It is that time of year again when we start to think about year end taxes. This year will be interesting. Although the political talk is that taxes have been simplified, that is far from true. There are more than 500 changes to the tax laws and an additional 6 forms on the individual return so that it could be said you can file on a postcard. And although itemized deduction on the federal side is limited, at this time, states have not always adopted the federal changes so two sets of calculations need to be made. Minnesota is one of these that has not adopted the Federal changes, so we will have to figure taxes both under the new laws and also under the old laws.
Here are some highlights and reminders for year end planning. Let’s start with business deductions.
Asset purchases have very generous write offs available now. Generally, if you buy less than $1,000,000 of business assets, you can write the entire amount off against your income. Vehicles with more than 6,000 Gross Weight are considered equipment and can be entirely written off (the business portion that is). Passenger autos get a first year cap at $18,000 for depreciation.
The new 20% deduction for pass through income will be new this year. Although guidance from the IRS has been slow, this could be good for many small business owners. However, as tempting as it may be for S-Corporation owners to give no salary to themselves to boost the deduction, the rules are still in place that S-Corporation owners must pay themselves a “reasonable” salary. We can help to determine what that might be. The 20% deduction caps out at incomes of $315,000 of taxable income for couples, so if you think you are close to that, delay income and accelerate deductions to get below that amount.
Now for the personal tax side. Remember if you are 70 1/2 you must take minimum distributions from your IRA and 401K accounts by year end, or pay a 50% fine. If you turn 70 1/2 this year, you can delay taking the minimum distribution until April 1 of 2019. If you are charity minded, you can make a direct transfer of these distributions to a charity and avoid paying tax on these. You cannot take them as charitable deductions, but with the higher standard deduction of $24,000 for married couples this might not be an issue anyway.
Be careful with the year end gifting rules. You can gift $15,000 per person in 2018, but you will want to be sure they deposit the check before year end in their account or use a cashiers check.
For working individuals, be sure to max out your 401k and Health Savings account contributions. If your tax bracket is low, you may want to consider contributing to a Roth IRA or 401k instead – but only if you have little or no tax.
Bunching charitable deductions can get you over the new standard deduction amount. Make two or three years of charitable deductions in one year. This would work if you have mortgage interest of at least $14,000 (presuming you have more than $10,000 of state tax). And speaking of mortgage interest, second mortgages are no longer deductible if you don’t use the funds to buy or build your principal residence. No more lines of credits on the house to buy other property or vehicles since this interest is no longer deductible as mortgage interest. And there are now limitations on new mortgage interest about $750,000 of principal.
Other changes that might affect you are the Alternative Minimum tax will likely not impact as many people this year. That does not mean your tax liability goes down, though since you regular tax liability will go up if you were subject to AMT before. And the additional .09 Medicare tax on earned income is still in force this year.
If you want to avoid underpayment penalties, you will need to pay in at least 90% of your 2018 tax bill (or 100% if over $150,000 of adjusted gross income) or 100%/110% of last years tax.
And the individual insurance mandate is still in place for 2018 for those without health insurance. There are many states that are considering adding a tax like this in 2019 when the Federal mandate stops.
Our usual year end tax facts will be sent out the first week of January. Until then, keep watching our blog for more updates.
Hope you all have a good holiday season!
David and Amanda