While the Tax Cuts and Jobs Act (TCJA) generally reduced individual tax rates for 2018 through 2025, some taxpayers could see their taxes go up due to reductions or eliminations of certain tax breaks — and, in some cases, due to their filing status. But some may see additional tax savings due to their filing status.

Unmarried vs. Married Taxpayers
In an effort to further eliminate the marriage “penalty,” the TCJA made changes to some of the middle tax brackets. As a result, some single and head of household filers could be pushed into higher tax brackets more quickly than pre-TCJA. For example, the beginning of the 32% bracket for singles for 2018 is $157,501, whereas it was $191,651 for 2017 (though the rate was 33%). For heads of households, the beginning of this bracket has decreased even more significantly, to $157,501 for 2018 from $212,501 for 2017.

Married taxpayers, on the other hand, won’t be pushed into some middle brackets until much higher income levels for 2018 through 2025. For example, the beginning of the 32% bracket for joint filers for 2018 is $315,001, whereas it was $233,351 for 2017 (again, the rate was 33% then).

2018 Filing and 2019 Brackets
Because there are so many variables, it will be hard to tell exactly how specific taxpayers will be affected by TCJA changes, including changes to the brackets, until they file their 2018 tax returns. In the meantime, it’s a good idea to begin to look at 2019. As before the TCJA, the tax brackets are adjusted annually for inflation.

Contact your advisor for help assessing what your tax rate likely will be for 2019 — and for help filing your 2018 tax return.

Below is a look at the 2019 brackets under the TCJA:

Single individuals
10%: $0 – $9,700
12%: $9,701 – $39,475
22%: $39,476 – $84,200
24%: $84,201 – $160,725
32%: $160,726 – $204,100
35%: $204,101 – $510,300
37%: Over $510,300

Heads of households
10%: $0 – $13,850
12%: $13,851 – $52,850
22%: $52,851 – $84,200
24%: $84,201 – $160,700
32%: $160,701 – $204,100
35%: $204,101 – $510,300
37%: Over $510,300

Married individuals filing joint returns and surviving spouses
10%: $0 – $19,400
12%: $19,401 – $78,950
22%: $78,951 – $168,400
24%: $168,401 – $321,450
32%: $321,451 – $408,200
35%: $408,201 – $612,350
37%: Over $612,350

Married individuals filing separate returns
10%: $0 – $9,700
12%: $9,701 – $39,475
22%: $39,476 – $84,200
24%: $84,201 – $160,725
32%: $160,726 – $204,100
35%: $204,101 – $306,175
37%: Over $306,175

While most provisions of the Tax Cuts and Jobs Act (TCJA) went into effect in 2018 and either apply through 2025 or are permanent, there are two major changes under the act for 2019.

Here’s a closer look:

1. Medical Expense Deduction Threshold
With rising health care costs, claiming whatever tax breaks related to health care that you can is more important than ever. But there’s a threshold for deducting medical expenses that was already difficult for many taxpayers to meet, and it may be even harder to meet this year.

The TCJA temporarily reduced the threshold from 10% of adjusted gross income (AGI) to 7.5% of AGI. Unfortunately, the reduction applies only to 2017 and 2018. So for 2019, the threshold returns to 10% — unless legislation is signed into law extending the 7.5% threshold. Only qualified, unreimbursed expenses exceeding the threshold can be deducted.

Also, keep in mind that you have to itemize deductions to deduct medical expenses. Itemizing saves tax only if your total itemized deductions exceed your standard deduction. And with the TCJA’s near doubling of the standard deduction for 2018 through 2025, many taxpayers who’ve typically itemized may no longer benefit from itemizing.

2. Tax Treatment of Alimony
Alimony has generally been deductible by the ex-spouse paying it and included in the taxable income of the ex-spouse receiving it. Child support, on the other hand, hasn’t been deductible by the payer or taxable income to the recipient.

Under the TCJA, for divorce agreements executed (or, in some cases, modified) after December 31, 2018, alimony payments won’t be deductible — and will be excluded from the recipient’s taxable income. So, essentially, alimony will be treated the same way as child support.

Because the recipient ex-spouse would typically pay income taxes at a rate lower than that of the paying ex-spouse, the overall tax bite will likely be larger under this new tax treatment. This change is permanent.

TCJA Impact on 2018 and 2019
Most TCJA changes went into effect in 2018, but not all. Contact your advisor if you have questions about the medical expense deduction or the tax treatment of alimony — or any other changes that might affect you in 2019. We can also help you assess the impact of the TCJA when you file your 2018 tax return.

To err is human, but some errors are more consequential — and harder to fix — than others. Most not-for-profits can’t afford to lose precious financial resources, so you need to do whatever possible to minimize accounting and tax mistakes.

Get started by considering the following five questions:

Have we formally documented our accounting processes? All aspects of managing your not-for-profit’s money should be reflected in a detailed, written accounting manual. This should include how to accept and deposit donations and pay bills.

How much do we rely on our accounting software? These days, accounting software is essential to most not-for-profits’ daily functioning. But even with the assistance of technology, mistakes happen. Your staff should always double-check entries and reconcile bank accounts to ensure that transactions entered into accounting software are complete and accurate.

Do we consistently report unrelated business income (UBI)? IRS officials have cited “failing to consider obvious and subtle” UBI tax issues as the biggest tax mistake not-for-profits make. Many organizations commonly fail to report UBI — or they underreport this income. Be sure to follow guidance in IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations. And if you need more help, consult a tax expert with not-for-profit expertise.

Have we correctly classified our workers? This is another area where not-for-profits commonly make errors in judgment and practice. You’re required to withhold and pay various payroll taxes on employee earnings, but don’t have the same obligation for independent contractors. If the IRS can successfully argue that one or more of your independent contractors meet the criteria for being classified as employees, both you and the contractor possibly face financial consequences.

Do we back up data? If you don’t regularly back up accounting and tax information, it may not be safe in the event of a fire, natural disaster, terrorist attack or other emergency. This data should be backed up automatically and frequently using cloud-based or other offsite storage solutions.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Annjeanette Yglesias, one of our tax managers and a member of our not-for-profit team. Annjeanette, welcome back to the playbook.

Annjeanette: Hi, Jen, it’s nice to be here.

Jen: So, we’ve talked a lot about different not-for-profit topics, and what are some options for families that are looking to invest?

Annjeanette: Family philanthropy is a really hot topic, especially here in Houston with all the opportunities and wealth in the city. Typically, when we talk about family philanthropy, two things come up: private foundations and donor advised funds.

Jen: Is there a difference between the two, I’m assuming? And what is that difference?

Annjeanette: A private foundation is a separate legal entity. It’s a 501(c)(3) organization that has its own tax filings and its own set up process, etc. But a donor advised fund is just an account that is set up at a 501(c)(3) organization that a donor can contribute to and then suggest grants be made out of.

Jen: How would a family decide which option is best for them?

Annjeanette: There’s a lot of things to consider when deciding which vehicle is the best. Is a private foundation the best for a certain family to use or is a donor advised fund the best?

There are several considerations, but one of the most important considerations is the administrative tasks that go into maintaining each of these types of vehicles. A private foundation is going to be more responsibility on the donor family, because they’ll have to maintain the accounting records, make sure that tax filings are made and, most importantly, administer the grant programs. With a donor advised fund, on the other hand, all the donor family does is contribute money to the donor advised fund, and the sponsoring organization takes care of the rest. It takes care of maintaining the funds, filing the appropriate forms, things like that. So that’s definitely one consideration.

Another consideration is setup time. A private foundation has to be established as a legal entity first, and then get its 501(c)(3) status from the IRS, and then it can go forth and start doing grant programs. That process can take up to six months—maybe a year—depending on how fast the paperwork gets through the system, but a donor advised fund can be set up within a week. It’s basically minimal paperwork, because the entity itself—the 501(c)(3)—is already created. You’re just setting up a donor advised fund, which is an account within that organization.

Jen: Perfect. It sounds like they need to talk with you if they need some advice on which would be best to meet their goals, right?

Annjeanette: Exactly. It’s important to have a conversation with a tax advisor, because families have different goals, charitable goals and family goals. There’s different succession planning that has to be discussed, and also, most importantly, is what assets are going to be used to fund these vehicles. Those are the types of things that we can help clients with.

Jen: Perfect. We will get you back to talk about a little bit more.

Annjeanette: That sounds good.

Jen: To learn more about how PKF Texas can help your not-for-profit organization, visit PKFTexas.com/NotForProfit. This has been another Thought Leader Production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

Will you be age 50 or older on December 31? Are you still working? Are you already contributing to your 401(k) plan or Savings Incentive Match Plan for Employees (SIMPLE) up to the regular annual limit? Then you may want to make “catch-up” contributions by the end of the year. Increasing your retirement plan contributions can be particularly advantageous if your itemized deductions for 2018 will be smaller than in the past, because of changes under the Tax Cuts and Jobs Act (TCJA).

Catching Up
Catch-up contributions are additional contributions beyond the regular annual limits that can be made to certain retirement accounts. They were designed to help taxpayers who didn’t save much for retirement earlier in their careers to “catch up.” But there’s no rule that limits catch-up contributions to such taxpayers.

So catch-up contributions can be a great option for anyone who is old enough to be eligible, has been maxing out their regular contribution limit and has sufficient earned income to contribute more. The contributions are generally pretax (except in the case of Roth accounts), so they can reduce your taxable income for the year.

More Benefits Now?
This additional reduction to taxable income might be especially beneficial in 2018 if in the past you had significant itemized deductions that now will be reduced or eliminated by the TCJA. For example, the TCJA eliminates miscellaneous itemized deductions subject to the 2% of adjusted gross income floor — such as unreimbursed employee expenses (including home-off expenses) and certain professional and investment fees.

If, say, in 2018 you have $5,000 of expenses that in the past would have qualified as miscellaneous itemized deductions, an additional $5,000 catch-up contribution can make up for the loss of those deductions. Plus, you benefit from adding to your retirement nest egg and potential tax-deferred growth.

Other deductions that are reduced or eliminated include state and local taxes, mortgage and home equity interest expenses, casualty and theft losses, and moving expenses. If these changes affect you, catch-up contributions can help make up for your reduced deductions.

2018 Contribution Limits
Under 2018 401(k) limits, if you’re age 50 or older and you have reached the $18,500 maximum limit for all employees, you can contribute an extra $6,000, for a total of $24,500. If your employer offers a SIMPLE instead, your regular contribution maxes out at $12,500 in 2018. If you’re 50 or older, you’re allowed to contribute an additional $3,000 — or $15,500 in total for the year.

But, check with your employer because, while most 401(k) plans and SIMPLEs offer catch-up contributions, not all do. Also keep in mind that additional rules and limits apply.

Additional Options
Catch-up contributions are also available for IRAs, but the deadline for 2018 contributions is later: April 15, 2019. And whether your traditional IRA contributions will be deductible depends on your income and whether you or your spouse participates in an employer-sponsored retirement plan.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m here with Martin Euson, a director on our tax team. Martin, welcome back to the Playbook.

Martin: Thanks, Jen. I’m glad to be here.

Jen: So, I’ve heard a little bit about the Opportunity Zone Program. What is it?

Martin: The Opportunity Zone Program is a new program that was created as a result of the Tax Cuts and Jobs Act that, as we know, was signed into law last December, and the program is really aimed at encouraging private investment and development into areas that are historically distressed communities or low-income communities across the United States. And in exchange for that, investors are given some pretty significant tax benefits.

Jen: We’re in Houston – are there areas where we can feel the impact locally?

Martin: Oh, absolutely. In Houston, alone, there are more than 100 Opportunity Zone designations. If you look at a map of inside the Beltway, most of Downtown Houston has the Opportunity Zone designation and much of the area to the east of Downtown. So, more than 100 areas inside of Houston, across the state of Texas more than 600 areas were designated Opportunity Zones, and so, it should have a very significant impact at the local level.

Jen: So, Martin, what kind of incentives exist for investment in these Opportunity Zones?

Martin: So, the incentive, Jen, really is a tax incentive. Investors who invest in Opportunity Zones can benefit from three different types of tax incentives:

  • The first one being deferral of gain from a recent sale or exchange transaction when that gain is reinvested into an Opportunity Zone area. And that gain can be deferred as long as December 31 of 2026, and so, that’s a pretty significant deferral just that length of time.
  • The second tax benefit comes from investors being able to eliminate up to 15% of the gain on the investment or the gain that they’re reinvesting into a qualified Opportunity Zone.
  • And the third tax benefit that investors can receive is avoiding tax on the gain associate with the investment in the Opportunity Zone and avoid paying tax all together if the investment’s held for at least 10 years.

Jen: So where can our viewers find out more information about where these Opportunity Zones are?

Martin: The IRS website has put together a very comprehensive FAQ section that addresses a lot of questions associated with the program. There’s also a map of the United States, and it can be scaled down to Texas and down to Houston.

Jen: Okay, perfect.

Martin: That provides a lot of good information, and as always viewers can go to the PKF Texas website for more information or connect with me directly on LinkedIn.

Jen: Sounds good. Now is there any specific industry that this impacts, or it’s pretty much anybody can invest in these Opportunity Zones?

Martin: There are some prohibited investments when you get into recreation and entertainment, things like that, and there are a lot of nuances that go along with it from a tax perspective and from the type of investment perspective. So, the best thing to do would be either to check out the FAQ sections or to consult with your PKF tax advisor.

Jen: Come talk to you. All right, perfect. We’ll get you back to talk a little bit more about it, sound good?

Martin: All right, thanks, Jen.

Jen: This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

A tried-and-true year end tax strategy is to make charitable donations. As long as you itemize and your gift qualifies, you can claim a charitable deduction. But did you know that you can enjoy an additional tax benefit if you donate long-term appreciated stock instead of cash?

2 Benefits From 1 Gift
Appreciated publicly traded stock you’ve held more than one year is long-term capital gains property. If you donate it to a qualified charity, you may be able to enjoy two tax benefits:

  1. If you itemize deductions, you can claim a charitable deduction equal to the stock’s fair market value, and
  2. You can avoid the capital gains tax you’d pay if you sold the stock.

Donating appreciated stock can be especially beneficial to taxpayers facing the 3.8% net investment income tax (NIIT) or the top 20% long-term capital gains rate this year.

Stock vs. Cash
Let’s say you donate $10,000 of stock that you paid $3,000 for, your ordinary-income tax rate is 37% and your long-term capital gains rate is 20%. Let’s also say you itemize deductions.

If you sold the stock, you’d pay $1,400 in tax on the $7,000 gain. If you were also subject to the 3.8% NIIT, you’d pay another $266 in NIIT.

By instead donating the stock to charity, you save $5,366 in federal tax ($1,666 in capital gains tax and NIIT plus $3,700 from the $10,000 income tax deduction). If you donated $10,000 in cash, your federal tax savings would be only $3,700.

Watch Your Step
First, remember that the Tax Cuts and Jobs Act nearly doubled the standard deduction, to $12,000 for singles and married couples filing separately, $18,000 for heads of households, and $24,000 for married couples filing jointly. The charitable deduction will provide a tax benefit only if your total itemized deductions exceed your standard deduction. Because the standard deduction is so much higher, even if you’ve itemized deductions in the past, you might not benefit from doing so for 2018.

Second, beware that donations of long-term capital gains property are subject to tighter deduction limits — 30% of your adjusted gross income for gifts to public charities, 20% for gifts to nonoperating private foundations (compared to 60% and 30%, respectively, for cash donations).

Finally, don’t donate stock that’s worth less than your basis. Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to charity.

Minimizing Tax and Maximizing Deductions
For charitably inclined taxpayers who own appreciated stock and who’ll have enough itemized deductions to benefit from itemizing on their 2018 tax returns, donating the stock to charity can be an excellent year-end tax planning strategy. This is especially true if the stock is highly appreciated and you’d like to sell it but are worried about the tax liability.

Some of your medical expenses may be tax deductible, but only if you itemize deductions and have enough expenses to exceed the applicable floor for deductibility. With proper planning, you may be able to time controllable medical expenses to your tax advantage. The Tax Cuts and Jobs Act (TCJA) could make bunching such expenses into 2018 beneficial for some taxpayers. At the same time, certain taxpayers who’ve benefited from the deduction in previous years might no longer benefit, because of the TCJA’s increase to the standard deduction.

The Changes
Various limits apply to most tax deductions, and one type of limit is a “floor,” which means expenses are deductible only to the extent that they exceed that floor (typically a specific percentage of your income). One example is the medical expense deduction.

Because it can be difficult to exceed the floor, a common strategy is to “bunch” deductible medical expenses into a particular year where possible. The TCJA reduced the floor for the medical expense deduction for 2017 and 2018 from 10% to 7.5%. So, it might be beneficial to bunch deductible medical expenses into 2018.

Medical expenses that aren’t reimbursable by insurance or paid through a tax-advantaged account (such as a Health Savings Account or Flexible Spending Account) may be deductible.

However, if your total itemized deductions won’t exceed your standard deduction, bunching medical expenses into 2018 won’t save tax. The TCJA nearly doubled the standard deduction. For 2018, it’s $12,000 for singles and married couples filing separately, $18,000 for heads of households, and $24,000 for married couples filing jointly.

If your total itemized deductions for 2018 will exceed your standard deduction, bunching nonurgent medical procedures and other controllable expenses into 2018 may allow you to exceed the applicable floor and benefit from the medical expense deduction. Controllable expenses might include prescription drugs, eyeglasses and contact lenses, hearing aids, dental work, and elective surgery.

Planning for Uncertainty
Keep in mind that legislation could be signed into law that extends the 7.5% threshold for 2019 and even beyond.

If you’re charitably inclined and you collect art, appreciated artwork can make one of the best charitable gifts from a tax perspective. In general, donating appreciated property is doubly beneficial because you can both enjoy a valuable tax deduction and avoid the capital gains taxes you’d owe if you sold the property. The extra benefit from donating artwork comes from the fact that the top long-term capital gains rate for art and other “collectibles” is 28%, as opposed to 20% for most other appreciated property.

Requirements
The first thing to keep in mind if you’re considering a donation of artwork is that you must itemize deductions to deduct charitable contributions. Now that the Tax Cuts and Jobs Act has nearly doubled the standard deduction and put tighter limits on many itemized deductions (but not the charitable deduction), many taxpayers who have itemized in the past will no longer benefit from itemizing.

For 2018, the standard deduction is $12,000 for singles, $18,000 for heads of households and $24,000 for married couples filing jointly. Your total itemized deductions must exceed the applicable standard deduction for you to enjoy a tax benefit from donating artwork.

Something else to be aware of is that most artwork donations require a “qualified appraisal” by a “qualified appraiser.” IRS rules contain detailed requirements about the qualifications an appraiser must possess and the contents of an appraisal.

IRS auditors are required to refer all gifts of art valued at $20,000 or more to the IRS Art Advisory Panel. The panel’s findings are the IRS’s official position on the art’s value, so it’s critical to provide a solid appraisal to support your valuation.

Finally, note that, if you own both the work of art and the copyright to the work, you must assign the copyright to the charity to qualify for a charitable deduction.

Maximizing Your Deduction
The charity you choose and how the charity will use the artwork can have a significant impact on your tax deduction. Donations of artwork to a public charity, such as a museum or university with public charity status, can entitle you to deduct the artwork’s full fair market value. If you donate art to a private foundation, however, your deduction will be limited to your cost.

For your donation to a public charity to qualify for a full fair-market-value deduction, the charity’s use of the donated artwork must be related to its tax-exempt purpose. If, for example, you donate a painting to a museum for display or to a university’s art history department for use in its research, you’ll satisfy the related-use rule. But if you donate it to, say, a children’s hospital to auction off at its annual fundraising gala, you won’t satisfy the rule.

Plan Carefully
Donating artwork is a great way to share enjoyment of the work with others. But to reap the maximum tax benefit, too, you must plan your gift carefully and follow all of the applicable rules.

When teachers are setting up their classrooms for the new school year, it’s common for them to pay for a portion of their classroom supplies out of pocket. A special tax break allows these educators to deduct some of their expenses. This educator expense deduction is especially important now due to some changes under the Tax Cuts and Jobs Act (TCJA).

The Old Miscellaneous Itemized Deduction
Before 2018, employee expenses were potentially deductible if they were unreimbursed by the employer and ordinary and necessary to the “business” of being an employee. A teacher’s out-of-pocket classroom expenses could qualify.

But these expenses had to be claimed as a miscellaneous itemized deduction and were subject to a 2% of adjusted gross income (AGI) floor. This meant employees, including teachers, could enjoy a tax benefit only if they itemized deductions (rather than taking the standard deduction) and all their deductions subject to the floor, combined, exceeded 2% of their AGI.

Now, for 2018 through 2025, the TCJA has suspended miscellaneous itemized deductions subject to the 2% of AGI floor. Fortunately, qualifying educators can still deduct some of their unreimbursed out-of-pocket classroom costs under the educator expense deduction.

The Above-the-Line Educator Expense Deduction
Back in 2002, Congress created the above-the-line educator expense deduction because, for many teachers, the 2% of AGI threshold for the miscellaneous itemized deduction was difficult to meet. An above-the-line deduction is one that’s subtracted from your gross income to determine your AGI.

You don’t have to itemize to claim an above-the-line deduction. This is especially significant with the TCJA’s near doubling of the standard deduction, which means fewer taxpayers will benefit from itemizing.

Qualifying elementary and secondary school teachers and other eligible educators (such as counselors and principals) can deduct up to $250 of qualified expenses. If you’re married filing jointly and both you and your spouse are educators, you can deduct up to $500 of unreimbursed expenses — but not more than $250 each.

Qualified expenses include amounts paid or incurred during the tax year for books, supplies, computer equipment (including related software and services), other equipment and supplementary materials that you use in the classroom. For courses in health and physical education, the costs of supplies are qualified expenses only if related to athletics.

Many Rules, Many Changes
The TCJA has made significant changes to many deductions for individuals. Some additional rules apply to the educator expense deduction.