As the days grow shorter and colder and the holidays are right around the corner, it’s not too early to start thinking about your 2018 tax returns.
Don’t wait and be surprised in March or April, get prepared now and be ahead of the game.
While the $10,000 cap on deductions of state and local income taxes, (SALT), got all the headlines when the tax legislation was passed last year, there are several provisions in the new tax law that may neutralize that cap and lead to lower overall tax liability for many taxpayers.
Some of these provisions are:
1. Higher standard deductions
Most people in the country (70%) don’t itemize deductions on their tax returns but rather take the standard deduction, except in higher income and higher tax states in the Northeast (NY/NJ/MA/CT), the Midwest (IL) and the West (CA). The standard deduction is almost doubling in 2018 to $24K (from $12.7K) for a married couple filing jointly. Similarly for single filers, the standard deduction is increasing from $6,350 to $12,000. It is expected that in 2018, 90% of individual taxpayers will now take the standard deduction.
2. Lower tax rates
The new tax brackets for 2018 are 10%/12%/22%/24%/32%/35% and 37% compared to the prior year tax brackets of 10%/15%/25%/28%/32%/35% and 39.6%. This represents a tax break of about 2% – 3% of taxable income on incomes up to $200K for single filers and $400K for married filers. The 35% tax bracket is level with prior years and then again at single incomes > $500K and married incomes > $600K the tax rate is 37%, not 39.6% as in prior years.
3. Enhanced Child Tax Credit
In prior years, the $1,000 per child tax credit (for dependents under 17 years of age) phased out for married couples beginning at $110K of adjusted gross income and $75K for single filers. That means that a married couple with a child aged 10 would receive no credit at all once their income reached $130K. That’s not a big family income where I live (lower Fairfield County, CT). For 2018, for married filers, that phase out ceiling is raised to $400K and the credit is doubled to $2,000. The phase out for single filers is $200K.A tax credit is not a deduction but rather a dollar for dollar reduction in the amount of tax liability a taxpayer owes.This provision is a big deal for people with children under 17 years of age.
4. Section 199A Deduction
Self-employed people who file either a Schedule C (sole proprietor) on their 1040 or have businesses in entities such as S-Corp’s or LLC/Partnerships will love this deduction. It’s quite complicated but for single filers with taxable income < $157,500, (married filers < $315K), you will qualify for a deduction equal to the lesser of 20% of your taxable income or 20% of your net business income (called qualified business income or QBI). Above those income levels and depending on the type of business you have (service or trade/manufacturing) there are adjustments and phase outs of the deduction you may take.
5. Reduced AMT (Alternative Minimum Tax)
The less said about the AMT the better, but this provision will be a welcome surprise to many clients in my neck of the woods. For 2018 the AMT doesn’t really kick in until single filers reach $500K of taxable income and married filers reach $1MM. In prior years the effect of the AMT could be seen at incomes as low as $121K for single filers and $161K for married filers.The dirty little secret here is that in the past the IRS would add back (to taxable income) all those state income taxes and property taxes (SALT) that tax payers in high tax states were deducting and then tax that additional income at either 26% or 28%.Now that they are no longer deductible (above $10K), there is nothing to add back and tax. Combine that with higher phase in levels and say goodbye to the AMT for most tax payers.
These are just several of the many provisions passed in the Tax Cuts and Jobs Act (TCJA) of 2017 but they will greatly impact many of my clients.
Everyone should begin the process of speaking to their tax professional now to understand how these provisions and others will affect their 2018 tax liabilities.
Also please review your withholding levels or estimated tax payments. The withholding tables were reduced in conjunction with the tax brackets. Having a lower tax rate might not result in a larger refund or lower balance due. It also depends on your level of tax withholding.
Every spring millions of taxpayers file extensions for their tax returns which gives them until October 15th to file their returns.
They do this mainly because they have not yet received all the tax documents they need to complete their returns. K-1’s for investments are usually the culprits here.
Knowing they have until October 15th, many taxpayers forget about their tax returns once school is out and summer and vacation season begins.
After Labor Day, when the kids are back in school, taxpayers get stressed out because they realize that they haven’t filed their tax returns yet and they will be penalized for filing a late return.
This creates another rush (or crush) for their tax professional starting about September 15th and going right up until the final deadline.
Get ahead of the curve and help out your tax professional. If you have all your documents, send them to him or her now to avoid the last minute rush. That’s when most mistakes are made, in October as well as April.
Ever see those late night television commercials where the hysterical announcer yells, “If you owe the IRS more than $10,000, call this 800 number right away”?
And then at the end a satisfied client says, “I owed the IRS $400,000 and settled for $850 thanks to the firm of Cheatem, Billem and Leeve, CPA”.
What they are talking about are “Offers-in-Compromise” or OIC in IRS lingo where a taxpayer may settle their debts with the IRS for less than the total amount owed.
It is important to know that the IRS turns down about two (2) out of every three (3) offers it receives from taxpayers.
This is because most tax professionals (except for the elite few) understand how the OIC formula works. There is no magic here. It is a straight arithmetic calculation used to arrive at a number called Reasonable Collection Potential or “RCP”.
RCP is the sum of two sets of numbers:
• Net Equity in assets plus
• Future income
Net equity of assets is the value of your assets like cash in the bank, investment accounts, retirement accounts, cash value of life insurance, collectibles such as art or jewelry, real estate (less mortgages) and vehicles like cars or boats (less loans).
For the assets with a loan against them, take a value of 80% of FMV (quick sale ratio) less the loan or mortgage. The excess is equity. Add the value of all your “net” assets up and that’s your equity in assets.
Future income is the excess of all cash that comes to you in a month (from all sources) less your allowable living expenses (as determined by the Bureau of Labor Statistics). This is a cash flow calculation not a taxable income calculation. Multiply that excess by twelve (12) to represent a year of free cash. Add that figure to the net equity in assets. That’s what the IRS will settle for.
If your calculation of these two items exceeds the amount you owe the IRS, they won’t settle. If it does, the odds are they will. So get a good night sleep and turn off the TV.
Many taxpayers who live in high tax states in the Northeast region of the United States are concerned that their 2018 tax liabilities will increase because they will only be able to deduct $10,000 of state and local income and property taxes (SALT) should they itemize their deductions.
For those taxpayers who have children 16 years of age and under, this may not be true. The reason for this is an enhanced child tax credit for tax years 2018 through 2025 that was put in place as part of the Tax Cuts and Jobs Act that Congress passed and President Trump signed in December 2017.
Under the law in place prior to 1/1/18, the child tax credit was $1,000 per child 16 years of age and under. The credit began to phase out (for a married couple filing a joint return) at adjusted gross income of $110,000. The phase out was $50 per thousand dollars of income above $110,000. A married couple filing jointly with two children under 16 years of age would receive no child tax credit once their adjusted gross income exceeded $150,000.
Under the new law, the child tax credit is doubled to $2,000 per child under the age of 16 and the phase out doesn’t kick in until a married couple’s income on a joint return reaches $400,000. The phase out kicks in at $200,000 for all other filing statuses with the same $50 reduction per thousand dollars of income over the phase out level.
Our married couple who received no tax credit because their adjusted gross income exceeded $150,000 would now get a $4,000 credit as long as their AGI didn’t exceed $400,000.
They may receive a 70% refundable credit ($1,400 per child) even if they had no federal tax liability in 2018.
They may also receive a $500 non-refundable tax credit for other dependents claimed on their tax return who are no longer considered to be children by the tax laws. For example, their son or daughter who graduated from college, came back home to live with them and hasn’t found a job yet. Under the old law, no tax credit. Under the current law, $500 credit.