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William G. Koch & Associates
Tax Letter
A summary of 2018 significant tax legislative changes and tax planning suggestions.
2650 Westview Drive • Wyomissing, PA 19610
(610) 678-9700 • (610) 678-9224 FAX
www.wgkcpa.com
TABLE OF CONTENTS
TAX CUTS AND JOBS ACT MAKES RADICAL CHANGES TO TAX CODE
................................................................................................................... 1
ITEMIZED DEDUCTION CHANGES: ......................................................... 2
OTHER CHANGES: ................................................................................... 2
BUSINESS CHANGES: .............................................................................. 4
OTHER ITEMS OF INTEREST: .................................................................. 5
WHAT DOES IT MEAN FOR TAXPAYERS? .............................................. 5
TAX FILING DEADLINES ........................................................................... 7
IDENTITY THEFT ....................................................................................... 7
CHARITABLE CONTRIBUTIONS ............................................................... 9
ALTERNATIVE MINIMUM TAX ................................................................ 10
CAPITAL GAINS & DIVIDEND INCOME TAX RATES .............................. 11
“KIDDIE” TAX ........................................................................................... 12
INDIVIDUAL FEDERAL TAX RATES........................................................ 13
HEALTH SAVINGS ACCOUNTS .............................................................. 14
HIGHER EDUCATION PLANNING ........................................................... 15
ENERGY CREDITS .................................................................................. 18
STANDARD MILEAGE RATES ................................................................ 18
FOREIGN ACCOUNTS ............................................................................ 19
REQUIRED IRA WITHDRAWALS ............................................................ 20
RETIREMENT PLANNING ....................................................................... 21
ESTATE AND GIFT PLANNING ............................................................... 23
PLANNING FOR SELF-EMPLOYED TAXPAYERS .................................. 24
SOCIAL SECURITY AND SELF-EMPLOYMENT TAXES ......................... 26
MEDICARE ............................................................................................... 27
AVOIDING PENALTIES FOR UNDERPAYING INCOME TAX ................. 29
DOCUMENT RETENTION AND AUDIT STRATEGIES ............................ 30
PENNSYLVANIA AND LOCAL TAXES AND DEVELOPMENTS .............. 30
DISCLAIMER ............................................................................................ 34
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Headline
TAX CUTS AND JOBS ACT MAKES RADICAL CHANGES TO TAX CODE
The Tax Cuts and Jobs Act (TCJA) signed by President Donald Trump on December 22, 2017 made drastic changes to the tax code - the most in over 30 years. The table below summarizes some of those changes that are further discussed in the body of this newsletter.
Change Trade off
Standard deduction was greatly increased.
Some itemized deductions were limited or eliminated through 2025.
The child credit was increased by $1,000 and a dependent credit of $500 will be available to some taxpayers.
The personal exemption has been suspended until 2026.
A new Section 199A deduction will be available to many sole proprietors and owners of pass through entities.
The old 199 DPAD deduction has been eliminated.
The income tax rates and brackets for all individuals’ trusts, estates, and corporations have been changed.
Although many taxpayers will be in a lower tax bracket, other changes including the reduction of itemized deductible expenses may create a tax increase.
$10,000 of 529 plan contributions may be used for grade k-12 educational expenses at public, private, and religious schools.
529 plans are a great way to save for college. To the extent funds are used for pre-college expenses, investment growth opportunities are diminished.
The Alternative Minimum Tax (AMT) exemption has been increased.
No disadvantages. Many taxpayers previously subject to AMT will no longer fall into its draconian trap.
Business entertainment expenses are no longer deductible and meal expense has been further limited.
This will impact many businesses in a negative way. Entertainment was often used as a marketing technique to draw new clients or customers.
Section 179 deduction has been increased and bonus depreciation has been expanded to include used assets. Bonus depreciation is 100%.
Generally, this is a win for businesses. Note: States may not follow federal rules.
Net operating losses (NOLS) incurred in 2018 must be carried forward and can be used to offset only 80% of future income each year.
Carryback rules enabled businesses to immediately seek tax refunds from prior taxable years. The 80% limitation is also a hit.
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ITEMIZED DEDUCTION CHANGES:
Itemized deductions were previously limited for taxpayers who reached certain Adjusted Gross Income (AGI) ranges. This limitation, known as the Pease Limitation, has been suspended. All itemized deductions will be deductible.
Medical expenses that exceed 7.5% of AGI are deductible as an itemized expense for all taxpayers who can itemize.
The deduction for State and Local Taxes (SALT) is limited to $10,000 ($5,000 MFS) in total. Any taxes that exceed this amount are not deductible. This includes income, realty and sales and use taxes.
The mortgage interest deduction is limited to mortgage interest secured by a primary or secondary residence and used to improve or purchase that residence. Interest on a Home Equity Line of Credit (HELOC) that was used to finance a college education, vacation, or any other expenditure is not deductible.
The IRS is no longer going to distinguish between origination interest and HELOC. Interest on loans secured by your home prior to December 17, 2017 and used for purchase or improvement is deductible to the extent the debt does not exceed $1,000,000. Loans originating after this date are subject to a $750,000 limitation. The deductible interest phases out above these thresholds.
Charitable deduction was limited to 50% of AGI prior to TCJA. Beginning 2018 charitable contributions that do not exceed 60% of AGI can be deducted. No charitable deduction will be allowed for the right to purchase tickets or seating at an athletic event of an institution of higher education.
A casualty loss can only be deducted if it occurs in a federally declared disaster area. The net loss must still exceed 10% of AGI and the first $100 is not deductible. A Federal Emergency Management Agency (FEMA) code must be included on Form 4684.
The 2% of AGI miscellaneous deduction has been suspended. Union dues, uniforms, licenses, tax preparation, broker fees and other expenses are no longer deductible.
OTHER CHANGES: The standard deduction has been increased to $24,000 for a married filing joint couple (MFJ), previously $12,700. It is $12,000 for single individuals and married people who choose to file separately, previously $6,350. Head of Household (HOH) filers get a boost of $8,650 to $18,000. Taxpayers who are married and blind or 65 and older get an additional deduction of $1,300 per taxpayer and those who are single get an additional $1,600.
The child tax credit has been increased to $2,000. Up to $1,400 is now a refundable credit. The AGI levels were increased. The credit begins to phase-out at AGI of $400,000 MFJ and $200,000 all other filers. The phase-out ranges previously began at $110,000 MFJ, $55,000 MFS and $75,000 all other taxpayers. Clearly many more
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taxpayers will benefit from this credit. The enhancements were put in place to reduce the effect of the suspension of the individual exemptions.
There is a new $500 dependent credit also put in place to reduce the effect of the lost dependency exemption. The dependent cannot be a qualifying child under age 17. They cannot have income in excess of $4,150 and must have lived with the taxpayer (unless in long term care facility) and the taxpayer must have provided more than 50% of their support.
The income tax rates and brackets have changed for all taxpayers. Please see the chart on page 13 for more information.
Section 529 Plans allow the investment of $15,000 into the account of a beneficiary each year to save for education expenses. Originally designed for college savings, the plans have been expanded to allow distributions of up to $10,000 a year for K-12 education at a public, private, or religious school of the beneficiary’s choosing.
Similarly, Achieving Better Life Experience (ABLE) account rules have also been expanded to allow the rollover of 529 Plan contributions into an ABLE account (with some limitations). The rollover must be from the 529 plan of the ABLE account beneficiary. In addition, the Savers Credit can be taken on contributions to an ABLE account if made by the beneficiary and income requirements are met.
The AMT exemption has been increased to $109,400 if MFJ and Qualifying Widower from $84,500 in 2017. Single and HOH filers have an exemption of $70,300 (previously $54,300). The exemption for MFS is $54,700, an increase from the 2017 exemption of $42,250. The AMT phase-out begins at $500,000 for all taxpayers except MFJ - $1,000,000. Far fewer taxpayers will be subject to AMT.
The payment of alimony will no longer be deductible and the receipt will no longer be taxable for taxpayers who execute a divorce decree after December 31, 2018.
Conversions to a Roth plan from a traditional IRA, SIMPLE, or SEP cannot be recharacterized back to the original plan. Rollovers from other retirement plans to a Roth are subject to the same treatment; however, you may treat a contribution made to a traditional IRA or a Roth IRA as being made to the other type of IRA if done in the same year.
If you have a loan against your employer retirement plan and you quit or are terminated, the plan sponsor may offset the outstanding loan balance against the plan balance to be rolled over. This would generally place you in the position of paying tax on the shortfall of the balance rolled over to another plan. You may now fund the difference until the due date of the return including extensions.
Early withdrawals from retirement plans as a result of a disaster may be eligible for waiver of the 10% penalty on early distributions. Also, one may be able to spread out a disaster distribution over 3 years, repay the distribution, have expanded loan ability, and extend the repayment period.
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The kiddie tax rules have changed. The unearned income of a child is taxed at ordinary and capital gain rates as applicable to estates and trusts. Unearned income above $2,100 will be taxed at these rates.
Professional gamblers are no longer allowed to treat excess gambling losses as an itemized deduction. Gambling expenses that exceed winnings are not deductible. Casual gamblers still treat expenses as an itemized deduction. Deductible gambling expenses cannot exceed gambling winnings.
Hobby expenses (other than cost of goods sold) are no longer deductible as an itemized deduction.
The deduction for moving expenses is suspended for all taxpayers except active military personnel who move as a result of military orders.
BUSINESS CHANGES:
The maximum corporate tax rate is 21%.
The AMT has been eliminated for corporate taxpayers.
A new deduction is available to many sole proprietor and pass through business owners. For most affected taxpayers it will be a 20% deduction of Qualified Business Income (QBI). Taxpayers in higher income brackets ($315,000 MFJ and $157,500 all others) may face phase-out limitations or other wage and capital asset tests. This is a complex area of the TCJA.
Business entertainment and country club and other private club dues are no longer deductible. Meals provided from an on-site cafeteria are subject to a 50% deduction limitation. Other meals are 50% deductible as long as the business owner or employee is present at the meal.
The former Domestic Production Activity Deduction (DPAD) has been eliminated. The DPAD generally created a 9% deduction based on wages paid or Qualified Production Activity Income (QPAI) for businesses or pass through owners. It was put in place through the American Jobs Creation Act of 2004 to spur domestic manufacturing and construction growth.
Section 179 has been greatly enhanced. A $1,000,000 expense election is available (formerly $500,000) and begins to phase out when purchased assets exceed $2,500,000.
100% bonus depreciation is available for assets with a life of 20 years or less. It now applies to used assets as well as new. Qualified Improvement Property (QIP) no longer qualifies.
The depreciation limits on passenger vehicles has been greatly enhanced. A taxpayer can take up to $18,000 combined regular and bonus depreciation expense. SUVs and certain trucks are limited to Section 179 of $25,000. Non-passenger vehicles are not limited.
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If a business sustained a net operating loss (NOL) prior to January 1, 2018, the business was allowed to carry the loss back two years and the excess forward twenty. The business was also allowed to offset 100% of the loss against prior or future income. With passage of the TCJA, beginning January 1, 2018 any new NOL must be carried forward and can offset only 80% of future income in any given year. Pre-2018 NOL carryforwards can be fully applied; they are not subject to the 80% limitation.
Deductible business losses are limited to the sum of aggregate gross income and $500,000 (MFJ) and $250,000 for all other taxpayers.
Like kind exchanges are limited to real property.
The write off for employee transportation fringe benefits is no longer allowed.
Moving expenses paid or reimbursed by the employer must be included in W-2 wages of the employee. Moving expenses excluded from W-2 wages are not deductible by the employer.
A temporary credit applicable in 2018 and 2019 is available to employers who pay family or medical leave. The credit is equivalent to 12.5% of the wages paid.
OTHER ITEMS OF INTEREST:
All taxpayers are required to have qualifying health coverage, be eligible for an exemption, or pay a shared responsibility payment for tax year 2018. The shared responsibility payment has been eliminated for individual taxpayers beginning tax year 2019.
The estate tax exclusion is $11,180,000 in 2018. The gift tax exclusion is $15,000 in 2018.
WHAT DOES IT MEAN FOR TAXPAYERS?
Plan, plan, and more planning...The higher standard deduction makes it less attractive to itemize. Section 179 expensing and 100% bonus depreciation are great incentives to purchase capital assets, but the 199A deduction needs to be considered before eliminating all business income through write offs. Higher Modified Adjusted Gross Income (MAGI) limits for child, dependent credits and AMT provide incentives to manage earnings to achieve the best tax strategy. Here are some ways to do that:
If you and dependents are in need of eyeglasses, braces, hearing aids or other expensive medical procedures try to purchase them in the same year so you can take advantage of the itemized medical expense deduction.
Consider increasing your charitable contributions or making them every two to three years (bundle them together). Put the money in a savings account or other interest bearing account until you are ready to contribute.
Donate those no longer needed, dust collecting items to charity. Document items donated, (thrift store) value, to whom donated and date.
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Prepay mortgage interest.
Pay final estimated tax payments in December if your total state and local income, realty and sales and use taxes will not exceed $10,000 and you are able to itemize.
If 70½ or older make Qualified Charitable Distributions (QCD) to lower MAGI and benefit from an otherwise lost charitable deduction because you do not meet the itemized deduction threshold.
Make the maximum contribution to deferred compensation plans, Health Savings Account (HSA) and Flexible Savings Account (FSA).
Harvest stocks that are at a loss and unlikely to recover.
Establish and contribute to 529 Plans and or ABLE accounts for your children/grandchildren and other individuals. This may have the effect of reducing state income taxes and will build a nice nest egg for education or other expenses.
If you own a business and are in need of new equipment, purchase it before year end so you can take advantage of depreciation alternatives. If your MAGI is near phase-out thresholds of various tax incentives utilize
Section 179 or Bonus depreciation to reduce taxable income.
If excess depreciation will put you in a loss position, consider electing out of bonus depreciation and reducing Section 179 expense. The new Section 199A deduction is largely based on Qualified Business Income (QBI). It may be advantageous to take the 20% deduction (for most taxpayers) and extend depreciation expense to future years. We can work with you to strategize the best solution.
There is a new $500 dependent credit. It is available to taxpayers who provide more than 50% of the support of a qualifying relative. Determination of who is a dependent is made by applying the 2017 dependent exemption rules. The person must: 1) not be a qualifying child under age 17, 2) must be a member of the taxpayer’s household or meet the relationship test, 3) meet the gross income test (taxable income that does not exceed $4,150), and 4) meet the support test (generally more than 50%, Note: the dependent’s funds aren’t support unless they are spent on support). Children who are 17 or older will qualify to be treated as a dependent if the
other criteria are met. Qualifying relatives (generally lineal descendants and relationships
established through marriage and not ended through death or divorce) or someone who lived in taxpayers home for the entire year meet the relationship test and are eligible to be treated as a dependent if the other criteria are also met. (Note: Individuals who reside in nursing homes or other care facilities are considered residing with the taxpayer. The same is true for students living on campus. Temporary stays at camps, medical facilities, etc. are considered time at home.) This credit should provide some relief to individuals who were previously eligible to claim the dependency exemption.
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Planning note: Families who have multiple support agreements can determine on an annual basis who will claim the credit. The eligible taxpayer must provide at least 10% of the total support to be eligible to claim the credit. The same individual would be eligible to claim itemized medical expenses they pay on behalf of the dependent.
TAX FILING DEADLINES
Partnership Form 1065 and S Corporation Form 1120S March 15, 2019
Individual Form 1040, C Corporation Form 1120, Foreign Bank and Financial Reporting (FBAR), FinCen Form 114, Trusts and Estates Form 1041
April 15, 2019
Tax Exempt Nonprofit Organization Form 990 May 15, 2019
Extended filings for Partnerships and S Corporations Sept. 16, 2019
Extended filings for Trusts & Estates Oct. 1, 2019
Extended filings for Individuals, C Corporations, FBAR Oct. 15, 2019
Extended filings for Tax-exempt Nonprofit Organizations Nov. 15, 2019
IDENTITY THEFT
Identity theft continues to be a serious problem. It is important all taxpayers safeguard
their personal information and not fall prey to the many scams that run afoul.
Remember these pointers:
Store your social security card in a safe location (do not carry it with you).
Do not provide your social security number to others unless absolutely
necessary.
Check your credit report routinely.
Check your social security earnings report annually.
Do not provide personal information to others unless you know who is asking for
the information and why.
Password protect computer files and use a firewall.
The IRS does not initially call taxpayers. All correspondence will begin with a
letter. Rarely is a call made by an IRS agent. It will only happen after other
avenues of communication have already been established. Most IRS matters
can be resolved through mail or fax correspondence or the taxpayer calling the
IRS. When speaking with the IRS the individual will always provide an
identification number.
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If you become a victim of identity theft, do the following:
File a police report and a FTC report (https://www.ftc.gov/).
Contact one of the 3 major credit bureaus (Experian, TransUnion, or Equifax) and check your credit report and place a fraud alert notice with them.
Contact your financial institutions and close fraudulent or tampered accounts.
If your social security number is compromised file Form 14039 with the IRS. A
fillable form is available at www.irs.gov.
If you receive a notice from the IRS stating your social security number has been
compromised, call them immediately at the number they provided.
Contact us so that we are aware of additional actions needed to file future
returns.
Living in our technology savvy society provides pros and cons. The IRS advises that in
order to protect yourself, your tax returns, and your refunds, you should remain aware of
these seven items to maintain online security.
Shop at familiar online retailers. Generally speaking, the “s” at the end of https
signifies a secure URL; however, this does not prevent fraudsters from obtaining
phony security certificates.
Avoid unprotected Wi-Fi. Avoid pop-up ads, unfamiliar sites, or online financial
transactions on unsecured Wi-Fi.
Discern phishing emails from actual emails from the IRS or established financial
institutions. If you are asked to click a link to take you to a foreign website, DO
NOT click it. You are most likely being guided to a website laden with malware
trying to steal your username and passwords.
Ensure your devices are protected and updated. Having antivirus, firewalls, and
other security measures protect you and your sensitive information from
individuals who seek to steal this data.
Use strong, long, and unique passwords. A minimum of 8 characters is advised
but longer is more effective. Using a combination of letters, numbers, and
special characters is advised.
Multi-factor identification is useful for ensuring you are the one accessing your
information.
Utilize encryption and password protection of sensitive data. Backing up
important information to a hard drive is also recommended. It is also important to
note that you should wipe the hard drive of your system before disposing of your
computer.
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TAX RELATED TOPICS
CHARITABLE CONTRIBUTIONS
Tax legislation that allowed taxpayers age 70½ or older to make tax-free distributions up
to $100,000 from traditional IRAs directly to charities has been permanently extended.
The increased charitable deduction for qualified conservation easements was also
permanently extended.
As a reminder, the IRS does not allow a deduction for any contribution of cash, check,
or other monetary gift unless you can show a bank record or a written communication
from the charity substantiating the donation. Also, donations of used household items
and used clothing must be in "good used or better condition" to be deductible. There is
an “antiques” exception for donated single items of used household items and used
clothing appraised at more than $500.
The appraisal must be written and contemporaneous with the donation. A general rule
of thumb is items donated should be valued at thrift shop or “yard sale” prices. Useful
guides can be found at https://satruck.org/Home/DonationValueGuide or
https://www.goodwill.org/wp-content/uploads/2010/12/donation_valuation_guide.pdf to determine fair prices. Remember to keep a list of all items donated and the price you
have assigned to each. Large deductions for donations of used household items and
used clothing have been sustained upon IRS audit if properly documented. The IRS no
longer accepts round number estimates with no list of what was donated.
Donations of appreciated stock can often produce a higher tax benefit than selling the
stock and donating the cash or just donating cash. Besides the charitable contribution
deduction, you also save tax on capital gains by donating stock that has a significant
increase in value from when you, or someone who gave it to you, bought it. Be certain
that you have held the stock for at least one year prior to making the gift. Stock held
less than one year provides a deduction at your original cost basis. Conversely, you
may have stock that has fallen in value. If you donate stock that has lost value, you are
precluded from deducting the tax loss on your income tax return. It is better to first sell
the depreciated stock you are considering donating, take the loss, and then donate the
proceeds as a cash gift.
A deduction for a charitable donation of a vehicle, boat, or other high-end item, if sold by
the charity, is generally limited to the gross sales price. The fair market value may be
used if the charity does a “qualifying act” with the property. A qualifying act is a
significant use or material improvement of the asset or a sale of the asset below fair
market value to the needy or disadvantaged. The qualifying act must also be part of the
charity’s purpose and be acknowledged in writing by the charity to the donor.
If the value of the sold vehicle, etc. is over $500, the charity must provide a Form 1098-
C to the donor stating the amount of the gross proceeds within 30 days of the sale.
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If the sold vehicle, etc. is valued under $501, no form 1098-C is issued and the general
rules for donations of property to charities are followed such as getting an
acknowledgement from the charity for property valued between $250 and $500 or
simply documenting the donation and the fair market value with receipts and records for
donations below $250. To be deductible, the donor must make the donation to an
organization that is listed in IRS Publication 78 https://www.irs.gov/pub/irs-prior/p15--
2017.pdf . We can help you check that information. You must itemize your deductions
(and attach a copy of form 1098-C, if applicable) in order to claim the deduction. Be
aware that, as with the donation of other kinds of property, deductions exceeding
$5,000 in value (other than cash, publicly traded securities, and certain other limited
property) require other substantiation, including a qualified appraisal.
ALTERNATIVE MINIMUM TAX
AMT is a second method of calculating tax by removing some deductions, exemptions and adding back some exempt income. It is only applicable if the tentative minimum tax exceeds your regular tax.
Some regular tax deductions and benefits that may trigger AMT are:
Exercising incentive stock options (ISOs) - the exercise is not taxable for regular tax but the difference between the FMV of the stock and the exercise price is an AMT adjustment unless the stock is sold in the same year as the exercise.
Taxes - state and local income taxes, real, and property taxes are disallowed when calculating AMT taxable income.
Long-term capital gains - although long-term capital gains receive the same treatment for regular and AMT taxation, they can trigger AMT tax by pushing a taxpayer into AMT income range.
“Tax-exempt” interest on private activity bonds - the interest is exempt for regular tax but taxable for AMT.
The AMT exemption is now subject to inflationary adjustment. Please see page 4 for new exemptions and revised thresholds. Far fewer taxpayers will be subject to the tax. Certain nonrefundable personal tax credits such as the credit for dependent care and the American Opportunity Tax Credit (AOTC)/modified Hope credit may offset an individual's regular tax and AMT. This offset provision was made permanent with the passage of American Taxpayer Relief Act (ATRA).
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CAPITAL GAINS & DIVIDEND INCOME TAX RATES
Capital Gains
Please be aware that brokerage statements reporting your dividends, interest, stock
sales, etc. must be mailed on or before February 15th. As has happened in previous
years, this deadline may be extended and the issuance of amended brokerage
statements after the initial ones are sent is also a possibility each year.
The capital gain rates remain the same in 2018 but the brackets have changed along
with the change in the income tax brackets. Additionally, depending on the amount of
your MAGI, capital gains are subject to the 3.8% Medicare Surtax.
The 0%, 15% and 20% capital gain rates apply in 2018 under the Tax Cuts and Jobs
Act. The 0% rate will apply to MFJ with income up to $77,200 and single with income up
to $38,600. The 15% rate applies up to $479,000 and $425,800 respectively and the
20% rate applies above these income thresholds. HOH thresholds are $51,700,
$452,400 and 20% in excess of $452,400. MFS thresholds are half of the MFJ
thresholds.
Net short-term capital gains are, and will continue to be, taxed at higher ordinary income
tax rates. After first considering the investment value of such a decision, consider
holding stock for more than one year to take advantage of the lower long-term gains tax
rates.
There are some assets which do not qualify for the lower tax rates. Collectibles, such
as antiques, fine art, gems and stamps, are taxed at a 28% rate even if held long term.
The portion of the gain on real estate that is attributable to “un-recaptured Code Section
1250 gain” is taxed at a 25% rate.
As the end of the year approaches, examine your investments. It may be beneficial to
sell some losers, provided that this strategy benefits your portfolio as well as saves
taxes. (The depressed stock can be repurchased 31 days later to avoid the wash sale
treatment.)
You can subtract capital losses from capital gains to zero out your gains, and still use
up to $3,000 more in capital losses to offset ordinary income. Unused capital losses
can be carried forward during your lifetime. In future years, you can use up to $3,000
per year to offset ordinary income that exceeds future year capital gain income. Please
note that unused losses expire at death. You should also be aware that
Pennsylvania does not allow offsetting of other types of income with capital
losses or carrying over net capital losses to future years.
As stated above, if you are in the 10% and 15% marginal tax brackets at least some of
your long-term capital gains may be taxed at a 0% rate so that you would not have to
offset all of them with capital losses to eliminate or greatly reduce your tax. Please
contact us to maximize the use of the 0% capital gains rate under various scenarios.
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The basis of property inherited from you is usually its fair market value on your date of
death no matter what you paid for it or how you otherwise acquired it. This is called a
stepped-up basis. The significance of a stepped-up basis is that if your property is
inherited by your heirs and soon thereafter sold, there would be little or no capital gains
tax to pay. This strategy of holding highly appreciated assets until your death to give
your heirs a stepped-up basis should be considered in an overall financial and estate
plan. Please contact us to implement such a plan.
Dividend Income
Qualified dividend income is taxed at long-term capital gain rates, 0%, 15% or 20%,
rather than ordinary income rates. Dividends received on the common or preferred
stock of a domestic corporation and dividends received from qualified foreign
corporations are “qualified” dividends for purposes of the reduced rates. Furthermore,
dividends received from mutual funds are treated as qualified dividends if the earnings
of the fund are at least 95% from qualified dividend income sources. Qualified
dividends received by a partnership or S corporation retain their qualified status when
they are passed through to the partners or shareholders.
If our office can be of assistance in reviewing your portfolio and helping you make some
important strategic decisions on how to maximize your tax savings, please let us know.
“KIDDIE” TAX
The “kiddie” tax law applies to children 19 years old and younger and also to dependent
children who are full-time students up through age 24. To the extent the unearned
income of children who could be claimed as dependents under the pre-TCJA rules is
over $2,100 for 2018, the unearned income will be taxed at trust and estate rates.
There is no longer a need to include parent and sibling(s) income in this calculation. If
the unearned income is below this amount, no federal income tax will be charged.
Earned income is taxed at the rates of single individuals.
If your child is 19 or older and is providing more than 50% of his or her own support
from earned income, the unearned income is not subject to the “kiddie” tax and will be
taxed at the child’s own rate. We can assist you in reporting your child’s income
correctly.
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INDIVIDUAL FEDERAL TAX RATES
The individual tax rates and the bracket amounts adjusted for inflation for 2018 are
outlined below.
2018 Tax Rates/Brackets
Rates
Single
Taxable Income
Married Filing
Jointly
Taxable Income
Married Filing
Separately
Taxable Income
Head of Household
Taxable Income
From
To and
Including
From
To and
Including
From
To and
Including
From
To and
Including
10% $0 $9,525 $0 $19,050 $0 $9,525 $0 $13,600
12% $9,526 $38,700 $19,051 $77,400 $9,526 $38,700 $13,601 $51,800
22% $38,701 $82,500 $77,401 $165,000 $38,701 $82,500 $51,801 $82,500
24% $82,501 $157,500 $165,001 $315,000 $82,501 $157,500 $82,501 $157,500
32% $157,501 $200,000 $315,001 $400,000 $157,501 $200,000 $157,501 $200,000
35% $200,001 $500,000 $400,001 $600,000 $200,001 $300,000 $200,001 $500,000
37% $500,001 or more $600,001 or more $300,001 or more $500,001 or more
Standard deductions are as follows in 2018:
Under 65* Age 65 and over¹
Single individual $ 12,000 $ 13,600
Married filing jointly 24,000 26,600²
Married filing separately 12,000 13,600
Head of household 18,000 19,600
¹ Additional standard deductions can be taken by taxpayers who are 65 and/or blind at
the end of the year.
² $25,300 if only one is 65 or over
The personal exemption is suspended for tax years 2018 through 2025.
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HEALTH SAVINGS ACCOUNTS
HSAs are individually-controlled, tax deductible savings plans available to individuals
who have high-deductible health insurance plans.
The high deductible health plan requires a minimum annual deductible for 2018 of
$1,350 for individuals and $2,700 for families.
In 2018 the maximum out-of-pocket expenses increases to $6,650 for individuals and
$13,300 for families in 2018. Employers and employees may contribute to the Health
Savings Account. The employer contributions are tax-free, as are any distributions for
qualifying medical expenses. Contributions by employees to the HSA are deductible
even if they do not itemize. 2018 HSA holders under 55 years of age can contribute and
deduct up to $3,450 in 2018 for individual coverage or $6,900 in for family coverage.
Those 55 and older can contribute an extra $1,000. You can make HSA contributions
for 2018 through April 15, 2019, even though contributions are reported on Form W-2 in
the year made.
If an employee changes jobs, the HSA goes with him/her. The unused portion of the
HSA can be carried forward indefinitely and is considered a retirement distribution at
retirement if it is not used for medical expense. A distribution for medical expense, even
after retirement, is tax-free. Once a person is enrolled in Medicare (generally by
reaching age 65), he/she may no longer make contributions to a HSA.
Qualified medical expenses include those items that would generally qualify as an
itemized deduction. Over-the-counter drugs (unless prescribed by healthcare
professionals with the exception of insulin for diabetics) cannot be paid from HSA funds.
Nonqualified expenses paid from an HSA are subject to an additional tax. The additional
tax on disqualified distributions is 20%. These rules also apply to FSAs.
HSAs are especially beneficial for those who are young and healthy. The contribution is
tax deductible and the earnings accumulate tax-free. The earnings could be substantial
if most of the contributions are not needed for medical expenses for several years. It’s
like a Super IRA!
15
HIGHER EDUCATION PLANNING
Tax incentives to help offset the high cost of education are available. These options
include Qualified Tuition Programs (Sec. 529 Plans), Coverdell Education Savings
Accounts, the AOTC – the modified former Hope Credit, the Lifetime Learning Credit,
education savings bonds, student loan interest deduction, and the Qualified Tuition
Deduction.
Congress previously modified the Hope Credit and renamed it the American Opportunity
Tax Credit (AOTC). The Protecting American from Tax Hikes (PATH) Act made this credit
permanent. The following is a brief outline of some of the more significant provisions of
the AOTC:
The maximum AOTC credit amount is $2,500 per eligible student per year (computed by taking 100% of the first $2,000 of qualified expenses & 25% of the next $2,000) of Qualified Tuition & Related expenses (QT&R);
Claiming the credit is a child under age 18 or a child under age 24 who is a student providing less than one-half of his support, who has at least one living parent, and doesn't file a joint return;
QT&R expenses include tuition, fees, and course materials;
The AOTC is allowed for each of the first four years of the student's post-secondary education in a degree or certificate program, and, for each eligible student, the AOTC can be claimed for four tax years;
The AOTC is phased-out at MAGI between $80,000 and $90,000 for single filers (between $160,000 and $180,000 for joint filers);
The AOTC can be claimed against AMT liability (unlike the Lifetime Learning Credit and the former Hope Credit); and 40% of the otherwise allowable AOTC is refundable
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Education Credits
Name American Opportunity Tax
Credit (former Hope Credit) Lifetime Learning Credit
Purpose
A per student yearly credit
based on the amount of post-
secondary qualified tuition, fees
and course materials paid during
a calendar year by or on behalf of
oneself, one’s spouse or a
dependent; not available to
spouses filing separately.
A per return yearly credit based on the
amount of post-secondary qualified
tuition and fees paid during a calendar
year on behalf of oneself, one’s spouse
or dependents; not available to spouses
filing separately.
Qualified
Student
First four years student enrolled
in an accredited college or
university on at least a half-time
basis.
A student enrolled in an accredited
college or university to acquire or
improve job skills or graduate level
education.
Limits
Up to $2,500 yearly calculated
by taking 100% of 1st $2,000 of
qualified expenses & 25% of the
next $2,000.
Up to $2,000 yearly calculated by taking
20% of up to
$10,000 of qualified expenses – these
amounts are not indexed for inflation.
Phase-outs
AOTC:
Single filers: starts at $80,000 to $90,000 of modified adjusted gross income
Joint filers: starts at $160,000 to $180,000 of modified adjusted gross
income
Lifetime credit:
Single filers: starts at $56,000 to $65,000 of modified adjusted gross income
Joint filers: starts at $112,000 to $131,000 of modified adjusted gross
income
Interplay
Cannot use AOTC and Lifetime credit for the same student in the same year
Can use AOTC for one student and Lifetime Learning credit for another on
same return
Funds from tax free accounts cannot be included in expenses that qualify
the taxpayer for higher education credits.
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Education Savings Plans
Plan Name Section 529 Plan Coverdell ESA (CESA)
Purpose Savings for certain education
expenses: k-12, state, college,
vocational school, or university
sponsored; the person who opens
the account maintains ownership
of the account.
Savings for qualified expenses at
virtually all levels of education:
public, private and religious.
Investments
Allowed
Menu of broad-based investment
strategies to select from.
Very flexible – any investment
allowed in an IRA is permitted.
Contributions Unlimited cash but nondeductible
from federal income; donor may
contribute up to $15,000 in 2018
per student per year without using
gift tax lifetime credit or incurring
gift tax.
Note: There is a lifetime
contribution limit per beneficiary.
$2,000 nondeductible contribution
allowed per student per year in
2018 and may be made up to
April 15th (or the first business
day thereafter if the 15th is not a
business day) for the previous
calendar year; contributions are
phased out for single taxpayers
with modified adjusted gross
income of:
$95,000 to $110,000 ($190,000 to
$220,000 if married filing jointly).
Federal tax Earnings are not taxed;
distributions used for higher
education purposes are excluded
from income; beneficiary pays
taxes on all other distributions to
or for his/her benefit.
Earnings are not taxed;
distributions used for qualified
educational expenses are
excluded from income;
beneficiary pays taxes on all
other distributions plus 10%
surtax.
State tax May depend on the plan selected;
Pennsylvania allows a deduction
on the 2018 PA 40 for PA plan
contributions up to the lower of
taxable income or $15,000 per
beneficiary reported on Schedule
O. Joint filers may contribute up
to $15,000 each or $30,000
combined in 2018 per beneficiary.
None for PA residents; call us
concerning your state if you think
it may be relevant.
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The Coverdell Education Savings Account (ESA) contribution limit was permanently set at
$2,000 by ATRA. Additional ATRA provisions relating to Coverdell ESAs are the
elimination of the marriage penalty phase-out range; entities are not subject to
contribution limits. Distributions may be used for qualified non-college expenses and
contributions to college tuition plans.
Student Loan Interest Deduction
Taxpayers may be able to deduct student loan interest as an adjustment to income,
even if they take the standard deduction. Qualified taxpayers may claim a maximum of
$2,500 per year throughout the length of the loan. In 2018 the deduction is phased-out
for single taxpayers and those who file as head-of-household with modified adjusted
gross income between $65,000 and $80,000 and for married taxpayers who file joint
returns with modified adjusted gross income between $135,000 and $165,000.
Individuals who are claimed as a dependent on another taxpayer’s return and married
taxpayers filing separately may not claim this deduction. This deduction has been made
permanent via ATRA.
ENERGY CREDITS
The credit for solar electric and solar water heating property is extended for property
placed in service through December 31, 2021.
The amount of the credit is based on 30% of the cost of the installed equipment through
2021. For example, suppose you spend $8,000 in 2018 buying and installing solar
heating panels on your residence. You may claim a credit of $2,400 (30% of $8,000).
Please let us know if you made any energy improvements to your residence so we can
determine if you are eligible to receive any of these credits.
STANDARD MILEAGE RATES
The standard rate for business purposes for 2018 is 54.5 cents per mile. The
depreciation portion is 25 cents in 2018.
The standard mileage rate for medical or moving purposes is 18 cents per mile for
2018. The standard mileage rate for charitable purposes is statutorily fixed at 14 cents
per mile and is not periodically adjusted, unlike the other standard mileage rates.
The standard mileage rates are illustrated by the following chart:
Purpose Cents per mile 2018 Cost per mile 2019
Business 54.5 58
Medical/Moving 18 20
Charitable 14 14
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FOREIGN ACCOUNTS
If you have a foreign account, had signature authority over or an “interest in” any foreign
financial account, Treasury Form TD-F 90-22.1 – Report of Foreign Bank and Financial
Accounts (FBAR) must be completed if the combined value of all non-domestic
accounts was more than $ 10,000 at any time during the year. The form should be
submitted separately to the U.S. Treasury and must be filed with the IRS on the same
due date as the federal 1040. A six-month filing extension is automatically granted. The
criminal penalty for willful failure to complete and submit this form is a fine of up to
$500,000, a jail term of up to ten years, or both.
The severity of criminal penalties may depend upon other factors other than the failure
to file the form. Substantial civil penalties may also be assessed for willful or negligent
violations. The IRS is charged with enforcing this law and has taken an aggressive
approach to enforcement.
“Financial accounts” include:
Bank accounts such as savings accounts, checking accounts, and time deposits.
Securities accounts such as mutual funds, brokerage accounts, and securities
derivatives accounts.
Accounts where the assets are held in a commingled fund and the account
owner holds equity interest in the fund.
Any other account(s) maintained in a foreign (located outside the United States)
financial institution or with a person doing business as a financial institution.
An insurance or annuity policy having cash surrender value.
Commodity futures or options accounts.
Hedge funds (possibly)
Individually held bonds, notes, or stock certificates are not “financial accounts”. In other
words, foreign bonds, notes, or stock in which you are invested and are held in your
U.S. brokerage account are not “financial accounts” for which you must file an FBAR.
Foreign commingled accounts in which an individual has a greater than fifty percent
interest must be reported.
In addition to the FBAR filing requirements, the IRS has enacted additional foreign
account filing requirements that must be submitted with individual or business income
tax forms. The information will be filed on Form 8938, Statement of Specified Foreign
Financial Assets.
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Taxpayers who own specified foreign assets that exceed an applicable threshold must
file Form 8938 with their Form 1040 or other applicable income tax forms. The
threshold varies depending upon residency and filing status. Specified foreign assets
include financial accounts maintained by a foreign financial institution and, to the extent
held for investment, any stock, securities, or any other interest in a foreign entity and
any financial instrument or contract with an issuer or counterparty that is not a U.S.
person. If you hold any foreign assets please let us know so we can determine if these
filing requirements apply to your specific situation.
REQUIRED IRA WITHDRAWALS
If you have a Traditional IRA and you are age 70½ or older, generally you must take a
required minimum distribution (RMD) from your IRA by December 31. The year in which
you turn 70½, you have until April 1st of the following year to take your first RMD.
Subsequent RMDs must be taken by December 31. If you choose to delay your first
RMD to the following April, you will still need to take your second RMD by December 31
of the same year. Often it more advantageous to take the first in the year you turn 70½
rather than delaying.
If you have several traditional IRA accounts, you must calculate your RMD for 2018 and
beyond based on the prior year-end value of all of your accounts, but you may withdraw
your total RMD from any one or combination of your IRA accounts. If you are at least
59½, you can withdraw from your IRA without the 10% early distribution penalty, but this
increases your AGI and may not be the best strategy.
Spouses of deceased taxpayers are eligible to treat the decedent’s IRA as their own.
Usually it is more beneficial for the spouse to take the IRA as his/her own because it is
then possible to distribute the IRA over a longer period of time. Since the spouse will
then become the owner of the IRA, the spouse can make his/her own investment
decisions regarding the IRA, and name a beneficiary or beneficiaries.
On the other hand, a surviving spouse who is under 59½ initially may not want to treat
the decedent’s IRA as his/her own in order to be able to receive penalty-free
distributions from the IRA for living expenses. The surviving spouse can elect at any
time thereafter to treat the IRA as his/her own. This nuance is an example of why it is
important to notify us whenever there is a critical event, such as a death, to explore all
of the complicated tax issues that may be involved.
The age of the beneficiary at the taxpayer’s death determines the RMD for non-spousal
beneficiaries. For a single IRA with several beneficiaries the age of the oldest beneficiary
is used to calculate the RMD for all beneficiaries; however, thanks to the Pension
Protection Act of 2006, as of 2007 non-spousal beneficiaries of a single IRA can directly
roll over their portions of an inherited IRA into separate IRAs. Then the RMD on each of
the separated, “beneficiary” IRAs is determined based on the age of the beneficiary.
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If the IRA owner dies after RMDs have begun and a beneficiary is not named, the IRA is
distributed to the estate over the period that had previously been determined for the
owner. If the IRA owner dies before RMDs begin, and no beneficiary is named, the IRA
has to be distributed to the beneficiary of the estate within five years. If a trust is named
as beneficiary, the beneficiary of the trust takes the IRA over his/her lifetime as
actuarially determined.
Keep in mind that high income individuals can still reap the benefits that lower income
taxpayers had by converting their traditional IRAs to Roth IRAs. Prior to 2010, there
were income restrictions on who could convert all or a part of a traditional IRA to a Roth
IRA. In any year a traditional IRA is converted to a Roth IRA, the previously untaxed
income in the traditional IRA will be taxed. All of the previously untaxed income must be
reported in the year it is rolled. After the conversion, under current law, the Roth IRAs
future earnings are tax free and there is no required distribution.
The advantage of the conversion is that you can continue tax-free growth in your Roth
IRA for many years. We can help you determine if this tax planning strategy will work
for you.
RETIREMENT PLANNING
One of the best ways to prepare for your future is to contribute to a qualified retirement
plan. Since contributing to a retirement account is deductible (except for 401(k)s and
Roth IRAs), you will save on your current tax obligation. Not only do you receive a tax
deduction when you contribute to a qualified retirement account, but the earnings grow
much faster because the investment compounds over time, free of taxes. Below are
two tables – one highlighting the retirement plans for individuals and the other
highlighting the retirement plans for small business owners.
The 2018 phase-out ranges for making contributions to traditional or Roth IRAs are $189,000-$199,000 ($193,000-$203,000 in 2019) for married couples and $120,000-$135,000 ($122,000-$137,000 in 2019) for singles and HOH.
Retirement
Plan 401(k) or 403(b) SIMPLE Traditional & Roth IRAs
Ages Under 50 50 Plus Under 50 50 Plus Under 50 50 Plus
Years 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019
Contribution
Limits $18,500 $19,000 $24,500 $25,000 $12,500 $13,000 $15,500 $16,000 $5,500 $6,000 $6,500 $7,000
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“Emp’ee” = Employee and “Emp’er” = Employer
*Employers may contribute to a SEP up to 25% of an employee's eligible compensation
or $55,000 for 2018. Self-employed persons may contribute to a SEP up to 25% of their
net compensation (net profit from IRS Form 1040 Schedule C or K-1, reduced by 50%
of your self-employment tax), up to $55,000 for 2018.
As of 2015, taxpayers are allowed to make just one IRA-to-IRA rollover per year.
All taxpayers, regardless of income levels or filing status, can roll over distributions
directly from an “eligible employer plan” (which includes an IRA) to a Roth IRA or
convert traditional IRA accounts to Roth IRAs. There are limitations to contributions to
Roth IRAs by certain taxpayers. These limitations can be circumvented by making non-
deductible contributions to a traditional IRA followed by a rollover or conversion to a
Roth IRA.
Retirement Planning for Business Owners
Retirement
Plan 401(k) SIMPLE SEP*
Ages Under 50 50 Plus Under 50 50 Plus Under 50 50 Plus
Years 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019
Emp’ee
Contrib
Lmts
$18,500 $19,000 $24,500 $25,000 $12,500 $13,000 $15,500 $ 16,000 $5,500 $6,000 $6,500 $7,000
Emp’er
Contrib
Lmts
25% of eligible compensation $12,500 $13,000 $15,500 $16,000 $55,000 $56,000 $55,000 $56,000
Emp’er +
Emp’ee
Lmts
$55,000 $56,000 $61,000 $62,000 $25,000 $26,000 $31,000 $32,000 N/A
Emp’ee
Borrow
Lmts 50% of acct. bal. up to $ 50,000
N/A N/A
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ESTATE AND GIFT PLANNING
For 2018 and 2019, the maximum per-person, annual gift exclusion is $15,000. In
addition, you can continue to pay someone’s tuition and medical expenses directly to
the educational institution or medical provider and not subject the gift to tax nor have it
applied to the annual gift exclusion limit.
If you are financially able and inclined to do so, don’t neglect to give gifts up to $15,000
per person so that they are received by the donees on or before December 31. (If the
gift is by check, the recipient must cash or deposit the check before year end to qualify
as a completed gift for that year.)
If your child or grandchild is over 18 years of age and not a dependent student under 24
years old and is in the bottom two tax brackets, consider gifting appreciated stock. Your
cost basis and holding period pass with the gift; however, the child pays 0% in tax in
2018 on any capital gain instead of the 15% or 20% tax you would pay on a sale
assuming you are not in the bottom two tax brackets. Note that in 2018 the child may
pay 15% tax on the part of the gain, if any, which causes the child’s taxable income to
exceed $37,950.
The first $2,100 in 2018 of unearned income of the child is not taxed. Unearned income
over those amounts is taxed at trust and estate rates.
Regarding both estate tax and generation-skipping transfer tax (transfers to
grandchildren, etc.), there is an $11.18 million exemption for U.S. citizens dying in 2018.
The exemption is indexed for inflation through 2025. In addition, for estate tax purposes,
but not for generation-skipping transfer tax purposes, any unused exemption of a
predeceasing spouse (dying after December 31, 2009) is available to the surviving
spouse’s estate. The ability to use a predeceasing spouse’s exemption is called
“portability” and is only available if the predeceasing spouse’s estate filed a federal
estate tax return.
The maximum lifetime taxable gifting exemption is tied to the estate tax exemption, i.e.
$11.18 million in 2018 and $11.4 million in 2019. Taxable gifts are “present interest”
gifts in excess of the $15,000 per person annual exclusion previously mentioned, and
any “future interest” gifts. Present interest gifts are gifts that are enjoyed immediately
without strings attached such as cash gifts. Future interest gifts are gifts that the
recipient must wait for a future time to enjoy, such as certain gifts in trust. The top
estate and gift tax rate is 37% in 2018.
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PLANNING FOR SELF-EMPLOYED TAXPAYERS
In 2018 taxpayers may elect to expense fixed assets placed in service instead of
depreciating over their useful lives. For tax year 2018, expensing is allowed up to
$1,000,000 of capital expenditures subject to a dollar for dollar 2018 phase-out amount
of $2,500,000 in 2018.
To qualify for the election to expense set forth in the previous paragraph, the property
must be “tangible personal” property. "Real property" such as real estate (buildings and
their structural components) does not qualify, nor do intangibles such as patent rights.
Please note that the dollar limitation should not hinder your decision to purchase assets.
If an asset does not qualify for a full Section 179 deduction due to the purchase
limitations, the cost of the assets over the purchase limitations will be depreciable over
their useful lives.
The Section 179 election can be spread over multiple assets as long as the total cost
covered by the election doesn't exceed the dollar limit for that year.
As mentioned above, if the total cost of qualifying property that you place in service
during a tax year beginning in 2018 is over $2,500,000, the immediate deduction limit is
reduced dollar for dollar to the extent your purchases are in excess of those limits. For
example, if you place in service $2,540,000 of qualifying property in a tax year
beginning in 2018, you may make the election for no more than $960,000 of property
($1,000,000 minus $40,000 [excess of $2,540,000 over $2,500,000]).
The Section 179 deduction is limited to your taxable income from all of your trades or
businesses calculated without regard to the Section 179 deduction. However, for most
types of property, any amount that cannot be immediately deducted because of taxable
income limitations is carried forward and can be deducted in subsequent years (to the
extent that the applicable dollar limit, the phase-out rule, and the taxable income limit
permit).
If Section 179 property is disposed of or retired before the end of the cost recovery
period, all or part of the amount of the deduction claimed under the election must be
taken back into income (“recaptured”). The amount recaptured is the amount deducted
for Section 179 purposes less the amount allowable had the asset been depreciated
instead. Exactly how much will depend on the type of property and how long you used
the property in a trade or business. Using 100% bonus depreciation might be a better
method if you are uncertain if you will hold the asset for the cost recovery period.
We can help you with long-range planning for your equipment needs to take advantage
of this benefit.
With regard to the deduction of business automobile expense, there are two options:
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The first option is to deduct actual expenses such as fuel, insurance, and repairs plus
depreciation of the vehicle. If you purchase the vehicle, the first year depreciation limit
for 2018 is $10,000 for passenger automobiles and light trucks and vans. Additional
bonus depreciation of $8,000 can be taken. Electric vehicles are subject to the same
caps as non-electric vehicles. Larger vehicles and trucks with gross vehicle weight
greater than 6,000 pounds follow different rules and are discussed below. If you lease
the vehicle, you may not deduct depreciation, but instead you deduct the portion of the
lease that is for business purposes based on a ratio of business over total mileage.
The second option is to elect to use the standard mileage rate for automobile expenses.
The mileage rate for 2018 is $0.545 (see chart p.18). If the standard mileage rate
approach is used, it must be substantiated for the amount of each business use (that is,
the mileage), or the time and business purpose of each use. A record of the time,
place, business purpose, and number of miles traveled suffices. See
https://www.irs.gov/taxtopics/tc510 for more information.
We will work with you to determine which option provides more tax savings for your
particular situation. Remember that in both cases, a mileage log of business use needs
to be kept. For actual expenses, records such as invoices, receipts, and purchase
information of the vehicle must be maintained.
Some larger vehicles have a more accelerated depreciation schedule which requires
some consideration when buying a new vehicle. First year expensing of SUVs, trucks
having a cargo bed less than 6 feet, and certain vans is limited to $25,000 if their gross
vehicle weight is over 6,000 lbs. and under 14,000 lbs. The deduction is prorated if the
vehicle is used at least 50% for business.
For example, if the vehicle costs $25,000 and is used 75% for business, $18,750 can be
deducted under Section 179. Remember, the Section 179 expense cannot be greater
than net profits. The overall Section 179 expense, including vehicles, is $1,000,000 in
2018. Section 179 is not an extra deduction, but it accelerates what would otherwise be
depreciated over five years or longer. These vehicles are eligible for Bonus depreciation
and can be fully written off if bonus is elected.
Also available is a 100% deduction of your, your spouse’s and your dependents’ health
insurance premiums up to the amount of your earned income from a business if you are
the business owner, partner, or a 2% or more shareholder in an S corporation as long
as your spouse and your dependents are not covered elsewhere. This applies to long-
term care insurance as well, although the deductible amount is further limited based on
age.
Despite the changes regarding the taxing of unearned income of children less than 19
years old or dependent students under 24 years old, hiring your own child to work for
you can still be a benefit to you as well as to your child. As a business owner, in 2018,
you can deduct the child’s wages as a business expense. And earned income for the
child is taxed at the child’s tax rate, even though unearned income above $2,100 is
taxed at trust and estate rates until age 19 or for dependent students under 24 years
26
old. If your child is under age 18, there would be no Social Security or Medicare
deductions, or employer matching. Remember to open a regular or Roth IRA for your
working child to reap additional tax savings.
There is a new deduction for some profitable businesses reported on the Form 1040. It
is generally equivalent to 20% of Qualified Business Income (QBI). Some pass-through
income is eligible as well as sole proprietor, farm, and some rental and royalty. There
are some income limitations and phase-outs depending upon the nature of the business
and the AGI of the taxpayer. It is the most complicated section of the TCJA, but we will
help you navigate through it. It was put in place to lower the tax bracket on business
income and align the individual tax rate on business income with the new 21%
corporate rate.
SOCIAL SECURITY AND SELF-EMPLOYMENT TAXES
The maximum amount of taxable annual earnings subject to the Social Security
(OASDI) tax is $128,400 for 2018 and $132,900 in 2019. This applies to employees
and self-employed persons. All earnings are taxable for Medicare. The 2018 employee
FICA tax rate is composed of 6.2% OASDI and 1.45% Medicare.
For 2018, the maximum OASDI tax is $7,960.80 or $15,921.60 if you are self-employed.
All earnings are subject to Medicare tax. Self-employed taxpayers can deduct a portion
(slightly more than 50%) of self-employment taxes from gross income when they file
their income tax return.
When you reach “full retirement age” and above, you may continue to work and still
receive full social security benefits. For those born in 1942, “full retirement age” is 65
years plus ten months; for those born in 1943 through 1954, it is 66 years. For 2018, if
a person reaches full retirement age, the exempt earnings are $45,360. This limit is
only for the period beginning January 1, 2018 through the last day of the month before a
person reaches full retirement age. In that period, if you are collecting social security
benefits, and earn above $45,360 you will lose $1 of social security benefits for every $3
of earned income above $45,360 ($46,920 in 2019). Those between 62 and 66 who
have enrolled and started to receive social security benefits may earn up to $17,040 in
2018 ($17,640 in 2019) per year ($1,420 and $1,470 per month respectively) without
losing any benefits.
If you earned above $1,420 ($1,470 in 2019) per month during 2018 (you will have to
pay back $1 for every $2 of earned income above the limit).
The cost-of-living adjustment (COLA) for Social Security and Supplemental Security
income benefits is 2% in 2018 and 2.8% in 2019. For reporting social security as
taxable income, the maximum taxable base remains at 85% of social security benefits if
your “provisional income” (generally, adjusted gross income without regard to taxable
social security plus tax-exempt income plus one-half of the social security benefits) is
over $44,000 for joint filers and $34,000 for single individuals. If “provisional income” is
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less than these income thresholds but more than $32,000 and $25,000, respectively,
only 50% or less of social security benefits are taxable. Married people filing separately
who lived with their spouse during any part of 2018 are taxed on the lower of 85% of
their social security benefits or 85% of their “provisional income”.
MEDICARE
The standard Medicare Part B premium deducted for most people in 2018 from Social
Security benefits is $134.00 per month beginning January 1, 2018. As in the past, there
is a sliding scale used to determine whether additional Medicare Part B surcharges will
be added to the Part B standard premium deduction for 2018 and 2019. Higher income
individuals who have Medicare prescription drug coverage (Medicare Part D) are
subject to a Part D surcharge. In addition to the recipient's modified adjusted gross
income for 2017, the amount of additional premium above the standard premium
deducted from Social Security depends upon the Social Security recipient's filing status,
i.e. married filing jointly, single and married filing separate (and living with the spouse
during at least part of the taxable year).
The 2018 year brings new developments for taxpayers concerning Medicare costs. It
benefits the savvy taxpayer to examine all of the available plans to determine the most
beneficial one for your scenario. The alternative to Medicare, Medicare Advantage, will
be changing for this tax year. There will be significantly fewer plans with out-of-pocket
expenses capped at $4,000 or less. This is due to health benefit providers deducing
that pushing the consumer to cover more of the expenses will act as a buffer to their
profitability. The following data tables highlight the rate of Part B and D charges that
For Married Filing Joint
If your 2017 modified AGI is Your 2019
monthly Part B
surcharge will be
Your 2019
monthly Part B
premium will be
Your 2019
monthly Part D, if
applicable,
surcharge will be
More than But not over
$0 $170,000 - $135.50 -
$170,000 $214,000 $ 54.10 $189.60 $12.40
$214,000 $267,000 $135.40 $270.90 $31.90
$267,000 $320,000 $216.70 $352.20 $51.40
$320,000 $750,000 $297.90 $433.40 $70.90
$749,000 $325.00 $460.50 $77.40
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may affect you in 2019.
As evidenced by these new data tables, your Part B premiums may have increased if
you find your AGI in the higher brackets. Although taxpayers with lower AGIs may not
be affected, it is important to understand the tax implications if your AGI will affect your
Part B premiums. This is all the more reason for those over 70 ½ to make QCD
contributions to charity rather than writing a check.
2017 income will affect 2019 Medicare premiums. Therefore, it might be better for
seniors to postpone income from 2018 to 2019, so the effect of the higher income
impacts the Medicare Premium in 2019 rather than 2018.
For Married Filing Separate
If your 2017 modified AGI is Your 2019
monthly Part B
surcharge will be
Your 2019
monthly Part B
premium will be
Your 2019 monthly
Part D, if
applicable,
surcharge will be
More than But not over
$0 $85,000 - $135.50 -
$85,000 $415,000 $297.90 $433.40 $70.90
$414,999 -- $294.60 $428.60 $77.40
Single Filers
If your 2017 modified AGI is Your 2019
monthly Part B
surcharge will be
Your 2019
monthly Part B
premium will be
Your 2019
monthly Part D, if
applicable,
surcharge will be
More than But not over
$ 0 $85,000 - $135.50 -
$85,000 $107,000 $ 54.10 $189.60 $12.40
$107,000 $133,500 $135.40 $270.90 $31.90
$133,500 $160,000 $216.70 $352.20 $51.40
$160,000 $500,000 $297.90 $433.40 $70.90
$499,999 $325.00 $460.50 $77.40
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Postponing taxable income in most cases is more prudent. Also, there are
circumstances (such as death, divorce, loss of work, etc.) that lower your higher-than-
standard premium payments and provide reasons to appeal incorrect calculations.
Please contact us if you think your Medicare Part B and/or Part D premiums were
miscalculated and are too high.
AVOIDING PENALTIES FOR UNDERPAYING INCOME TAX
The safe harbor rules for federal estimated taxes are:
No matter what your taxable income is, there is no penalty if you pay 90% of the current
year tax in equal quarterly installments and/or through withholding.
If your adjusted gross income (AGI) for 2017 was less than $150,000 and you pay
100% of that year’s tax in equal quarterly installments and/or through withholding during
2018, there is no penalty for underpayment. The last quarterly installment is due
January 15th, 2019.
REMINDER: If you are relying on your withholding to avoid a penalty on
underpayment of income tax, make sure your current year-to-date
withholding is at least equal to last year’s withholding.
If your AGI for 2017 was $150,000 or more, and you pay 110% of the 2017 tax in equal
quarterly installments and/or through withholding during 2018, there is no penalty for
underpayment. The last quarterly installment is due January 15th, 2019.
If you notice that you have underpaid federal income taxes, the best strategy is to
request extra withholding, if possible, late in the year to make up for any past
underpayments. Withheld taxes, even those withheld at the very end of the year, are
treated as if they were paid evenly throughout the year.
Pennsylvania Department of Revenue has become very proactive about assessing
penalties for underpayment of income tax. In order to avoid these penalties, which
would be more accurately referred to as “interest,” make sure you pay each year at
least 90% of your current year PA tax or 100% of your prior year PA tax. Pay the tax in
equal quarterly installments and/or through withholding.
If you have any questions or need help with your estimated tax payments, such as
projecting your current year taxable income, do not hesitate to call us.
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DOCUMENT RETENTION AND AUDIT STRATEGIES
Many individuals consider receiving an IRS notice to be a scary thing. Many notices
can be answered quickly and easily but sometimes a notice relates to a Notice of Audit.
In all cases it is important that all businesses and individuals retain all tax return
documentation for a minimum of three years after the filing date of a tax return. This
includes all personal and business bank statements that can be requested for review by
the IRS if your return is selected for review by the IRS.
The IRS has a random audit program where your return could be selected for a
compliance review through no fault of your own. In these audits, the IRS will trace bank
deposits back to your tax return and require explanation of any unreported deposits. It
may come as a surprise to many tax filers that the IRS is allowed to do this type of
review. Most taxpayers think a review is triggered by something specific on a filed
return. This is not always the case. We want to make you aware of this new random
audit program.
Taxpayers with rental properties or the self-employed with Schedule C should consider
using separate bank accounts for each endeavor. Mixing different reporting entities in
one bank account will make any audit more painful than necessary.
Lastly, make sure you have proper documentation for all deductions taken, including
mileage logs for any mileage deduction and source documents for all itemized
deductions. In an audit situation, the burden of proof will be on you the taxpayer. The
more prepared you are, the quicker the agent will get through your audit.
PENNSYLVANIA AND LOCAL TAXES AND DEVELOPMENTS
The Pennsylvania personal income tax is levied at a rate of 3.07% against the taxable
income of resident and non-resident individuals, estates, trusts, partnerships, S
Corporations, business trusts and LLC not taxed as corporations.
The Commonwealth taxes eight classes of income: 1) compensation, 2) interest,
3) dividends, 4) capital gains, 5) income from rents, royalties, patents and copyrights,
6) income derived through trusts and estates, 7) profits from the operation of a
business, 8) gambling and lottery winnings. A loss in one income class cannot be used
to offset income in another income class. Gains or losses cannot be carried back or
forward to other tax years.
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The following deductions, credits and exclusions are available to reduce tax
liabilities:
Deductions:
Allowable unreimbursed expenses that are ordinary, actual, reasonable,
necessary and directly related to the taxpayer’s occupation or employment
Medical savings account deduction
Health savings account deduction
IRC Section 529 tuition account program contributions
ABLE account contributions
Credits:
Foreign tax credit is allowed against Pennsylvania income tax for income taxes
paid by residents to other states (no longer allowed for tax paid to foreign
countries)
A Tax Forgiveness Credit is available to residents who meet certain income
thresholds
Exclusions:
Payments to Section 125 plans for hospitalization, sickness, disability or death are excluded from Pennsylvania compensation
Capital gain from the sale of a principal residence is excluded for all residents who own and use the residence at least two years during the five year period preceding the sale date.
Personal use of employer-owned property is excluded for income
All PA taxpayers who receive 1099-Rs must report the information on their Form PA 40.
Some 1099-R reported distributions are taxable, but those showing distribution codes of
3, 4, and 7 are not taxable for Pennsylvania.
As mentioned above ABLE accounts are exempt from all PA taxes. Undistributed earnings are not subject to tax. Distributions made to the beneficiary for qualified expenses are also exempt. A contributor can deduct up to $15,000 (2018 and 2019) per beneficiary from taxable income. The deduction cannot reduce taxable income below zero. Those who contribute to a Section 529 Qualified Tuition Account program will receive a
deduction on their Pennsylvania income tax return limited to the lower of taxable income
or $15,000 (2018 and 2019) per taxpayer. Joint filers may each contribute up to
$15,000 each ($30,000 total in 2018 and 2019) per student. (Please see the prior
section on Higher Education Planning for more information on Section 529). These rules
also apply to PA ABLE accounts.
Health Savings Account (HSA) and Medical Savings (MSA) contributions are also
deductible against Pennsylvania income tax and are reported on Schedule O, Part II.
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Distributions from these accounts that are included in income for federal tax purposes
will also be included in gross income for purposes of Pennsylvania income tax.
Additional Information
The 2018 Form PA-40 will continue to have a line to report “use tax” (like sales tax
collected by a vendor) on purchases that were not subject to PA sales tax. This includes
tax on utilities claimed as a home office deduction. The Department of Revenue added
this line in hope of collecting this often overlooked tax by taxpayers.
Pennsylvania income tax withholding on lottery prize winnings is required if federal
income tax is withheld.
The Property Tax/Rent Rebate Program benefits eligible Pennsylvanians age 65 and
older, widows and widowers age 50 and older, and people with disabilities age 18 and
older. For 2018 household income levels up to $35,000 for homeowners (which
excludes half of social security income) and $15,000 for renters may be eligible for this
relief. Also for 2018, the maximum standard rebate is $650, which is not to exceed the
property tax or rent paid; the lower the income, the greater the rebate potential.
Supplemental rebates for qualifying homeowners can boost rebates to $975.
Business Taxes The corporate business rate is 9.99% on taxable income. A business that sustained a Net Operating Loss (NOL) prior to 2018 can deduct up to 35% of the loss against current year income. The 35% cap increases to 40% in 2019 and thereafter.
Online sellers who do not maintain a place of business in PA with sales of $10,000 or more in the prior 12 calendar months must elect to collect sales tax or send notice with each applicable sale stating use tax is due unless an exemption is filed. Please contact us for additional information. A Manufacturing Innovation and Reinvestment Deduction is available to taxpayers who make capital investments in excess of $100 million to refurbish or create new manufacturing capacity in the Commonwealth within three years of the designated start date. Other limitations apply; please contact us for more information. For those involved in the film industries, the Film Production Tax Credit has been amended to allow the state to designate up to two tax credit districts. The tax credit may be authorized for fiscal tax years 2019/2020 and thereafter. There are many intricacies to this credit, please contact us for more information.
Before awarding any tax credits, the department has the right to verify all tax filings are current and all taxes are currently paid. Entities who make rent and royalty payments over $5,000 on Pennsylvania property to non-residents must withhold personal income tax on the payments.
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Pennsylvania partnerships and S corporations with non-resident owners must withhold PA personal income tax on pass-through income. Also, companies that bring out-of-state independent contractor workers into Pennsylvania for work and pay in excess of $5,000 must withhold personal income tax on the non-resident workers. Businesses are required to electronically file 1099-MISC forms for all classes of income.
House Bill 1421 was signed by Governor Wolf on December 22, 2017. This legislation
clarified the filing requirements of charitable organizations and defined the filing date as
the postmark date of the 15th day of the 5th month after the close of the fiscal year. An
extension of time can be granted to the 15th day of the 11th month after the close of the
fiscal year. If the department finds the filing is incomplete it must notify the charitable
organization within 15 business days of receipt; otherwise the filing is deemed to be
complete.
We will update the website as changes or legislative updates come available. Please
check our website regularly: www.wgkcpa.com.
We hope this provides some insight about the changes to expect with your 2018 tax
filings. There is still opportunity to fund HSAs, 529 plans, increase charitable deductions
to reach the new itemized deduction thresholds, consider Section 179 and bonus
depreciation and a host of other planning techniques. Please contact us if we can be of
any assistance. We look forward to serving you.
Best regards,
Staff of William G. Koch & Associates
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DISCLAIMER
No Rendering of Advice The information contained within this document is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional accountant. Readers are advised not to act upon this information without seeking the service of a professional accountant. Accuracy of Information While we use reasonable efforts to furnish accurate and up-to-date information, we do not warrant that any information contained in or made available through this document is accurate, complete, reliable, current or error-free. We assume no liability or responsibility for any errors or omissions in the content of this document or such other materials or communications. IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (I) avoiding penalties under the Internal Revenue Service (II) promotion, marketing or recommending to another party any transaction or matter addressed herein.