As we enter the holiday season, I always want to take a minute and thank all my clients, staff and readers for their time and allowing me the honor of being able to service them throughout the year. My family and I are very grateful.
This year we have really tried to take Turkey and Taxes to a new level of social media by providing you some helpful information and a little bit of fun throughout the year regarding taxes and finances.
Now, as the year closes, we need to get back to the roots of what makes Turkey and Taxes famous: some good ol’ fashioned tax planning. If you are a pack rat and have kept prior copies of this article from years gone by, please feel free delete them, as they are no longer helpful with the new tax laws in place.
There is a great commercial out right now during the holiday season where two neighbors meet in their driveway. One of the neighbor is unloading lots of packages from his SUV, so other neighbor walks up and asks what he was doing and he says “I got up at 3am, went shopping all day and saved hundreds,” the other neighbor points to his truck and says “I slept in and saved thousands.” The point of Turkey and Taxes has always been, don’t worry about Black Friday to save hundreds, use this long 4-day weekend to spend time with family, eat, drink, watch football and do tax planning to save thousands. You have just 6 weeks left until “Happy New Tax Year,” so there is not much time.
There are lots of articles that walk you through all the changes and comparisons of the new tax law. I do not want to reiterate the same information, so this article will focus a little more on planning rather than the actual law changes. (If you would like to see the changes in detail, the IRS has a new publication 5307 https://www.irs.gov/pub/irs-pdf/p5307.pdf that is a big help.) Here are a couple of new thoughts that may help you before the year end.
- This year all the withholding rates changed as well as your take home pay. So, if you had a refund last year you may not get one this year. I strongly encourage everyone to please use the IRS tax withholding calculator, which is free, to estimate your refund or tax owed. If you owe, you now have 4 months to save to pay the amount vs. waiting until the last minute when cash may be tight. https://www.irs.gov/individuals/irs-withholding-calculator
- The IRS has a very good site with lots of help. In addition to the withholding calculator above, you may want to check out https://www.irs.gov/individuals/steps-to-take-now-to-get-a-jump-on-next-years-taxes. This site has certain steps to follow to get a jump on your 2018 taxes. There is information in the middle of the page and on the left side for more specific issues that may affect you.
- If you are a charitable person, please look at how much you donate. With the increased standard deduction, you may not get a benefit. To get around this problem, consider doubling down on your donations in one year vs. splitting it between two. For example, if you give $10,000 a year, you may not get a benefit, but if you give $20,000 in one year and zero the next, you may get over the standard deduction limit and be able to claim a benefit for your donation.
- Consider donating appreciated stock to a charity. You get the deduction at today’s value and do not have to pay capital gains tax on the difference.
- Many of you take a deduction for unreimbursed business expenses, accounting and legal fees and investment fees that exceed 2% of your income. This deduction is now gone. If you have unreimbursed business expenses you should go to your company and try and get them to cut you a check for the reimbursement. Your company can still deduct the expenses they reimburse you, but you can no longer deduct the unreimbursed expenses.
- With the large increase in the exemption of AMT, it may be time to review your stock options and see if you can exercise some stock without paying the tax.
- With the new 199A deduction for 20% of qualified business income for a partnership, S corporation or sole proprietorship, please review the rules to see if you qualify. If you do, you may want to do a final review of comparing your W2/guaranteed payment income to your flow-through income.
- The corporate tax rate was reduced to 21% for a C corporation. This is great for larger companies but for smaller companies, it may not be the home run you think. Before you convert, please discuss this with your advisor as it usually does not help for smaller companies that may want to sell their business down the road.
- The tax treatment for qualified dividends and capital gains did not change, but the tax brackets did. If your income is down and you have some capital gains, you may be able to sell at the lower rates of 0% or 15%, whereas last year it may have been at 20%.
- For business owners, see if you need any new asset – computers, equipment, furniture or even cars – because there are new rules that allow for 100% depreciation in the year of purchase.
- If you purchased a building, consider a cost segregation study. This breaks out the components of the building, from assuming it is all 39-year property to possibly having some of the building treated as 5, 7 or 15-year property that may be eligible for the 100% bonus deprecation. With the new depreciation rules, this could really be a huge benefit for taxpayers.
- The rules changed for cash basis accounting to allow companies with gross revenue for a 3-year average of $25M or less to be eligible. If you have a business with inventory and large accounts receivable, this may be the year to switch from accrual to cash basis.
- Review your retirement plan – 401k, safe harbor, profit sharing, SEP or cash balance, there are lot of options. With the lower tax rate and other deductions available, you may be able to contribute more to the plan than you thought.
- If you are getting a divorce, you may want to put it on the fast track or slow track before year end. The deduction for alimony as well as the requirement to count it as taxable income both go away at the end of the year.
For a little fun, here’s an amusing tax story that might make your situation seem less worrisome. Sometimes you win, sometimes you lose and sometimes you tie; I think this report from an “efile.com” article is a tie:
“…in 1981, a drug dealer from the Minneapolis area was caught with possession of large amounts of cocaine, amphetamines, and marijuana. He was arrested and later audited, talk about a bad day. The audit found that he owed $17,000 in taxes. The drug dealer argued that he should be able to deduct a significant amount of the back taxes as business costs incurred by running his business from his home. He managed to get a deduction, but still went to jail for drug possession.”
Remember, always consult a tax advisor for proper treatment of your specific situation.