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RBTS, CPA

Jan 2019 Tax Letter

In this issue:


2018 Standard Mileage Rates

Beginning on Jan. 1, 2018, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) is:

  • 54.5 cents per mile for business miles driven
  • 18 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations

The business mileage rate and the medical and moving expense rates each increased 1 cent per mile from the rates for 2017. The charitable rate is set by statute and remains unchanged.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.


2018 Business Taxes

Regular corporations (C corporations) pay tax at a flat 21% rate and it's permanent.

Many individual owners of pass-through organizations get 20% deduction. The rules cover sole proprietors and owners of S corporations, partnerships, and LLCs. They can generally deduct 20% of so-called qualified business income. There are lots of limits and restrictions to help deter gaming of the tax system. For example, two limits apply to individuals with higher taxable income in excess of $315,000 for couples filing a joint return and $157,500 for all others.

The write-off for business losses on individual returns is capped. The amount of trade or business losses that exceed a $500,000 threshold for couples and $250,000 for other filers is nondeductible, but any excess can be carried forward. This limitation applies after application of the current passive-activity loss rules.

There are enhanced write-offs for business asset purchases, 100% bonus depreciation for many assets put into use during the year. Also increased is the phase-out threshold from $2 million to $2.5 million. These changes apply to property placed in service in taxable years beginning after Dec. 31, 2017.

The deduction that firms claim for interest on business debt is limited. Their net interest write-offs is capped at 30% of adjusted taxable income, with disallowed interest carried forward. Firms with $25 million or less of gross receipts, real estate companies, and certain regulated public utilities are exempt from this.

Business breaks that are eliminated include business entertainment, country club dues, 9% domestic production deduction.

Net operating losses (NOL) can offset only 80% of taxable income, and NOL carrybacks are generally prohibited.

Tax differed like-kind exchanges are limited to real property not held primarily for sale.

The write-off that employers take for the cost of transportation-related fringe benefits, such as parking, mass transit passes and even bicycles commuting, is disallowed. Employees can still use pretax money for parking and transit passes, but not for biking.


2018 Estates & Trusts

Far fewer estates will be subject to the estate tax, since the the lifetime estate and gift tax exemption is doubled to $11,180,000. The tax rate remains 40%. The annual gift tax exclusion for 2018 is $15,000 per done.

The new income tax rates are 10% for income up to $2,550; 24% for income over $2,550 but not more than $9,150; 35% for income over $9,150 but no more than $12,500; and 37% for income over $12,500.


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Big changes have gone into effect in 2018. Most individual tax provisions are temporary. They expire after 2025. Unless extended by Congress, the provisions will revert automatically to the rules in effect for 2017. The corporate tax changes are permanent. This letter is devoted to the new law, Tax Cut and Jobs Act (TCJA).

Personal Tax Changes That Take Effect in 2018

The law keeps seven tax brackets, but with different rates and break points. The top individual rate is lowered from 39.6% to 37% and it kicks in at a higher income level.

Tax Brackets for Single Filing:
Taxable Income Tax Rate
$0 - $9,525 10% of taxable income
$9,526 - $38,700 $952.50 plus 12% of the amount over $9,525
$38,701 - $82,500 $4,453.50 plus 22% of the amount over $38,700
$82,501 - $157,500 $14,089.50 plus 24% of the amount over $82,500
$157,501 - $200,000 $32,089.50 plus 32% of the amount over $157,500
$200,001 - $500,000 $45,689.50 plus 35% of the amount over $200,000
$500,001 or more $150,689.50 plus 37% of the amount over $500,000
Tax Brackets for Married Filing Jointly or Qualifying Widow(er):
Taxable Income Tax Rate
$0 - $19,050 10% of taxable income
$19,051 - $77,400 $1,905 plus 12% of the amount over $19,050
$77,401 - $165,000 $8,907 plus 22% of the amount over $77,400
$165,001 - $315,000 $28,179 plus 24% of the amount over $165,000
$315,001 - $400,000 $64,179 plus 32% of the amount over $315,000
$400,001 - $600,000 $91,379 plus 35% of the amount over $400,000
$600,001 or more $161,379 plus 37% of the amount over $600,000
Tax Brackets for Married Filing Separately:
Taxable Income Tax Rate
$0 - $9,525 10% of taxable income
$9,526 - $38,700 $952.50 plus 12% of the amount over $9,525
$38,701 - $82,500 $4,453.50 plus 22% of the amount over $38,700
$82,501 - $157,500 $14,089.50 plus 24% of the amount over $82,500
$157,501 - $200,000 $32,089.50 plus 32% of the amount over $157,500
$200,001 - $300,000 $45,689.50 plus 35% of the amount over $200,000
$300,001 or more $80,689.50 plus 37% of the amount over $300,000
Tax Brackets for Head of Household:
Taxable Income Tax Rate
$0 - $13,600 10% of taxable income
$13,601 - $51,800 $1,360 plus 12% of the amount over $13,600
$51,801 - $82,500 $5,944 plus 22% of the amount over $51,800
$82,501 - $157,500 $12,698 plus 24% of the amount over $82,500
$157,501 - $200,000 $30,698 plus 32% of the amount over $157,500
$200,001 - $500,000 $44,298 plus 35% of the amount over $200,000
$500,001 or more $149,298 plus 37% of the amount over $500,000

Standard Deduction: The new law combines personal exemption and standard deduction into one larger standard deduction of $12,000 for single filers, $18,000 for household heads, and $24,000 for couples.

People age 65 and up and blind people get $1,300 more per person ($1,600 if unmarried).

Child tax credit: The child tax credit (CTC) is doubled to $2,000 for each dependent under the age of 17, with up to $1,400 of the credit refundable to lower-income taxpayers. The income phaseout thresholds are much higher - Adjusted Gross Incomes over $400,000 for couples and $200,000 for all other filers. A social security number is needed for each child.

There is a new $500 credit for each dependent who is not a qualifying child, for example, an elderly parent you take care of or a disabled adult child. It's nonrefundable and phase out under the same thresholds as the child credit.

Alimony deductions: Alimony paid to an ex-spouse will no longer be deductible by the payer, and alimony payments will no longer be included in the recipient's gross income. This provision is effective for divorce and separation agreements signed after December 31, 2018.

Moving expense deduction: Employment-related moving expenses will no longer be deductible, except for the military.

Healthcare deductions and credits: The bill repeals the individual mandate of the Affordable Care Act starting in 2019. For 2018 the mandate continues to apply.

Medical expenses: For 2018, the threshold for deducting medical expenses remains 7.5% of the Adjusted Gross Income (AGI). For 2019 and later years, the threshold will increase to 10%.

State and local taxes: The TCJA limits the deduction for state and local income taxes (SALT) to $10,000 annually for any combination of state and local property taxes or (2) state and local income taxes or sales taxes. Property taxes remain fully deductible for taxpayers in a business or for-profit activity, so taxes paid on rental realty can be taken in full on Schedule E.

Mortgage interest: Although deductions for prior debt is grandfathered, the new law limits the mortgage interest deduction to interest paid on the first $750,000 of acquisition debt, down from $1 million. The new limit generally applies to mortgage debt incurred after December 14, 2017. Older loans and refinancing up to the old loan amount get the $1,000,000 cap. No write-off is allowed after 2017 for interest on existing or new home equity loans from which the proceeds are used to buy a car, pay down credit card debt and the like.

Casualty and theft losses: This itemized deduction is eliminated, but it is preserved, with certain modifications, for losses incurred in federal disaster areas.

Charitable Contribution: The AGI limitation on cash donations to qualified charities is increased from 50% to 60%.

Write-offs subject to the 2%-of-AGI threshold are eliminated, including employee business expenses, brokerage and IRA fees, hobby expenses and tax preparation costs.

Section 529 plans: The list of qualified expenses for Section 529 plans is expanded to include tuition at an elementary or secondary public, private or religious school, plus home schooling expenses, for up to $10,000 per year.

Education deductions and credits: No changes are made to major education deductions and credits, or to the teacher deduction for unreimbursed classroom expenses, which remains at $250.

Savings Plans: The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased from $18,000 to $18,500. Employee catch-up contribution (if age 50 or older by year-end) remains $6,000.

IRAs: For 2018, total contributions to all traditional and Roth IRAs cannot be more than: $5,500 ($6,500 if age 50 or older), or the taxable compensation for the year, if the compensation was less than this dollar limit.

Traditional IRA: For single taxpayers covered by a workplace retirement plan, the phase-out range is $63,000 to $73,000.

For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $101,000 to $121,000.

For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple's income is between $189,000 and $199,000.

For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Roth IRA: The income phase-out range for taxpayers making contributions to a Roth IRA is $120,000 to $135,000 for singles and heads of household.

For married couples filing jointly, the income phase-out range is $189,000 to $199,000.

The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The new law bars IRA owners who convert their traditional IRAs to Roth IRAs from later undoing the conversion and recovering the income tax paid on the switch.

Health Savings Account (HSA) Contributions: Single: $3,450 ($3,500 in 2019); Family: $6,900 ($7,000 in 2019); Catch-up Contribution: $1,000 (same in 2019) for owners age 55 and older.

Investments: Tax rates on long-term capital gains and qualified dividends do not change. The 0% rate will apply for taxpayers with taxable income under $38,600 for single-filed returns and $77,200 on joint returns. The 20% rate starts at $425,800 for singles and $479,000 for joint filers. The 15% rate applies for filers with income between those break points. The 3.8% surtax on net investment income remains, kicking in for single people with modified AGI over $200,000 and $250,000 for marrieds.

Krassy Popova, CPA, MBA, EA, CAA
RBTS, CPA

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