While the Tax Cuts and Jobs Act (TCJA) reduces most income tax rates and expands some tax breaks, it limits or eliminates several itemized deductions that have been valuable to many individual taxpayers.
Here are five deductions you may see shrink or disappear when you file your 2018 income tax return: Continue Reading Your Deductions May be Smaller When You File Your 2018 Tax Return
When you file your 2018 income tax return, you’ll likely find that some big tax law changes affect you — besides the much-discussed tax rate cuts and reduced itemized deductions. For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) makes significant changes to personal exemptions, standard deductions and the child credit.
The degree to which these changes will affect you depends on whether you have dependents and, if so, how many. It also depends on whether you typically itemize deductions.
Continue Reading These 3 TCJA Changes Affect Your 2018 Individual Tax Returns and More
The IRS opened the 2018 income tax return filing season on January 28. Even if you typically don’t file until much closer to the April 15 deadline, this year you should consider filing as soon as you can. Why? You can potentially protect yourself from tax identity theft — and reap other benefits, too.
What is tax identity theft?
In a tax identity theft scheme, a thief uses your personal information to file a fraudulent tax return early in the filing season and claim a bogus refund.
You discover the fraud when you file your return and are informed by the IRS that the return has been rejected because one with your Social Security number has already been filed for the same tax year. While you should ultimately be able to prove that your return is the legitimate one, tax identity theft can cause major headaches to straighten out and significantly delay your refund.
Filing early may be your best defense: If you file first, it will be the tax return filed by a would-be thief that will be rejected — not yours.
Continue Reading File Your 2018 Income Tax Return Sooner Rather Than Later…
Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Frank Landreneau, one of our International Tax Directors. Frank, welcome back to The Playbook.
Frank: Thank you. It’s good to be back with you.
Jen: In a previous segment we went over transfer pricing, and we touched on it just a little bit, but I know we want to do a deeper dive. So, with tax reform and transfer pricing, what else do folks need to know?
Continue Reading A Closer Look at Transfer Pricing and the International Space
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.
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: Thanks, Jen. It’s good to be here.
Jen: So, tax manager, tax reform is a hot topic this year. How has it impacted not-for-profit organizations?
Annjeanette: It’s interesting, because tax reform has been a hot topic, and the tax reform has some direct impacts for nonprofit organizations, as well as some indirect impacts, because a lot of nonprofit organizations receive their funding from the general public.
Jen: So, what are some of the direct impacts not-for-profits have seen?
Annjeanette: Well, tax reform affected nonprofit organizations in several ways. First of all, with unrelated business income, or UBI. UBI activities were previously allowed to offset each other. The losses from one could offset the income from another, and so you had a netting effect.
But now with tax reform, the IRS is requiring that all UBI activities must be reported individually. So that benefit – there is no longer available. Also, under tax reform, the UBI tax rate has been lowered to 21%. Previously it was a graduated scale with the highest tax bracket being 35%.
Jen: Oh my gosh. So that’s a good thing?
Annjeanette: Absolutely a good thing. But there are also some more negative things that came out of tax reform as well. For example, the IRS is now imposing a 21% excise tax on compensation of covered employees over $1 million.
Jen: Oh my gosh.
Annjeanette: So basically, that portion of an employee’s compensation that exceeds $1 million, the nonprofit organization will have to pay a 21% excise tax on that.
Jen: Oh my gosh.
Annjeanette: In addition, there’s a 1.4% net investment income tax now imposed on certain educational institutions, like private colleges and universities. So, that’s something else to think about.
Jen: Now, are there any indirect aspects? You mentioned that earlier.
Annjeanette: Yes, absolutely. Because of the nature of nonprofit organizations, how they receive a lot of their funds from the general public, there are several provisions in tax reform that affected the general public – namely individuals. So, individuals now have a little bit of a decreased incentive to donate to nonprofit organizations, because even though the individual income-based limitation increased to 60%, the standard deduction has now doubled. So, the incentive for an individual to make a donation to a nonprofit organization has been substantially reduced.
Jen: Well, great. Well, we’ll get you to talk some more about tax reform and not-for-profits, and we’ll have you back again.
Annjeanette: 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.
Prepaying property taxes related to the current year but due the following year has long been one of the most popular and effective year-end tax-planning strategies. But does it still make sense in 2018?
The answer, for some people, is yes — accelerating this expense will increase their itemized deductions, reducing their tax bills. But for many, particularly those in high-tax states, changes made by the Tax Cuts and Jobs Act (TCJA) eliminate the benefits.
What’s Changed?
The TCJA made two changes that affect the viability of this strategy. First, it nearly doubled the standard deduction to $24,000 for married couples filing jointly, $18,000 for heads of household, and $12,000 for singles and married couples filing separately, so fewer taxpayers will itemize. Second, it placed a $10,000 cap on state and local tax (SALT) deductions, including property taxes plus income or sales taxes.
For property tax prepayment to make sense, two things must happen:
If you don’t itemize, or you’ve already used up your $10,000 limit (on income or sales taxes or on previous property tax installments), accelerating your next property tax installment will provide no benefit.
Example
Joe and Mary, a married couple filing jointly, have incurred $5,000 in state income taxes, $5,000 in property taxes, $18,000 in qualified mortgage interest, and $4,000 in charitable donations, for itemized deductions totaling $32,000. Their next installment of 2018 property taxes, $5,000, is due in the spring of 2019. They’ve already reached the $10,000 SALT limit, so prepaying property taxes won’t reduce their tax bill.
Now suppose they live in a state with no income tax. In that case, prepayment would potentially make sense because it would be within the SALT limit and would increase their 2018 itemized deductions.
Look Before You Leap
Before you prepay property taxes, review your situation carefully to be sure it will provide a tax benefit. And keep in mind that, just because prepayment will increase your 2018 itemized deductions, it doesn’t necessarily mean that’s the best strategy. For example, if you expect to be in a higher tax bracket in 2019, paying property taxes when due will likely produce a greater benefit over the two-year period.
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:
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.
The Tax Cuts and Jobs Act (TCJA) has enhanced two depreciation-related breaks that are popular year-end tax planning tools for businesses. To take advantage of these breaks, you must purchase qualifying assets and place them in service by the end of the tax year. That means there’s still time to reduce your 2018 tax liability with these breaks, but you need to act soon.
Section 179 Expensing
Sec. 179 expensing is valuable because it allows businesses to deduct up to 100% of the cost of qualifying assets in Year 1 instead of depreciating the cost over a number of years. Sec. 179 expensing can be used for assets such as equipment, furniture and software. Beginning in 2018, the TCJA expanded the list of qualifying assets to include qualified improvement property, certain property used primarily to furnish lodging and the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems.
The maximum Sec. 179 deduction for 2018 is $1 million, up from $510,000 for 2017. The deduction begins to phase out dollar-for-dollar for 2018 when total asset acquisitions for the tax year exceed $2.5 million, up from $2.03 million for 2017.
100% Bonus Depreciation
For qualified assets that your business places in service in 2018, the TCJA allows you to claim 100% first-year bonus depreciation, compared to 50% in 2017. This break is available when buying computer systems, software, machinery, equipment and office furniture. The TCJA has expanded eligible assets to include used assets; previously, only new assets were eligible.
However, due to a TCJA drafting error, qualified improvement property will be eligible only if a technical correction is issued. Also be aware that, under the TCJA, certain businesses aren’t eligible for bonus depreciation in 2018, such as real estate businesses that elect to deduct 100% of their business interest and auto dealerships with floor plan financing (if the dealership has average annual gross receipts of more than $25 million for the three previous tax years).
Traditional, Powerful Strategy
Keep in mind that Sec. 179 expensing and bonus depreciation can also be used for business vehicles. So purchasing vehicles before year end could reduce your 2018 tax liability. But, depending on the type of vehicle, additional limits may apply.
Investing in business assets is a traditional and powerful year-end tax planning strategy, and it might make even more sense in 2018 because of the TCJA enhancements to Sec. 179 expensing and bonus depreciation.