Dear Clients and Friends,
We are in the final months of 2018 and the year is quickly coming to an end, but the epic changes due to the Tax Cuts & Jobs Act (TCJA) reform have only just begun.
Hundreds of pages with tax code edits and additions are making these new changes extremely complicated this time around, even for the seasoned tax professionals. With that said, it does create room for great tax planning opportunities, but you have to act fast while there’s still time to revise your plan.
Take a few minutes to read about the dramatic standard deduction increase and the personal exemption elimination, as well as other changes that may alter your tax bill this year. Then, find out how you can prepare — especially if the tax deductions, credits and other strategies you’ve benefited from in the past are no longer options for you.
To help us learn more about major changes that will most likely impact your tax situation, please contact us to schedule an appointment for your 2018 Tax Projection where you can discuss any last-minute tax moves.
Money-Saving Tax Ideas
- Aggregate your deductions together
The recent standard deduction increase, lumping your deductions together on your income tax return may be particularly helpful for 2018 if you are eligible to itemize.
Aggregating your deductions means, pooling multiple years of itemized deductions into one year, offering the greatest tax benefits. You can then claim the standard deduction in alternate years. Pooling deductions are most effective when combined with other tax planning, such as reducing your adjusted gross income (AGI).
For example, charitable contributions can often be combined and deducted in one year. In general, as long as you have written acknowledgment from a qualified charity, you can deduct donations in the year you donated (written the check or put the charge on your credit card).
Keep in mind that donating appreciated assets before Dec. 31 may be more tax advantageous than cash contributions. When you contribute property you have owned for more than a year, you can usually deduct the full fair market value.
Other itemized deductions you can control to maximize your tax savings include medical expenses, real estate interest payments, and state income taxes.
- Monitor your AGI
Another tax-planning strategy is to reduce your AGI by maximizing the above-the-line deductions. These are deductions you can claim even if you don’t itemize.
Review above-the-line tax ideas to lower your taxable income. They include retirement plan contributions and withdrawals, student loan interest deductions, teacher classroom expenses, and health savings account contributions.
- Consider shifting income
It’s important to understand; individuals are cash basis taxpayers and any income they can shift into next year or deductible payments they can make this calendar year, can help reduce their taxable income. So remember, delaying receipt of bonuses, or pre-paying qualified deductions before the year-end are just a few examples of lowering your taxable income.
You can also reduce tax by shifting income among family members. You could consider making gifts of income-producing property to family members in lower tax brackets. Up to $2,100 of unearned income is usually taxed at a rate lower than yours. Though you can’t take a tax deduction for gifts, up to $15,000 can be given to a person each year ($30,000 when you’re married) and avoid any gift tax complications.
To discuss the tax-cutting options best for your circumstances, call to schedule a year-end tax review.
Reduce Your Business Taxes
Bonus depreciation increased from 50 percent to 100 percent for qualified property purchased and placed in service after Sept. 27, 2017. Section 179 expensing deduction increases to $1,000,000 from $500,000 this year.
Consider examining the tax benefits of leasing business equipment versus buying them. Depending on the type of lease, you may be able to deduct the payments in full as you make them. The downside of leasing is that generally, you’ll forfeit depreciation deductions. Run an analysis to determine which option works best for you.
- Set Up a Retirement Plan
Contributions to a self-employed retirement plan reduce above-the-line AGI. Depending on the plan you choose, you can set up the paperwork before year-end and make contributions by the due date of your 2018 tax return.
Say you’re the sole owner of your business. Establishing a 401(k) plan gives you the opportunity to put away as much as $18,500 in salary deferral (plus an extra $6,000 if you’re older than 50). Also, you can put up to 20 percent (not to exceed $55,000) of your business profit into your plan.
- Consider Hiring Family Members
Hiring family members to help you in your business is a great way of reducing your overall taxes.
For more information on this topic, visit our earlier Blog: https://alliedtaxgroup.com/general/be-tax-smart-and-hire-your-children/
Major Changes for 2018
- Larger Standard Deduction
The standard deduction increased from $6,350 to $12,000 for single individuals and $12,700 to $24,000 for married filing joint. Some clients will find themselves moving from itemizing to the standard deduction, and many will not. If you own a home, have high medical bills, or donate to charities, you will most likely continue to itemize.
- State and Local Income Tax (SALT)
State income tax deductions are now capped at $10,000; this includes property taxes, state income taxes, and sales taxes. And home equity loan interest can now only be deducted if the funds are used to buy, build or significantly improve your home. Plus, all miscellaneous itemized deductions have been eliminated, including employee business expenses, union dues, and investment-related expenses.
- Personal Exemptions & Child Tax Credit
The TCJA reform did away with personal exemption deduction of $4,050 for you, your spouse, and each of your dependents. The Child Tax Credit, however, has been doubled to $2,000 per child. The new income phase-out limits are significantly higher: $200,000 for single taxpayers and $400,000 for Married Filing Joint. As a result, most people with children under age 17 are entitled to the Child Tax Credit.
- Big Changes for Small Businesses
The new C Corporation tax rate is now 21 percent (down from 35 percent). There is a new tax benefit for sole proprietors, partnerships, and S corporations. Section 199A will provide a 20-percent qualified business income deduction.
Also, bonus depreciation and Section 179 expensing have been expanded. Unfortunately, the domestic production activities deduction (DPAD) is no longer available this year.
We are prepared to assist you in developing projections to help determine which strategies are right for you. For more information, please contact Shawn Daei at Allied Tax Advisory Group and Schedule an appointment. We are conveniently located in Encino and the Westside.
Call Us @ (818) 338-9090