipment needs NOW. It may make sense to make purchases and place the item(s) in service before December 31, 2018. Many businesses can write off 100% of equipment purchases through bonus depreciation or Section 179 expensing.
We will discuss more Year-End plans next week, with particular emphasis on donations and gifts.