Everyone has probably already heard complaints about the new tax law’s effect on charitable deductions. Experts agree that higher standard deduction in 2018 will result in millions of taxpayers who will no longer find it advantageous to itemize deductions (charitable or other types) on their federal tax returns. For those who will still itemize, lower tax rates mean deductions carry less value. In 2018, the standard deduction will almost double to $12,000 for single filers and $24,000 for joint filers. Because some popular deductions were reduced or capped (think state and local taxes as well as home mortgage interest), many folks will find their total allowable itemized deductions will come in lower than the standard deduction. What does that mean for those who will no longer realize any tax benefit from itemizing charitable deductions? And what changes affect those who still should itemize their charitable donations in 2018?
What do you want first? The good news or the not-so-good news?
It’s short so here is the good news first: charitable donations remain deductible under the Tax Cuts and Jobs Act. The rules are largely the same with only a few changes.
- Charitable cash donation limit increased. The percentage limit for charitable cash donations by an individual taxpayer to public charities and certain other organizations increases from 50% to 60% of their adjusted gross income (AGI). See Line 37 on IRS Form 1040.
That about does it for the good news. Now the not-so-good news:
- Deductions for Certain Payments to College Athletics. Taxpayers can no longer deduct payments made to a college or college athletic department (or similar) in exchange for athletic event tickets or seating rights at a college stadium.
- Charitable Standard Mileage Rate Frozen. The charitable standard mileage rate will no longer be adjusted for inflation. So for 2018, the rate remains a lousy 14 cents per mile. As in previous years, if a taxpayer itemizes, they can still deduct the costs of gas and oil directly related to getting to and from the place where they volunteer. As an alternative to making those calculations and keeping those records, they have the option to instead deduct 14 cents for each mile traveled using a personal vehicle. That rate, however, compares unfavorably to the IRS standard mileage rate of 54.5 cents per business mile and 18 cents for medical and moving deductions. These rates each increased one cent over 2017 rates as a result of inflation.
Why a little tax planning is now more important than ever
If you have benefited from itemizing charitable contributions in previous years and are worried about how the changes might impact you in 2018, don’t panic just yet. There is a bit more good news. Doing a bit of advanced planning with a tax professional will still allow you to realize significant tax savings from your charitable giving. This is because the Tax Cut and Jobs Act did not change some of the biggest (but lesser known) tax advantages for charitable donations. These include:
- Donations of appreciated stocks or bonds. By donating appreciated stocks or bonds, rather than cash, one still avoids capital gains taxes regardless of whether or not a donor itemizes. If a donor doesn’t want to change their current investments, they just utilize the cash they planned to donate to buy the same bonds or stocks to replace those donated. The new or replacement assets would then have 100 percent basis, which in the simplest terms means no capital gains taxes are due on any past increase in the value of donated assets. This creates a “win-win” for both the donor and charity as it eliminates any taxes that might be due while increasing the amount available for charity by as much as 20 percent.
- Using donor-advised funds. Donor-advised funds were also unaffected by the Tax Cuts and Jobs Act. Per Wikipedia, a donor-advised fund is “a charitable giving vehicle administered by a public charity created to manage charitable donations on behalf of organizations, families, or individuals.” These funds allow givers to deposit dollars into them in one year, but then spread out gifts to charities they designate over a period of several years. This is an effective strategy for individuals who may wish to itemize deductions the first year (the year they contribute to the fund), but may instead want to take the standard deduction in the second or future years.
- Qualified charitable distributions. Donors that are 70 ½ years of age or older can continue to donate to a charity directly from an IRA. Known as a “qualified charitable distribution”, this method of giving is better than a deduction because the income is never reported to the IRS and the gift counts towards the required minimum distribution the donor must withdraw each year. The tax savings is not contingent on whether or not the donor is itemizing deductions on their federal return; it remains the same either way.
Have questions about the 2018 changes? Need to talk to a tax professional about your charitable giving plans or developing your tax strategy? Please feel free to contact us today to schedule your appointment.
Overview of New Home Mortgage Deductions
Congress passed the new tax bill at the end of last year. What does it mean for homeowners? How do the changes affect mortgage interest deductions on your 2018 forms?
Part of the goal was to simplify the massive tax code and make it easier to file. Whether it will prove easier or not, allowing Americans to use the standard deduction instead of itemizing is one big change.
The new law nearly doubles the standard deduction to $12,000 (from $6,350) for single filers and $24,000 for married couples (from $12,700) . That means a lot of people who previously filed itemized forms will be able to file the standard deduction. The law caps mortgage interest deduction at $750,000 on new homes (purchased after December 15, 2017). This will primarily affect expensive real estate markets in coastal areas like New York and California. It might also freeze new home purchases at the upper end since the tax bill will be higher.
Also, home equity loans are no longer deductible under the new law unless they are used to improve the home. Additions and upgrades count, money to pay off other debts does not. The previous tax law had no requirement.
Mortgage rates have risen slowly all year but they are still historically low at around 4%. New home buyers should consider buying soon to prevent paying higher rates later. Rising interest rates affect a buyer’s purchasing power. An increase of just 1% decreases the purchasing power by 10%.
Some housing experts predict an increase in rates over the next few years. Most people won’t see their tax obligation change significantly but the housing market may be getting more expensive.
Our experts would be happy to help with any mortgage interest questions or general tax information you might have.
The medical expense tax deduction is one of the only retroactive potential tax benefits from the new tax bill. If you itemize your deductions and experienced significant unreimbursed medical costs during 2017 the new lower threshold limit of 7.5% of adjusted gross income may be of benefit to you.
Prior to the passage of the Tax Cut and Jobs Act in December 2017, only qualified medical expenses in excess of 10% of adjusted gross income were eligible for itemized deduction. With the new expansion of the medical expenses deduction, the threshold has been reduced from 10% to 7.5%.
For example, if your adjusted gross income for 2017 is $75,000, the first $5,625 of medical expenses would not be deductible under the new rules. If you incurred $10,000 in medical expenses during the year, you would now be able to deduct $4375, a $1875 bigger deduction than previously.
It’s important to note, this reduced threshold is good only for the 2017 and 2018 tax years. Beginning with January 2019, all taxpayers may deduct only the amount of the total unreimbursed allowable medical care expenses for the year that exceeds 10% of their adjusted gross income.
So what does this mean? If you think you’re likely to itemize deductions and had quite a few medical and/or dental expenses during the 2017 year, for yourself, spouse, and dependents, add up those receipts.
Include unreimbursed prescription costs, durable medical equipment such as crutches, orthodontia, contact lenses or glasses, and any other medical expenses not covered by your insurance or reimbursed elsewhere. The IRS maintains a list of qualified expenses in publication 502 beginning on page 5 if you aren’t sure what to include.
If your total is greater than 7.5% of your adjusted gross income, you can likely reduce your taxes owed with this deduction. Consult your tax professional with any questions or to help you accurately determine the medical expenses deduction for you.
Paying federal taxes is a responsibility that all wage earners share. In December 2017, the federal government completed a major overhaul of the US tax code. This new tax code went into effect starting January 1, 2018. There are several major changes to the tax code, which could have a big impact on a wide variety of people.
Personal Exemptions and Standard Deductions
One of the biggest changes for 2018 is the change for personal exemptions and standard deductions. In 2017, you received around $4,000 for each dependent and a standard deduction of around $6,000 for individuals and $12,000 for married couples. Starting with the 2018 tax year, personal exemptions have been eliminated and standard deductions are now $12,000 for an individual and $24,000 for a married couple.
Another big change for the tax code is the change to housing deductions on your tax return. Starting in 2018, mortgage interest that is deducted is limited to interest on the first $750,000 of loan balance, down from $1 million the prior year. Another major change is that state and local taxes, which include property taxes and state income taxes, are now capped at $10,000 in deductions.
Child Tax Credit
For those that have children, there are some significant new benefits. The child tax credit has been increased to $2,000 per child, up from $1,000 per child. Furthermore, the phase out for income for the tax credit now starts at around $400,000. This is a significant increase compared to the prior year when the phase out started around $110,000.
New Tax Brackets
Another big change that came with the new tax code are the new tax brackets. While there are still just as many tax brackets as before, the tax percentages in each category are lower. This should result in a tax savings for many people. The highest tax bracket overall is now 37%, which is compared to 39.6% under the prior tax law.
As a way of encouraging people to make charitable donations, the IRS allows you to take a deduction on your tax return based on your contribution to charities. However, the limits and rules involved can be confusing.
In order to deduct a charitable contribution, you must itemize your taxes. Less than 40% of American taxpayers do and choose the standard deductions instead. If you take the standard deduction, you can’t deduct charitable contributions.
As to the limits for individuals, you will be able to deduct at a minimum 20% of your adjusted gross income (AGI) and up to 50% of your AGI at a maximum. Nevertheless, if in a particular year you end up contributing more than 50% of your AGI, you should not feel like that will not count in your tax deduction since IRS provides an option. For such a case, IRS allows you to carry over your excess contribution to the following tax years up to the fifth year. According to the new Tax Cuts and Jobs Act recently signed off on by President Trump, the new maximum charitable contribution deduction for 2018 will be 60% of the AGI.
Now that there is a tax deduction opportunity, how can you maximize on it?
Make sure you donate to qualified organizations
The IRS has provided a complete list of the organizations that qualify for the charitable donations. You also need to verify if the organization you are contributing to qualifies for the 50% contribution limit or if it is a 30% limit type of an organization.
Keep proper records of your contributions
To claim a deduction, you must provide the IRS with supporting documents. Have a good record of such documents as canceled checks, receipts, and letters from the recipients. For cash and property worth $250 or less, a receipt indicating the amount or the item donated will be enough. For money or property worth more than $250, you will need written documents from the receiving organization. However, property donations worth more than $500 require documentation of how you obtained the property and those above $5,000 need a professional appraisal.
Account even for the small donations
Many are the times when you press the “donate $1” button at the store’s cashier, and you forget about it. If you account for that $1 donation and the $15 you gave the local leading cheering squad, it will surprise you what this can add up to in a fiscal year.
Do not inflate numbers
To avoid triggering a tax audit on yourself, always ensure that you provide the right figures for deduction on non-cash goods donated. The IRS has an average amount that a person within your household income range can give per year. If you exceed these figures, you may trigger a tax audit. However, do not let the fear of a tax audit hinder you from asking for a legitimate refund; all you need is proper documentation to back up your claim.
To ensure that you do not inflate your deductions, know the fair market value of the goods or property you are donating, which is not equivalent to the retail price of the good. Fortunately, most charitable organizations provide valuation guidelines for frequently donated goods.
Keep track of your cost of doing good
Ensure you account for the miscellaneous amounts you spend while doing charitable work. This includes keeping track of the total miles you drive for charity and the cost involved in delivering the donation.
Accurate bookkeeping is a necessary practice for small businesses and large ones alike. Knowing where your money is and what you’re spending it on could mean the difference between success and failure. Here’s a look at some common bookkeeping mistakes and how to avoid or fix them:
1. Improper Categorization
One of the most common bookkeeping mistakes is categorizing expenses improperly. If you or your hired bookkeeper doesn’t pay careful attention, expenses can be improperly categorized and result in a mess with the IRS. Correctly filing your profits and expenses, and knowing what expenses are tax deductible, helps prevent some hassle at tax time and can result in huge tax savings.
2. No Bank Reconciliation
When personal and business accounts are mixed, it becomes extremely difficult to accurately track, categorize, and manage profits and expenses. For effective bookkeeping, it is crucial that bank accounts are reconciled regularly and often. In case of an audit, you need to provide accurate documentation regarding your income and business-related expenses. If bank accounts are not properly reconciled, providing this documentation becomes a hassle that can cause loss of money.
3. No Data Backups
In our increasingly digital world, much bookkeeping is done on computers. While this makes keeping track of profits and expenses more convenient and streamlined, it is still possible for this data to be lost. To avoid hassle and lost profits, make sure you keep regularly updated backups of all your books. If a file is lost or corrupted or a computer malfunctions, you’ll still have access to all your data.
4. Not Managing Reimbursements
Many business owners end up paying for business expenses out-of-pocket. When this happens, it is necessary that this reimbursable expenses are tracked and managed. Without management, reimbursements often get overlooked and lost over time, resulting in a loss of profits and tax deductions. Always manage and track your reimbursements in your books to keep everything balanced.
5. Lack of Communication
In many businesses, the accounting department is often viewed as separate from the rest of this business. When this occurs, it is difficult for bookkeepers to keep accurate records of expenses and profits. Good communication between your accountants, bookkeepers, and other employees keeps the books well-managed and allows the bookkeepers to provide accurate statements about the business’ finances.
One of the best ways to ensure your bookkeeping is done accurately and effectively is to work with us. We provide tax preparation, payroll processing, bookkeeping, and financial advice services to our clients to keep their businesses running smoothly, efficiently, and profitably. If you’re ready to let experts keep your books and avoid the hassle of doing it yourself, contact us today to see what we can do for you!
The tax reform bill known as the Tax Cuts and Jobs Act (“The Act”) passed both houses of Congress on December 20, 2017, and was signed by President Trump on December 22, 2017. This is the largest change to the tax law since Ronald Reagan’s Tax Reform Act was signed in 1986. We have reviewed the many changes under this new law that takes effect in 2018 and are summarizing the major changes that will impact most of our readers.
- Lower Tax Rates—the number of brackets remains at seven, but they have been reduced to 10%, 12%, 22%, 24%, 32%, 35% and 37%. Most people will see that their tax bracket is reduced anywhere from 1-3%. The financial website Business Insider projected average 2018 tax savings for a single taxpayer who uses the standard deduction. It amounts to $369 at the $25,000 level, $2,129 at the $75,000 level and $5,240 at the $175,000 level. For a taxpayer with a family of four, the amount of savings was projected to be $100, $2,244 and $3,095 respectively. For seniors, a projection by the non-partisan Tax Policy Center show savings ranging from $300 to $1,000.
- Capital Gains Rates—these remain the same, but the income levels at which the rates apply are now adjusted for inflation.
Changes to Adjusted Gross Income
- Alimony Major Changes—this is no longer deductible by the payer and includible as income for the payee for agreements executed after December 31, 2018.
- Moving Expenses Eliminated—except for military personnel. Moving expense reimbursements are now taxable (except if military).
- IRA Recharacterizations—The Act excludes conversion contributions to ROTH IRAs from the rule that allows IRA contributions from one type of IRA to another IRA. This is designed to prevent taxpayers from using this law to unwind a ROTH conversion.
- New Deduction for Pass-Through Income—individuals can deduct 20% of “qualified business income” from partnerships, S corporations, sole proprietorships, REIT dividends, qualified cooperative dividends and publicly traded partnership income. The deduction is limited to 50% of the W-2 wages paid by the business. Excluded from this deduction are specified services businesses—accounting, health, law, consulting, athletic, financial services, brokerage services or any business where the principal asset of the business is the reputation or skill of one or more of its employees.
- Like-Kind Exchanges—for exchanges completed after December 31, 2017, these are limited to exchanges of real property that is not primarily held for sale.
Deductions and Exemptions
- Standard Deduction Increased—it is now $24,000 for taxpayers who file married filing jointly (”MFJ”), $18,000 for head of household (“HOH”) and $12,000 for all others. The additional standard deduction amounts for the elderly and blind taxpayers were not eliminated in The Act.
- Itemized Deductions Increased—the overall limitation was repealed.
- Personal Exemptions Eliminated—these have been repealed and are in effect included with the increased standard deductions.
- Medical Expenses Expanded—the threshold to deduct has been reduced from 10% to 7.5%.
- Mortgage Interest Deduction Reduced—the limit on acquisition indebtedness has been reduced from $1 million to $750,000 for all binding written contracts after December 15, 2017. Also, the deduction for interest on home equity loans was repealed.
- State and Local Tax Deduction Reduced—you are now allowed to deduct only up to $10,000 in state and local income or property taxes.
- Charitable Contribution Deduction Increased—now it is based on 60% of your income (up 10%).
- Miscellaneous Itemized Deductions Eliminated—they were previously those that exceeded 2% of your adjusted gross income.
- Casualty Losses Restricted—you can now only deduct this if the loss is attributable to a disaster declared by the President.
- Child Tax Credit Increased—it was increased to $2,000 per qualifying child, and the maximum refundable portion is $1,400. There is also a new non-refundable $500 credit for qualifying defendants who are not qualifying children.
- Education Provisions Limited—Sec. 529 plans can only distribute $10,000 in expenses for tuition incurred at an elementary or secondary school. Also, there are now some exceptions from exclusion of student loan discharges from income.
Other Significant Provisions
- Alternative Minimum Tax—the exemption was increased to $109,400 for MFJ, $54,700 for MFS and $70,300 for others (not including estates and trusts). The phase-out thresholds are increased to $1 million for MFJ and $500,000 for all others (except estates and trusts). The exemption and threshold amounts will be indexed for inflation.
- Estate Tax Exemption Expanded—The Act doubles the estate and gift tax exemption after 2017.
- Individual Mandate Eliminated—the penalty for not having insurance under Obamacare was eliminated effective after 2018.
- Business Tax Rates Reduced—the graduated corporate tax rates have been replaced by a flat rate of 21%.
Expenses and Deductions
- Interest Expense Limited—to the sum of (1) business interest income (not including investment interest) + (2) 30% of the taxpayer’s adjusted taxable income + (3) the taxpayer’s floor plan financing interest. Any disallowed interest can be carried forward. If the taxpayer meets the $25 million gross receipts test, they are exempt from the interest deduction limitation. The limitation also does not apply to real property activities or farming.
- Entertainment Deductions Eliminated—The Act disallows the deduction for entertainment, amusement, recreation and membership dues. The 50% deduction for meals was retained; however, we expect to see clarification on what this means from the IRS.
- Transportation Fringe Benefits Deduction Eliminated.
- Compensation to Employees of Publicly Traded Corporations—rules have changed as to who this applies to and removes exceptions for commissions and performance-based compensation.
Depreciation and Amortization
- Bonus Depreciation Expanded—100% deduction now allowed, and it applies to new and used property.
- Luxury Auto Depreciation Limits Increased—these have more than doubled in most cases and are now $10,000 for the first year, $16,000 for the second year, $9,600 for the third year and $5,760 for all subsequent years.
- Section 179 Deduction Increased—the maximum deduction is $1 million, and the phase-out threshold is now $2.5 million. It also now includes improvements to non-residential real property for roofs, heating, air conditioning, fire protection and alarm and security systems.
- Amortization of R&D—must be capitalized and amortized over a five-year period (15-year if research is conducted outside of the U.S.).
- Orphan Drug Credit Reduced—from 50% to 25%.
- Rehabilitation Credit Modified—the 10% credit for pre-1936 buildings was repealed, and the 20% credit for certified historic structures was retained. The credit must be claimed over a five-year period.
- Family or Medical Leave Credit—eligible employers can claim a tax credit of 12.5% of the amount of wages paid to employees on medical leave if they are paid at least 50% of their normal wages. For each percent the payment exceeds 50%, the credit increases .25%. The maximum medical leave is 12 weeks, and the credit is only available in 2018 and 2019.
Other Significant Provisions
- Corporate Alternative Minimum Tax Eliminated.
- Domestic Production Activities Deduction Eliminated.
- Cash Method of Accounting—now can be used by taxpayers with average annual gross receipts of $25 million or less in the past three years (up from $10 million). This will be indexed for inflation.
- Inventories—cash-basis taxpayers will not be required to account for inventories under Sec. 471. They can be treated as cost of sales or can conform to their financial accounting treatment. Also, cash-basis taxpayers are not subject to the UNICAP rules of Sec. 263A.
- Net Operating Losses Limited—to 80% of taxable income (determined without regard to the deduction) for losses. The two-year carryback was repealed (expect for farming businesses). Losses must be carried forward and can be done so indefinitely.
- Dividend Deduction—there is a 100% dedication for the foreign-sourced portion of dividends received from specified 10%-owned foreign corporations by domestic corporations that are U.S. shareholders of those foreign corporations. Also, no deduction is allowed for stock held by the corporation for 365 days or less.
- Foreign Tax Credit Disallowed—for taxes with respect to a dividend that qualifies for the deduction.
- Repatriation—for any tax year beginning before January 1, 2018, taxpayers must include in income its pro rata share of the accumulated post 1986 deferred foreign income of the corporation. Many other new rules apply to this topic.