Tax planning is always a good idea, but this year it is especially critical. With the Tax Cuts and Jobs Act (TCJA) making sweeping changes that impact virtually every taxpayer, and looming additional legislative action following the mid-term elections, new strategies should be considered to maximize your tax savings.
The TCJA introduced lower tax rates and new tax benefits, however it also eliminated some long-standing tax benefits that you may have taken advantage of in the past. Below is an overview of 5 ways the TCJA may impact individuals and businesses, and tax planning strategies that can help you achieve short-term savings amidst all of the changes.
- Income tax rates.
The TCJA introduced a new rate structure on ordinary income, with significantly lower tax rates. If you deferred income from 2017, this year may be a good time to take advantage of the lower tax rates.
- Inflation adjustments.
The TCJA also introduced a switch from the Consumer Price Index (CPI-U) to the Chained Consumer Price Index (C-CPI-U), which is used in calculating annual inflation adjustments. This may impact taxpayers near the higher end of tax rate brackets, because it means that movement from one bracket to another will result from inflation pressures only, instead of effective increase in earnings.
For divorces and separation agreements entered into after December 31, 2018, alimony or separate maintenance payments are no longer deductible by the payor, or includible in the income of the payee. If you are in the final stages of negotiating a divorce or separation agreement, it may be beneficial to finalize prior to January 1, 2019.
- Medical expenses.
The TCJA changed the deduction for medical expenses to 7.5% of AGI for all taxpayers, not just those aged 65 or higher, but only for 2017 and 2018. In 2019, the deduction will return to 10%. If you have medical procedures planned for the future that could potentially take place before the end of 2018, it may be easier to claim this deduction.
- Standard deduction.
One of the most impactful changes of the TCJA is the increase of the standard deduction for all taxpayers. For 2018, the standard deduction amounts are $24,000 for joint filers, $18,000 for heads of households, and $12,000 for all other individual filers—these are nearly double what they were in the past. This may make it less beneficial to itemize deductions, such as charitable contributions. However, there are strategies that may allow you to work around this, such as staggering your contributions on a bi-yearly basis.
- Expended eligibility to use the cash method of accounting.
Most entities that have average annual gross receipts of less than $25 million for the three prior taxable years will be eligible to use the cash method of accounting. The prior threshold for using the cash method ranged from $1-10 million average annual gross receipts for the three prior taxable years, depending on numerous factors. For federal income tax purposes, the use of the cash method may benefit taxpayers that generate accounts receivable that significantly exceed their accounts payable and accrued expenses.
- Reduction in corporate tax rate and Section 199A deduction.
The corporate tax rate was permanently reduced from 35% to 21%, and the corporate AMT was repealed (C corporations). The TCJA also established the Section 199A deduction for qualified business income (QBI). Taxpayers (other than C corporations) with taxable qualified business income may be eligible for a deduction up to 20% of the QBI. Recently proposed regulations provided much-needed guidance, however, in order to maximize the Section 199A benefits, pass-through entities will need to work through a number of potentially complex steps.
- Depreciation and expensing.
The TCJA reintroduced 100% bonus depreciation for 2018, allowing businesses to immediately deduct the costs of both new and used depreciable assets in 2018. These increases do not apply to 2018 only, so there is time to take advantage of them in the future, but if you considering acquiring new equipment or assets, now is a great time to do so.
- International tax provisions.
In addition to last year's international tax reform, the TCJA also enacted several significant provisions that will continue to impact taxpayers with foreign business holdings going forward. The IRS and Treasury have proposed guidance throughout the year, and we are expecting additional guidance to be released over the next several months. Taxpayers with international business interests should evaluate their overall structures and supply chains, and the impacts that these new provisions could have on their particular circumstances.
- Paid family leave credit.
The TCJA created a new credit for employers that provide paid family leave—up to 25% of the amount paid to employees. In order to receive the credit, employers must have a written policy in place by December 31, 2018.
Through careful planning, you may be able to significantly reduce your tax liability—but many savings strategies are time sensitive. The longer you wait, the less likely it is that you will be able to achieve a meaningful reduction. If you have questions about how to reduce your tax bill, leave a comment below, or feel free to contact me directly.