January 7, 2019
Despite the government shutdown, the Internal Revenue Service today confirmed that it will process tax returns beginning January 28, 2019, and provide refunds to taxpayers as scheduled.
The filing deadline to submit 2018 tax returns is Monday, April 15, 2019 for most taxpayers. Because of the Patriots’ Day holiday on April 15 in Maine and Massachusetts and the Emancipation Day holiday on April 16 in the District of Columbia, taxpayers who live in Maine or Massachusetts have until April 17, 2019 to file their returns.
January 1, 2018
On Aug. 8, 2018, the IRS released proposed regulations around the centerpiece provision of the Tax Cuts and Jobs Act. The new Section 199A measure affords owners of sole proprietorships, partnerships, trusts and S corporations a lucrative 20 percent deduction on their qualified business income (QBI) beginning in tax year 2018. In general, the deduction is available to qualifying business owners with taxable income below $315,000 for joint filers and below $157,500 for other filers. Overall, the deduction is limited to the lesser of: 20% of QBI (plus 20% of qualified real estate investment trust dividends and qualified publicly traded partnership income); or 20% of taxable income minus net capital gain.
Specified Service Trades or Businesses - For this new class of businesses, the Section 199A deduction does not apply to specified service trades or businesses (SSTB), In the general sense, a SSTB is any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more professionals. On August 9, 2018, the US Treasury clarified that Insurance Agents and Brokers, as well as Real Estate Agents and Brokers are NOT included in the definition of a specified business.
The proposed regulations elaborate on and provide examples on which professions are included and excluded in the definition of a specified service trade or business. Please contact this office for more information or if your business may qualify for this new expanded tax credit.
December 31, 2017
The Tax Cut and Jobs Act is here. This new tax law includes many expected changes, and some surprises as well. Here are a few of the most important things that individual taxpayers should know:
1. New individual tax rates and brackets For 2018 through 2025, the new law keeps seven tax brackets, but six are at lower rates. In 2026, the current-law rates and brackets would return. The temporary rate brackets under the new law are as follows.
Single Joint Head of household
10% tax bracket $0 - $9,525 $0 - $19,050 $0 - $13,600
Beginning of 12% bracket $9,526 $19,051 $13,601
Beginning of 22% bracket $38,701 $77,401 $51,801
Beginning of 24% bracket $82,501 $165,001 $82,501
Beginning of 32% bracket $157,501 $315,001 $157,501
Beginning of 35% bracket $200,001 $400,001 $200,001
Beginning of 37% bracket $500,001 $600,001 $500,001
2. No change in taxes on long-term capital gains and dividends The new law retains the existing 0%, 15% and 20% tax rates on long-term capital gains and dividends. For 2018, the rate brackets are as follows.
Single Joint Head of household
0% tax bracket $0 - $38,599 $0 - $77,199 $0 - $51,699
Beginning of 15% bracket $38,600 $77,200 $51,700
Beginning of 20% bracket $425,800 $479,000 $452,400
3. No mandatory FIFO stock basis rule Starting next year, the Senate version of the tax reform bill would have forced you to use the first-in-first-out (FIFO) method to calculate the tax basis of shares that you sell from taxable accounts. If the price of the shares stair-stepped higher as you bought them, having to use the FIFO method would have meant that your taxable gain would be figured by treating the oldest and cheapest shares as being sold first. That would maximize your gain and maximize the resulting tax hit. Fortunately, this proposed change didn’t make the cut, so it’s business as usual.
4. Higher standard deductions, but no more personal and dependent exemption deductions The new law almost doubles the standard deduction amounts, starting in 2018. However, personal and dependent exemption deductions, which would have been $4,150 each for 2018, are eliminated. The 2018 standard deduction amounts are as follows. • $12,000 for singles (up from $6,350 for 2017) • $24,000 for joint-filing married couples (up from $12,700) • $18,000 for heads of households (up from $9,350) Additional standard deduction amounts for the elderly and blind are still allowed.
5. New limits on deductions for state and local taxes Starting 2018, the new law limits your deduction for state and local income and property taxes to a combined total of $10,000 ($5,000 if you use married filing separate status). Foreign real property taxes can no longer be deducted, but you can still choose to deduct state and local sales taxes instead of state and local income taxes.
6. New limits on home mortgage interest deductions Effective next year, the new law reduces the maximum amount of mortgage debt to acquire a first or second residence for which you can claim itemized interest expense deductions from $1 million (or $500,000 if you use married filing separate status) to $750,000 (or $375,000 if you use married filing separate status). However, this change doesn’t affect home acquisition mortgages taken out under binding contracts in effect before Dec. 16, 2017 as long as the home purchase closes before April 1, 2018. Also, the old-law $1 million/$500,000 limits continue to apply to home acquisition mortgages that were taken out under the old-law rules and are then refinanced after this year (as long as the refinanced loan principal doesn’t exceed the old loan balance at the time of the refinancing). Starting next year, the new law also eliminates the old-law rule that allowed interest deductions on up to $100,000 of home-equity loan balances.
7. No change in home sale gain exclusion rules The new law preserves the valuable break that allows you to potentially exclude from federal income taxation up to $250,000 of gain from a qualified home sale, or $500,000 if you are a married joint-filer. The earlier House and Senate bills both included restrictions on this break, but none of the proposed changes made the cut. So it’s business as usual and the "2 out of 5" rule remains.
8. Expanded medical expense deduction for 2017 and 2018 The new law preserves the deduction and actually expands it to cover medical expenses in excess of 7.5% of adjusted gross income (AGI) for 2017 and 2018 (the old-law deduction threshold for 2017 was 10% of AGI).
9. Education tax breaks preserved The new law leaves existing education-related tax breaks in place.
10. IRA to Roth Conversions Starting next year, you will not be able to reverse the conversion of a traditional IRA into a Roth account. Under the old-law rules, you had until October 15 of the year after an ill-advised conversion to reverse it and avoid the conversion tax hit. At this point, it is not clear if this change would prevent you from reversing a 2017 conversion by 10/15/18 or it would only prevent you from reversing a conversion done in 2018 and beyond. So if you have a 2017 conversion that you already know you want to reverse, get it reversed before year-end to be on the safe side.
11. Alternative Minimum Tax (AMT) Unfortunately, the new law retains the individual alternative minimum tax (AMT), but the AMT exemption deductions are significantly increased and phased out at much higher income level, starting next year. For many folks AMT exposure was caused by high itemized deductions for state and local income and property taxes and lots of personal and dependent exemption deductions. Those breaks were disallowed under the AMT rules. With the new limits in deductions for state and local taxes, the elimination of personal and dependent exemption deductions, and larger AMT exemption deductions, many previous victims of the AMT will find themselves off the hook, starting next year.
12. Child Tax Credit Starting next year, the maximum child credit is increased to $2,000 per qualifying child, and up to $1,400 can be refundable (meaning you can collect it even if you don’t owe any federal income tax). In addition, a new $500 nonrefundable credit is allowed for qualified non-child dependents.
13. Casualty Losses, Moving Expenses & Miscellaneous Itemized Expenses Starting next year, deductions for moving expenses and most miscellaneous itemized expenses are eliminated. • Starting next year, itemized deductions for personal casualty and theft losses are eliminated, except for personal casualty losses incurred in a federally-declared disaster.
14. Alimony Starting in 2019, you will no longer be able to deduct alimony payments if they are required by a divorce agreement entered into after 12/31/18. Recipients of nondeductible payments won’t have to include them in taxable income.
15. Plug-in Vehicles Tax breaks for adoption expenses are preserved. • The tax credit for qualified plug-in electric vehicles is preserved.
16. Unified Gift and Estate Tax Exemption Starting next year, the unified federal gift and estate tax exemption will basically double — to about $11.2 million or $22.4 million for a married couple.
17. The Annual Gift Tax Exclusion for 2018 is $15,000
These are just a few highlights of the new tax laws for individual taxpayer. As we enter into the 2017 Tax Season, for tax planning purposes, we can estimate how these changes could effect your individual tax return for 2018. Knowing what to expect will help you make wise decisions going forward.
Nadine Lord Divan EA, CFP®
30021 Tomas, Suite 300
Rancho Santa Margarita CA 92688
Toll Free 800-350-1299