How the new tax bill affects your 2018 personal income taxes

Tax bill

Anxiety levels have soared among the lower and middle class as the GOP instigates a tax bill overhaul proffering hefty cuts to corporations and the highest-earning 1%. But most income brackets will see a boost in take-home pay – a blip for some earners and a bump for others. Find out where you stand.

The tax brackets have shifted. What does that mean for me?

First, determine your tax rate based on your income bracket. In a nutshell, the middle class (defined by Pew Research as those earning $39,560-$118,080) sees their taxes slashed from 25 percent to 22 percent.

Here’s the good news for married taxpayers filing jointly: the Republican tax bill shifts the seven income brackets upwards, so that the larger tax rates are introduced at higher increments. Conversely, higher rates kick in earlier for middle-class single filers — but the well-heeled can take solace in knowing the highest tax bracket just jumped from $418,401 to $500,001 and up.

Tax brackets for single filers

Tax brackets for married taxpayers filing jointly

The personal exemption has been repealed! Does that mean I get a smaller tax deduction?

Not necessarily. Personal exemptions are for those who score a larger deduction by itemizing expenses such as a mortgage or state and local taxes, rather than accepting the standard deduction. In 2017, the standard deduction for a single taxpayer was $6,350 plus one personal exemption of $4,050 per taxpayer, usually claimed by those with incomes less than $100,000, which constitutes about 70 percent of Americans. The new law combines these into one larger standard deduction for 2018: $12,000 for single filers and $24,000 for joint filers (up from $12,700).

The hike in standard deductions most benefits childless married couples, while married couples claiming multiple dependents claim a more modest deduction ($24,000 regardless of income), potentially offset by an enhanced child tax credit of $2,000 per child under age 17 (up from $1,000).

Can I still itemize under Schedule A?

Yes, but beware of changes to Schedule A items. The bill imposes a $10,000 cap on state and local taxes (including property tax) which you can deduct from your federal income taxes, so if you reside in a high-tax state, you should budget accordingly. Furthermore, a number of items are no longer itemizable: casualty and theft losses (exempting areas beset by natural disaster), the cost of tax preparation, investment fees, bike commuting ($20/month), unreimbursed job expenses and moving expenses.

I’m looking to buy or sell a home. What should I be aware of?

Your current mortgage-interest deductions won’t be affected, but if you move, your mortgage deduction will shrink from $1 million to $750,000 for married filers and $500,000 to $375,000 for single filers. These adjustments could make homeownership less affordable in pricey markets.

So what’s the verdict?

See below for an at-a-glance rundown of your filing status.

You’re Single, with No Children You’re Married Filing Jointly, with No Children You’re Married Filing Jointly, with Two Children
  • Standard deduction increases from $6,350 to $12,000.
  • Personal exemptions decrease from $4,050 to $0.
  • Old tax break: $10,400.
  • New tax break: $12,000.
  • Standard deduction increases from $12,700 to $24,000.
  • Personal exemptions decrease from $8,100 to $0.
  • Old tax break: $21,100.
  • New tax break: $24,000.
  • Standard deduction increases from $12,700 to $24,000.
  • Personal exemptions decrease from $16,200 to $0.
  • Old tax break: $28,900.
  • New tax break: $24,000.

 

June 6th, 2018|Tax|0 Comments

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The New Tax Law: A Guide for Small Businesses

new tax law

The Tax Cuts and Job Act of 2017 is hotly contested for its drastic tax breaks for corporations and the top one percent of households. But it does offer small businesses a significant breather — at least until 2025. Here are a few things to ask your accountant as tax season approaches:

1. As a small-business owner, what is the most important tax cut I should know about in the new tax law?

The largest cut is a 20-percent deduction for pass-through income. This refers to business income that is reported as personal income by the small-business owner, rather than being taxed through a corporate tax structure.

new tax law If you’re a sole proprietor or an independent contractor providing labor services — such as a self-employed IT specialist, a pizza-shop owner, or a real estate investor — you are most likely eligible for this tax break, which means that you shave 20 percent off your earnings before paying taxes on the rest.

But there are limits on who can claim the pass-through deduction. If you’re an individual earning more than $157,500 or from a household that earns less than $315,000, the deduction is capped at either 50 percent of wages or 25 percent of wages, plus 2.5 percent of capital assets — whichever is greater.

2. How do I know if my business’s earnings qualify as pass-through income?

If your business is a partnership, an S corporation, or a limited liability company, you generally qualify for this deduction. Pass-through income simply means that company revenue passes to the owner, who is taxed at the appropriate individual tax rate. If you’re a company founder or partner, this perk should apply to you. Also note that categorizing your income as pass-through income allows you to pay a generally lower tax rate (29.6 percent) than on personal income tax, depending on your income bracket.

3. Should I consider incorporating to benefit from further tax breaks?

Some pass-through businesses might decide to become corporations to reduce their tax burden.

In a bid to increase global competitiveness, the new tax law slashes corporate taxes from 35 percent (one of the highest rates in the world) to 21 percent.

But unlike the other provisions for personal income taxes and pass-through income, which phase out on December 31, 2025, this provision is permanent.

That said, before you incorporate, consider issues like financial liability and changes to accounting methods. As a corporation, you’ll be required to use accrual accounting methods. With this process, expenses are recorded at the time they are incurred, rather than when they’re paid. This can complicate the process of tracking real cash flow because there is often a delay between when a business processes an order and when it receives payment. Unincorporated small businesses, on the other hand, tend to rely on cash accounting. With this method, outlays and earnings are recorded and taxed in the period they are collected or paid.

4. Are there any other tax breaks I should consider in the new tax law?

Yes — but only if you qualify. Does your small business export goods or services? Or does it conduct significant research and development to actively develop new products or processes? If you run a pharmaceutical company or are an education entrepreneur or a tech disruptor with the potential to become the next Uber, this could be your godsend. The new R&D tax credit, introduced in 2017, allows you to claim up to $250,000 per fiscal year.

First things first: You should work with an accountant to conduct an audit of your business’s R&D expenses. Your accountant will then file Form 6765, Credit for Increasing Research Activities, with your business’s annual income taxes. If eligible, you can expect a hefty credit. You can use this to reduce taxes on taxable income or payroll depending on your company’s profit or loss situation.

5. I conduct business overseas as well as domestically. How can I max out my tax breaks?

If you export goods or services or produce a widget that is included in a larger item that is exported (such as a component part for an electronic device sold overseas), know that foreign profits will be taxed at a lower rate. While this might galvanize multinationals to offshore their operations and headquarters, it’s an incentive to small businesses to expand internationally. Small and medium-size enterprises, or SMEs, accounted for 98 percent of U.S. exporters in 2013 and continue to be a linchpin of economic growth.

Still have questions about the new tax law? You can schedule an appointment with a financial expert at Fibrick today!

If you want a comprehensive list of revisions in the new tax law, Bloomberg has an excellent article.

 

This article was originally published on Centsai.com, a publication devoted to explain finance, accounting, taxes and more through storytelling and media. You can view the original piece here.

February 14th, 2018|Tax|0 Comments

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Quick Tax Tips to Make the Best of the Tax Season

taxes

Tax season is here again! For tax professionals like me, this is a happy season. For almost everyone else, it’s a time of year they wish should they could skip.  However, since no one has come up with a way to avoid life’s inevitabilities – taxes are one of them- let’s at least try to make the best of it. Here are my quick tips to take advantage of some of the tax perks available to you and to make the process of filing your tax return as painless as possible.

  • Don’t miss important deadlines: Individual and C Corporation income tax returns are due April 17th. Other entity tax structures have a deadline of March 15th, and if your company is incorporated in Delaware, you must file the Delaware franchise tax return by March 1st.

 

  • Get organized: There is still time to get your finances in order in time for your income tax return due date. If you didn’t use a software application to track your finances and receipts, you can still log those financial transaction that will impact your income tax return using Excel and scan your receipts to a cloud-based storage application for easy sharing with your tax professional. Don’t forget to include your charitable contributions!

 

  • List important live events: Believe it or not, more life-changing events impact our taxes than we think. Marriage, divorce, legal separations and having a baby are just a few on the list.  However, think about the not-so-obvious ones, like caring for your elderly parent, the death of a spouse or parent, relocating for work and buying or selling a home. Be sure to make your tax professional aware of these changes so that he or she can assess their impact on your taxes.

 

  • Schedule a call or meeting with your tax professional: This is especially important if you are using a new tax professional for your 2017 taxes.  The earlier he or she gets to know you, the more time you have to get to know each other and to exchange important information about your tax situation. Make sure to have with you a list of questions and other information you want to discuss during this meeting.

 

  • Set up a retirement plan: Subject to some limitations, you might qualify for a Roth or Traditional IRA retirement account and the good news is that you have until April 17th to open a new account and make contributions for the previous year. If you own a small business, you have until the filing of the business returns (including extensions) to set up and contribute to a SEP IRA.

 

  • Don’t forget to deduct: Your health insurance premiums if you are self-employed, and job searching expenses (subject to some limitations) if you were searching for a job in your field.

 

  • Don’t forget to claim: The lifetime learning credit if you took any courses to improve your post-secondary education.

As always, happy tax filing season!

February 4th, 2018|Tax|0 Comments

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What I Learned This Tax Season

thinking woman in glasses looking up with light idea bulb above head

As another tax season has come and gone, I thought it would be a good opportunity to pass along some general takeaways which may make next year’s tax experience more seamless, informative and less taxing (pardon the pun). Well, here it goes …

8 Things Entrepreneurs Should Keep in Mind for Tax Season

Most entrepreneurs clinch at the sound of the word “taxes.” And it’s not simply out of a fear of paying large sums of money to Uncle Sam. It’s more because of the complexity – the multiple layers and branches of compliance associated with taxes. This is not true for everyone, but there might be some who would rather pay a little more in taxes in exchange for some relief from the burden of the paperwork, research, and unknown final results of filing tax reports.

But entrepreneurs need to come to grips with the fact that taxes are an inevitable part of being in business. The best antidote for the fear and dread associated with taxes is preparation. Planning, knowledge, and information help to reduce the anxiety about dealing with the mean IRS.

Of course, no one will ever know everything about taxes – industry trends, compliance issues, and even simple changes in government all lead to regular changes in the tax code. But knowing some basics about your tax situation and knowing where to turn to when your situation changes can help you confront the fear of what will happen if you receive bad news from the IRS.

Entrepreneurs can confront their fears and address their tax obligations through planning and preparation. Here are the basic steps every entrepreneur should consider:

April 5th, 2017|Tax|0 Comments

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Where is my W-2?

If you switched employment in 2016, you may not have received an email notification that your W-2 is available online. This may not mean that your prior employer did not send you notification, but rather that the employer does not have your correct email address.

January 25th, 2017|Tax|0 Comments

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Tax Readiness Checklist

tax-article-option3

Tax season is around the corner… A little planning before year-end can make all the difference.

Are we really talking about taxes again? It feels like just yesterday I was writing about how to track down your W-2 and how to avoid missing important deadlines for key tax saving opportunities. Well, since January is almost here, I want to (share a few tips to help you cruise through yet another tax season. The following list is not all-inclusive. Talk to your tax professional to ensure you are aware of all factors impacting your taxes. 

December 7th, 2016|Tax|0 Comments

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