Year-end tax planning tips have always been a popular subject as the calendar turns to the fourth quarter, but as a result of the Tax Cuts and Jobs Act (TCJA) passed at the end of 2017, there is more interest in this topic than ever! The Act brings with it both the creation of new deductions and the elimination of old deductions that need to be taken into consideration when planning any last minute maneuvers.
Following generic, one-size-fits-all “tax tips,” may not be the best way to start the process. Instead, the first step for you as a business owner or as an individual tax payer is to think strategically about your own situation.
In order to make educated decisions regarding your tax obligations, you should compare your income and expenses for the current year versus what you anticipate for 2019. Knowing if you will be in the same or a lower tax bracket next year will enable you to take advantage of the most effective tax strategies for 2018. In doing so, you can make a more relevant determination regarding what income or expenses you should defer to 2019 and what income or expenses you should claim in 2018 when possible.
Knowing what your tax bracket will be in 2018 and 2019 will provide you with a reasonable basis for making sound professional and personal decisions.
Business Owners May Consider These Strategic Options:
- If your business is a sole proprietorship (or single member LLC), partnership LLC treated as a partnership) or an S Corp, you will benefit from the new ‘pass through business income deduction.’
- If you are an eligible business owner, you may establish an employer-sponsored retirement savings plan, such as a 401(k), Simple IRA, SEP IRA, and profit sharing plans.
- If you have qualifying properties and expenditures that were placed in service after 2017 such as furniture, kitchen appliances, lawn mower and other similar furnishings for a hotel, motel, rental condo, you may be eligible for the new $1 million available under the Section 179 deduction. This deduction also includes applies to improvements to both the interior of a nonresidential building and exterior expenditures to nonresidential buildings such as roofs, HVAC equipment, fire protection, alarm systems and security systems.
- In 2018 and beyond, if you are an eligible small business, you will be able to use the cash method of accounting rather than the accrual method than in previous years. In this way, as an owner whose company’s average annual gross receipts don’t exceed $25 million, you can choose to either defer paying certain bills until the following year or alternatively you can choose to pre-pay some invoices. By paying early, or putting off payment, as a small business owner you can employ this strategy to shift income as necessary to maximize tax opportunities.
- Based on the Tax Cut’s 100% bonus depreciation deduction, you can now write off the entire cost of some – or all – the assets you have acquired for your business in 2018, including purchases of new and used machinery and equipment along with other long term assets placed in service after September 27, 2017.
As a business owner, we suggest you confer with a knowledge CPA to decide if deferring income (by using credit cards to pay recurring expenses for 2019 in 2018; by issuing checks in 2018 for expenses due in 2019; or by making a major purchase at the end of 2018) or accelerating deductions are going to be beneficial for your own situation.
Individual Taxpayers May Consider These Strategic Options:
- Increase your federal tax withholdings now if it appears that you will owe federal taxes at the year-end (or consider using estimated tax payments)
- Make the maximum contribution allowable to your retirement savings to reduce your taxable income for the year
- Review your portfolio and consider any year-end investment moves that may help to minimize your taxes for 2018, as long as the decision is aligned with your overall investment strategy
- Remember that if you have medical expenses (that are not reimbursed by your insurance company) that exceed 7.5% of your Adjusted Gross Income (AGI), you can deduct the excess amount.
One of the biggest changes for individuals under TCJA is the increase in the basic standard deduction to $24,000 for joint filers, $12,000 for single filers, $18,000 for heads of household or $12,000 to married filing separately. Because of the corresponding abolishment or reduction of many of the itemized deductions that were available in previous years, the expectation is that most individuals will not itemize and instead will likely opt for the new, higher standard deduction.
This change has an impact on a range of popular deductions including state and local tax and property tax, personal casualty and theft losses, charitable contributions, and unreimbursed employee expenses, to name just a few.
As always, you need to use good judgment and have access to sound advice when seeking year-end moves based on the goal of potentially postponing the payment of taxes from 2018 to 2019. As with business owners, it is strongly suggested that you seek advice from a trusted advisor before determining your tax strategy.