As you know, a major tax reform law went into effect this year. The IRS has started issuing guidance on many of the new tax provisions, so we want to pass along the most important information to you.
Please contact our office to set up an appointment to discuss your particular tax planning strategies based on changes in the law. There are many more tax law changes than those listed below, and we can employ myriad planning strategies to save you money in 2018 and beyond. Additionally, California will likely not follow most of these new provisions, creating many planning opportunities to lower your California tax liability.
Lower tax brackets: Almost all taxpayers will pay tax at a lower rate starting in 2018. Only the lowest earners, generally those making less than $20,000, will see no change in their tax rates.
Repeal of personal exemption deduction: The personal exemption deduction is completely repealed in 2018. The personal exemption deduction would have been $4,150 for each taxpayer, spouse, and dependent in 2018. That translates to a lost deduction of $16,600 for a family of four.
Larger standard deduction and credits for dependents: To offset the loss of the personal exemption deduction, the standard deduction is nearly doubled for all taxpayers. Additionally, those with children under the age of 17 can claim up to a $2,000 credit per child and a $500 credit for other dependents. Previously, taxpayers could only claim a credit of $1,000 per child, and the credit was reduced when a married couple’s income reached $110,000 ($75,000 for a single parent). Under the new law, the credit is not reduced until a married couple’s income reaches $400,000 ($200,000 for a single parent).
Lost deductions: The following deductions have been either repealed or severely limited under the new law: moving expenses, state and local income taxes, property taxes, unreimbursed employee business expenses (business miles, home office, union dues, meals and entertainment, etc.), and investment advisor fees, among others. These deductions remain fully deductible if paid for rental properties, businesses, or farmers.
Mortgage interest: Mortgage interest is now limited to only the first $750,000 of mortgage debt, but only for loans used to purchase, construct, or make improvements to your home and one secondary residence. Loans that were in place on or before December 15, 2017, may still use the old rules, even if they are refinanced, but only for the first $1 million of debt. Interest is no longer deductible for any home equity debt unless the proceeds were used for a rental, business, or farm property.
Estates and trusts: The lifetime estate exclusion amount is doubled under the new law and is now $11.2 million per taxpayer and spouse.
Foreign taxes: Two new foreign taxes are imposed under the new law. We should discuss any foreign investments, bank accounts, or other interests you have.
New 20% deduction on small business and rental income: The new tax law creates a massive new deduction of up to 20% of business income from partnerships, S corporations, and rental properties, among others. In other words, if your business generates $100,000 of income, you will be able to claim a new deduction of up to $20,000. There are many limitations and planning opportunities regarding this new deduction that we should discuss.
Low flat tax for C corporations: All C corporations are now subject to a flat tax rate of 21%. Personal service corporations are no longer subject to a special higher rate. This reduced rate means that C corporation owners who pay out all their profit as salary at the end of each year may want to rethink that strategy. For certain businesses, we might reconsider operating as a C corporation, or in some cases converting to an S corporation.
Corporate alternative minimum tax: The AMT is repealed for C corporations. If your C corporation has previously unused AMT credits, you will receive a full refund of those credits over the next few years.
Favorable depreciation rules: Businesses may now claim 100% bonus depreciation for all assets placed in service from September 28, 2017, through 2022. A large added benefit is that bonus depreciation can now be claimed for used property.
Meals and entertainment: Entertainment is no longer deductible at all. That includes ballgame tickets, golf outings, etc. Additionally, business meals have been further limited. The rules are very detailed, and we should discuss how to determine which meals are 100%, 50%, or 0% deductible. You must change your internal bookkeeping strategy to adequately account for these changes.
New credit for paid family and medical leave: A new credit is available in 2018 and 2019 only for businesses that offer paid family and medical leave to their employees. The credit can be as high as 25% of the wages paid to your employees while on leave. As with most provisions, there are many requirements that we must discuss before implementing a paid family and medical leave plan.
Like-kind exchanges are limited: Like-kind exchanges (IRC §1031 exchanges) are now limited to real estate only. For real estate investors who have utilized cost segregation studies on their properties, this change may give rise to significant taxable gain if the real estate is relinquished in another exchange. It is imperative that we discuss, in advance, any moves you intend to make with real estate that has been the subject of a cost segregation study.
Business losses: The new law makes significant changes to net operating loss rules, and certain business losses in excess of specified amounts are limited. Please contact us early if you expect business losses this year or next.