Earlier this year we communicated some aspects of the new tax law enacted in December 2017. In August, the IRS issued regulations clarifying many of the new provisions. As tax season approaches, we are writing again to briefly review some of the main points of the new tax law. Each taxpayer’s situation is unique under the new law, but we can give you some broad details.
The three main items affecting many taxpayers are:
- The Schedule A state and local tax deduction is limited to $10,000
- Employee business expenses, investment expenses and union dues are disallowed
- The standard deduction has increased to $12,000 single, $24,000 married
A big “however” is that the new law is for Federal taxes only. States taxes generally do not conform to these changes. In other words, we will need all of the same information and documents we requested for 2017 taxes because the state income tax will use prior law and federal taxes will use new law for your 2018 tax return.
WAGE EARNERS & RETIREES
If the majority of your income is from wages, pensions or IRA distributions, planning may be limited. Such taxpayers will benefit from generally lower tax rates and expanded tax brackets. However, withholding tables were changed mid-year resulting in many taxpayers getting more take-home pay up front. This means your refund may be less than last year’s or you may owe more than in the past.
If your itemized deductions are close to the standard deduction amount, $12,000/24,000, then you may want to discuss bunching certain deductions in alternating years. For example, if you are single with $10,000 of state tax deductions and $3,000 of charitable deductions, you may want to make next year’s charity before year-end. That way you have the $12,000 (single) standard deduction in one year, and $16,000 of itemized deductions the next year.
There is a new 20% Qualified Business Income (QBI) deduction for certain businesses beginning in 2018. The rules and calculations are quite complex, and again, each situation is different. The deduction pertains to sole proprietors, LLCs, partnerships and S-corporations (not C‑corporations). This deduction will be extremely valuable for those who qualify. Two things to keep in mind for the QBI deduction:
- If taxable income (earned Income plus investment income, rental income, taxable social security, etc. less itemized deductions) is more than $157,500 (single) or $315,000 (married), additional factors come into play and the deduction calculation becomes extremely complex.
- Businesses is in the fields of health, law, accounting, performing arts, consulting, athletics, and financial services/brokerage do not qualify for the QBI deduction once income exceeds the $157,500 or $315,000 threshold.
Your annual tax organizer will be available in our portal on January 7, 2019. Please consider your own situation and contact us with any questions.
We wish you a happy holiday season and a prosperous 2019!
Thank you for your continued business!