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Navigating the Tax Cuts and Jobs Act: Volume 4 – Individual year-end planning

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Posted by Evan Piccirillo, CPA

[Editor’s note: this is one of an ongoing series of articles parsing and clarifying the tax reform commonly known as the Tax Cuts and Jobs Act. Previous articles are linked at the end of the post.]

Nearly everything involving taxes in our country has been acutely affected by the Tax Cuts and Jobs Act (TCJA). Unfortunately, owing and paying tax are still necessary and required in most cases, but on the other hand we are treading on new terrain for year-end tax planning. We will explore some actions taxpayers can make before the end of 2018 that can provide a tax benefit.

Itemized deductions

The only itemized deductions that have survived the TCJA are:

  1. medical expenses in excess of 7.5% of adjusted gross income

  2. state income and real estate taxes, limited to $10k

  3. mortgage interest including home equity interest paid, subject to limits

  4. charity

One of the most impactful changes to individual taxpayers is the limitation on state income tax and real estate tax paid (the so-called SaLT deduction) to $10,000. Many taxpayers, especially those in high-tax states, were itemizing their deductions primarily due to their state tax burden. Couple this limit with the drastic increase of the standard deduction ($24k for married filing joint taxpayers), and you will find most taxpayers will no longer itemize their deductions.

Tax planning points

  1. Bunching deductions. If you have significant deductions that are just below the standard deduction, you might consider “bunching” your deductions, i.e. paying charitable contributions on January 1st and December 31st of year one, and then not making such contributions in year two. As a result, you will itemize deductions in year one and tax the standard deduction in year two, then alternate this method each year.

  2. For estimated taxpayers, there is no more pressure to get your 4th quarter estimated state tax payment in on or before December 31st since you will likely already exceed the $10k cap, and therefore receive no benefit from paying the estimate two weeks early (they are due January 15th).

Sec. 199A – The 20% Deduction

To put individual taxpayers on more even ground with corporations that now have a 21% flat tax rate, the TCJA provides a deduction of up to 20% of income from pass-through entities. Depending on the income level of a taxpayer and the type of business that generates the income, this 20% deduction may be limited or altogether eliminated. We will discuss this provision in depth in a different article, but we will explore basic tax planning here.

Tax planning points

  1. For s-corporation shareholders, consider adjusting owner’s salaries to maximize the deduction. If a taxpayer’s income is over the threshold and the business is qualified, the 20% deduction may be limited to 50% of the wages paid by the company. Since only the pass-through income and not the wages earned from the company get the benefit of a 20% deduction you would prefer the pass-through income to be as high as possible and the wages paid to be as low as possible. There is a sweet spot in the relationship between the wages and the pass-through income that will offer the optimal deduction assuming the owner’s compensation is still considered to be reasonable.

  2. An alternate limitation is 25% of wages plus 2.5% of depreciable property. Taxpayers might consider making an investment in tangible property for the business before the end of the year, especially in partnerships or sole proprietorships where owners are precluded from paying themselves wages. There are also enhanced accelerated depreciation incentives in the new tax law that make this an even sweeter deal.

Gain Deferral – Qualified Opportunity Zones

An incredible tax deferral tool provided by the TCJA is the advent of qualified opportunity funds (QOFs) which are entities that invest in qualified opportunity zones (QOZs). QOZs are economically depressed areas that have been identified by state governments. The intention of the law is to spur economic investment in these depressed areas. QOFs may present an attractive option for taxpayers that have significantly appreciated property and would like to dispose, but do not want to pay tax on the gain.

Tax planning points

A taxpayer may defer paying tax on a capital gain, if they invest the gain in a QOF within a 180-day window. If specified holding periods are met, those taxpayers may receive a deemed step up in basis of up to 15%, thereby permanently eliminating tax on that portion of the gain. In addition, the appreciation on the investment in the QOF is not taxed if held 10 years.

Bottom line

Only two months remain in 2018, but that is enough time for savvy taxpayers to take advantage of some of the changes to the tax code… and these are just a few of the options available to taxpayers looking to decrease their federal tax liability. As always, consult with your advisor before taking it upon yourself to engage in any of these tactics. Everyone’s personal income tax situation is nuanced, and certain actions may not yield expected results.


WAKE UP WITH REM: Attack of the one-hit wonders

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Today is National One-Hit Wonder Day, and we’re celebrating by kung fu fighting and doing the Safety Dance. But enough tubthumping—we’ve got plenty of tax news to share.

$77 million is missing. Kevin Garnett has filed a federal malpractice lawsuit against an accountant and his firm, alleging they helped a wealth manager steal $77 million from the retired Minnesota Timberwolves and Boston Celtics star. [NBC Sports]

Charitable giving: how to save tax deductions despite new law. A feasible workaround for the new SALT deduction limitation? [Forbes]

Think you know your one-hit wonders? Take the REM Cycle quiz challenge here.

 
 

Dubai Department of Finance launches blockchain-based payment system for UAE government. The new platform, called “Payment Reconciliation and Settlement,” was officially launched Sunday, September 23. It is reportedly geared towards government entities, such as the Dubai Police, Roads and Transport Authority (RTA), Dubai Health Authority (DHA), and others. [Cointelegraph]

 
 

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

WAKE UP WITH REM: Soda tax, tax reform, a reformed form, and marijuana tax

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We can't think of a clever opening paragraph this week. If you can think of one, leave it in the comments below.

Soda taxes again. Several states, including California, Pennsylvania, Oregon, Mississippi, Arizona, and Michigan, are either considering or have already adopted food and/or soda taxes. But what happens when individual municipalities have their own food taxes? [Reason.com]

Tax Reform 2.0. Rep. Kevin Brady (R-Texas), Chairman of the House Ways and Means Committee, released a two-page outline of a plan to reform the nation’s most recent tax reform. The idea is nothing new — for instance, several states have already drafted legislation to mitigate the SALT deduction cap — but it will be interesting to see Brady’s finished plan. [Bloomberg]

ICYMI: Facebook stock drops by more than the worth of the entire global cheese market. John Oliver hopes that this will inspire the return of MySpace. (Strong language warning.) [YouTube]

At last! The new, improved(?) W-4. You know that annoying form you fill out every once in a while? The one where you fill in zeroes and ones, etc., to calculate the number of withholding allowances you can claim? The IRS has revamped it, and you’ll find a few surprises. [Forbes]

New Jersey budgets $20M in medicinal marijuana revenue for FY 2019. But based on tax data from previous years, this would mean handing out more than twice the number of existing cannabis prescriptions. Unless Willie Nelson moves to the Garden State, experts warn that’s not going to happen. [NJ.com]

This week's videos

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

WAKE UP WITH REM: Trade secrets, co-working, and SALT lawsuits

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Taxes don’t take the summer off! Trade secrets, 529 plans, and co-working spaces are this week’s topics. We’ve also got videos for you: develop professionally by learning how to hack networking like a champ, and join us in our bemusement at a state witness who claims not to know what a photocopier is.

Another lawsuit to preserve the SALT deduction. Tuesday, the states of New York, Connecticut, New Jersey, and Maryland joined to sue the federal government, seeking to void the $10,000 cap on federal deductions for state and local taxes. [Reuters]

Be careful when filing that 10-K. A recent study indicates that companies who disclose the existence of trade secrets in their 10-K reports—not the secrets themselves, but the existence of the trade secrets—increase their risk of a cyber-attack by 30%. [Accounting Today]

 

PROFESSIONAL DEVELOPMENT: What if all the advice we've heard about networking is wrong?

 

Is it time to let your office lease run out? As co-working gradually becomes the norm for startups and smaller companies (and is growing in popularity among established businesses), CPA firms are beginning to ask whether permanent offices are really necessary. [CPA Insider]

How will the new tax law affect education-related tax breaks? Answer: Mostly, it won’t. But in certain cases, 529 plans are now eligible to take advantage of federal income tax-free withdrawals of up to $10,000 per year (yay!) …unless your state imposes state income tax on these distributions (boo!). [MarketWatch]

 

What is a photocopier? “I don’t understand the question.”

 

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

Wake up with REM: Spring fling edition

Spring has sprung, the vernal equinox has been and gone, and everyone you know is sleep-deprived thanks to Daylight Saving Time. If you're looking for a break from tax season, we’ve got just the blog post for you. (Hint: it begins right below this paragraph.)

State sales tax is being collected by Amazon—but cities haven’t seen a dime. Amazon now collects sales tax in every state that has one. Why aren’t local governments receiving any of the revenue? [New York Times]

How will tax reform affect carried interest and private equity? This is the $64,000 question that only the newly enacted IRC Section 1061 can answer. [MiddleMarket.com]

How the new tax law creates a “perfect storm” for Roth IRA conversions. Word to the wise: while it’s true that contributing annually to your Roth IRA is generally a good idea, doing so does not guarantee that you will get to meet George Clooney. Yes, we were disappointed, too. [MarketWatch.com]

 
 

Raise a glass! Raich Ende Malter counts several distilleries as clients, so we would be remiss for not mentioning that March 27 of each year is International Whisk(e)y Day. The parenthetical “e” is a tip of the hat to the difference in spelling for Irish and American whiskeys and their Scottish, Canadian, and Japanese (Japanese whisky is apparently a thing) counterparts, which drop the “e.” Not to be confused with World Whisky Day or National Bourbon Day. Remember this at your next pub trivia night.

“Spring clean” your finances with these seven tips. Most people start their spring cleaning right around now. We de-clutter, wash the curtains, replace air filters, pack up our winter clothes and bring out the short-sleeved shirts. But what about neatening up your finances? [WKTR.com]

California considers lower taxes on pot to help new legal industry compete with black market. Good news for Seth Rogen! [Los Angeles Times]

VIDEO: Daylight Saving Time Explained. [YouTube]

EGG MYTH BUSTED! Balancing an egg on the equinox explained. Take that, Humpty Dumpty. [YouTube]

ICYMI: At last! A self-driving potato. [YouTube]

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

Wake-Up Call - Don't hit the snooze!

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Posted by REM Cycle Staff

Welcome back to another edition of The REM Cycle's Wake-Up Call, our biweekly feature where we bring you a variety current tax-related issues. Let's get it started, shall we?

As the Super Bowl approaches, it’s time to examine our priorities… Specifically, how will the new tax structure affect your ability to get reasonably-priced craft beer? How the Tax Cuts and Jobs Act could impact small and independent craft brewers [Brewers’ Association]

A young Swiss banker allegedly abetted dozens of Americans in hiding millions of dollars from the IRS between 2009 and 2013 (hey, take advantage of offshore voluntary disclosure programs, guys!). Here’s what happened when he was extradited and brought to trial [New York Times]

Why is tax day April 17 this year? Tax returns for 2017 are due a couple days later than usual this year. Here’s why. [MSN.com]

SALT news for New York taxpayers: Representatives Nita Lowey (D-NY) and Peter King (R-NY) introduced a bipartisan piece of legislation last week to “restore the full state and local tax (SALT) deduction, which is limited by the new tax law that President Trump signed last month.” NY lawmakers offer bill to restore state and local tax deduction [The Hill]

How does blockchain technology work? Political scientist and blockchain researcher Bettina Warburg was challenged to explain the central concepts of blockchain to five different people: a child, a teen, a college student, a grad student, and a blockchain expert. Blockchain expert explains one concept in 5 levels of difficulty [WIRED-YouTube]

Meet Angel, a kitten who does not like to file her tax returns. Can you blame her? [YouTube]

That’s all for this week. Got a hot tip? Email us at REMCycle@rem-co.com and tell us all about it.

Wake-Up Call - New Year's Edition

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Posted by REM Cycle Staff

Good morning, and welcome to your first Wake-Up Call of 2018! As you know, we have been publishing every other Tuesday since 2016. This year, the REM Cycle staff has resolved to bring you tax tidbits from a variety of sources on alternate Tuesdays. We promise to keep things fresh and lively to get you going in the morning.

That’s it for this week. Did you like your first wake-up call? Leave us a shout-out in the comment section below and let us know what you think.

Have a tip for an article you’d like to see linked here? Please forward it to REMCycle@rem-co.com.

‘Twas the night before tax reform

Posted by Evan Piccirillo, CPA

As you may have read in the news, or heard from your coworker or surly uncle, the wheels of legislation are grinding forward on real and transformative tax reform in our country; it is difficult to avoid talking about it and having an opinion (informed or not). The House put together a bill. The Senate put together a similar bill (which is a sign that they agree on many of the issues at hand). The House revised their bill and now plans to put it to a vote on the floor… this Thursday!

 
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All this talk of “winners and losers” and “is this is a middle-class tax cut or not” is dizzying. Eleven months ago, tax reform was destined to be a slam-dunk, with the Republicans controlling the Presidency and majorities in the House and Senate. Fast-forward to November 2017 and things aren’t nearly as certain. The failure to repeal the Affordable Care Act (Obamacare) and a series of gaffes and in-fighting among visible members of the GOP have blown tax reform off course.

On the other hand, passing the budget with the allowance for a decrease of $1.5 trillion in revenue over the next ten years was a critical step to the potential realization of tax reform. This was accomplished just recently by a narrow margin.

Passing the bill faces many hurdles. One such point of contention is the issue of the State and Local Tax (SaLT) deduction limitations and eliminations that are proposed therein. The SaLT deduction allows taxpayers to reduce federal taxable income by taxes paid to state and local governments. For obvious reasons, this deduction is very popular in high-tax states (such as NY, CA, NJ, etc.). The proposed bills eliminate income tax deductions and either eliminate or limit the real estate tax deduction. This is a sticking point for taxpayers in those states, and therefore their elected officials. Assuming either the limitation on the deduction is increased or some other compromise is reached to satisfy Republican representatives from those states enough to vote in favor and the bill will still operate in the confines of a $1.5 trillion decrease in revenue, this hurdle can be cleared.

However, the longevity of tax reform is still at stake.

The Senate will most likely try to pass the bill through reconciliation, which is a back-door way to enact legislation. Reconciliation allows a bill to be passed without minority support (the Democrats), provided that the legislation not add to the debt after a period of ten years. This means that some parts of the bill will necessarily have a limited lifespan or tax hikes in the future.

The President hopes to have the bill on his desk and ready for his signature in late December, just in time for Christmas. It is a near certainty that any kind of legislation that reaches his desk will be passed for the mere fact that the administration is thirsty for a “win.” Whether tax reform for you is a shiny gift or a lump of coal is still difficult to determine. We will have to see the bill in its final version to be certain.