06/09/2018
TAX REFORM
Dear Whitney Ranch Neighbors:
As you know, a major tax reform law went into effect this year. The IRS began issuing guidance on many of the new tax provisions and we want to pass the most important information on to you.
INDIVIDUALS
Lower tax brackets: Most taxpayers will pay tax at a lower rate in 2018. Individuals making less than $20,000 will not experience a change in their tax rates.
Repeal of personal exemption deduction: The personal exemption deduction is completely repealed in 2018. Prior to the tax reform, the personal exemption deduction allowed $4,150 for each taxpayer, spouse, and dependent in 2018. The change to this allowance translates to a loss of $16,600 in deductions for a family of four.
Larger standard deduction and credits for dependents: To offset the loss of the personal exemption deduction, the standard deduction is nearly doubled for all taxpayers. Additionally, those with children under the age of 17 can claim up to a $2,000 credit per child and a $500 credit for other dependents. Previously, taxpayers could only claim a credit of $1,000 per child; the credit was reduced when a married couple’s income reached $110,000 ($75,000 for a single parent). Under the new law, the credit is not reduced until a married couple’s income reaches $400,000 ($200,000 for a single parent).
Lost deductions: The following deductions have been repealed or severely limited under the new law: moving expenses, state and local income taxes, property taxes, unreimbursed employee business expenses (business miles, home office, union dues, meals and entertainment, etc.), and investment advisor fees, amongst others. These deductions remain fully deductible if paid for rental properties, businesses, or farmers.
Mortgage interest: Mortgage interest is now limited to only the first $750,000 of mortgage debt, but only for loans to purchase, construct, or make improvements to your primary residence and one secondary residence (vacation, RV, mobile home, etc.). Loans in place on or before December 15, 2017, may still follow the old rules, even if they are refinanced, but only for the first $1 million of debt. Interest is no longer deductible for any home equity debt unless the proceeds were used for a rental, business, or farm property.
Estates and trusts: The lifetime estate exclusion amount is doubled under the new law and is now $11.2 million per taxpayer and spouse.
Foreign taxes: Two new foreign taxes are imposed under the new law. Foreign taxes apply to any foreign investments, bank accounts, or other interests.
BUSINESSES
New 20% deduction on small business and rental income: The new tax law creates a massive new deduction of up to 20% of business income from partnerships, S corporations, and rental properties, amongst others. In other words, if your business generates $100,000 of income, you’ll claim a new deduction of up to $20,000. There are many limitations and planning opportunities regarding this new deduction.
Low flat tax for C corporations: All C corporations are now subject to a flat tax rate of 21%. Personal service corporations are no longer subject to a special higher rate. This reduced rate means that C corporation owners who pay out all their profit as salary at the end of each year may want to rethink that strategy. For certain businesses, consideration for operating as a C corporation, or in some cases converting to an S corporation may be a viable option to take advantage of the new rate.
Corporate alternative minimum tax (AMT): The AMT is repealed for C corporations. If your C corporation has previously unused AMT credits, you will receive a full refund of those credits over the next few years.
Favorable depreciation rules: Businesses may now claim 100% bonus depreciation for all assets placed in service from September 28, 2017, through 2022. The new law added the bonus depreciation benefit to apply to used property as well.
Meals and entertainment: Entertainment is no longer deductible. That includes ballgame tickets, golf outings, etc. Additionally, business meals have been further limited. The rules are very detailed, and determine which meals are 100%, 50%, or 0% deductible. A business’ internal bookkeeping strategy should be altered to adequately account for these changes.
New credit for paid family and medical leave: A new credit is available in 2018 and 2019 only for businesses that offer paid family and medical leave to their employees. The credit can be as high as 25% of the wages paid to your employees while on leave. As with most provisions, there are many requirements to be considered before implementing a paid family and medical leave plan.
Like-kind exchanges are limited: Like-kind exchanges (IRC §1031 exchanges) are now limited to real estate only. For real estate investors who have utilized cost segregation studies on their properties, this change may give rise to significant taxable gain if the real estate is relinquished in another exchange. It is imperative that consideration for any moves you intend to make with real estate are fully thought out; particularly for real estate that has been the subject of a cost segregation study.
Business losses: The new law makes significant changes to net operating loss rules, and certain business losses in excess of specified amounts are limited.
There are many more tax law changes than those listed here. If you are in need of a tax consultant, consider Johnson & Associates Tax Services. Contact us early if you anticipate business losses in the coming or future tax year. Call our office to set up an appointment to discuss your particular tax planning needs for strategies based on changes in the law. We can employ a myriad of planning strategies to save you money in 2018 and beyond. California tax law is unlikely to follow most of these new provisions, creating many planning opportunities to lower your California tax liability.
Sincerely,
James T. Johnson III, E.A., M.S.
Enrolled Agent
(916) 539-7330
