Mo Vidwans
You just finished your filing of tax return for 2018 last month with a sense of immense pride that you managed the tax preparation without any problems even though many tax laws were relatively new. And you are thinking that now you don’t have to look at it again or worry about it till at least early next year. I can almost hear the big sigh of relief like some heavy burden is taken off your shoulders for at least eleven months or so.
Well, enjoy if you wish to, but I have some news for you. Take time off from thinking about taxes for a month or two but the real work, behind the scenes so to speak, is to be done now while there is still time this year and not when the year is over or almost over. It is too late then because once the New Year starts every thing is frozen for this year (with one or two exceptions) and there is nothing you can do about it. Let us review what I am thinking.
While it is fresh in your mind let us take a second look at the tax forms you just filed for 2018. It was touted by the Administration that the new law is going to cut taxes for all the middle class. Did it happen to you? Did you pay fewer taxes than last year for comparative income? Were you able to take all the deductions that you have taken in the past years, especially for those who Itemized? Did the fact that the personal exemption was taken away, without much hoopla, affect you? There are many such questions that can be asked but you know your own personal tax situation much better than anyone else and you can compare and decide. The general reaction I am hearing is that most are paying slightly more taxes for 2018.
So given what we have, and unless Congress passes new laws, we are stuck with it, and we have to do the best we can. Granted, the way the law is written right now, this new law would expire by end of 2025 and the old 2017 law would come back with all the bells and whistles that came with it. But there is always a big slip between the cup and the lip and many things can happen in between now and 2025.
So let us review what we can do with what we are served. I will focus on the individual tax returns first and then we will look at the small business side. The main point here is to start planning for all these moves that are suggested now and don’t wait till December. Even though we tend to ignore it, tax planning is a big part of your financial strategy, so give it the attention it deserves and demands.
Individual Returns:
Adjustments to income
If you are an educator, like a teacher or teacher’s assistant then you can still deduct expenses that you incur out of pocket. There is an upper limit as to how much you can deduct but this is a good feature to have. Almost all teachers spend their own money out of compassion for the profession they are in and also for the students and at least the Government is still recognizing that.
Many Businesses go for HSA as their health insurance model which has a high deductible but it reduces the premium. Your contributions towards the HSA are deductible. HSA is a good way to satisfy your needs for health insurance. The money accumulated in that account is portable and you can use it for medical expenses till way after you are 65. There are many other benefits, too.
I will talk more about self-employed SEP and other qualified plans, self-employed health insurance deduction and business tax later in the Business section.
If you open your own traditional IRA or if you have student loan interests that you are making payments on regularly then that is also deductible.
Itemized deductions
This has been a much-talked about and lamented subject. So many of the deductions that were previously possible are taken away. I am going to focus here on how can we counter that since you already know what is taken away.
Clearly, now it is difficult for many to accumulate enough every year through just medical expenses over 10 percent of AGI, property taxes and state income taxes (with an upper limit of $10,000), mortgage interests to a limit and donations since that is all that is left. But a strategy of taking Itemized deductions every alternate year (as against every year) by accumulating some of these deductibles judiciously could work wonders. Donations can wait for a year and be done in the chosen alternate years. For mortgage payments and property taxes we can arrange so that December and January payments can be adjusted to fall in the same year we are planning to take deductions.
The idea is that if you cannot exceed the enhanced limit of Standard deduction every year then maybe you should look at if we could do it every other year. Otherwise the increased standard deduction is always there.
For those who are drawing an RMD (required minimum distribution) from their retirement account, there is another neat method possible. If you give donations anyway but cannot itemize every year then instruct the retirement account manager to take that same amount from your RMD in the form of QCD (qualified charitable donations). By doing this, you reduce your income, pay less taxes, donate to your charities and still get the enhanced standard deduction.
Credits
Credits are always much better than deductions because they reduce taxes directly, dollar for dollar, and not by reducing taxable income. By far the biggest one that many miss, or are totally oblivious to, is the foreign tax credit.
When you own foreign stock and get dividends on that stock you pay taxes on that dividend to the foreign country where the Corp. is located. This foreign tax paid by you is given full credit for in your taxes, which means it reduces your tax liability dollar for dollar.
The Child Tax Credit is now worth $2,000 per child, two times what it was before. The tax law also expanded the number of families who are eligible. The credit begins to phase out for couples with an Adjusted Gross Income of more than $400,000 (up from $110,000 in 2017)
If you or somebody in the family is taking educational classes then credits are possible there. If you are working full time and have a need to have child or dependent care or if you started retirement savings you can get credit for all of those. Just keep records and your paperwork handy in case it gets questioned by IRS. For residential energy credits you can only take credits for solar and wind power sources.
Business:
American tax laws have always leaned favorably towards the businesses ever since the tax laws came into existence. But with the new laws in place they have made it even more palatable.
Having a small secondary business is a thought that has always resided in the back of our heads. Some people act on it but many don’t.
However, it does not hurt to know what the law allows us to do and how it helps us. I have always advocated to many clients, young and old, to utilize their special skills they may have and run their own business on a small scale. In addition to opening an IT business, accounting or real estate business for yourself, some of the ideas that have worked well in this regard are jewelry making, sewing prom and key dresses, special fruit baskets, making cakes and cake decorations, flower basket arrangements, special food preparation, special soap making, and tutoring.
I am sure you can think of many others.
So how does the new tax law help? For one it has lots of breaks for businesses but there are, still, some pitfalls you want to avoid. Making the right moves before the end of the year can save you and your business plenty of taxes.
You can, of course, claim all expenses towards the business, profits are taxed if you have them, but now there is a special provision in the new law to slash 20 percent deduction for pass-through income. The self-employed and owners of LLCs, S-corporations and other pass-through entities can deduct 20 percent of their qualified business income; it is subject to limitations for individuals with taxable income in excess of $315,000 for couples and $157,500 for all others. If you are close to or just above the income limits, consider accelerating deductions or deferring income so that you come in under the dollar thresholds for this year.
Pay attention to your asset purchases. Very generous write-offs are in place now. Many small tools and small equipment can be fully expensed. For one, 100 percent bonus depreciation is back. Firms can write off the full cost of qualifying assets, both new and used, with lives of 20 years or less that they buy and place in service after September 27, 2017. Expensing is also available. For 2018 Firms could have expensed up to $1 million of new or used business assets. This limit phases out once more than $2.5 million are placed in service during the year. The amount expensed can’t exceed the taxable income of the business.
Buying a new or used business vehicle can generate big tax breaks. The annual depreciation caps for passenger autos have risen sharply also.
Business owners can shift income and expenses between 2019 and 2020. Professionals can postpone their yearend billings to collect less revenue in 2019 or they can speed up if they expect to be in a higher tax bracket next year.
You can deduct 50 percent of the cost of the client meals as long as they are not lavish or extravagant. The taxpayer or an employee needs to be present with the meal furnished to the current or potential customers, clients or similar contacts. Meals and entertainment expenses need to be kept separate if both are provided.
More businesses can use the cash method of accounting. Under the prior law, C corporations with average gross receipts of $5 million or more over three years could not use cash method. Tax reforms raised the threshold to $25 million.
The new law sheds brighter light on deducting business interest expense also. Tax reform caps net business interest write-offs generally at 30 percent of adjusted taxable income, with disallowed interest carried forward.
General
It is clear to me, as it should be to you after reading this article, that much planning is needed both for individual taxes as well as business taxes. More planning means more time which suggests we should start looking at our tax situation now so that if there is a need for major change, then it can be started now and be ready before the year is over. Last minute rush does not work, is not necessary and should not be contemplated.
Best place to start is to create “estimated tax form for 2019″ using last year’s filed forms. For individuals start thinking in terms of which year you are going to have Itemized deductions; is it 2019 or 2020?
Accordingly, plan on shifting the Dec/Jan payments for medical, mortgage interests, property taxes and donations. If you are going for QCD then sooner you inform your IRA manager about who the donees are, what you amount is and start filling the appropriate forms, better off you are.
For business, be cognizant of the thresholds of the different areas of concern so that you can insure that you don’t cross them. If you do all this within the framework established by the new law and IRS, then you are safe and you do not have to worry about getting on the wrong side of the law.
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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].
