Beginning in 2018 under the new tax law, individuals can only claim an itemized deduction of up to $10,000 for the total of state and local property taxes and state and local income taxes. Consider paying the last installment of 2017 estimated state and local taxes by Dec. 31, 2017, rather than on the 2018 due date. But don’t prepay in 2017 a state income tax bill that will be imposed for 2018. Such prepayments aren’t deductible in 2017. (The new law only forbids state income tax prepayments, so a prepayment of 2018 property tax before year end is apparently OK.)Read More
Accelerating deductible expenses, such as property tax on your home, into the current year typically is a good idea. Why? It will defer tax, which usually is beneficial. Prepaying property tax may be especially beneficial this year, because proposed tax legislation might reduce or eliminate the benefit of the property tax deduction beginning in 2018.
The initial version of the House tax bill would cap the property tax deduction for individuals at $10,000. The initial version of the Senate tax bill would eliminate the property tax deduction for individuals altogether.
In addition, tax rates under both bills would go down for many taxpayers, making deductions less valuable. And because the standard deduction would increase significantly under both bills, some taxpayers might no longer benefit from itemizing deductions.Read More
On Thursday, November 16, the House of Representatives passed their version of the Tax Reform bill. The Senate Finance Committee also voted to approve their version, which will allow the Senate to consider the bill after Thanksgiving. While both bills contain many similar proposals, there are some major differences. At Hancock & Dana, we have been closely following the proposed changes and how they may affect our clients and we will continue to do so.
The chart below explains some of the major provisions of the two tax bills, as well as how they compare to each other and to current tax law. If you have questions about how the proposed changes may affect your situation, please give us a call.
|Category||Current Law||House GOP Plan (as passed 11/16/2017)||Proposed Senate GOP Plan (as of 11/16/2017)|
|Income taxes (see more detail on tax brackets below)||Seven brackets: 10%, 15%, 25%, 28%, 33%, 35%, 39.6%||Four brackets: 12%, 25%, 35%, 39.6%||Seven brackets: 10%, 12%, 22%, 24%, 32%, 35%, 38.5%|
|Standard deduction||$6,350 for Singles, $12,700 for married couples||Increases 2018 deduction to: $12,200 for individuals, $24,400 for married couples||Increases 2018 deduction to: $12,000 for individuals, $24,000 for married couples|
|Personal Exemptions||$4,050 exemption each for taxpayer and spouse (if applicable) and each dependent claimed on return||Eliminates Personal Exemptions||Eliminates Personal Exemptions|
|Child Tax Credit/Family Tax Credit||Provides $1,000 tax credit per child age 16 and under for families making less than $110,000||Provides $1,600 credit per child age 16 and under for families making less than $230,000.
Creates new $300 credit for each non-child dependent (i.e., children over age 16 or non-child dependent).
Creates new $300 family flexibility credit for each taxpayer and spouse (if applicable).
The Non-child dependent credit and Family Flexibility credit will expire after 2022.
|Provides $2,000 credit per child age 17 and under for families making less than $500,000. Creates new $500 credit for each non-child dependent.|
|Alternative Minimum Tax (AMT)||Limits certain benefits for higher-income earners||Eliminates AMT||Eliminates AMT|
|Mortgage Interest Deduction||Allows deduction of interest on first $1 million of mortgages for first and second home(s)
Permits deduction for interest expense on up to $100,000 of home equity indebtedness.
|Limits deduction to interest on first $500,000 of mortgages for primary residence only.
No deduction for mortgage interest on second home.
No deduction for home equity interest expense.
|Retains deduction of interest on first $1 million of mortgages for first and second home acquisition indebtedness.
Eliminates deduction for interest expense on home equity indebtedness.
|State/local income and property tax deductions||Allows deduction for state and local income tax (or sales tax), real estate tax, personal property tax.||Eliminates Deductions for state and local income taxes, sales tax and real property tax.
Limits deduction for real property taxes to a maximum of $10,000.
|Eliminates deductions for all state and local income taxes, sales tax, real property tax and personal property taxes.|
|American Opportunity Tax Credit (AOTC)||Tax credit for up to $2,500 for the first $4,000 spent on tuition and fees for the first four years of undergraduate education for each eligible student. Taxpayers must have Modified Adjusted Gross Income (“MAGI”) of less than $90,000 as a single filer or $180,000 as joint filers in order to claim the credit.||Extends the AOTC credit to a fifth year, but only allows for half the credit in the final year ($1,250). Phaseout of credit remains at $65,000 for single filers and $130,000 for joint filers.||Retains AOTC under current rules|
|Lifetime Learning Credit||Credit for 20% of up to $10,000 in qualified tuition expenses for higher education, not limited to undergraduate education. Taxpayers must have MAGI of less than $65,000 as a single filer or $130,000 as joint filers in order to claim the credit. Credit is limited to $2,000 per tax return.||Eliminates the Lifetime Learning Credit||Retains the Lifetime Learning Credit|
|Other deductions||Various deductions to reduce tax burden for individual filers||Eliminates deductions for student loan interest, medical expenses, tax preparation fees, most personal casualty losses, tuition and fees deduction, and employee business expenses.
Denies deduction for charitable contributions that entitle donors to a right to purchase tickets to college sporting events.
|Eliminates deductions for tax preparation fees, most personal casualty losses, and employee business expenses.
Retains deduction for medical expenses and charitable contributions
|Sunset provisions||N/A||Family Flexibility Credit and non-child dependent credit will expire as of January 1, 2023.||The individual tax cuts would expire after 2025 in order to comply with a rule that requires the bill to not increase the deficit after 10 years.
Corporate tax cuts will be permanent.
|Estate tax||Taxes assessed on estates with total property valued at more than $5.5 million, $11 million if passed to a surviving spouse.||Increases exemption to $11 million ($22 million for a surviving spouse). Repeals tax entirely after six years.||Increases exemption to $11 million ($22 million for a surviving spouse).|
|Corporate taxes||Graduated tax rates of 15% – 35%.||Flat rate of 20% for corporations starting in 2018.
Maximum rate of 25% for certain small businesses that pass on profits to owners. Lower tax rate is not available for specified service businesses.
|Flat rate of 20% for corporations starting in 2019.
Certain small businesses owners are able to deduct some earnings, but will pay ordinary tax rate on remainder. Deduction is not available for owners of specified service businesses with taxable income of greater than $500,000 for married taxpayers and $250,000 for single taxpayers.
Tax Bracket Changes
|Rate||Single||Married Filing Joint|
|39.6%||Over $426,700||Over $480,050|
House Bill (passed)
|Rate||Single||Married Filing Joint|
|12%||$0 to $45,000||$0 to $90,000|
|25%||$45,001 – $200,000||$90,001-$260,000|
|35%||$200,001 – $500,000||$260,001 – $1,000,000|
|39.6%||Over $500,000||Over $1,000,000|
Senate Bill (as of 11/16/17)
|Rate||Single||Married Filing Joint|
|38.5%||Over $500,000||Over $1,000,000|
Many investors, especially more risk-averse ones, hold much of their portfolios in “income investments” — those that pay interest or dividends, with less emphasis on growth in value. But all income investments aren’t alike when it comes to taxes. So it’s important to be aware of the different tax treatments when managing your income investments.
Varying tax treatment
The tax treatment of investment income varies partly based on whether the income is in the form of dividends or interest. Qualified dividends are taxed at your favorable long-term capital gains tax rate (currently 0%, 15% or 20%, depending on your tax bracket) rather than at your ordinary-income tax rate (which might be as high as 39.6%). Interest income generally is taxed at ordinary-income rates. So stocks that pay dividends might be more attractive tax-wise than interest-paying income investments, such as CDs and bonds.
Currently, a valuable income tax deduction related to real estate is for depreciation, but the depreciation period for such property is long and land itself isn’t depreciable. Whether real estate is occupied by your business or rented out, here’s how you can maximize your deductions.
Segregate personal property from buildings
Generally, buildings and improvements must be depreciated over 39 years (27.5 years for residential rental real estate and certain other types of buildings or improvements). Whereas personal property, such as furniture and equipment, generally can be depreciated over much shorter periods. Further such assets may qualify for 50% bonus depreciation or Section 179 expensing (up to $510,000 for 2017, subject to a phaseout if total asset acquisitions for the tax year exceed $2.03 million) for the year placed in service.Read More
If you’re charitably inclined but concerned about having sufficient income to meet your needs, a charitable remainder trust (CRT) may be the answer. A CRT allows you to support a favorite charity while potentially boosting your cash flow, shrinking the size of your taxable estate, reducing or deferring income taxes, and enjoying investment planning advantages.
How does a CRT work?
You contribute stock or other assets to an irrevocable trust that provides you — and, if you desire, your spouse — with an income stream for life or for a term of up to 20 years. (You can name a noncharitable beneficiary other than yourself or your spouse, but there may be gift tax implications.) At the end of the trust term, the remaining trust assets are distributed to one or more charities you’ve selected.
It’s a safe bet that state tax authorities will let you know if you haven’t paid enough sales and use taxes, but what are the odds that you’ll be notified if you’ve paid too much? The chances are slim — so slim that many businesses use reverse audits to find overpayments so they can seek reimbursements.
Take all of your exemptions
In most states, businesses are exempt from sales tax on equipment used in manufacturing or recycling, and many states don’t require them to pay taxes on the utilities and chemicals used in these processes, either. In some states, custom software, computers and peripherals are exempt if they’re used for research and development projects.
This is just a sampling of sales and use tax exemptions that might be available. Unless you’re diligent about claiming exemptions, you may be missing out on some to which you’re entitled.Read More
If you own a profitable, unincorporated business with your spouse, you probably find the high self-employment (SE) tax bills burdensome. An unincorporated business in which both spouses are active is typically treated by the IRS as a partnership owned 50/50 by the spouses. (For simplicity, when we refer to “partnerships,” we’ll include in our definition limited liability companies that are treated as partnerships for federal tax purposes.)
For 2017, that means you’ll each pay the maximum 15.3% SE tax rate on the first $127,200 of your respective shares of net SE income from the business. Those bills can mount up if your business is profitable. To illustrate: Suppose your business generates $250,000 of net SE income in 2017. Each of you will owe $19,125 ($125,000 × 15.3%), for a combined total of $38,250.
Fortunately, there are ways spouse-owned businesses can lower their combined SE tax hit. Here are two.Read More
Projecting your business income and expenses for this year and next can allow you to time when you recognize income and incur deductible expenses to your tax advantage. Typically, it’s better to defer tax. This might end up being especially true this year, if tax reform legislation is signed into law.
Timing strategies for businesses
Here are two timing strategies that can help businesses defer taxes:
1. Defer income to next year. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.Read More
One important step to both reducing taxes and saving for retirement is to contribute to a tax-advantaged retirement plan. If your employer offers a 401(k) plan, contributing to that is likely your best first step.
If you’re not already contributing the maximum allowed, consider increasing your contribution rate between now and year end. Because of tax-deferred compounding (tax-free in the case of Roth accounts), boosting contributions sooner rather than later can have a significant impact on the size of your nest egg at retirement.Read More