Mo Vidwans
I am sure everyone is in the midst of preparing to get going on filing their tax returns, with collecting the paperwork like W2s and 1099s and many other documents needed to finish them. I had written about the new tax laws and what they mean and how they will affect us in my article in December of last year, just so that you would be aware of what is coming your way. You may have become painfully cognizant of the fact that for most of us the new tax laws are not going to reduce the taxes and if anything they will increase them slightly.
Knowing that most of the returns are filed in late March and early April, I will go through here what we can do legally to reduce our taxes. Granted, as you must have realized by now that most of our ways are taken away from us by reducing many items in the itemized deduction area, but there are still some things we can do either for this year or plan accordingly for next year.
Individual
This is the title most of us come under, either individual, married filing jointly or separately or head of the household. If you itemized in the past, you may have to take a second look and determine if you can itemize for 2018 or not because the laws have changed quite a bit in this area. I am sure you have realized by now that many deductions that we took in the past cannot be taken any longer. Examples would be everything on the itemized form which had a 2 percent of AGI threshold is gone and not deductible now.
That includes employee business expenses, brokerage and IRA fees (this was a big item), hobby expenses, tax return preparation fees, safe deposit box fees, theft losses and many more. So now there is no point in keeping receipts or any other paperwork for these items.
So, the real question is: what can we do now? Let’s look at what is left that we can still itemize and then we will strategize how we can use it to our advantage. Medical expenses can be still deducted after the 7.5 percent of AGI limit for this year but the limit will go to 10 percent for 2019. Home mortgage interest deductions are there but are nicked a bit since there is an upper limit of $750,000 for the mortgage.
Deductions for state and local taxes are also squeezed. Donations are all there. It is estimated that because of all this the number of people who can still claim the itemized deductions will cut by 66 percent. So the new strategy is to not itemize every year (because now we cannot) but itemize every other year with the assumption that we can accumulate all or some the deductions for that year. You can do that to a small extent for medical and property taxes but by shifting some expenses from December to January or the other way. The idea is to take the deductions in one year, then take the standard deduction the next year and then take the itemized deduction again the year after. It is difficult, but can be done.
For seniors who are over 70.5 years, there is another very nice avenue open. You have to take your RMD anyway. And if you are so inclined to give donations every year but now cannot deduct then there is a way. Donate the same amount from your RMD (you can instruct your institution to do so by filling a form) which will reduce your RMD by the same amount and the reduced amount will show up as your income and not the full RMD that you would normally take. Your taxable income will be less, which will reduce income taxes, and you can still take your full standard deduction whatever it may be ($12,000 or $24,000). This has a bonus benefit of perhaps pushing you into lower taxes for Social Security and/or for Medicare premiums.
Business
Many of us have run a business on the side when we are still doing a full time job; this is normally done by getting your spouse to run the business either by herself or jointly with you. The new tax laws have really done a great job for small businesses by giving them so many new benefits and breaks. Let’s go through that here.
Pay special attention to your asset purchases; very generous write-offs are in place now and you need to take advantage of them as soon as possible. Bonus depreciation of 100 percent is back and firms can write-off the full cost of qualifying assets, both new and used, with a life of 20 years or less.
These assets need to be bought and placed in service after September 27, 2017. Expensing is also available now. For 2018, firms can expense up to $1M of new or used business assets. Note that amount expensed can’t exceed taxable income of the business.
Buying a new or used business vehicle can generate big tax breaks because the annual depreciation caps for passenger autos have risen sharply.
Business owners can shift income and expenses between 2018 and 2019. Professionals can postpone their year-end billings to collect less revenue in 2018 or they can speed them up if they expect to be in a higher tax bracket next year. Firms can also juggle their income by shifting some expenses from one year to another. It is clear looking at the statement above that at least a two-year business planning is needed to work this out.
Let us not forget about the new 20 percent deduction of pass-through income. The self employed and owners of LLC, S-corporations and other pass-through entities can deduct 20 percent of their qualified business income subject to limitations with taxable income in excess of $315,000 for couples and $157,000 for all others.
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Mo Vidwans is an independent, board-certified financial planner. For details visit www.vidwansfinancial.com, call +1 (984) 888-0355 or write to [email protected].
