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Evanston, Illinois


Many people will be very pleased with how the new tax law treats them in 2018.

Last year, we did projections of 2018 Federal tax based on 2017 income and deductions.   Clients can refer to the projection at the front of the tax return booklet.    The projections did not reflect the Qualified Business Income Deduction for those with self-employment, rental and pass through entity (K-1) income.  The rules are very complex and must be applied on a case by case basis.  More on this later.

Here are some areas that will affect your return and some action plans to do before year end.

Standard vs. itemized deductions

Standard Deduction:

Married couples          $ 24,000

Single                        $ 12,000

Head of household      $ 18,000  (IRS will monitor qualification)

So itemized deductions will have to exceed these amounts; many taxpayers won’t itemize in 2018.

Charitable contributions:

Contribute to a donor advised fund in 2018 with the amount covering two years of charitable contributions.  The 2018 charitable contribution deduction may allow itemizing, and you can pay out the fund balance over two years.

If you are taking a required minimum distribution (RMD) from your IRA, you can have the financial institution donate all or part of the distribution to charities you choose.  For those who will not itemize, this allows these charitable distributions to reduce the taxable amount of the RMD distribution.  Your income is reduced and you can still take a standard deduction if you can’t itemize.

Medical expenses:

Often taxpayers can’t deduct medical expenses, since the amount is limited by a percentage of income.

But many people have health insurance coverage that allows for Health Savings Account contributions that are deductible against adjusted gross income.

SALT is more than a seasoning:

SALT is a shortcut for “state and local taxes”.  The total of all real estate, income and personal property tax deductions cannot exceed $10,000.  But states such as Illinois still allow a credit for a percentage of home real estate taxes for most taxpayers, so be sure to provide your home real estate taxes.

Miscellaneous itemized deductions:

Miscellaneous itemized deductions are gone for 2018 – they include union dues, professional services, unreimbursed employee business expenses and investment advisory fees.  For investors and for employees with significant unreimbursed expenses, this can really impact a return – especially for those who have expense allowances included in their W-2s (and no way to offset the taxable income).

Alternative Minimum Tax (AMT):

This is not an itemized deduction – it is an additional tax. We mention it because AMT is often triggered by deductions of state and local taxes and miscellaneous itemized deductions.  The new law does not allow any miscellaneous itemized deductions, including employee business expenses.  While the deductions for taxes and miscellaneous itemized deductions are limited or gone, AMT may have negated any benefit for some taxpayers in past years.

Speaking of AMT, most taxpayers with under $1 million in income will not be subject to this onerous tax.

It may be entertaining but it is no longer deductible:

If your business entertains clients at sporting events or concerts, the entertainment expense is no longer deductible.  Meals are still deductible but the meals must be separately stated. If your courtside seats have meals provided, the meal cost must be separately stated or the entire cost will not be deductible.

Did you acquire an auto, equipment or a building during the year?

The new law has too many benefits to list, but deductions are very favorable.

And if you acquire or improve real estate for business use, you may want to utilize cost segregation services so that you can maximize your ability to depreciate assets.  The ability to deduct more of the repairs and improvements can be a major way to lower taxes.  But, if you need assets to qualify for a QBID deduction (see below), you may want to capitalize such expenditures and use bonus depreciation and other options to get the best of both worlds.

Qualified Business Income Deduction (QBID):

This is an impactful deduction that can give many self-employed taxpayers, those with rental income and with passthrough entity income up to a 20% of income deduction for doing nothing other than having such businesses.  As we mentioned before, the rules are very complex and are computed on a case by case basis.  Factors include type of business, income level, whether wages are paid or if equipment or buildings are part of the business.  Land is not considered, so rental of land is not eligible.    We are aware of these issues when preparing returns.

Capital gains and the ability to defer gains:

Capital gains still get beneficial tax treatment and the new tax law introduces the Qualified Opportunity Fund (QOF).  Within 180 days from the sale, you can invest the proceeds into a QOF, a fund that invests in low income areas.  As the fund is held over the years, some or all of the deferred gains will not be taxed.  My caveat is that you have to check out the economic value of these investments.

Foreign investments (not to be confused with foreign stock held in your US investment account):

If you have foreign investments of at least $10,000, you must file an FBAR return and may file additional forms with your personal return.  Failure to do so results in huge penalties, so don’t ignore this requirement.  Report the highest balance in each foreign account and provide account numbers and addresses for each investment.  Be sure to provide us with this detailed information for your return.

529 Plans now cover elementary and high school tuition:

If you have children or grandchildren (or another relation) who have elementary and high school tuition to pay, you can contribute to a 529 plan and use the plan funds to pay the tuition.

We can’t include all of the new tax law changes and how it may affect your tax situation.  This law impacts so many areas that aren’t covered – so please b contact us with any questions.

©2018 Linda Forman CPA

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