Tips on Tax Planning for 2018: What You Need to Know!
| Posted by: James Soller | No Comments
At first glance the 2018 tax regulations seem very similar to previous years; maybe a slightly lower rate here and there. So, will this really make a big difference to me? See the tax table comparison for a detailed summary of the new tax regulations. As you can see, the tax regulations have changed significantly from 2017 to 2018. Not only have the tax rates changed but the tax brackets have been substantially adjusted. Moreover, the ‘Gift Tax’ and ‘Estate Tax’ also see drastic changes in 2018. Lastly, there are a few changes in businesses as well.
At the end of the day, a real understanding of the new regulations combined with appropriate planning can offer substantial opportunities for saving on your 2018 tax returns. Below are five tips on how you can not only survive the incoming tax regulations, but also thrive. If done right, you could find yourself saving a decent amount of money.
1. Work with a professional tax expert!
This is our number one recommendation! Find an experienced tax advisor who can work with you on short and long-term planning for you to take the full advantage of the new tax regulation. You may be able to save thousands with some very basic strategies that would not be obvious to the average untrained taxpayer. Sure, you hiring a qualified accountant is not inexpensive, the amount of money you save will offset that cost.
2. Take advantage of the corporate tax changes
The most significant changes to the 2018 Tax regulations apply to Corporations and to the treatment and taxation of pass-through income. C Corps, S Corps and LLCs are all impacted. Under the Tax Cuts and Jobs Act, C-corps are taxed at a flat rate of 21%—a cut from the previous range of 15%-35%.
The new Section 199A provides both benefits and complexity to business owners. Different qualifications apply to specific industries and incomes (Qualified Business Incomes QBI) to receive all the benefits of 199A. The deduction is phased out for income between $415,000 and $315,000 for Joint Filers and $257,000 and $157,000 if a single filer. Keep in mind that the the computation of the deduction is complex and should be left to a tax expert.
Taxpayers with income above these levels must meet two requirements to qualify for a 199A deduction:
- The income may not be generated by a Specified Service Business; and
- The Qualified Trade or Business generating the income must either pay wages or own property.
A Specified Service Businesses (SSB) is broadly defined as any trade or business involving the performance of services in the fields:
- Health
- Law
- Accounting
- Actuarial Science
- Performing Arts
- Consulting
- Athletics
- Financial Services
- Brokerage Services
- Investing
- Investment Management
- Trading or Dealing in Securities
An SSB is also any trade or business where the principal asset is the reputation or skill of one or more of its owners or employees. We strongly suggest the opinion of a tax expert in determining your participation under 199A as it can be a complicated process.
199A provides up to a 20% discount on pass-through income derived from C Corps, S Corps and LLCs. W2 wages are not eligible for the 199Aa discount. The difference in tax rates for C Corps offers additional savings (21% max rate) over S corps depending on how much money is passed through The calculations are complex and in some cases conversion to a C Corp can have tax benefits to the owners. Again your tax expert can help navigate you to the correct financial and business decisions to take full advantage of the new 2018 regulations
3. Take advantage of tax bracket changes
One thing we can be sure of is if you use last year’s tax strategy you will not have not done yourselves a financial favor. A quick comparison of the tax table (rates) for 2017 vs 2018 does not look like a big deal for individual taxpayers.
| 2018 Tax Rates – Standard Deduction $24,000 | 2017 Tax Rates – Standard Deduction $12,700 | ||
| 10% | 0 to $19,050 | 10% | 0 to $18,650 |
| 12% | $19,050 to $77,400 | 15% | $18,650 to $75,900 |
| 22% | $77,400 to $165,000 | 25% | $75,900 to $153,100 |
| 24% | $165,000 to $315,000 | 28% | $153,100 to $233,350 |
| 32% | $315,000 to $400,000 | 33% | $233,350 to $416,700 |
| 35% | $400,000 to $600,000 | 35% | $416,700 to $470,700 |
| 37% | Over $600,000 | 39.60% | Over $470,700 |
But now let’s look at the details for families where the two parents are filing jointly. The income ranges for these rates have changed significantly. For families having taxable incomes of 233k to 315K,( keep in mind that the average family income in Bethesda Md is around a $170K ), we see some notable changes. Not only has the standard deduction almost doubled for 2018, but we can also see in the chart a roughly 4% decrease in the tax rate for upper middle class families.
| MARRIED FILING JOINTLY & SURVIVING SPOUSES | |||
| 2018 Tax Rates – Standard Deduction $24,000 | 2017 Tax Rates – Standard Deduction $12,700 | ||
| 10% | 0 to $19,050 | 10% | 0 to $18,650 |
| 12% | $19,050 to $77,400 | 15% | $18,650 to $75,900 |
| 22% | $77,400 to $165,000 | 25% | $75,900 to $153,100 |
| 24% | $165,000 to $315,000 | 28% | $153,100 to $233,350 |
| 32% | $315,000 to $400,000 | 33% | $233,350 to $416,700 |
| 35% | $400,000 to $600,000 | 35% | $416,700 to $470,700 |
| 37% | Over $600,000 | 39.60% | Over $470,700 |
Opt for itemizing instead of the standard deduction
In order to reduce taxable income, most taxpayers can either take the standard deduction or choose to itemize deductions. As the above charts clearly show, the standard deduction in 2018 is nearly doubled from 2017. At first glance, the 2018 standard deduction looks very appealing and it seems like a no-brainer. However, ‘smart-money’ doesn’t always take the most obvious choice. In fact, the data shows that higher income earners are more likely to opt for itemized deductions than the standard deduction. If you are making a modest income, then the standard deduction makes sense, but if you are in a upper middle class tax brackets, as the vast majority of Bethesda residents are, then you are always better off itemizing. This is where hiring an experienced accountant can really go a long way to saving you money.
If you choose to itemize deductions, then that number needs to be greater than the standard deduction. It is no secret that the best way to itemize deductions is through charitable donations. But here is the catch! In 2018, you can now deduct charitable contributions of as much as 60% of adjusted gross income, up from 50% in 2017. Be sure you have enough itemized deductions to exceed the standard deduction. If you don’t, then look at donations, and other income reducing ideas we discuss to increase your itemized deductions passed the standard options.
4. Look for itemized deductions that you would not ordinarily pursue
The easiest way to increase your deductions is through donations.(More on the Gift Tax Below). However, do not limit your donations to cash only. Cars, boats, art jewelry and collectibles can be used to move you into lower tax brackets add real savings far larger then you investment in the donated items!
Donating cars, jewelry and art can have real benefits, your deduction is based on the appraised value of the donated item. (You will need and appraisal on all donated items over $5k) With art and jewelry the appraised value is usually considerably much more (than you could easily sell it for so the donated value may actually be a profitable event for you.
So, if you paid big bucks for that that trendy work of art by the next Picasso (so they told you) in a work of art you paid big bucks for some years ago, it now appraises for a good amount, if you were to sell it you might get 20% of the appraisal unless the artist really did take off (most don’t)if you were lucky. What is a n art deduction worth? If you are in the upper middle income it could be over 30% Or more.
This model of appraisal also holds value vs resale value holds true for cars, boats, planes, and jewelry as well. With that being said, you may have the big deduction in plain view, hanging on the wall or sitting in a draw. Boats are also a major loss leader and are prime candidates for profitable charitable donations. Again, if you in a an upper middle class or higher tax bracket, this is all the more reason why you need an experienced tax expert to help you make the right choices when it comes to filing your taxes!
5.Maximize your business deductions through capitol purchasers
If you are a business owner, you can lower your bracket by investing in your firm’s infrastructure by using ‘pass-through’ income.
| 2018 | 2017 | ||
| Business expensing limit: Cap on equipment purchases | $2,500,000 | Business expensing limit: Cap on equipment purchases | $2,030,000 |
| Business expensing limit: New and Used Equipment and Software | $1,000,000 | Business expensing limit: New and Used Equipment and Software | $510,000 |
The table above shows that the ability to increase capital purchases of new and used equipment and software has increased. This gives you a further tool for reducing you pass-through income and moving into a lower tax bracket. Any capital expenses for your business will reduce your pass-through income. It may not take a lot to get big tax benefits. Careful analysis of the your businesses finances can present opportunities for not only enhancing your business but reducing your taxes. In many cases, just a small increase in investments in your business can generate tax savings that are more than the dollars you laid out. In other words, investment can generate an immediate tax savings.
6.Take advantage of new gift and estate tax regulations
Make tax-free ‘cash gifts’
Assuming you able to itemize, ‘cash gifts’ in 2018 are now deductible up to 60% of adjusted gross income, which is up from 50%. You can also give ‘gifts of stock’ up to 30% of adjusted gross income. You can give as many family members as you like up to $15,000 per year ($30,000 from a married couple electing to split gifts) each without reporting it to the IRS.
Estate Tax Changes
The change in Estate taxes is one of the more notable ones in 2018. The lifetime federal gift and estate tax exemption has more than doubled, to $11.18 million for individuals ($22.36 million for married couples), meaning far fewer estates will owe estate tax. Anything above these numbers is taxed at 40%.
And finally: A bonus tip!
Sell losers in taxable accounts.
If you have investment losses in a taxable account, you can sell them to offset gains from this year. If you have more losses than gains, you can deduct up to $3,000 against ordinary income; and if you have more than $3,000, you can carry over that amount to future years. A tax reform that could go into effect next year forces investors to sell stocks on a first-in, first-out basis, which could reduce your tax savings with this strategy next year.
Keep in mind that a small reduction in income from taking a loss could move you into a lower bracket and generate additional savings. An expert eye on your finances is the key to maximizing your tax savings! Get in touch with an experienced tax expert today!
Click here to see tax rates comparisons between 2017 and 2018.