As the end of 2018 rapidly approaches, we are sharing this alert as a reminder that 2018 is not business as usual from a Federal and state income tax year-end planning perspective.
The 2018 tax year is the first year the changes made by the 2017 Tax Cuts and Jobs Act go into effect for most businesses and individuals.
MAJOR BUSINESS CHANGES
- Corporate tax rate. The C corporation tax rate was reduced to a flat 21 percent rate. For some corporations this will be a tax rate increase.
- Section 199A pass-through deduction. A new 20 percent tax deduction was created for businesses, including farming and rental real estate, operating as a sole proprietorship, S corporation, limited liability company or partnership. The new tax deduction comes with a great deal of complexity and requires review prior to year-end for optimization.
- Depreciation. More liberal depreciation rules were put into effect starting September 17, 2017. The new rules carry over into 2018 and future tax years. Both new and used equipment purchases qualify for some of these new liberalized rules, including business acquisitions. Coordinating with the new Section 199A tax deduction is required.
- Like-kind exchanges. Like-kind exchange of personal property was repealed. Now all car and equipment trade-ins are taxable.
- Cash method of accounting. Expansion of the ability to utilize the cash method of accounting may provide an opportunity for additional flexibility for year-end planning.
- Interest expense deduction. A limitation on the use of interest expense as a tax deduction was enacted for larger corporations.
MAJOR INDIVIDUAL CHANGES
- Section 199A deduction. The Section 199A deduction from pass-through entities is discussed above. Managing your taxable income is important to maximizing your Section 199A deduction.
- Standard deduction increase. For many individuals, the increased standard deduction may limit the ability to itemize tax deductions each year. Bunching deductions in alternative years will become an important planning tool for many individual taxpayers.
- Limit on state and location tax deduction. The itemized deduction for state income tax, real estate tax and personal property taxes is limited to a combined $10,000 annually.
- Charitable giving alternatives. Direct charitable gifts from IRA accounts for individuals over 70 ½ and the use of donor advised funds will become important planning tools for those with charitable giving objectives.
- Reduced Federal withholding. The 2018 Federal income tax withholding tables could cause individual taxpayers to owe money when they file their 2018 tax return. Check your withholding before year-end so you can plan for this possibility.