There are more than 100 changes in the Tax Cuts and Jobs Act taking affect for the 2018 tax return. When talking to your clients before year-end, here are a few items to consider in that discussion.
- A personal casualty loss is not deductible for 2018 to 2025. Remind clients that they should review their insurance coverage with their agent to make sure it is adequate. Federally declared disaster losses remain deductible.
- The 529 College Savings Plan has been expanded. Qualified distributions now include a withdrawal of up to $10,000 per beneficiary for elementary or secondary public, private or religious school tuition. The advisability of withdrawals for K through 12 tuition needs to be considered, particularly if the funds saved for college costs seem inadequate.
- Since the standard deduction is almost doubled from prior years ($24,000 MFJ, $18,000 HOH and $12,000 single), some year-end strategies that had tax benefit for 2017 may not provide tax benefit for 2018.
a. Making a charitable contribution before year-end may not provide a tax benefit if total itemized deductions do not exceed the new standard deduction amounts. Doubling up by making 2018 and 2019 charity pledges before year-end may help. A contribution to a Donor Advised Fund may help. An IRA transfer to a charity of at least the amount of the required minimum distribution for the age 70 ½ account holder may be advisable.
b. Bunching medical deductions into one year may help get a deduction above the 2018 7½ % AGI limitation (10% in 2019). Again the increased standard deduction may result in medical expenses providing no tax benefit whether they are bunched or not.
- 2018 Schedule A taxes are limited to $10,000. Thus, prepaying the January installment of state estimated tax before year-end will not provide a benefit if deductions already exceed the $10,000 limit. The same warning applies to prepaying before year-end the March 2019 installment of property tax on personal use property. Taxes on business or rental property are not limited by the new law.
- The interest deduction on home equity debt is suspended for 2018 through 2025. Clients need to be reminded that a refinanced first loan, a second loan or a home equity line of credit, where the proceeds of the loan were used for personal purposes (for example, paying off student loans, credit cards or auto loans), will result in a reduction of the deductible portion of the interest showing on their Form 1098-Mortgage Interest.
a. Clients should prepare a worksheet showing the original acquisition loan amount, the date and term of the original loan. The worksheet should also include the date and amount of any additional borrowing that was used to substantially improve their first or second home. Where the appropriate election was made, interest remains deductible ifthe proceeds of additional borrowingwere used for business, investment or rental purposes.
- Fewer limitations apply to the new qualified business income deduction (QBID) if the taxable income on the Form 1040 is below a threshold amount of $157,500 ($315,000 for MFJ). Project 2018 taxable income and advise on ways to reduce taxable income below the threshold amounts. This is especially important for specified service businesses and for businesses with no W-2 wages and little or no depreciable business assets (referred to as UBIA in the regulations).
- Most people will require a revised Form W-4 for 2019. Be sure to request a pay stub so that you can assist with preparing the 2019 Form W-4.
- Because 2018 withholding charts were adjusted downwards by the IRS in February 2018, estimated tax payments may be slightly off if the computation of estimates relied on 2017 withholding amounts. Many clients innocently assume that they will pay less tax this year. Analyze their withholding and estimated taxes now to avoid unhappy clients during preparation time.
- Divorcing clients will need special help for the transition to the new law. Alimony is not deductible by the payor (or includable in the income of the recipient) for divorce agreements executed after Dec. 31, 2018. The payor spouse may be particularly stressed to discover that neither child support nor alimony is deductible for 2019 or later divorces.
a. Divorced and divorcing clients need to make changes or complete their separation agreements prior to 2019. Any changes made after 2018 may jeopardize future alimony deductions. 10. The estate and gift tax exemption is doubled in the new law for 2018 through 2025. The exemption is $11,400,000 for decedents dying in 2019. While Federal estate tax may not be an issue for many clients, estate planning always is. Probate, blended families, who-getswhat, and business succession are a few items that should be discussed with an estate attorney.
- Expanded sections 179 and 168 allow huge deductions for equipment placed in service prior to year end.
- Defer or eliminate capital gains. Capital gains will be deferred on the amount invested in a Qualified Opportunity Fund (QOF) within 180 days of a sale generating the capital gain. If the investment is held for more than 5 years 10% of the deferred gain can be excluded, 15% for investments held for more than 7 years. Investments held for at least 10 years receive an increase in basis to FMV on the date of the sale. Clients should be careful to evaluate the quality of the QOF investment.
- Search for AMT credit carryovers. Since most clients will not be subject to AMT this year, their carryover credits will be valuable. Form 8801 should show any accumulated AMT credits, but prior year returns need to be analyzed carefully to avoid loss of these valuable credits.
- Hobby losses are under attack. Since expenses to the extent of revenue are no longer deductible as miscellaneous itemized deductions, revenue from unprofitable business ventures could end up being fully taxed. Consider forcing profits by capitalizing many costs and being careful to remove personal expenses.
- Bearer of bad news. Financial planner fees, investment expenses and moving expenses are not deductible for 2018 through 2025. Unreimbursed employee business expenses are not deductible for 2018 through 2025. Encourage clients to negotiate accountable expense reimbursement arrangements with their employer to avoid paying tax on amounts spent for business expenses.
- Tried and True. Year-end planning still includes deferring income, accelerating deductions, purchasing and placing in service depreciable business assets before Dec. 31, maximizing elective deferral contributions, and harvesting capital losses (up to the $3,000 annual limit for net Schedule D losses). These “tried and true” year-end planning ideas take on a new importance if using any or all of them results in a taxable income below the thresholds for a QBI deduction. See number 6 above.
- Carefully check state tax conformity to the new Federal law. Many states have not conformed. For example California conforms to nearly nothing in TCJA, and has a much lower standard deduction than federal law. That means, that with the exception of state tax payments, deductions for items 1, 4, 5, and 11 can still reduce California state income tax significantly. Advise clients to provide the same information that they gave you for 2017.