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2018 Tax Law Changes -Pro-active Year End Tax Planning

Pavel Verbsky, CPARLR, LLP

1235 Riverside AveFort Collins, CO970-692-5300

www.rlrcpas.com

Evans, CO970-304-9420

Cheyenne, WY307-631-5598

Pavel Verbsky, CPA is apartner at RLR, LLP.

Pavel Verbsky was born in theCzech Republic. After graduatingfrom the University ofEconomics in Prague, he hasworked in public accountingsince 2003. In 2005, he joinedRLR, LLP in Fort Collins.

He enjoys working with smallbusiness owners and primarilyfocuses on tax returnpreparation, tax planning andgeneral accounting consulting.

Pavel Verbsky, CPARLR, LLP

Full service CPA firm:

• Tax preparation, taxplanning, IRSrepresentation

• Small business accounting

• Quickbooks consulting

• Payroll

• New business formation

• Audits – Reviews -Compilations

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Why tax planning?

• Understand where you are

• Avoid costly tax mistakes

• Take advantage of taxdeductions and tax credits

• Optimize taxes paid overtime

• Plan for future income &taxes

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Tax planning tools

• Avoid tax completely

• Shift taxable income to adifferent tax year

• Take advantage of low taxbrackets

• Optimize income to obtainor retain tax or otherbenefits

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Many changes!

• Generally effective after 12/31/17

• Most changes are temporary- Sunset after 2025

• Some guidance is out, but moreneeded

• Future legislation?

• State conformity to changes?

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The basics

• Still seven tax brackets– 10%, 12%, 22%, 24%, 32%, 35%, 37%

• No more dependent exemption

• Higher child tax credit ($2,000)– New $500 non-child dependent credit

• Increase in standard deduction

• Individual AMT not repealed– But exemption amounts have increased

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Rate Single Married10% $0 - $9,525 $0 - $19,050

12% $9,526 - $38,700 $19,051 - $77,400

22% $38,701 - $82,500 $77,401 - $165,000

24% $82,501 - $157,500 $165,001 - $315,000

32% $157,501 - $200,000 $315,501 - $400,000

35% $200,001 - $500,000 $400,001 - $600,000

37% Over $500,000 Over $600,000

Rate Single Married10% $0 - $9,325 $0 - $18,650

15% $9,326 - $37,950 $18,651 - $75,900

25% $37,951 - $91,900 $75,901 - $153,100

28% $91,901 - $191,650 $153,101 - $233,350

33% $191,651 - $416,700 $233,351 - $416,700

35% $416,701 - $418,400 $416,701 - $470,700

39.6% Over $418,400 Over $470,700

2017 Tax Brackets 2018 Tax Brackets

Single Married HOH2017 $6,350 $12,700 $9,3502018 $12,000 $24,000 $18,000

Standard Deduction AmountsPersonal

exemptions$4,050 =GONE

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Dividend and capital gains rates unchanged

• The top tax bracket for qualified dividendsand capital gains is 20%(23.8% if the net investmentincome tax applies).

Here’s the breakdown: 0% for MFJ taxpayerswith < $77.2k taxable

income

15% for MFJ taxpayerswith between $77.2kand $479k taxable

income

20% for MFJ taxpayerswith taxable incomegreater than $479k

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Dividend and capital gains – tax strategies

Tax strategies:

• Harvesting capital losses to offset other capitalgains

• Trigger capital gains in low income year to“step up” basis

• Installment sales to stretch income intomultiple years

• Like Kind Exchanges to defer income

• Inheritance basis step up

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Itemized deductions changes

• Repeal of the overall limitation on itemized deductions

• Medical deduction threshold is 7.5% for 2017 & 2018– Reverts to 10% starting in 2019

• Mortgage interest limited to $750k of debt– Debt prior to 12/15/17 is grandfathered

• Home equity interest no longer deductible

• State and local tax deduction is limited to $10k ($5k if MFS)

• Misc. deductions subject to 2% threshold no longer deductible

Tax strategies:

• HSAs, FSAs

• Deducting healthinsurance for businessowner (SEHI)

• HELOC/homemortgage asinvestment or rentalinterest, interest topurchase stock in smallbusiness – interesttracing rules

• ‘Bunch’ charitabledonations or larger onetime donations to donoradvised funds

• Charitable IRA rollover(age 70 ½)

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Misc. itemized deductions subject to 2% AGI

• Unreimbursed employee expenses

• Tax prep fees

• Hobby expenses

• Investment fees/expenses

• Legal fees related to producing income

• Safe deposit fee

…are no longer deductible

Tax strategies:

• EBE – get reimbursedfrom the business

• Tax prep fees –allocate to rental orbusiness activity

• Hobby vs business?Hobby income vsexpensereimbursement?

• Pay IRA fees fromwithin regular IRAaccounts

• Attorney fees – whatare they for?

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20% pass-through deduction

• 20% of qualified business income

• Qualified business income definitions

– Qualified trade/business income – from soleproprietorship, partnership, or S-corporation• Not a specified trade/business

(architectural and engineering, manufacturing,construction, retail, wholesale, restaurant, etc.)

• Specified trade/business involving performance ofservices in the fields of health, law, accounting,actuarial science, performing arts, consulting,athletics, financial services, brokerage services,investment management, “celebrities”

flowchart

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20% pass-through deduction• Does not include capital gains, interest, dividends,

wages, guaranteed payments, retirement income, rentalincome

• Phase-out limitations

– Taxable income exceeding> single: $157,500 to $207,500> married filing joint: $315,000 to $415,000

• Limitations based on

– taxable income (for specified service business)– 50% of wages– 25% wages plus 2.5% of adjusted basis in qualified

property (certain depreciable assets)

Tax strategies:

• Controllingtrade/business income

• Controlling overalltaxable income

• Adjusting wages for S-Corporation owners

• Multiple businesses

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Affordable Care Act impact

• Penalty to maintain insurance coverage(individual mandate) is repealed for 2019 andforward

• HOWEVER, still in effect for 2017 and 2018

• 2018 penalty:

• Higher of 2.5% of yearly household income, or

• $695 per person ($347.50 per child under 18)

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Estate and gift taxes changes

• 2018 estate tax exemption: $11.2 million

• 2018 gift tax annual exclusion: $15,000

• Estate planning is more than minimizing estate taxes.

– Updating documents– Repurposing insurance– Privacy– Asset protection

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Education tax benefitchanges

• Sec 529 plan distributions for privateschool tuition

• Sec 529 plan assets can transfer toABLE accounts for family members

• Student loan forgiveness will not betaxable income to student upondeath/total disability

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State and local tax issues

• Total deduction limit of $10k ($5k if MFS)

- Combination of income/sales and state/localproperty taxes

• Exceptions

- Tax imposed at entity level

- Property taxes for residential rentalproperty/business property

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Other individual changes to note

• Casualty losses: only from federally-declared disasters

• Alimony: deduction/inclusion repealed for divorces executed after12/31/18

• Moving expenses deduction repealed

• Kiddie tax now at trusts/estate tax rates

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Questions

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Corporate rate changes

• Flat rate of 21% (C-corporation)

• Effective for years beginning after 12/31/17

• Fiscal year corporations should apply Sec. 15

• Personal service corporations taxed at same rate(no more surtax)

• Corporate AMT has been repealed

• Dividends received deduction reduced

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Depreciation

• Additional first year/bonus depreciation-100% for property acquired after 9/27/17

• Phase down schedule for years after2022

• Now allowed for new and used property

• Qualified improvement property – newdefinition and recovery life

• Passenger auto depreciation limitsincreased

• Increases to Sec. 179 ($1M andthreshold $2.5M)

• SUV Sec 179 limitation remains at$25,000

• Limits are indexed for inflation

• Sec 179 now allowed for certain non-residential real property (roofs, HVAC)

• Allows residential rental property

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Net operating loss provisions

• No longer allowed to carryback NOLs

• Carried forward indefinitely

• 80% of taxable income may be reduced by NOL

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Accounting methods for small taxpayers

• Expanded availability of cash method ($25M)

• Inventory tracking requirements

• Sec. 263A threshold raised

• Expanded availability of completed contract method

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Changes to fringebenefits/entertainment expense

• Repeal of business entertainment expenses

• Repeal of deduction for qualified transportationfringe benefits

• Repeal of exclusion for bicycle commutingreimbursement

• Repeal of exclusion for employee reimbursedmoving expenses

• Other changes to employee fringe benefits

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Other changes to note

• Changes for Sec. 1031 (Like Kind) exchanges

• New credit for paid family and medical leave

• Expenses for employer operating eatingfacilities is now 50% (rather than fullydeductible)

• Lobbying costs no longer deductible

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Questions

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Thank youThank you

RLR, LLP1235 Riverside Ave

Fort Collins, CO970-692-5300

www.rlrcpas.com

Greeley, CO970-304-9420

Cheyenne, WY307-631-5598