TEMPE, Ariz., Dec. 19, 2018 /PRNewswire-PRWeb/
To help taxpayers save money and reduce mass confusion, Tax-Free Wealth Author, CPA and CEO Tom Wheelwright clarifies nine tax law changes for 2018 returns based on the Tax Cuts and Jobs Act. 2018 will be the first year that the new tax law will impact returns, and the majority do not understand these big picture changes. With less than two weeks left in 2018, it's important to understand what is new, talk to your Tax Advisor and make a long-term wealth strategy plan.
The biggest winners of the new tax law are corporations, small business owners and investors. While most people will get a higher deduction, there are gray areas where some will pay more tax.
Wheelwright emphasizes, “Tax Advisors should not rely on computer software to make these calculations. It is big mistake because you have to make some choices. Taxpayers need a tax professional who understands the mechanics and options.”
1. 21 Percent Lower Corporate Tax Rate – For corporations with a 21% tax rate (reduced from 35%), these companies will have a team of accountants to determine their best tax strategy with the new tax law. Corporate tax savings are significant, and should result in more jobs and pay increases for employees over the long run.
2. Higher Standard Deductions will result in Fewer Itemized Returns – Because the standard deduction almost doubled to $12,000 for single tax filers and $24,000 for married couples filing jointly, many will choose not to itemize their 2018 returns. The result should be that most people pay less in taxes.
3. Some Miscellaneous Deductions are Eliminated – The new tax code also eliminated miscellaneous deductions for employee business expense deductions and fees paid to accountants and investment advisors.
4. Business Owners and Real Estate Investors may Qualify for 20 Percent Pass-Through Deduction – With more than 90% of businesses in the U.S. being small business, the new 20 percent pass-through deduction will impact many people. This deduction may apply to qualifying companies, including S Corps, with limitations. For example, S Corps must be domestic (meaning the company and owners must live in the U.S.). For service businesses involving categories like doctors, lawyers and financial advisors, the taxable income of the professional involved, must be below $207,500 (for a single individual) or $415,000 (married, and filing jointly) according to the IRS to qualify.
5. How to Calculate the 20 Percent Pass-Through Deduction – To determine if a business owner qualifies for the tax savings, there are five steps. Step 1) Calculate your qualified business income, which is your pass-through net income that does not include wages, subtracting losses. Step 2) Calculate your taxable income, and determine which is lower, your qualified business income or taxable business income. Step 3) For a service business, determine if it qualifies within the income caps. Step 4) Calculate the other limitations on the 20% deduction. And Step 5) Calculate 20% of the lesser of the two income options, and that is your 20% pass-through deduction.
6. Overall Charity Deduction Limits Increased – The limit on charitable deductions has gone up from 50% to 60% of AGI (Adjust Gross Income) under the new law. As a result, higher income taxpayers who itemize are more likely to increase charitable deductions. If individuals select the standard deduction, they will not itemize charitable donations.
7. IRS Position on Charity Donation through State Tax Credits may impact Federal Returns – The IRS proposed regulation, which states the IRS' position, says if you get a tax credit from the state, the same deduction cannot be taken on your federal return. For example, if a taxpayer donates $1k to a qualified charity tuition program in Arizona, the state gives you a $1k credit. The IRS says that if the state tax credit is taken, then the charitable deduction is lost.
8. Retail Owners can Deduct Inventory, Even if Not Sold – Both online retailers and stores now have the opportunity for a new inventory deduction when buying goods versus the previous rules where products could only be deducted after it was sold. The new law states that a retail owner can write-off inventory, as long as the item is under $2500. For example, if someone is carrying $300,000 of inventory at the end of 2017, the business could get a $300,000 deduction in 2018. To qualify, the retailer must have less than $25 million in sales. In the first year of the new law, this change can result in significant tax savings for retailers. Eventually, it will even out. Wheelwright adds, “This inventory deduction change is one of the best parts of the new law.”
9. State and Local Tax (SALT) are now Capped – SALT tax deductions for property and income tax or sales tax on Schedule A are now capped at $10,000 on federal returns. This cap is going to hurt homeowners and investors in high income states where property taxes are much higher. California, New York and New Jerseyhomeowners are likely to pay more in taxes based on this change. Some states have implemented “workaround tax credits” including New York, New Jersey, Connecticut, and Oregon to minimize this tax burden.
What is most important for everyone to do now is plan ahead for year-end by meeting with your Tax Advisor right away. 2018 is the first year that the new Tax Cuts and Jobs Act of 2017 will impact your tax returns. Don't wait another minute to start planning ways to legally put more money back in your pocket!
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