You can love it, or you can hate it. But the Tax Cuts and Jobs Act is now a reality. Yes, absent some serious future spending cuts (unlikely) it is projected to add substantially to the national debt. But it does offer some planning opportunities as well.
Emphasize Roth strategies. While the business tax cuts are permanent (until Congress revises the tax code, anyway), the personal income tax cuts are not. They are scheduled to sunset with the 2025 tax year. This means it may make sense to emphasize Roth IRAs over traditional IRAs. Remember – Roth IRAs have you paying taxes on amounts you contribute now, at reduced tax rates. But since distributions from Roth accounts are tax free (provided the assets have been in the Roth at least five years), you’ll avoid the higher income tax rates that are scheduled to take effect in 2026 when the TCJA ‘sunset’ provisions kick in, and the tax cut for individual taxpayers is effectively revoked.
Meanwhile, emphasizing Roth IRAs over traditional IRAs also means avoiding required minimum distributions (RMDs) in retirement, which means you can benefit from indefinite compounding as long as the assets stay within your Roth IRA.
The benefits aren’t limited to just Roth IRAs. Those of you who are self-employed or are owner-employees of your own corporations may consider establishing a Roth option for your 401(k) plans. You may also consider converting traditional IRA assets to Roth assets – especially if you can pay the income taxes from outside the account. If you have assets in an old 401(k) or other qualified retirement account, the tax cuts give you an opportunity to start converting them to Roth accounts.
Increase 401(k) contributions. The IRS increased the 401(k) allowable employee salary deferral contribution to $18,500. If you’re age 50 or older, you can contribute even more – up to $24,500.
Track medical expenses. Good news for those of you who have significant out-of-pocket medical expenses! More medical expenses may be tax deductible. Prior to 2018, you could only write off medical expenses to the extent they exceeded 10 percent of your adjusted gross income. But the new tax law lowers the threshold to 7.5 percent of AGI. This means if you have an AGI of $100,000, and medical expenses of $10,000, your potential deduction goes from zero last year to $2,500. That means a significant reduction of your tax bill.
It’s a good idea to track all your medical expenses from the very start of the year – even if you expect not to itemize, and even if you think you’re healthy now. That could change in an instant. So track these items:
- Doctor copays
- Prescription drugs
- Medical equipment
- Health insurance premiums (the portion you pay yourself)
- Long-term care insurance premiums paid out-of-pocket
- Payments to dentists, chiropractors, psychologists and non-traditional medical practitioners not covered by insurance.
- Residential or inpatient nursing home care costs
- Alcohol or drug addiction rehabilitation costs
- Insulin costs paid out of pocket
- Eye exam and prescription glasses costs
- Service animal costs
- Costs of transportation to medical appointments and treatment locations, including tolls and parking
- Ambulance charges
Note: Non-prescription (over-the-counter) drugs don’t qualify for the deduction, nor do most prescription drug charges or costs paid by your insurance carrier. For more information, see the IRS link here.
Be careful about taking out that home equity loan. Previously, you could write off the interest on up to $100,000 of home equity loan debt on your personal residence. Not anymore. The new tax law eliminates that deduction – unless they are used to buy, build or substantially improve the property that provides security for the loan.
So, you can’t deduct the interest on a home equity loan on your personal residence to buy a car, fund a business or pay off high-interest credit cards. But if you use the proceeds to add a much-needed bedroom to the home providing the collateral for the loan, you can still take the deduction for interest on balances up to $100,000.
Don’t rely on the home mortgage interest deduction for high-dollar homes. Previously, taxpayers could deduct home mortgage interest on balances of up to $1 million (or $500,000 for married individuals filing a separate return). The new limit for home mortgage balances that qualify for the home mortgage deduction is $750,000 ($350,000 for married individuals filing a separate return). So if you’re buying a home and taking out a mortgage for more than $750,000, then only part of your mortgage interest will be deductible. If you took out the mortgage prior to December of 2017, don’t worry: The old limits are grandfathered in for you. The lower home mortgage deduction limit only applies to new home loans.
Reduce unreimbursed business expenses. Last year, you could deduct unreimbursed business expenses if they exceeded 2 percent of your income. That’s not true for 2018 and for future years. If you’re an employee with significant work-related expenses you’ve been paying out of pocket, speak with your employer about setting up an accountable reimbursement plan. This allows you to receive reimbursement for expenses tax-free. If you have employees, you may want to set up an accountable plan for your employees, too, so they aren’t stung out of pocket for expenses they can’t deduct. Call us if you have questions about setting one up.
Claim the child tax credit. Be sure to claim the tax credit for any eligible children. Under the new law, this credit is worth up to $2,000 per child age 17 or younger, as of the end of the year. Up to $1,400 of it is refundable. That means you can still benefit from claiming the credit, even if you expect to get a refund, or if your taxable income is below the standard deduction – or if you expect to have no tax liability at all for the year. This is a big benefit even for those earning lower incomes, so we encourage anyone with children under 18 at home to claim the credit.
There is a catch: Congress limits the refundability of the credit to 15 percent of your earned income over $4,500.
Congress has also increased the income cap on qualifying for the child tax credit. For 2018, the credit for single taxpayers and heads of household begins phasing out at an adjusted gross income of $200,000 and phases out completely when your AGI reaches $240,000. The limits are doubled for married couples filing jointly: $400,000 to $440,000, respectively.
Military families: Keep track of moving expenses. You may read some reports that moving expenses are no longer deductible. But that doesn’t apply to families moving on military orders. So keep careful track of any and all unreimbursed moving expenses, to include mileage on your personal vehicles!
Take advantage of the special deduction for certain small businesses. If you have a sole proprietorship, LLC, partnership or S corporation, the new tax law allows you to take a special deduction on certain kinds of income.
Specifically, you may be able to deduct the greater of:
- 20 percent of the qualified business income from your trade or business, OR the greater of:
- 50 percent of the total W-2 wages of the business paid to all employees, or
- 25 percent of the W-2 wages, plus 2.5% of the original acquisition cost of the business’ real property.
Consider incorporating. The Tax Cuts and Jobs Act includes a dramatic tax cut for C corporations: The top corporate tax rate is lowered from 35 percent to 21 percent. If you were on the fence about becoming a C corporation before, it may make sense to revisit that decision. Give us a call today.
At Taxvanta, we have particular expertise in helping our customers minimize their short-term and long-term tax exposures. It’s our familiarity with federal and state tax taxes and their impact on small businesses that sets us apart from the crowd. To schedule an appointment, give us a call at 919-589-7760. Or visit us on Facebook or on the Web at www.taxvanta.com.