Dear Friends and Clients, January 2018
REED & DAILEY ASSOCIATES’ ANNUAL INCOME TAX UPDATE
THE TAX CUT and JOBS ACT OF 2017 (TCJA) is the Big News for 2018. As we predicted in last year’s tax letter, Tax Reform has dominated the airwaves and everyone wonders “is it good or bad for me”? The answer is “YES”, of course J. The TCJA will benefit most typical taxpayers to varying degrees but some will suffer greatly. An entire explanation of the TCJA is beyond the scope of a newsletter so we’ll just hit on some major points of interest for the average Joe Taxpayers.
URGENT: Unless noted- all changes in the New Tax Law do not affect filing your current 2017 Income Tax Return. Changes start as of 1/1/2018 and affect NEXT YEAR’S 2018 Tax Returns, which are to be filed next year- in 2019.
FIRST: THE STANDARD DEDUCTION is increased to $12,000 Single and MFS; $18,000 Head of Household; and $24,000 for Married Joint. However, the Deduction for Dependents is eliminated. GONE! Quick Analysis: Don’t judge just yet. Read on…
SECOND: THE SEVEN CURRENT “TAX BRACKETS” are replaced with SEVEN NEW TAX BRACKETS. Those seven current tax rates of 10%, 15%, 25%, 28%, 33%, 35%, 39.6% rates are replaced with tax rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%. As we can see, most rates are reduced. Not shown are the ranges which apply to each bracket. Quick Analysis: The Upper-Middle incomes may see higher taxes with bracket changes, BUT the Top Tier will save the most. (See last year’s newsletter.)
WHAT’S “OUT”: Deductions for Dependents; Moving Expenses (except Military); Alimony tax deductions for post 2018 agreements (previous Alimony agreements are “grandfathered” and the deductions remain), the “Obamacare Tax” mandate for those not covered by medical insurance; most Meals & Entertainment Deductions for business, and major changes to Schedule A- Itemized Deductions. The changes to Itemized Deductions deserve its own section. Please see below.
Losing the Deduction for Dependents is Good News? For most people, yes! To offset the loss of Deductions for Dependents, The TCJA has increased the Child Tax Credit for children (age 16 and under) from $1,000 to $2,000. Better News: The income “phase-out” for the Child Tax Credit is increased to $400,000 MFJ and $200,000 Single/Head of Household/MFS. Best News: If you can’t fully utilize the Child Tax Credit due to low taxes then the “Refundable Child Tax Credit” is increased from $1,000 per child to $1,400 per child. This actually increases Tax Refunds to a great many young working families.
But What About Other Dependents? Students over age 16, dependent parents, grandparents, and that slacker nephew? No Deduction? True. But the new law brings in a new Dependent Credit for them at $500 per dependent. The Dependent Credit reduces your income tax DOLLAR-FOR-DOLLAR but is not “refundable” if unusable. Overall, Not Bad, not bad.
BIG CHANGES TO SCHEDULE A- ITEMIZED DEDUCTIONS. Only about 24% of our clients itemize deductions on Schedule A and nationwide the percentage is lower. So these changes don’t affect most taxpayers. HOWEVER, many of those that ARE affected are Whacked Hard. [**Reminder** The Standard Deduction of $12,000/$18,000/$24,000 is “In lieu of Itemized Deductions”.] So now it takes even more of Itemized Deductions to be a better choice than the Standard Deduction.
SCH. A- ITEMIZED DEDUCTIONS Part I: Who got Whacked? (1) The TCJA limits the Schedule A Deduction for Taxes at $10,000. This is for Real Estate Taxes, Sales Tax or State/Local Income Taxes ALL COMBINED. BIG LOSERS: High-tax states like NY, NJ, CA, MA (“Blue States”?) and those with high incomes and high Real Estate Taxes. (2) All Home Equity Interest- GONE! (3) Mortgage Interest for a Second Home: Gone! (4) New Home Mortgage Interest: (If home purchased after 2017) the first $750,000 of the loan- Interest is OK. After $750,000 loan: Interest Gone! **Mortgages taken out before 2018 retain their prior deduction status until paid off** (5) Mortgage Insurance Deduction- GONE! (6) Personal Casualty and Theft Losses- GONE! (Except for Casualty Losses due to Federal Disaster Areas, which remain) (7) Miscellaneous Deductions- See Next…
SCH. A- PART II: Miscellaneous Deductions- GONE! BIGGEST LOSERS? Any Employee business expenses? (…Gone!). Employees with auto and travel expenses, Union Dues, work tools, work clothes, and especially Truck Drivers with overnight meals lose big-time under the new law. Plus: All Other Miscellaneous Deductions on Schedule A that are subject to a 2% floor: Gone! Examples are tax prep fees, investment management fees and investment expenses, legal fees to collect taxable income, and even safe deposit box fees: they all disappear under the new TCJA.
SCH. A- PART III: MEDICAL EXPENSES SURVIVE THE CUTTING BOARD FOR ONE MORE YEAR ONLY. In a surprise move, Medical Expenses remain deductible for Tax Years 2017 and 2018. The House version had Medical Expenses due for elimination after 2017 but the Final Version kept it intact through 2018. ANOTHER SURPRISE: The 10% of AGI threshold is reduced to 7.5% for both years, thereby increasing deductions while the deduction is in force. This is great news for elderly clients and those in nursing homes. We predict a renewal of Medical Deductions in some form for future years, in fairness.
REPEAT: Unless noted- all changes due to the New Tax Law do not affect filing your current 2017 Income Tax Return. Most provisions of the TCJA affect NEXT YEAR’S 2018 Tax Returns, which are to be filed next year in 2019. If You’re Still With Us At This Point… here’s a Fun Fact: MANY OF THE TCJA PROVISIONS EXPIRE AFTER DECEMBER 31, 2025, unless extended by Congress. Right now it would be too confusing to go point-by-point and show which changes stay and which ones are scheduled to go away. Of course, we will keep you informed each year about what’s going down. That’s why we do this.
ON TO “BUSINESS”: OWNERSHIP HAS ITS REWARDS. Most BUSINESS OWNERS WIN BIG. Active Business Owners get to shave off up to 20% of their profit for Income Tax Purposes under the TCJA. Whether an active Partner, S-Corp Owner, or Self-Employed Owner you’ll get a deduction up to 20% of your Profit when you go to figure your Income Tax. No break on Self Employment Tax though. The deduction is only for the Federal Income Tax on your Profit. [**OBSERVATION** Many experts predict that this tax break will result in substantial changes in work arrangements where “Contractors” could replace “Employees” in massive numbers. This saves Employers on Payroll Taxes, Medical Benefits, Workers Comp, Pensions, and overhead costs to name but a few.]
CERTAIN PROFESSIONAL SERVICE OWNERS GET “CAPPED” on the 20% “Profit Shave”. Accountants, Lawyers, Doctors, Financial Reps, and certain other Professionals (Athletes, Actors, Musicians, Creative Sorts…) have reduced tax benefits if their Taxable Income is over $315,000 MFJ (or $157,500 Single). This will not affect the vast majority of Professionals.
C-CORPORATE TAX RATES DROP DRAMATICALLY: Old Rule: C-Corporations were taxed on “graduated tax rates” starting at 15% up to a maximum of 35%. New Rule: C-Corporate Net Income is taxed at a flat 21% tax rate. This HUGE tax break for Big Business is expected to free up $Billions in Cash to be re-entered into the US Economy. Opinions vary on whether the cash will result in Economic Growth or if it will result in furthering US Budget Deficits, or a combination of each.
PERSONAL SERVICE CORPORATIONS: Old Rule: “Personal Service Corporations” (PSC’s) were taxed at a flat rate of 34%. New Rule: PSC net income is taxed at a 21% flat rate. *PSC’s are for Doctors, Engineers, Architects, Accountants, etc. filing as a C-Corporation. [**OBSERVATION** Most PSC’s are set up that the owners take out all potential profits in the form of Wages and Benefits before year-end, leaving little room for Profit to be taxed anyway.] Just the facts, Ma’am.
FEAR FACTOR: Current rules on Tax-Free Profits for selling your personal residence remain in place. Before the New Rules were approved one version tried to eliminate this break! Another version increased the time limit from a minimum of two- to a new minimum of five years of occupancy to realize tax-free profits on selling your home. Upon final passage the current (favorable) rules were retained (two out of five years, ownership and occupancy…). Other Tax Benefits that are retained, but were feared to be dropped include: Educator Expense Deduction: $250 retained; Student Loan Interest Deduction: retained; Exclusion of Taxation on Tuition Waivers for Graduate Students: retained.
LANDLORDS: Finally, RENTAL PROPERTY OWNERS CAN GET IMMEDIATE SEC. 179 TAX DEDUCTIONS for furnishings, fixtures, HVAC, appliances, and…ROOF REPAIRS. Prior to January 1, 2018, Landlords had to depreciate over various time periods the above common capital expenditures. With the new change, Rental Deductions are put on par with Business deductions.
BACK TO BUSINESS: SECTION 179 DEDUCTIONS INCREASED AND MADE PERMANENT. The New Law increases the Sec. 179 Deduction Limit to $1,000,000 and is made permanent effective for purchases starting January 1, 2018. SECTION 179 APPLIES TO BOTH NEW AND USED QUALIFYING PROPERTY. This is contrasted with BONUS DEPRECIATION, discussed next.
“BONUS DEPRECIATION” IS ENHANCED RETROACTIVE TO SEPT. 28, 2017, UP UNTIL DECEMBER 31, 2022. “Bonus Depreciation”, similar to Section 179 Deductions, allows Business to deduct 100% of the cost of “Qualifying Property” in the year placed in service. One major change is the definition of “Qualifying Property”. For Bonus Depreciation, “Qualifying Property” formerly meant New Property only. Used Property did not qualify for Bonus Depreciation. Now, with the TCJA Used Property qualifies for Bonus Depreciation (unless acquired from a related party, and a few other restrictions.)
BONUS DEPRECIATION IS THEN REDUCED IN FUTURE YEARS AFTER 2022 by 20% per year each calendar year starting in 2023. For instance, in 2023 first-year Bonus Depreciation is reduced to 80% of qualifying cost; in 2024 60% can be first-year Bonus Depreciation, and so on. Look for further extensions and refinement of the crazy Depreciation rules in years to come.
COMPUTERS & PERIPHERAL EQUIPMENT ARE NO LONGER “LISTED PROPERTY” and are therefore not subject to the heightened substantiation requirements that used to apply to listed property. Still, keep a record of personal vs. business use.
When a family member is deceased, Reed & Dailey Associates often files tax returns for the Estate of The Deceased Person. We work along with several attorneys in the area and we are glad to be of service in the most sensitive of times. Please do not hesitate to call us for any questions, or for planning purposes to minimize future income taxes when a loved one passes.
TOP TEN TAX TIDBITS: (1) Don’t forget to send 1099’s to non-employees paid $600 or more for the year by Jan. 31st. (2) The IRS does not allow “estimates” of Travel and Entertainment. Keep actual mileage and hotel receipts at the time incurred. (3) The annual Gift Tax Exclusion is $14,400; (4) If you exceed the annual Gift Tax Exclusion you must report it on a Gift Tax Return, but no tax is due unless you gift over $5,400,000+ in your lifetime. (5) Gifts are not subject to Income Taxes. (6) Seek tax advice before you act, not after the fact. (7) IRA Required Minimum Distributions (RMD) can be taken from one account or from several accounts in a year. It is your choice. (8) You might be able to claim Medical Expenses for a medically dependent relative, even if you do not claim them as a dependent. (9) Rollover mistakes cost taxpayers THOUSANDS OF DOLLARS each year. Call us first to avoid penalties and unnecessary taxes with proper planning. (10) We offer FREE INCOME TAX SERVICE to COMBAT ZONE military families.
DO YOU NEED HELP WITH YOUR INVESTMENTS, IRA’S, ROLLOVERS, COLLEGE SAVINGS, OR LUMP SUM MONEY? Donald Reed, Jr. and Matthew J. Dailey are Financial Advisers with Cetera Financial Specialists, LLC. If you need help with your financial and retirement planning goals and are a resident of PA, OH, or MD please call anytime. (These services are not affiliated with Reed & Dailey Associates, Inc.; Securities offered by Cetera Financial Specialists, LLC, member FINRA/SIPC; Branch Office 475 S. Buhl Farm Drive, Hermitage, PA 16148. Advisory services offered through Cetera Investment Advisers, LLC. Cetera is under separate ownership from any other named entity).
APPOINTMENTS: Please call us ASAP for appointments. Should you wish to DROP-OFF your information, please don’t call ahead of time to DROP-OFF. Jot down questions- we will call you back. WE HAVE ALL TAX FORMS ON COMPUTER SOFTWARE (Federal, State, and Local) so don’t wait for those to come in the mail.
REFERRALS are greatly appreciated! We say THANK YOU for sending great people our way. Please tell a friend if you are pleased with our service. We strive to offer you the best possible experience with our friendly staff!
MAY THE LORD BLESS YOU IN 2018 AND BEYOND
Donald G. Reed, Enrolled Agent Don Reed, Jr., CPA Matthew J. Dailey, CPA, MBA
JoLynn DeVries, General Manager Jill Seidel, Senior Staff Accountant
Cathy Kamovitch, Front Office Coordinator Carol Kamovitch, Collation/Quality Control
STAFF TAX PREPARERS:
Gail Moore, Lynn Mathieson, Walt Bedich, LeaAnne Dumars
Mary Hatton, Jamie Dailey, Cheryl Whalen, Beth Luther,
Kathy Murphy, Melody Perdian, Michelle Parker
*PLEASE FILL IN THE 2017 CLIENT INFORMATION SHEET FOUND ON THE REVERSE SIDE OF THIS FORM *
AND BRING IT WITH YOU, OR SEND IT IN ALONG WITH YOUR INCOME TAX INFORMATION.
PHONE: 724-981-7779 FAX: 724-981-3199
Please Visit our Website: www.reedtax1.com
Office Hours: Monday-Thursday 8:00AM- 8:00PM Friday & Saturday: 8:00AM- 4:00PM