As we roll toward the next tax planning stage, the focus for taxpayers shifts to understanding the impact of the Tax Cuts and Jobs Act and optimizing tax positions — but that’s no small task, since there are more than 130 new tax provisions.
Here are some of the biggest tax planning opportunities so far for individual taxpayers in 2018:
Itemized deductions versus the standard deduction
The Tax Cuts and Jobs Act roughly doubles the standard deduction. This means that for 2018, joint filers can enjoy a standard deduction of $24,000. However, the new law suspends personal exemption deductions and eliminates or limits many of the itemized deductions.
For example, the state and local tax deduction is now capped at $10,000 per year, or $5,000 for a married taxpayer filing separately. Also, the Tax Cuts and Jobs Act temporarily eliminates miscellaneous itemized deductions subject to the 2 percent floor (like tax preparation fees and employee business expenses) and limits the home mortgage interest deduction to home acquisition debt of up to $750,000, or $375,000 for a married taxpayer filing separately.
So, what does this mean for you? For those who typically claim the standard deduction, chances are your tax bill will decrease for 2018. Although personal exemption deductions are no longer available, a larger standard deduction, combined with lower tax rates and an increased child tax credit, may result in less tax. Also, you may have itemized last year but won’t itemize this year, or you may be able to itemize for state income tax purposes but not for federal. You will need to run the numbers with your tax advisor to assess the impact. Depending on the results, you may need to adjust your estimated quarterly tax payments or turn in a new Form W-4 to your employer.
Deduct those moving expenses
For now, employer payments or reimbursements in 2018 for employees’ moving expenses that were incurred prior to 2018 can be excluded from an employee’s wages for income and employment tax purposes. Enjoy that perk for now, because the Tax Cuts and Jobs Act will change that for this year and going forward.
The tax overhaul that Congress passed last year suspended the exclusion from income for moving expenses reimbursed or paid by an employer for most employees starting this year, so those amounts are now taxable, except for active-duty members of the U.S. Armed Forces whose moves are tied to a military-ordered permanent change of station.
Now, under Notice 2018-75, reimbursements paid by an employer to an employee in 2018 for qualified moving expenses incurred in a prior year aren’t subject to either federal income or employment taxes. The same holds true if the employer pays a moving company in 2018 for qualified moving services provided to an employee prior to 2018.
To qualify, any reimbursements or payments must be for work-related moving expenses that would have been deductible by the employee if the employee had directly paid them before Jan. 1, 2018. The employee must not have deducted them in 2017.
Employers that have already treated the reimbursements or payments as taxable events can follow the normal employment tax adjustment and refund procedures. See Publication 15, Section 13, or Form 941-X and its instructions for details.
Revisit your qualified tuition plans
Qualified tuition plans, also called 529 plans, are a great way to ease the financial burden of paying for college. Before the Tax Cuts and Jobs Act, earnings in a 529 plan could be withdrawn tax-free only when used for qualified higher education at colleges, universities, vocational schools or other post-secondary schools. Thanks to the Tax Cuts and Jobs Act, 529 plans can now be used to pay for tuition at an elementary or secondary public, private or religious school, up to $10,000 per year. If you are paying tuition for children or grandchildren to attend elementary or secondary schools, consider either setting up or revisiting your 529 plans.
Watch out for home equity debt interest
Under the Tax Cuts and Jobs Act, home equity debt interest is no longer deductible. Or so you thought. According to the IRS, interest paid on home equity loans and lines of credit is deductible if the funds were used to buy or substantially improve the home that secures the loan. In other words, it’s treated as home acquisition debt subject to the new $750,000/$375,000 limit. This is good news for homeowners, but you’ll have to trace how the proceeds were used. If you used the cash to pay off credit card or other personal debts, the interest isn’t deductible, even if the payoff occurred prior to 2018.
Bunch charitable contributions
The new law temporarily increases the limit on cash contributions to public charities and certain private foundations from 50 to 60 percent of adjusted gross income. However, the doubling of the standard deduction and changes to key itemized deductions will prevent some clients from itemizing in 2018 and therefore benefiting from this increased limit. One way to combat this is to bunch or increase charitable contributions in alternating years, so consider setting up donor-advised funds. This will allow you to claim a charitable tax deduction in the funding year and schedule grants over the next two years or other multiyear periods. Then you can take advantage of the deduction when you’re at a higher marginal tax rate while actual payouts from the fund can be deferred until later. It’s a win-win situation.
Maximize the qualified business income deduction
Perhaps the hottest topic of the Tax Cuts and Jobs Act is the new qualified business income deduction under Section 199A. Individuals who own interests in a sole proprietorship, partnership, LLC, or S corporation may be able to deduct up to 20 percent of their qualified business income. However, the deduction is subject to various rules and limitations.
Although the final official guidance is lacking on this new deduction, there are some planning strategies that can be considered now. For example, some taxpayers can adjust their business’s W-2 wages to maximize the deduction. Also, it may be beneficial to convert your independent contractors to employees where possible, but make sure the benefit of the deduction outweighs the increased payroll tax burden and cost of providing employee benefits. Other planning strategies include investing in short-lived depreciable assets, restructuring the business, leasing and selling property between businesses, and, yes, even getting married.
If you have questions about tax changes and how it might affect you, please contact a KraftCPAs representative. We’ll be glad to answer your questions.