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Preparing For Next Years Taxes

by
Spencer Wilson
on
3/20/2018
Preparing For Next Years Taxes

After many months of promised change, Congress passed a tax reform bill, and it means a change for just about everybody. For the vast majority of American taxpayers, the biggest difference can be seen in the standard deduction, which has increased significantly and is being touted as a plus for the average person on the street. What people need to be aware of though is the concurrent loss of the personal exemption. Looking beyond the terminology to see what the effect of those two changes are on an average married couple, where they previously would have been able to deduct $21,300 (based on two personal exemptions of $4,150 and a standard deduction of $13,000), starting in 2018 the standard deduction rises to $24,000, which represents an overall increase of $2,700 – the loss of personal exemptions didn’t hurt. But add in four kids and under the old law the couple would have had four more $4,150 exemptions, bringing the total to $37,900 compared to the new $24,000 standard deduction. Fortunately, the loss is made up by the increased child tax credit of $2,000 per child, with $1,400 of that being refundable. Another big change for families will be seen in the use of Qualified Tuition Plan funds. Under the new law, up to $10,000 per year can be used for elementary and high school tuition/expenses.

Beyond the changes to the standard and personal deductions, the new tax reform act also made substantial changes to the rules regarding itemized deductions. Under the new law, unreimbursed employee business expenses can no longer be deducted. The same is true for a number of other previously popular deductions, and there are new limits on the amounts that qualify for itemizing, with the deduction for taxes limited to $10,000, medical expenses allowed only in excess of 7.5% of AGI, and certain miscellaneous deductions eliminated. 

If you calculate the new tax rules’ impact and find that it impacts you negatively, you may want to look into a strategy known as bunching which many people are going to be using in the coming years. The way it works is to bunch itemizable expenses together and use them one year, then shift to using the standard deduction the following year. By grouping together as many expenses that may be itemized as possible, you can maximize their tax advantage. Some ideas on how to do this would be to make two years’ worth of charitable contributions in one year, prepay medical expenses and quarterly estimated state taxes as well as property taxes (up to the maximum of $10,000 that is allowed).

From an investment perspective, taxpayers need to know that they will no longer be able to change their minds after converting a traditional IRA to a Roth IRA and undo the process without a tax impact. It is also important to make sure that you have adequate coverage under your insurance policy, as casualty losses will no longer be deductible. Those considering a new home and including a calculation of how much they’ll be able to write off in mortgage interest need to know that the deduction for homes purchased after 2017 is limited to the interest on the first $750,000 of the debt ($375,000 for married taxpayers filing separately). The interest on up to $1 million of home acquisition debt is still allowed for homes purchased prior to 2018, but equity interest is no longer deductible at all.

For employees that are in a position of having to spend money on behalf of their company, the new tax law presents significant challenges. Where unreimbursed expenses were previously deductible, that is no longer true. Those most likely to be impacted include salespeople who use their vehicles, long-haul truckers, and people who have to travel overnight for business. To head off a loss, employees are advised to discuss with their employer the possibility of establishing an accountable expense reimbursement plan so that they are not out of pocket. Another big impact on employees it that their moving expenses are no longer deductible, and when your employer reimburses you for your expenses the reimbursement is treated as income. The best way for an employee who is required to move for a job should handle this is to request that when calculating reimbursement for a move, the employee should request that the employer calculate the taxes on the compensation and add it on so that the employee doesn’t have to shoulder the cost.

Business owners will see some shifts as well. One of them is a new ability to expense 100% of tangible business assets. This deduction does not apply to structures. Though it may be tempting to utilize the expensing options, it requires a careful evaluation to determine the most beneficial long-term results.

There is also a new flow-through-business deduction of 20%. Certain higher income individuals will not be eligible for the deduction, and it may be worthwhile to reduce income by utilizing the aforementioned expensing deduction in order to qualify for it. Another additional item that will be changed is the treatment of business entertainment expenses, which will no longer be deductible.

On a more personal basis, the new tax law will make a change to how alimony is treated for couples who are divorcing. Where current law views alimony as taxable income to the recipient and deductible by the person who is paying it, under the new law any divorce agreements that are written after December 31, 2018 (or existing agreements that are changed after that date as a result of the new law) the payer will no longer be able to deduct alimony, and the recipient will no longer be required to report it as income.

Spencer Wilson writes for TaxBuzz, a tax news and advice website. Reach him at [email protected].

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Spencer Wilson

Spencer Wilson

Spencer Wilson, EA is a tax preparer based in Long Beach, CA. Spencer Wilson Financial Management Services has been serving the Greater Los Angeles Area and Orange County since 2004. <br /> We began in the heart of Naples in Long Beach and we continue to work hard offering tax preparation and planning, business accounting and bookkeeping and payroll services . <br /> We have helped many different people and businesses succeed financially and take control over their finances.

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