How dependents impact your taxes in 2018

The recently enacted Tax Cuts and Jobs Act (TJCA) has brought numerous changes to the computation of income taxes for 2018 and beyond. One of the most significant changes involves the tax treatment of dependents on an individual income tax return.

Understanding how these changes impact your individual income taxes will help you plan for the upcoming tax filing season and hopefully prevent any unwanted surprises.

The personal exemption of $4,150 has been eliminated entirely.

No longer will a taxpayer receive a deduction from their adjusted gross income in computing their taxable income of this amount. Although the TJCA eliminates the dependency exemption itself, the definition of a dependent itself remains for some computations such as the child tax credit.

Although the dependency exemption has been eliminated, the child tax credit has been significantly expanded to help offset the tax impact.

The child tax credit was initiated in 1998 as a relatively small nonrefundable credit of $400 for each qualifying child under the age of 17. In the past 20 years, this child tax credit has gone through a number of changes. Prior to 2018, the child tax credit was $1,000 per qualifying child and was refundable for taxpayers with earned income of at least $3,000.

However, this child tax credit was phased out for taxpayers with an adjusted gross income over $75,000 individually and $110,000 for jointly filed returns.

Under the new TJCA rules, the child tax credit has been modified and expanded significantly. The child tax credit is now worth up to $2,000 per qualifying child. The child must be under 17 at the end of the calendar year to claim the credit. In addition, the refundable portion of the credit is now up to $1,400 and will be adjusted for inflation going forward. The earned income threshold for this refundable portion of the credit has been reduced to $1,500.

One of the most significant changes is that the credit phaseout for the child tax credit has been substantially increased to $200,000 for single filed returns and $400,000 for jointly filed returns. These income phaseout limits also apply to the new family credit for other dependents that are over 17 years of age. Previously once a child was over 17 there was no tax credit available. However, there is a new nonrefundable family credit for $500 for other dependents. Other dependents might include aging parents, or children over the age of 17 that you continue to support.

Two other credits that are available for taxpayers as a result of dependents are the child and dependent care tax credit and several education credits. These two credits remain essentially unchanged from prior years but are important to be aware of nevertheless.

The child and dependent care credit allows a taxpayer to claim up to $3,000 in expenses for a single child and up to $6,000 for two or more in expenses related to child and dependent care. The credit is equal to 20 to 35 percent of these expenses as a credit. There is no phaseout limit on this child and dependent care credit.

There are two education credits available, and they may be claimed for your dependents. The Lifetime Learning Credit covers up to $2,000 per year as long as the modified adjusted gross income is $65,000 or less for single filers and $130,000 or less for married filing jointly. The American Opportunity Tax Credit allows a taxpayer to claim up to $2,500 per eligible student per year for up to four years as long as their modified adjusted gross income is under $90,000 for single filers or $180,000 for married filing jointly. Up to 40 percent of the American Opportunities Tax Credit is refundable. A taxpayer can only claim one of the education credits for each student.

A tax credit is a very significant reduction on a dollar for dollar basis of the amount of income taxes a taxpayer pays. Being aware of these credits and how they impact the taxes and how they have changed will help greatly in planning for the upcoming tax season.

Tax planning around new law can help save money

The new tax law could save you money if you plan properly. With only a few months left to impact your tax planning for 2018, it is important to act now.

The Tax Cuts & Jobs Act (TCJA) is now in effect for 2018. Taxpayers will need to sort through how these changes affect their tax liability. The differences in what you will be able to deduct or itemize have changed substantially. You may want to meet with your tax adviser as early as possible and use the last few months of the year to prepare for these changes.

Here are some money-saving opportunities:

1.Consider funding an IRA account. Most employees who have a 401(k) plan may have forgotten they might also be eligible for an IRA. If your tax status is Married Filing Jointly and only one spouse has a 401(k) plan, the other spouse may be eligible for a $5,500 deduction or $6,500 if over the age of 50. Check the IRS limits for Adjusted Gross Incomes that range from $189,000 to $199,000. Those with two qualified employer plans with incomes under $101,000 can both write off the full contribution. This may be enough to reduce other factors, such as eligibility for child care tax credits.

2.Self-employed individuals may be eligible for an SEP (Simplified Employee Pension). These limits can be substantially higher than an IRA based on business or consulting income. Most plans allow for deductible contributions similar to 401(k) limits — which for 2018 are $18,500 with an age 50-and-older catch-up provision of another $6,000. Higher income earners may also be eligible for a solo 401k or profit-sharing contribution up to 25 percent of your business profit up to $55,000 plus catch-up, depending on your business structure.

3.Consider maximizing your Health Savings Accounts for the year if they have not already been funded. You may be eligible if you had a high-deductible health insurance plan starting no later than Dec. 1. An individual can contribute a tax-deductible amount of $3,450 with a $1,000 catch-up provision for anyone over age 55 by December 31st. Households with one spouse on family coverage can contribute $6,850 plus the catch-up for those over age 55.

4.The penalty for not having health insurance does not expire until 2019. Therefore, those who forgo health insurance for 2018 could still face a penalty. You can apply during open enrollment next month to avoid this penalty.

5.Consider funding college savings plans, which are eligible for the state income tax deduction for children or grandchildren.

6.If you pay quarterly estimated tax payments, be aware of the new SALT (state and local tax) deduction limit. It used to be that if you paid your fourth-quarter state taxes before year-end, then you would be able to deduct it on your Schedule A the following April. This is now limited to just $10,000 for the entire SALT category, including state income taxes and property taxes.

7.To help reduce unwanted taxable investment income, consider meeting with your financial adviser for tax loss harvesting and to structure your investments to be tax-efficient. The long-term capital gain and the qualified dividend tax was indexed up slightly but in essence remained the same as 2017. Therefore, if you would have been in a 15 percent tax bracket in 2018 (even though there is not a 15 percent bracket this year) then your long-term capital gains and qualified dividend tax is capped at zero, or 15 percent for higher brackets.

8.It is important to monitor your tax withholding on your paychecks this year. New withholding tables for employers appear to be shy of the actual tax liability. If you noticed a larger take-home pay starting in February, check with your tax accountant to confirm if you need to increase your withholding for the remainder of the year.

9.One last major change: The Child Care Credit actually improved for people in higher tax brackets. Parents can now take a credit up to $2,000 if their joint income is under $400,000 or a single parent with income under $200,000.

10.These tax law changes are important to review as the goal is to keep more of your hard-earned dollars working for you. Take advantage of every deduction you are eligible for and make estimated tax payments on time. Then you won’t have to pay any more than necessary.

New tax law, new money tricks

Four months into living under the new tax law, it’s time for you to learn some new tricks that just might save you some money.

Before 2018, making a charitable donation likely lowered your income and lowered your taxes. In a very real way, Uncle Sam was your partner in giving. He’s not quite the partner he used to be!

Since January 1 and the dawn of our new tax law, you may not be enjoying any tax benefits from your charitable donations. That is, unless you change your method of giving.

When you donate to charity, you basically list out your donations and add them up. Using tax lingo, you itemize them. Other itemized deductions include things such as your mortgage interest, your property taxes, your state income taxes and your out-of-pocket medical expenses. The old tax law and the new one preserved these itemized deductions.

But the new law made three notable changes to your deductions.

First, it now limits the combined deductibility of your property taxes and state income taxes to $10,000.

Second, it completely wiped out the deductibility of your miscellaneous expenses. This means your investment management fees and the cost of your tax preparation aren’t deductible anymore. (Tip: talk to your adviser.)

These two changes may have lowered your total itemized deductions.

The third change is the near doubling of the “standard deduction” that every taxpayer gets automatically. For example, for an older, married couple, the new standard deduction is nearly $27,000. Last year, it was around $15,000.

Given the larger standard deduction, compared with your possibly lower itemized deductions, you may not even itemize your deductions at all. Therefore, it’s possible that your donations won’t increase your deductions and you’ll receive no tax break for having made them.

Thankfully, as always, there are some tricks to get around the new tax law that can help you preserve the tax deductibility of your charitable giving.

For those older than age 70.5, you can donate to charity directly from your IRA. These are known as “qualified charitable distributions” and they work to satisfy, in part or in whole, your annual required minimum distribution (RMD) from your IRA. The best part is, the money you give directly to charity out of your IRA doesn’t count as income on your tax return. Just like that, your charitable gift will lower your tax bill!

For those under age 70.5, that strategy isn’t yet in your bag of tricks. Instead, you might consider “bunching up” years worth of your charitable donations into a single year. The objective is to deliberately boost your itemized deductions above your new standard deduction, at least for that year, and reap some tax benefits for your giving.

A new game in town: How businesses can maximize the 20% pass-through deduction

The recently enacted Tax Cuts and Jobs Act (TCJA) is one of the largest pieces of federal tax legislation since 1986. Many of the provisions in the act are not permanent and are scheduled to expire after Dec. 31, 2025.

One of the more controversial income tax topics and the one with the most potential impact, could be the new Internal Revenue Code Section 199A deduction, also referred to as the 20 percent pass-through deduction.

In an effort to keep the tax rates of pass-through businesses somewhat in line with corporate tax rates (which were reduced to 21 percent under the TCJA), individuals, trusts, and estates who are eligible owners of pass-through businesses can deduct 20 percent of qualified business income (QBI). Taxpayers who are eligible for the deduction are owners of sole proprietorships (Schedule C), sole owners or tenants in common owners of rental real estate (Schedule E), partnership or LLC owners (Form 1065), and S-Corporation owners (Form 1120S).

Qualified business income

The term “qualified business income” means, for any taxable year, the net amount of income, gains, deductions, and loss with respect to any qualified trade or business of a taxpayer. The term “trade or business” is not defined by statute or regulations, but is rather determined by a “facts and circumstances” test.

In general, to qualify as a trade or business, an entity must show profit motive, continuous and regular activity that has begun, and the sale of goods or services.

To prevent abuse of the deduction, the new QBI rules include certain limitations. A limitation on the amount of the pass-through deduction is imposed on income derived from certain specified service businesses (including lawyers, doctors, accountants, consultants, and financial advisors but excluding engineering and architecture firms).

The pass-through deduction for owners of these personal service businesses begins to be phased out when the owner’s taxable income (from all sources and not from just the personal service business) exceeds $315,000 for married taxpayers filing jointly ($157,500 for a single person) and is completely eliminated when taxable income reaches $415,000 married filing jointly ($207,500 for a single person). The deduction cannot exceed the taxpayer’s taxable income and is available even to taxpayers who take a standard deduction.

For non-specified service businesses, the QBI deduction may also be limited if the business does not employ a substantial number of employees or invest in a substantial amount of property (this limitation is referred to as the “wages and property” limitation).

Taxpayers who are able to take advantage of the full 20 percent QBI deduction will effectively be taxed on only 80 percent of each dollar. This savings could reduce their top marginal tax rate on income from pass-through entities from a 2018 top tax rate of 37 percent to a reduced rate of 29.6 percent (37 percent x 80 percent).

Plan ahead

Given the substantial tax benefit available for those who are eligible taxpayers, there may be significant planning opportunities to explore to take advantage of the deduction.

Appropriate strategies could include:

• Reducing income through pension contributions or expensing capital purchases to reduce the amount of income exceeding the threshold amounts and increase the deduction.
• Increasing business income by paying off debt or increasing W-2 wages in non-specified service businesses.
• Adding qualified property or spinning out practice buildings or equipment into separate entities.

With the QBI deduction set to expire on Dec. 31, 2025, now is the time to explore possible opportunities to maximize the 20 percent pass-through deduction and generate income tax savings over the next eight years.

New tax law creates confusion about entertainment deductions

FROM www.financial-planning.com

The tax rules related to meals and entertainment have changed, and left some uncertainty in the gap between the old law and the new.

Before the new tax law took effect, the deduction allowed for entertainment expenses was limited to 50% of the amount otherwise deductible. Under the new law, the deduction for entertainment is completely repealed. Prior to the act, a 50% deduction was allowed for expenses related to business meals that were not lavish or extravagant. The confusion results from the issue of whether such business meals fall under the entertainment umbrella, or are still deductible.

“It now raises the question of what is an entertainment expense,” says Nathan Smith, director at the accounting firm CBIZ MHM. “Taxpayers have to be certain as to what falls under that category. It made no difference before, since there was a 50% deduction either way. Now, if it’s entertainment, it’s totally nondeductible.”

Until the IRS comes out with guidance in the area, the confusion will remain, according to Smith: “Some would argue that taking a client out for a meal clearly falls under entertainment. You could make a strong case for that by looking at the legislative notes for prior legislation, which suggest that meals are entertainment. On the other hand, the committee reports for the current law passed last December indicate they did not intend to change prior-law treatment for business meals. But the actual law that’s on the books doesn’t say this.”

“The consensus is that business meals are not caught under the entertainment umbrella and remain 50% deductible, which is what the committee report indicated, but it’s not the law,” he continues. “Nothing in the code says that meals are only entertainment and can be nothing else. The 50% deduction for business meals will likely remain, but we just don’t know for sure.”

“It will be some time before we see guidance on this,” says Meredith Kowal, senior manager of R&D tax credit services at the accounting firm Aprio.

“It comes down to intent — are you really entertaining customers or are you having a business discussion to solve an issue,” she explains. “Documentation is increasingly important this year, as it will provide more opportunity to deduct items now considered ‘gray area’ due to the vague rules.”

“The IRS will provide more guidance in the coming months,” she says. “What it will come down to is whether there is a business purpose, and what is the business purpose? What people don’t realize is that extravagant entertainment — such as a luxury suite at a ballgame — has always been disallowed. The luxury suite portion was disallowed in the past but the regular ticket price was deductible.”

And contrary to common misconceptions, internal expenses such as holiday parties, and team-building outings that boost employee morale are still fully deductible, Kowal indicates. “And sponsorships are often included in the same contract as a suite or box,” she says. “While the suite or box is no longer deductible, the sponsorship is still deductible.”

“My interpretation now, without more clarification, is that a meal is a meal, and entertainment is entertainment,” says Emily Matthews, principal at Boston-based Edelstein & Co. “So if you’re going to a game, the tickets are not deductible, but if you go to dinner beforehand and talk about business, that’s trickier. Arguably the meal would be 50 percent deductible, but there is some clarity to be had there.”

“Clearly the idea is to cut back on entertainment side, but to allow for the business meal to take place,” says Roger Harris, president of Padgett Business Services. “Make sure that while you’re eating you’re discussing business matters. If the conversation is boring and you feel like falling asleep, it’s probably deductible.”

New Tax Law Increasing Need for Specialized Tax Professionals

When President Donald Trump signed the new Tax Cuts and Jobs Act into law last December, it included the most sweeping changes to tax structures for corporations in decades, leading companies to assess the impact on their financial statement disclosures and creating additional financial reporting and audit risk considerations to both companies and their external auditors.

With studies showing tax account complexity and judgement errors as common reasons for tax-related misstatements, the Big 4 accounting firms have been focused on addressing the latest tax accounting developments and ASC 740, a set of financial accounting and reporting standards, for the effects of income taxes that result from a company's activities during the current and preceding years.

Companies, when facing increased strain in their internal tax department, may consult with specialized tax professionals to achieve better control over tax accounting issues. Companies typically use either one or a combination of (1) their external auditor, (2) other consultants including tax and law firms, or (3) their internal tax departments for tax compliance and planning services.

In addition to the reduction in the corporate tax rate from 35 to 21 percent, tax professionals face a new tax regime for foreign earnings and a mandatory earnings repatriation tax, new limits on interest and net operating loss deductions, the elimination or expansion of deductions, the retirement of tax credits and the creation of even more.

5 Moves to Reduce Your 2018 Taxes

FROM consumerreports.org

If you submitted your taxes on time, you’re probably keenly aware of your financial situation and ready to move on. But it may be a good idea to think about taxes a little longer and start figuring out how to reduce them next year.

The Tax Cuts and Job Act that went into effect on Jan. 1 will help many people pocket more of their income thanks to its higher standard deductions and more generous tax brackets. But because it eliminates many itemized deductions, it makes things more complicated for others.

Here are five ways to reduce your 2018 taxes and pave the way for lower taxes in the future. 

Review Your Withholdings

Your paycheck should now reflect the new tax law, but that could change the number of withholding allowances you should take. To figure out how many you'll need, you should consider not just your income but also your spouse's income and any credits and deductions that you take.

If your household income comes mostly from your paycheck, the IRS’s new withholding calculator can help you estimate how much you should be withholding.

But if you also have income from other sources, such as rental income, investments, or a side business, the calculator won’t work. In this case, you may want to consult a tax expert.

Increase Your Retirement Fund Contributions

Because your tax bite could be lower in 2018, consider putting after-tax funds into a Roth 401(k) or IRA because there's less benefit now to making pretax contributions to a tax-deferred account.

But if the loss or reduction of itemized deductions, such as state income and property tax, will cost you more in taxes, consider making bigger pretax contributions to a traditional 401(k) or IRA to reduce your taxable income now.

Appeal Your Property Taxes

Asking for a reduction in your property tax could be worthwhile in parts of the country where taxes exceed the new law’s deduction limit of $10,000 on state and local taxes

The deadline to file an appeal varies by state and even jurisdiction. New Jersey’s April 1 deadline for 2018 has passed, California’s is July 1, and New York’s varies depending on the municipality. How homes are assessed for taxes also varies by location.  

To appeal your property tax, you'll have to prove that your home’s tax assessment is based on a valuation that is too high. You could pay a professional to do that for you or try to appeal yourself. One method is to identify comparable properties to yours that have sold recently; you can find those on real-estate websites. If the market values are significantly lower than the value used to come up with your tax assessment, you may have a case.

“The best time to appeal your property taxes is when you just bought your home or are about to sell it, because you know what it’s worth.

The potential savings can be significant. In New Jersey, where the average home sells for $400,000 or more and property taxes often exceed $10,000, the typical tax rate is about 2 to 3 percent of market value. “If you were to prove that your assessment was $50,000 too high, you’d save about $1,000 on your tax bill.”  

Plan Your Charitable Spending

Because of the near doubling of the standard deduction, the new tax law has significantly reduced the number of households that need to itemize their taxes.

But if you plan your charitable contributions, you might be able to get enough deductions that it pays to itemize. For example, instead of donating, say, $5,000 every year, try donating $10,000 in one year and nothing in the second year.

If that $10,000 contribution, when added to your other deductions, puts you over the standard deduction limit, you'll benefit. The next year you don't donate anything, so you'll probably take the standard deduction. 

While this won't help you increase your tax savings every year, this "bunching" strategy allows you to save more over time than you would just using the standard deduction every year. And it doesn’t require you to spend more just to reduce your taxable income. 

If the charities you donate to depend on your largesse every year, consider setting up a donor-advised fund with an investment company, a fairly simple process with minimal fees.

Your contribution to the fund counts as a charitable donation in the year you make it, but you get to choose when the money is distributed. That allows you to give money every year, even though you’re donating every other year.  

Qualify Your Business for a 20% Tax Break

Owners of so-called “pass-through entities”—those who claim their business income on their individual income tax forms—may now be able to exempt 20 percent of that income from federal taxes.

If you make a significant income from your pass-through business, you’ll run into eligibility rules. Professionals like lawyers, accountants, and consultants don’t qualify once their incomes exceed $207,500 for an individual or $405,000 for a married couple filing jointly.

But single filers with total taxable income of less than $157,000 in 2018—and joint filers with taxable income under $315,000—can take advantage of the pass-through tax break regardless of their line of work. That goes for folks with side jobs and home-based businesses as well.

“For many individuals in the gig economy that have an established trade or business, this is very good news,” 

The key to maintaining that break as your business grows is to keep your taxable income below those thresholds, 

For instance, if you already can project your income exceeding the threshold for 2018, increase your pretax retirement contributions to a SEP individual retirement arrangement, an IRA for the self-employed. You could also replace bonds in your portfolio that generate taxable interest with tax-exempt bonds. Be aware, too, of the potential downside of selling appreciated assets that generate capital gains. “While long-term capital gains have a reduced tax rate, the ultimate impact may be higher due to a reduction in your pass-through deduction,” .

The new tax law also changed the rules on depreciating and expensing equipment. Now, if you want to reduce taxable income, you might just go buy some equipment and expense it. “I think you will see a lot more capital investment for flexible taxpayers,”.