Starting with the 2018 tax year, the new tax reform took full effect, creating an increased obligation for planning as we wrap up the year. The year-end is the time to consider strategies in order to take advantage of the modifications to tax rates for businesses and individuals, alterations to the tax brackets, removal and modifications to many itemized deductions, and updates to the taxation of pass-through income. All of these could impact the approach of traditional planning methods that are typically engaged.
Planning for Businesses
While the business tax rate change to a flat 21% was a key area of focus for the 2018 tax year there were a variety of other changes that may impact how you approach tax planning. Many of the same types of planning techniques will still apply such as finding ways of shifting income to the future and accelerating deductions. Other areas need to be considered when planning for 2018.
Changes to Bonus/Section 179
Typically year-end is a time to review your companies capital spending and potentially look to purchase additional assets to take advantage of the accelerated expensing options. The 2018 tax year is not different and may actually be even better when it comes to this strategy. The tax reform significantly increased the Sec. 179 expensing amount allowing corporations to deduct even more than they were historically. In addition, assets such as HVAC units and security systems that were not included before are now allowed. Sec. 179 was not the only change in this area though. The tax reform changes included not only an increase in the bonus percentage to 100% but also an update to the definition to include used asset. This could add a significant increase to the deductions available to businesses. Proper planning needs to be done though to review and plan accurately since other changes such as the NOL rules may impact the decisions being made.
Changes to Net Operating Loss
Starting with the 2018 tax year any net operating loss generated will be allowed to be carried forward indefinitely but will not be allowed to be carried back. While this change seems straightforward and beneficial, the carryforward is limited to 80% of taxable income in future years. Therefore, while you may have plenty of losses to offset future taxable income you may still be subjected to tax due to the limitation put in place. Therefore, simply building up losses with the assumption they can be carried forward and used may not necessarily be the best action. Certain expenses that can be deferred rather than deducted immediately may need to be considered in tax planning and that includes whether to accelerate depreciation or not.
Other Changes Worth consideration
- Business Interest Limitation
- Repeal of the Alternative Minimum Tax and refund of previous credits
- Changes to various business deductions and credits (i.e. entertainment, R&D, Sec 199)
- Opportunity Zone Programs investment planning
- State Tax Nexus in light of the Wayfair
Planning for Individuals – New Rates & New Deductions
Similar to corporations, individuals tax rates and brackets have been updated starting in 2018. The changes for individuals, however, are more complex than a simple drop in the rates due to the bracket structure. In addition, the impact of other changes implemented may have a more significant impact on one taxpayer’s situation versus another and therefore every person should be reviewing their particular tax position.
With changes to the standard deduction and limitations on itemized deductions, certain taxpayers may no longer be able to itemize. Changes were made to the business income reported on an individual’s tax return potentially resulting in a 20% reduction to qualified income.
Itemized Deductions in 2018
Traditionally for individuals, looking at itemized deductions or income from investments is an important part of tax planning. Reviewing a taxpayer’s position with regard to certain itemized deductions with the current state of tax reform has become even more relevant. Some of the major areas that have been impacted are the State and Local tax deductions, miscellaneous deductions subject to the 2% of adjusted gross income (AGI) floor, and the removal of the AGI limitation.
State and local taxes will now be capped at $10,000, meaning it may no longer be beneficial to pay two years real estate taxes in a single year. In addition, the deduction related to tax preparation fees, investment fees, unreimbursed employee expenses and other deductions subject to the 2% AGI floor have been repealed. That means a significant amount of people will not be able to deduct the large amounts of administrative fees as in previous years. These changes for many taxpayers with the increase to the standard deduction may prevent them from benefiting from itemizing at all. The AGI limitation has been repealed so the amounts that qualify to be itemized won’t be reduced. A taxpayer may consider making anticipated donations before year-end or look into prepaying donations through certain programs to increase their deductions as a way of planning. With the increase to the standard deduction, however, taxpayers may still find themselves in a position where they do not have enough expenses to itemize.
Retirement Savings Considerations
Year-end is a good time to review if your retirement savings plans and tax strategies complement each other. For 2018, the maximum amount of contributions that can be made to an IRA is $5,500, with a $1,000 catch-up amount allowed for individuals over age 50. Keep in mind that the maximum amount that can be contributed to a Roth IRA begins to decrease once a taxpayer’s adjusted gross income crosses a certain threshold.
Traditional IRAs and Roth IRAs are very different savings vehicles. A traditional IRA or Roth IRA set up years ago may not be the best savings vehicle today or for the immediate future if employment and other personal circumstances have changed. Very complex rules apply in these situations; therefore, rollovers and conversions should be carefully planned. Every individual has unique goals for retirement savings and no one size fits all. Please contact our office for a more detailed discussion of your retirement plans.
Gift-giving is often overlooked in year-end planning strategy. For 2018, individuals can make tax-free gifts (no tax consequences for the giver or the recipient) of up to $15,000 to any individual. Married couples may “split” their gifts to each recipient, which effectively raises the tax-free gift to $30,000. These are important thresholds to keep in mind if you do plan to give large gifts. With the increase in the unified lifetime credit, this may be a time to consider looking into estate planning opportunities. There are also special rules for gifts made for medical care and education that can be a valuable component of a year-end tax strategy. Monetary gifts given directly to a college to pay tuition or to a medical service provider are tax-free to the person making the gift and the person benefiting from education or medical care.
With all of these changes that impact the 2018 tax year, tax planning may be a wise decision to consider. We have already been calling our clients for year-end tax planning and we have reviewed many year-end tax planning strategies that could help to minimize 2018 tax bills and maximize savings. So please contact Mark Levine (firstname.lastname@example.org) or Nathan Rizk (email@example.com) or call (972) 644-7112 with questions or to discuss your year-end planning needs!