Client Letter for Year End Planning December 7, 2018

One of our Tax Update attendees generously provided a client letter for you to use.  Use it as-is or change it to fit your own client base.  We hope sharing this with you will make your next few weeks easier. 

Dear Clients,
I am writing to briefly review some of the main points in the new tax law, in an effort to do year‑end planning to minimize your 2018 taxes. In the past many clients did not benefit from a year end review as things were set when we prepared the previous year’s tax return and the Alternative Minimum Tax nullified many of the strategies that could reduce tax for many.

This year might be different. Each person’s tax situation is unique under the new law, but I can give you some broad details. A full tax projection for your particular facts may be needed before December 31 to see if a certain strategy may cut your taxes.

The three main items affecting most of us are: (1) the Schedule A tax deduction is limited to $10,000 total; (2) employee business expenses and investment expenses are no longer deductible; and (3) the standard deduction is increased to $12,000 Single, $24,000 Married.

A big “however” is that the new law is for Federal taxes only.  States taxes generally do not conform to these changes.  In other words, we will need all of the same information and documents we requested for 2017 taxes because the state income tax will use old law and Federal taxes will use new law for your 2018 tax return.

I have tried to make the following list as clear as possible, but again, everyone is different.

Wages/Pensions Only ‑ If the majority of your income is from wages or pension distributions, planning is limited.

However, as a result of the new tax law, withholding tables were changed midyear. This means your refund may be less than last year’s or you may owe more than in the past. I can check this for you if you send me a copy of your last pay stub.

Expense Bunching ‑ If your itemized deductions are close to the standard deduction amount, $12,000/24,000, then you may want to discuss bunching certain deductions in alternating years. For example,  if you are single with $10,000 of state tax deductions and $3,000 of charity deductions, you may want to pay the following year’s charity before year-end. That way you have the $12,000 (single) standard deduction in one year, and $16,000 of itemized deductions the next year.

Businesses ‑ There is a new 20% Qualified Business Income (QBI) deduction for certain businesses beginning for 2018.  The rules and calculations are quite complex, and again, each situation is different. This pertains to Sole Proprietors, S‑corporations, LLCs and Partnerships (not C‑corps). This deduction will be extremely valuable for those who qualify for it. 

Two things to keep in mind for the QBI deduction:

1. If Net Taxable Income (Earned Income plus Investment Income, Rental Income, taxable Social Security, etc. less Itemized Deductions) is more than $157,500 Single and $315,000 Married, then additional factors come into play to qualify for the 20% QBI deduction.
2. If your business is in the field of health, law, accounting, performing arts, consulting, athletics, financial services or brokerage, once you go over the limits you do not get a QBI deduction.

With that in mind some tax planning, before December 31, might be in order. Planning includes:
a ‑ Choice of Entity
b ‑ Pension Planning to achieve targeted Net Taxable Income
c ‑ Insuring the paying of wages to maximize the QBI deduction, whenever possible.
d ‑ Timing of deductions to maximize the QBI deductions

I encourage you to consider your own situation and contact me, as soon as possible, if you feel that you have the type of income that would warrant a year‑end review. Also, if anything has changed significantly from 2017, you may want to have me prepare a tax projection before year end.

Best wishes for the holiday and the new year.