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RBTS, CPA

Jan 2021 Tax Letter

In this issue:


2021 Tax Deadlines for Individuals and Small Businesses

Tax year 2020 4th quarter estimated tax payments: January 15, 2021

Partnerships/LLCs tax returns (Form 1065): March 15, 2021

S Corps tax returns (Form 1120S): March 15, 2021

C Corps tax returns (Form 1120): April 15, 2021

Individuals and Sole Proprietors tax returns (Form 1040): April 15, 2021

2021 1st Quarter Estimated Tax Payments: April 15, 2021

2021 2nd Quarter Estimated Tax Payments: June 15, 2021

Partnerships/LLCs with filed extensions (Form 1065): September 15, 2021

S Corps with filed extensions (Form 1020S): September 15, 2021

2021 3rd Quarter Estimated Tax Payments: September 15, 2021

S Corps with filed extensions (Form 1020): October 15, 2021

Individuals and Sole proprietors with filed extensions (Form 1040): October 15, 2021

2021 4th Quarter Estimated Tax Payments: Mid-January 2022


2021 Standard Mileage Rate

The optional standard mileage rates for business use of a vehicle will decrease once again in 2021 after increasing significantly in 2019. For business use of a car, van, pickup truck, or panel truck, the rate for 2021 will be 56 cents per mile after decreasing to 57.5 cents per mile in 2020, down from 58 cents per mile in 2019.

Taxpayers can use the optional standard mileage rates to calculate the deductible costs of operating an automobile.

Because the law known as the Tax Cuts and Jobs Act (TCJA) suspended the miscellaneous itemized deduction for unreimbursed employee business expenses from 2018 to 2025, the standard mileage rate cannot be used to claim a deduction for those expenses during that period.

However, self-employed taxpayers can deduct automobile expenses if they qualify as ordinary and necessary business expenses. And an exception to the disallowance of a deduction for unreimbursed employee business expenses applies to members of a reserve component of the U.S. armed forces, state or local government officials paid on a fee basis, and certain performing artists. They are permitted to deduct mileage expenses on line 11 of Schedule 1, Additional Income and Adjustments to Income, of Form 1040, U.S. Individual Income Tax Return, and may continue to use the 56 cents-per-mile business standard mileage rate.

The standard mileage rate also can be used as the maximum amount an employer can reimburse an employee for operating an automobile for business purposes without substantiating the actual expense incurred.

Driving for medical care or for certain limited moving expense purposes for members of the armed forces may be deducted at 16 cents per mile, which is 1 cent lower than for 2020.

The TCJA repealed the moving expense deduction for individual taxpayers from 2018 to 2025, except for U.S. armed forces members on active duty who move pursuant to a military order and incident to a permanent change of station.

The rate for service to a charitable organization is unchanged, set by statute at 14 cents per mile.

The portion of the business standard mileage rate that is treated as depreciation will be 26 cents per mile for 2021, 1 cent less than 2020.

To compute the allowance under a fixed-and-variable-rate (FAVR) plan, the maximum standard automobile cost is $51,100 for 2021 for all automobiles (including trucks and vans), $700 more than in 2020.

The FAVR amounts were recalculated in 2018 after the TCJA retroactively amended the bonus depreciation rules. Under a FAVR plan, a standard amount is deemed substantiated for an employer's reimbursement to employees for expenses they incur in driving their vehicle in performing services as an employee for the employer. Those rules were also updated in IRS regulations.

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.

 

Everyone's hoping that 2021 will be a lot different from how 2020 was. But when it comes to your 2021 income taxes, the IRS isn't planning on a huge transformation like we saw back in 2018.

Even without major tax reform, however, you still have to go through the minor changes that happen to your taxes every single year. Below, you'll find the information you need on some of the most important ones.

Personal Tax Changes That Take Effect in 2021

Standard deduction for 2021
Annual inflation adjustments brought a modest rise in standard deductions for 2021:

Filing Status Standard Deduction for 2021 Tax Year Change from 2020
Single $12,550 +$150
Married filing jointly $25,100 +$300
Head of household $18,800 +$150
Married filing separately $12,550 +$150

DATA SOURCE: IRS.

In addition to these base standard deductions, those who are 65 or older or are blind get an extra add-on. For those who are married, the added amount is $1,350, while singles get to add $1,700. Both of those figures are $50 higher in 2021 than they were in 2020. For joint filers, each spouse has an opportunity to get these added amounts.

The standard deduction amount for those minor children who have to file income tax returns remained the same in 2021 as it was in 2020. Children always get at least $1,100 as a standard deduction, and if they get more than $750 in earned income from work, then the standard deduction is their total earned income plus $350 more up to the regular standard deduction in the table above.

Popular tax credits in 2021

Tax credits reduce your tax bill dollar-for-dollar, making them more valuable than deductions.

The earned income tax credit gives reductions in taxes to workers with low- or mid-level incomes. The credit amount varies by family size and income, with maximums of $6,728 for those with three or more children (up $68 from 2020), $5,980 for those with two children (up $60), $3,618 for those with one child (up $34), or $543 for those with no children (up $5). The income limits below indicate which taxpayers are eligible for at least some of the earned income credit. The top credit amount phases out gradually over a large portion of the income range.

Filing Status Income Limit if No Children Income Limit if 1 Child Income Limit if 2 Children Income Limit if 3+ Children
Single, Head of Household, or Widowed $15,980 $42,158 $47,915 $51,464
Married Filing Jointly $21,920 $48,108 $53,865 $57,414

DATA SOURCE: IRS.

A special thing about the earned income tax credit is that even if you don't owe anything in taxes, you can still get the credit amount back from the IRS in the form of a refund.

The saver's tax credit pays as much as $1,000 per person to encourage retirement contributions. Depending on your income, you can get a credit for 10%, 20%, or 50% of up to $2,000 in contributions to an IRA, 401(k), or similar retirement account. The following income limitations apply, and above the top amount, no credit is available.

Credit Percentage Single or Married Separate Head of Household Married Joint
50% of contribution $0 to $19,750 $0 to $29,625 $0 to $39,500
20% of contribution $19,751 to $21,500 $29,626 to $32,250 $39,501 to $43,000
10% of contribution $21,501 to $33,000 $32,251 to $49,500 $43,001 to $66,000

DATA SOURCE: IRS.

The Lifetime Learning tax credit offers additional educational tax breaks even beyond traditional college. A 20% credit on up to $10,000 in eligible expenses every year is available to taxpayers making less than $59,000 in 2021 if they're single or $119,000 if they're filing jointly, with reduced credits available up to $69,000 in income for singles and $139,000 for joint filers. This credit is available for graduate school, vocational training, and certain other nontraditional educational expenses.

Retirement tax planning for 2021

IRA contribution limits will be the same in 2021 as they were in 2020: $6,000 for those younger than 50 and $7,000 for those 50 or older. Similarly, 401(k) contribution limits will remain $19,500 for those under 50 and $26,000 for those 50 or older. Traditional IRAs always allow you to make contributions regardless of income, but you can't always deduct those contributions. Roth IRAs can prohibit you from making contributions if your income is too high.

The applicable limits for 2021 are below. Below the phase-out range, you're entitled to a full contribution or deduction. Above it, no contribution or deduction is allowed. With it, you can only deduct or contribute a portion of the $6,000 or $7,000 maximum.

Filing Status Roth IRA Phase-Out Range Traditional IRA Phase-Out Range if Worker Has Employer-Sponsored Retirement Account Traditional IRA Phase-Out Range if Spouse Has Employer-Sponsored Retirement Account
Single $125,000 to $140,000 $66,000 to $76,000 N/A
Married filing jointly $198,000 to $208,000 $105,000 to $125,000 $198,000 to $208,000
Married filing separately $0 to $10,000 $0 to $10,000 $0 to $10,000

DATA SOURCE: IRS.

No such income limits apply to 401(k) contributions.

529 plans and Coverdell ESAs let you set money aside for educational purposes, with tax-free treatment as long as you use the money on qualifying expenses. There are no income limits on 529 plans, but income limits of $95,000 to $110,000 for single filers and $190,000 to $220,000 for joint filers apply to reduce or eliminate the ability to make the maximum Coverdell contribution of $2,000 per year.

For healthcare expenses, those with high-deductible health insurance coverage can use health savings accounts to set money aside for future care costs. Contribution amounts of up to $3,600 for those with self-only policies or $7,200 for family policies apply in 2021, with minimum annual deductibles of $1,400 or $2,800 respectively required to qualify for high-deductible health plan status. Catch-up contributions of $1,000 are available if you're 55 or older, but a qualifying plan must have maximum out-of-pocket expenses of $7,000 for self-only policies or $14,000 for family coverage.

Estate taxes in 2021

In 2021, this amount rises to $11.7 million, up from $11.58 million in 2020.

More people focus on the annual gift tax exclusion amount. That lets people give up to $15,000 per year to as many different recipients as they want in 2021. That amount is unchanged from 2020's level.

Tax brackets for 2021

If you file as a single or married filing separately (MFS), the following brackets apply:

Bracket for Singles Tax is this amount plus this percentage Of the amount over
$0 to $9,950 $0 plus 10% $0
$9,950 to $40,525 $995 plus 12% $9,950
$40,525 to $86,375 $4,664 plus 22% $40,525
$86,375 to $164,925 $14,751 plus 24% $86,375
$164,925 to $209,425 $33,603 plus 32% $164,925
$209,425 to $523,600 ($314,150 for MFS) $47,843 plus 35% $209,425
Above $523,600 ($314,150 for MFS) $157,804.25 plus 37% $523,600

DATA SOURCE: IRS.

To qualify as a head of household, the requirements include that you be unmarried and provide both housing and financial support for a child, parent, or other relative who lives with you for greater than half of the year. The financial support you provide must generally be more than half of all support the child or other relative received during the year.

Bracket for Head of Household Tax is this amount plus this percentage Of the amount over
$0 to $14,200 $0 plus 10% $0
$14,200 to $54,200 $1,420 plus 12% $14,200
$54,200 to $86,350 $6,220 plus 22% $54,200
$86,350 to $164,900 $13,293 plus 24% $86,350
$164,900 to $209,400 $32,145 plus 32% $164,900
$209,400 to $523,600 $46,385 plus 35% $209,400
Above $523,600 $156,355 plus 37% $523,600

DATA SOURCE: IRS.

Most married taxpayers file jointly. If you were married but your spouse passed away recently, then you're also allowed to use these brackets as a surviving spouse.

Bracket for married filing jointly Tax is this amount plus this percentage Of the amount over
$0 to $19,900 $0 plus 10% $0
$19,900 to $81,050 $1,990 plus 12% $19,900
$81,050 to $172,750 $9,328 plus 22% $81,050
$172,750 to $329,850 $29,502 plus 24% $172,750
$329,850 to $418,850 $67,206 plus 32% $329,850
$418,850 to $628,300 $95,686 plus 35% $418,850
Above $628,300 $168,993.50 plus 37% $628,300

DATA SOURCE: IRS.

2021 tax rate on long-term capital gains and qualified dividends

Tax Rate on Income Single Married Filing Jointly Head of Household Married Filing Separately
0% Up to $40,400 Up to $80,800 Up to $54,100 Up to $40,400
15% $40,400 to $445,850 $80,800 to $501,600 $54,100 to $473,750 $40,400 to $250,800
20% Above $445,850 Above $501,600 Above $473,750 Above $250,800

DATA SOURCE: IRS.

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

Dec 2020 Tax Letter

In this issue:


2021 Tax Deadlines for Individuals and Small Businesses

Tax year 2020 4th quarter estimated tax payments: January 15, 2021

Copy A of Form 1099-NEC: January 31, 2021

The 1099-NEC is a new form specifically for reporting non-employee compensation-currently defined as payments to individuals not on payroll on a contract basis to complete a project or assignment. This would include all independent contractors, gig workers, or self-employed individuals who previously had their payments reported in box 7 of a 1099-MISC form.

Partnerships/LLCs tax returns (Form 1065): March 15, 2021

S Corps tax returns (Form 1120S): March 15, 2021

C Corps tax returns (Form 1120): April 15, 2021

Personal and Sole Proprietors tax returns (Form 1040): April 15, 2021

2021 1st Quarter Estimated Tax Payments: April 15, 2021

2021 2nd Quarter Estimated Tax Payments: June 15, 2021

Partnerships/LLCs with filed extensions (Form 1065): September 15, 2021

S Corps with filed extensions (Form 1020S): September 15, 2021

2021 3rd Quarter Estimated Tax Payments: September 15, 2021

C Corps with filed extensions (Form 1020): October 15, 2021

Individuals and Sole proprietors with filed extensions (Form 1040): October 15, 2021

2020 4th Quarter Estimated Tax Payments: Mid-January 2022


2020 Standard Mileage Rate

Beginning on Jan. 1, 2020, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) is:

  • 57.5 cents per mile driven for business use, down one half of a cent from the rate for 2019.
  • 17 cents per mile driven for medical or moving purposes, down 3 cents from the rate for 2019.
  • 14 cents per mile driven in service of charitable organizations. The charitable rate is set by statute and remains unchanged.

Under the Tax Cuts and Jobs Act, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses. Taxpayers also cannot claim a deduction for moving expenses, except members of the Armed Forces on active duty moving under orders to a permanent change of station.

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.

 

There is still time to make a 2020 donation. Per the IRS, taxpayers who don't itemize deductions may take a charitable deduction of up to $300 for cash contributions made in 2020 to qualifying charities. Cash donations include those made by check, credit card or debit card.

As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act if you received a stimulus check, it will not count as income on 2020 tax return. It will be treated as a refundable tax credit for 2020, i.e. an advance on money you would have received anyway as part of your tax refund in 2021.

Taxpayers, who didn't get some or all of the economic impact payment (EIP) they were entitled to, will be able to claim the difference as a Recovery Rebate Credit on their 2020 tax return. According to the IRS, there is no provision in the law that would require individuals who qualify for a payment based on their 2018 or 2019 tax returns, to pay back all or part of the payment, if based on the information reported on their 2020 tax returns, they no longer qualify for that amount or would qualify for a lesser amount.

Personal Tax Changes That Took Effect in 2020

The tax items for tax year 2020 of greatest interest to most taxpayers include the following:

The standard deduction for married filing jointly rises to $24,800 for tax year 2020, up $400 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,400 for 2020, up $200, and for heads of households, the standard deduction will be $18,650 for tax year 2020, up $350.
There is also an additional standard deduction, for older taxpayers and those who are blind. A married filer who is blind or aged 65 and over can claim $1,300 for themselves. Two married filers who are both over 65 or blind can claim $2,600 collectively, unchanged from 2019. Single filers who are blind or over 65 are eligible for a $1,650 additional standard deduction. This is up $50 from 2019.

The personal exemption for tax year 2020 remains at 0; this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act (TCJA).

2020 Tax Brackets & Rates
  • 37% for individual single taxpayers and heads of households with incomes greater than $518,400 ($622,050 for married couples filing jointly)
  • 35%, for individual single taxpayers and heads of households with incomes greater than $207,350 ($414,700 for married couples filing jointly)
  • 32% for individual single taxpayers and heads of households with incomes greater than $163,300 ($326,600 for married couples filing jointly)
  • 24% for individual single taxpayers and heads of households with incomes greater than $85,525 and $85,500 respectively ($171,050 for married couples filing jointly)
  • 22% for individual single taxpayers and heads of households with incomes greater than $40,125 and $53,700 respectively ($80,250 for married couples filing jointly)
  • 12% for individual single taxpayers and heads of households with incomes greater than $9,875 and $14,100 respectively ($19,750 for married couples filing jointly)
  • 10% for single individuals with incomes of $9,875 or less, for heads of households with income of $14,100 or less ($19,750 or less for married couples filing jointly)

Capital Gains rates remain the same for 2020, but the brackets for the rates will change. Most taxpayers pay a maximum 15% rate, but a 20% tax rate applies if the taxable income exceeds the thresholds set for the 37% ordinary tax rate. Maximum 0% rate is for married filing jointly taxpayers with no more than $80,000 taxable income, single and married filing separately taxpayers with no more than $40,000 taxable income, and heads of household with no more than $53,600 taxable income.

For 2020 there is no limitation on itemized deductions, as that limitation was eliminated by the TCJA.

The Alternative Minimum Tax exemption amount for tax year 2020 is $72,900 and begins to phase out at $518,400 (exemption of $113,400 for married couples filing jointly for whom it begins to phase out at $1,036,800).

The contributions to 401(k) or similar workplace retirement plans goes up from $19,000 in 2019 to $19,500 in 2020. The 401(k) catch-up contribution limit for people 50 or older in 2020 is $6,500 for workplace plans, up from $6,000 in 2019. But the contributions to Individual Retirement Accounts stay the same for 2020: $6,000, with a $1,000 catch-up limit for people 50 or older. For self-employed taxpayers, the overall defined contribution plan limit moves up to $57,000, from $56,000 in 2019.

The maximum Earned Income Credit in 2020 for single and joint filers is $538 if there are no qualifying children. The maximum credit is $3,584 for one child, $5,920 for two children, and $6,660 for three or more qualifying children. All these are relatively small increases from 2019.

For tax year 2020, the monthly limitation for the qualified transportation fringe benefit is $270 (up from $265), as is the monthly limitation for transit passes and van-pooling expenses.

There is no federal penalty for not having health insurance since 2019, however, certain states and jurisdictions have enhanced their health insurance mandates. There is penalty in New Jersey, DC, and Massachusetts. Vermont enacted a mandate that took effect in 2020, but there is no penalty for non-compliance.

For tax year 2020, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements is $2,750, up $50 from the limit for 2019.

The limits for health saving accounts (HSAs) for 2020 are up $50 for individual coverage and $100 for family coverage, bringing them to $3,550 and $7,100, respectively. The catch up contribution limit for those over age 55 will remain at $1,000.

The 2020 threshold for deducting medical expenses on Schedule A is 7.5% of Adjusted Gross Income (AGI).

The child tax credit remains $2,000 for 2020, with the refundable part that can be claimed as a payment, also, staying at $1,400 per child. There is a temporary $500 nonrefundable credit for other qualifying dependents. Adjusted Gross Income phaseouts are not adjusted for inflation and remain at $400,000 for married taxpayers filing jointly and more than $200,000 for all other taxpayers.

American Opportunity Tax Credit and Lifetime Learning Credit are available for 2020. In order to get the full $2,500 American Opportunity Tax Credit, the modified adjusted gross income (MAGI) cannot be higher than $80,000 for singles or over $160,000 for joint tax return filers. If the taxpayer has MAGI of more than $180,000 (joint) or $90,000 (all others), they can't claim the credit at all. To get the full $2,000 Lifetime Learning Credit, the MAGI cannot be higher than $59,500 for single taxpayers or $119,000 for couples filing jointly. The credit phases out entirely for AGI over $69,500 or $139,000, respectively. The Lifetime Learning Credit is not available for married people filing separately, nonresident aliens at some point during the year and dependents.

For 2020, the maximum amount that can be deducted for interest paid on student loans remains $2,500. The deduction begins to phase out for single taxpayers with MAGI in excess of $70,000, or $140,000 for married taxpayers filing jointly, and is completely phased out for single taxpayers at $85,000 or more, or $170,000 or more for married couples filing jointly.

The residential solar credit falls to 26% for 2020, which is down from 30% in 2019. It drops again to 22% next year and ends after 2021.

For tax year 2020, the foreign earned income exclusion is $107,600 up from $105,900 for tax year 2019.

Estates of decedents who die during 2020 have a basic exclusion amount of $11,580,000, up from a total of $11,400,000 for estates of decedents who died in 2019.

For 2020, the annual gift exclusion is $15,000 per person, same as it was in 2019 and will be in 2021.

The maximum credit allowed for adoptions is the amount of qualified adoption expenses up to $14,300, up from $14,080 for 2019.

The fine for filing late returns is higher for returns with post-2019 due dates. The minimum penalty for returns filed 60 or more days after the due date is now the lesser of $435 (up from $215) or 100% of the required tax shown on the return.

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

Aug 2019 Tax Letter

In this issue:

  • Taxpayers with Expiring ITINs Should Renew Them Now

Taxpayers with Expiring ITINs Should Renew Them Now

Taxpayers with expiring Individual Tax Identification Number should renew their number ASAP. There are nearly 2 million ITINs set to expire at the end of 2019. Taxpayers with an expiring number should renew before the end of this year. This will help avoid unnecessary delays related to their tax refunds next year.

ITINs are used by taxpayers required to file or pay taxes, but who aren't eligible for a Social Security number.

Here's info about which ITINs will expire and how taxpayers can renew them.

  • The following ITINs expire on Dec. 31, 2019:
    • Those not used on a federal tax return at least once in the last three consecutive years.
    • Numbers with middle digits 83, 84, 85, 86 or 87 that are not already renewed.
  • ITINs with the middle digits 83, 84, 85 or 86, 87 need to be renewed, even if the number was used in the last three years.
  • Taxpayers whose ITIN is expiring and who expect to have a filing requirement in 2020 must renew their number. Others don't need to take any action.
  • The IRS is sending notices to affected taxpayers, CP48 Notice. It explains the steps to renew the ITIN.
  • Taxpayers who receive the notice after renewing their ITIN don't need to take further action unless another family member is affected.
  • ITINs with middle digits of 70 through 82 have previously expired. Taxpayers with these ITINs can still renew at any time, if they haven't already.
  • Those who receive a renewal letter from the IRS can renew the family's ITINs together. They can do so even if family members have an ITIN with middle digits that aren't expiring. Family members include the tax filer, spouse and any dependents.

Feel free to contact us. We are Certified Acceptance Agents and can help you to comply with the U.S. tax laws.

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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