“Nothing is certain except for death and taxes” is a quote sometimes attributed to Benjamin Franklin, among others. Fall is the perfect time to start thinking about your upcoming certainty – 2018 taxes. While CCMI has always been a big fan of tax planning, we want to stress the importance of tax planning this year because of changes resulting from the Tax Cuts and Jobs Act (TCJA) that was signed into law at the end of 2017. Start planning earlier than usual while there is still time before year-end to make changes that could impact how much you pay in taxes (for better or worse!).
The list below highlights changes to tax law you should consider in your personal tax planning. Please note this is not a comprehensive list, but various areas CCMI believes you should be aware of as you approach your tax planning for 2018:
- Lower Tax Rates – The 2018 ordinary tax rates are generally lower than those in 2017. The top rate has been reduced from 39.6% to 37%, and the remaining rates are 10%, 12%, 22%, 24%, 32% and 35%. Also, the taxable income breakpoint for some of the tax rates have changed. You should also check to ensure you’ve withheld enough in taxes over the course of 2018, please refer to a recent withholdings blog by clicking here.
- Federal and State Conformity – Not all states will conform to the new Federal tax law. For instance, California taxpayers will report some income and deductions differently on their federal and state tax returns.
- Federal Standard vs. Itemized Deductions – The Standard Deduction has increased as follows:
|Single or Married Filing Separately||$6,300||$12,000|
|Married Filing Jointly or Qualifying Widow(er)||$12,600||$24,000|
|Head of Household||$9,300||$18,000|
As a result, many taxpayers now may end up using the Standard Deduction rather than Itemized Deductions due to the increased limits (and other changes to itemized deductions). Additionally, personal exemptions have been suspended.
- Changes to Itemized Deductions – If you previously itemized your deductions, be aware of the following changes:.
- State and Local Taxes – This section is now capped at $10,000 and includes State Income Taxes and Real Estate Taxes. This has the potential to greatly change your Itemized Deductions if you live in a high-income tax state, such as California.
- Deductible Mortgage Interest – The TCJA significantly changed what is deductible for mortgage interest. In 2017, taxpayers could deduct interest paid up to $1 million of home acquisition debt and $100,000 of home equity debt, regardless of how the proceeds were used (please note that the numbers for married filing separately are different and not included). For 2018, the deductibility of home acquisition debt is limited to $750,000 and generally disallows home equity debt. Home equity loans or lines of credit may be included in certain circumstances. The new limits only apply to home acquisition debt taken out after 12/15/2017.
- Charitable Contributions – TCJA temporarily increases the limit on cash contributions to certain entities from 50% to 60% of AGI. However, for those that may become Standard Filers given the various changes, you may want to consider “bunching” your charitable contributions together which we outlined in a blog post here.
- Miscellaneous Deductions – these deductions have been eliminated. You can no longer deduct tax preparation fees and investment advisor fees.
- New Alimony Rules – Certain future alimony payments will no longer be deductible by the payer and no longer be considered income to the recipient for federal tax purposes for divorces or legal separations that are executed after 2018.
- Alternative Minimum Tax (AMT) Thresholds – TCJA significantly increases the AMT exemptions, which means fewer people will be subject to the AMT rules.
- Child Tax Credit – The TCJA doubles the federal child tax credit to $2,000 per qualifying child under age 17 and substantially increases the phase-out threshold for the credit which starts when AGI exceeds $400,000 for married filing jointly filers ($200,000 for all other filers).
- Entity Choice – As a result of some of the major changes of TCJA, many businesses are re-evaluating their entity structure. The primary driver of this is that C corporations are now taxed at a 21% flat rate (compared to a top rate of 35% under prior law). While the rate is more attractive, switching entities is a much more complicated decision which should be carefully evaluated based on a variety of factors, including whether your business qualifies for the QBI Deduction (see below), when/if you plan to sell your business, and a variety of other factors such as legal protections.
- Qualified Business Income (QBI) Deduction – In certain entity structures, business owners may be able to deduct up to 20% of their qualified business income, subject to various rules and limitations. This potential deduction may be available for sole proprietors as well as pass-through entities such as partnerships, LLCs, and S corporations. There are many strategies that can be used to adjust a businesses W-2 wages to maximize your QBI.
- Acquiring Assets – The TCJA provides a very generous Section 179 deduction, which will allow you to deduct the cost of qualifying property rather than recovering it through depreciation. The maximum amount that can be expensed in 2018 is $1 million (which is up from $510,000 in 2017), but the amount is reduced if the cost exceeds $2.5 million. Additionally, you may also be able to claim first-year bonus depreciation.
As you can see, your 2018 taxes will likely look a bit different than prior years as a result of the new federal regulations. Everyone’s tax situation is unique, which is why we suggest working with your tax preparer now to better understand how all of the changes will impact you in the coming tax season. If you have questions about your taxes or tax planning, please give CCMI a call.
CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
How can we help you?