By David Mandell, JD, MBA and Carole Foos, CPA
As fall weather descends upon us, it’s a good time to start thinking about the end of 2018 and what that means when it comes to your taxes. As you already know, there was a major tax overhaul at the end of 2017, and most of the provisions in the 2017 Tax Cuts and Jobs Act are effective this year. If you haven’t already done so, you should evaluate how the new tax law affects your personal tax situation.
First and foremost, if you receive W-2 wages, you need to review your 2018 withholding and consider making changes to your W-4. The tax law brought with it new withholding tax tables, so make sure your current withholding is sufficient to avoid any underpayment penalties. If it is not, you still have time to increase withholding through the end of the year.
It’s also a good time to review stock sales for 2018. If your portfolio has loss positions, they could be used to offset capital gains you have realized this year, thus reducing your 2018 capital gains tax.
If you still plan to itemize, even though state and local tax deductions are now limited and the standard deduction has increased, you may want to consider “bunching” your charitable contributions to take advantage of them this year. Making more contributions in years you itemize, and fewer in years when you take the standard deduction, will maximize the tax benefit. Since property taxes are now limited along with state and local income and sales taxes, make sure you allocate any business property taxes to the business return (or to the rental schedule on your personal return) so you still receive the tax benefit.
You should also note that because the Alternative Minimum Tax (AMT) exemption increased with the new tax act, you may be able to recapture some of the AMT you paid in previous years. You can discuss this with your CPA at your year-end tax planning meeting.
New deduction for business owners
If you are the owner of a business which is not taxed as a C corporation, you may be eligible for the new Section 199A deduction. This is a 20% deduction against Qualified Business Income (QBI) of pass-through entities – S corporations, partnerships, sole proprietorships, estates and trusts including LLCs taxed as such. This new deduction is effective January 1, 2018 through 2025. The deduction is the lesser of 20% of the taxpayer’s QBI or 20% of taxable income less capital gains. Note that this is a deduction against business income but it is taken on the owner’s personal return.
For a business owner who is married and files a joint tax return, if personal taxable income is below $315,000, there are no further limitations – no matter the type of business. You can deduct 20% of your qualified business income. For single, married filing separate or head of household taxpayers, if your taxable income is below $157,500, you get the deduction. This deduction would effectively reduce a 37% tax rate on business income to 29.6%!
But wait, tax law is never that easy. If you are over the $315,000 / $157,500 taxable income threshold, there are further restrictions. Specified service business (SSB) income is not eligible for the deduction if the owner’s personal taxable income exceeds $415,000 for a married taxpayer or $207,500 for a single taxpayer. These SSB’s include medical practitioners, attorneys, accountants, consultants, athletes, financial service providers, and investment managers. In fact, if the principal asset of your business is your skill or reputation or that of your employees, you are an SSB. Engineers and architects are exempt from this status.
If your business is not an SSB and your taxable income is above the thresholds, you have further limitations. Your deduction cannot exceed 50% of your allocable share of W2 wages paid by the business or 25% of your share of W-2 wages paid by the business plus 2.5% of the unadjusted basis of qualifying business property.
Sound confusing? It is! Talk to your CPA about how this pass-through deduction affects you and consider ways to either qualify for or maximize the deduction. Can a qualified retirement plan deduction get you under the threshold amount? Should you reduce the W-2 wages you are receiving from your S corporation and take more profit distributions? Keep in mind your W-2 wages still need to reasonably compensate you for the services you provide. You might need to change your partnership compensation structure to reduce guaranteed payments and to increase partnership distributions since guaranteed payments are not eligible for the deduction.
The bottom line is that the new tax law provides both challenges and opportunities, and planning is essential to maximize your benefits. Talk to your CPA about your personal tax situation, and contact OJM Group for a free consultation to discuss how you and your business can put together a comprehensive and effective wealth management plan. The authors welcome your questions.
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David B. Mandell, JD, MBA is an attorney and author of more than a dozen books, including Wealth Management Made Simple. He is a principal of the wealth management firm OJM Group www.ojmgroup.com, where Carole Foos, CPA is also a principal and lead tax consultant. They can be reached at 877-656-4362 or firstname.lastname@example.org.
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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.