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Accounting and Tax Planning

Items That Add Up

By Kathryn A. Sisson, CPA, MST

There are many changes that businesses and individuals should be aware of under The Tax Cuts and Jobs Act (TCJA), the most significant tax legislation in the U.S. in more than 30 years. Here are the 10 changes that will have the most significant impact this tax season.

Individuals

1. Tax Rates. The 2018 tax brackets have changed, resulting in lower tax rates for most individuals. For example, the 15% tax bracket has been reduced to 12% and the 25% bracket to 22%.

2. Income-tax Withholding. As a result of the lower taxes rates, income-tax withholding during 2018 also decreased for most individuals. This could result in underpayment of taxes for 2018, depending on your tax situation. Taxpayers should carefully review their withholding going into 2019 and discuss it with their tax professional.

3. Itemized Deductions. TCJA made several changes to itemized deductions as noted below.

Medical Expenses: TCJA lowered the threshold for the medical-expense deduction to 7.5% of AGI for 2017 and 2018. The threshold for 2019 is 10% for most taxpayers.

State and Local Taxes: TCJA limits the deduction for state and local taxes to $10,000 per year. This includes payments for state income tax, property tax, and excise tax. The same $10,000 limit applies regardless of whether you are a single taxpayer or if you are married and file a joint return. The deduction for taxpayers who are married and filing separate returns is limited to $5,000.

Kathryn A. Sisson

Kathryn A. Sisson

Mortgage Interest: Interest is generally deductible on original home acquisition debt up to $750,000. Home-equity interest is deductible only if the funds were used to improve the mortgaged property.

Charitable Donations: Donations are generally deductible up to 60% of AGI, up from 50%, for most donations. You could also consider giving directly from your IRA if you are over age 70 1/2 or gifting appreciated stock directly to a charity. Discuss with your tax professional in order to maximize your benefit.

Miscellaneous Itemized Deductions: TCJA has eliminated miscellaneous itemized deductions. These include deductions for unreimbursed employee business expenses, tax-preparation fees, and investment-advisory fees.

4. Increased Standard Deduction. One of the most significant provisions of TCJA is the near-doubling of the standard deduction for all taxpayers. For 2018, the standard deduction amounts are $24,000 for joint filers, $18,000 for head of household, and $12,000 for all other filers. The limitations on itemized deductions as noted above and the increased standard deduction amounts may make it less advantageous to itemize deductions.

5. Personal Exemptions. TCJA eliminated personal exemptions for 2018. For 2017, taxpayers received a personal exemption deduction of $4,050 per person. Therefore, a family of four received a deduction of $16,200 in 2017 that is no longer available under the new tax act.

Businesses

6. Tax Rates. A flat tax rate of 21% replaces the graduated tax rate brackets for C corporations that ranged from 15% to 39% in prior years.

7. Qualified Business Income (QBI) Deduction. A deduction of up to 20% of business income may be available to owners of pass-through entities. There are limitations based on several factors, including income of the taxpayer as well as the type of trade or business. The purpose of the deduction is to provide some parity between the new flat 21% corporate rate and the tax rates paid by owners of pass-through entities on their individual income-tax returns.

8. Depreciation. TCJA made significant changes to encourage businesses to expand and invest in new property; 100% bonus depreciation is now available for federal purposes, and the limitation on expensing certain assets has been increased to $1 million, with a $2.5 million investment limitation.

9. Business Credits. TCJA created a Family Leave Credit for employers making family-leave payments to employees. The credit is available only to employers who have a written policy in place for the payment and credit.

10. Deductions. Previously, the deduction for meals and entertainment was limited to 50% of expenses incurred. For 2018, 50% of meals are still deductible; however, entertainment expenses are no longer deductible.

Many of these changes are significant and warrant your full attention. As you approach tax season this year, seek the assistance of tax professionals, and do not follow your neighbor’s tax advice.

Kathryn A. Sisson, CPA, MST is a tax manager in the Commercial Services Department of Melanson Heath in Greenfield. She has 20 years of experience in public accounting and has been with Melanson Heath for 10 years. She has extensive experience in corporate and individual income-tax planning and review as well as financial-statement compilations and reviews. Her corporate experience includes working with businesses doing business in multiple states. She is also a QuickBooks ProAdvisor assisting many clients with general ledger systems and software training.

Banking and Financial Services

Giving Some Insight

By Terri Judycki

Terri Judycki, CPA, MST

Terri Judycki, CPA, MST

The Tax Cuts and Jobs Act (TCJA) has resulted in many changes for taxpayers. One area in particular is charitable giving.

For those who regularly make charitable contributions, changing philanthropic giving habits may result in greater tax benefits. This article will explore various strategies for maximizing the tax benefit of charitable giving under the new law.

The TCJA increases the standard deduction to $12,000 for a single taxpayer and $24,000 for a married couple filing a joint tax return. In addition, the itemized deduction for taxes has been capped at $10,000 for all combined state and local tax payments. The Congressional Budget Office estimates that these changes will reduce the number of taxpayers who itemize deductions by more than half.

To maximize the benefit of the higher standard deduction, consider bunching charitable contributions in alternating years. For example, if a married couple with no mortgage ordinarily gives $12,000 to charity each year, they will likely take advantage of the $24,000 standard deduction ($12,000 to charity plus $10,000 in state and local states is less than the $24,000 standard deduction). If, instead, they give $24,000 every other year, they will use the $24,000 standard deduction in the ‘off’ year and $34,000 in itemized deductions in the year with the gifts ($24,000 charitable contributions plus $10,000 state and local taxes), resulting in lower taxable income without any increase in cash expenditures.

From the charity’s perspective, though, this could leave some budget challenges.

Another way to bunch deductions without bunching the charities’ income is through the use of a donor-advised fund (DAF). DAFs are funds controlled by 501(c)(3) organizations in which the person establishing the fund has advisory privileges as to the ultimate distribution to charities.

In our example above, the married couple might establish a DAF with $24,000 in one year and direct or ‘advise’ that donations be made to specific charities over time. Amounts used to establish the DAF are deductible charitable contributions when transferred to the sponsoring organization.

“For those who regularly make charitable contributions, changing philanthropic giving habits may result in greater tax benefits.”

Whether the idea of bunching appeals to you or not, don’t overlook the benefits of gifting appreciated stock to charity. The stock must have been held for more than a year to take advantage of this planning opportunity. The charitable deduction is the fair market value on the date gifted. Gifting the stock instead of cash avoids income tax on the appreciation.

For example, if a taxpayer wants to make a gift of $10,000 to a charity and sells stock worth $10,000 for which he paid $7,000, he would have a $10,000 deduction and $3,000 taxable gain. If, instead, he directs his broker to transfer the stock to the charity, he is still entitled to a $10,000 deduction, but does not report the $3,000 gain.

Finally, taxpayers age 70½ or older have another option available. An individual who is 70½ or older on the transfer date can direct the trustee of his IRA to distribute directly to a qualified public charity. The distribution is called a qualified charitable distribution (QCD). The amount transferred counts as a distribution for purposes of meeting the minimum distribution requirement but is not included in the taxpayer’s income.

There are a few requirements. The charity cannot be a private foundation or a donor-advised fund. No more than $100,000 can be donated by an account owner each year. The gift to the charity must be one that would have been entirely deductible if made from the taxpayer’s other assets — for example, the donor should obtain adequate substantiation from the charity, and the donation should not be one that entitles the donor to attend a dinner, play golf, or receive any other benefit.

In our example above, the couple who makes a QCD from IRAs for the $12,000 each year reduces taxable income by $12,000 and still uses the standard deduction.

Another possible advantage is the effect the reduction may have on other taxable items. Depending on the taxpayer’s total income, reducing adjusted gross income could result in reduction of the amount of Social Security benefits that are taxed, an allowed loss from certain real-estate rentals, or a reduction in the net investment income tax (if the amount of excess AGI exceeds the net investment income).

Reducing income may also result in lower Medicare premiums that are based on income for higher-income taxpayers. In addition, some states do not provide deductions for charitable donations, but do follow the federal treatment of excluding the QCD from income.

These changes may result in tax savings that could be used to make an even larger donation to a favorite charity.

Terri Judycki is a senior tax manager with the Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 322-3510; [email protected]