Year-end Planning Moves for Individuals
Maximize Itemized vs. Standard Deduction. The TCJA almost doubled the standard deduction amounts. For 2018, the amounts are $12,000 for singles and those who use married filing separate status (up from $6,350 for 2017), $24,000 for married joint filing couples (up from $12,700), and $18,000 for heads of household (up from $9,350). If your total annual itemizable deductions for 2018 will be close to your standard deduction amount, consider making additional expenditures before year-end to exceed your standard deduction. Next year, you can claim the standard deduction. Examples of additional expenditures include:
Medical payments - if possible, elective medical procedures, dental work, and vision care could be planned to take place before year end (medical expenses are deductible to the extent they exceed 7.5% of Adjusted Gross Income (AGI), assuming you itemize)
Mortgage interest - make your house payment due in January 2019 in 2018 to give you 13 months' worth of interest in 2018. Although the TCJA put new limits on itemized deductions for home mortgage interest, you are probably unaffected. Check with us if you are uncertain.
Charitable contributions - make the contributions you would be making in 2019, in 2018. Also consider the use of Donor Advised Funds as we communicated in our newsletter published in early November.
State and local income and property taxes - consider paying bills due in early 2019 in December of 2018. Note - the TCJA decreased the maximum amount you can deduct for state and local taxes to $10,000, so this strategy may not benefit you.
Year-end Planning Moves for Small Businesses
Establish a Tax-favored Retirement Plan. If your business doesn't already have a retirement plan, now might be the time to consider one. Current retirement plan rules allow for significant deductible contributions. For example, if you are self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $55,000 for 2018. If you are employed by your own corporation, up to 25% of your salary can be contributed with a maximum contribution of $55,000 (note that if your business has employees, you may have to cover them too).
Other small business retirement plan options include the 401(k) plan (which can be set up for just one person), the defined benefit pension plan, and the SIMPLE-IRA. Depending on your circumstances, these other types of plans may allow bigger deductible contributions.
The deadline for setting up a SEP-IRA for a sole proprietorship and making the initial deductible contribution for the 2018 tax year is 10/15/19 if you extend your 2018 return to that date. Other types of plans generally must be established by 12/31/18 if you want to make a deductible contribution for the 2018 tax year, but the deadline for the contribution itself is the extended due date of your 2018 return. However, to make a SIMPLE-IRA contribution for 2018, you must have set up the plan by October 1
Take Advantage of More Generous Depreciation Tax Breaks. Thanks to the TCJA, 100% first-year bonus depreciation is available for qualified new and used property that is acquired and placed in service in calendar year 2018. That means your business might be able to write off the entire cost of some or all of your 2018 asset additions on this year's return. Consider making additional acquisitions between now and year-end. Contact us for details on the 100% bonus depreciation break and what types of assets qualify.
Claim 100% Bonus Depreciation for Heavy SUVs, Pickups, or Vans. The 100% bonus depreciation provision can have a hugely beneficial impact on first-year depreciation deductions for new and used heavy vehicles used over 50% for business. That's because heavy SUVs, pickups, and vans are treated for tax purposes as transportation equipment that qualifies for 100% bonus depreciation. However, 100% bonus depreciation is only available when the SUV, pickup, or van has a manufacturer's Gross Vehicle Weight Rating (GVWR) above 6,000 pounds. If you are considering buying a vehicle in your business, now might be a good time to do so.
Claim Bigger First-year Depreciation Deductions for Cars, Light Trucks, and Light Vans.For both new and used passenger vehicles (meaning cars and light trucks and vans) that are acquired and placed in service in 2018 and used over 50% for business, the TCJA dramatically increased the so-called luxury auto depreciation limitations. For passenger vehicles that are acquired and placed in service in 2018, the luxury auto depreciation limits are as follows:
$18,000 for Year 1 if bonus depreciation is claimed.
$16,000 for Year 2.
$9,600 for Year 3.
$5,760 for Year 4 and thereafter until the vehicle is fully depreciated.
These allowances are much more generous than under prior law. Note that the $18,000 first-year luxury auto depreciation limit only applies to vehicles that cost $58,000 or more. Vehicles that cost less are depreciated over six tax years using depreciation percentages based on their cost. Contact us for details.
Cash in on More Generous Section 179 Deduction Rules. For qualifying property placed in service in tax years beginning in 2018, the TCJA increased the maximum Section 179 deduction to $1 million (up from $510,000 for tax years beginning in 2017). The Section 179 deduction phase-out threshold amount was increased to $2.5 million (up from $2.03 million). The following additional beneficial changes were also made by the TCJA.
Qualifying Real Property. As under prior law, Section 179 deductions can be claimed for qualifying real property expenditures, up to the maximum annual Section 179 deduction allowance ($1 million for tax years beginning in 2018). Qualifying real property means any improvement to an interior portion of a nonresidential building that is placed in service after the date the building is first placed in service, except for expenses used to enlarge the building, install an elevator or escalator, or change the building's internal structural framework.
For tax years beginning in 2018 and beyond, the TCJA expanded the definition of real property eligible for the Section 179 deduction to include qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property. To qualify, these items must be placed in service in tax years beginning after 2017 and after the nonresidential building has been placed in service.
Maximize the New Deduction for Pass-through Business Income. The new deduction based on Qualified Business Income (QBI) from pass-through entities was a key element of the TCJA. For tax years beginning in 2018-2025, the deduction can be up to 20% of a pass-through entity owner's QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owner's taxable income. The QBI deduction also can be claimed for up to 20% of income from qualified REIT dividends and 20% of qualified income from publicly-traded partnerships.
Note that business income (not capital gains or investment income) from partnerships, S corporations, single member LLC's, Schedule E rentals, Schedule C businesses, and farms can all qualify for the deduction.
Because of the various limitations on the QBI deduction, tax planning moves (or nonmoves) can have the side effect of increasing or decreasing your allowable QBI deduction. So, individuals who can benefit from the deduction must be really careful at year-end tax planning time. We can help you put together strategies that give you the best overall tax results for the year.
Employee Spotlight - Jordan V. Smith, CPA
Jordan first joined the firm as a professional intern for the 2015 tax season. After receiving his Masters in Accountancy from Colorado State University in May of 2017, he began as an associate the following June. He also received his Bachelor of Science degree in Business Administration from CSU in December of 2015. Jordan prepares both individual and business tax returns and assists with the employee benefit audit team.
Outside of work, Jordan loves spending time with his wife Alexis and their son Winston. They enjoy most everything from board games to backpacking trips to spending time with their numerous nieces and nephews.
This letter only covers some of the year-end tax planning moves that could potentially benefit you and your business. Please contact us if you have questions, want more information, or would like us to help in designing a year-end planning package that delivers the best tax results for your particular circumstances.