Finally a tax break to help small business. This will include anyone getting pass through income such as a sole proprietor, Sub S income, LLC, or LLP. Individuals who earn income through pass-through businesses may qualify to deduct from their income tax an amount equal to up to 20% of their “qualified business income” (“QBI”) from each pass-through business they own. QBI is the net income (profit) your pass-through business earns during the year. It is essentially net income from your pass through businesses. QBI includes rental income so long as your rental activity qualifies as a business it will qualify too.
20% Deduction for Taxable Income Below $315,000 ($157,500 for Singles)
Now here is what I see as a planning point. In the past it has always been beneficial to be an employee as opposed to a 1099 contractor. With this 20% deduction most people would benefit from being a 1099 contractor. Certainly worth taking a look at the total picture. I’ll have more on this later.
Long Term Capital Gains Tax Rates
||Head of household
|0% tax bracket
|beginning of 15% tax bracket
|beginning of 20% tax bracket
Don’t forget that Net investment tax of 3.8% will apply at certain modified adjusted gross incomes.
As many of you know the federal income tax laws have so dramatically changed that many of you that have previously itemized deductions on schedule A will no longer benefit from doing that on your federal return. This is due to the tremendous increase in the standard deduction and most folks simply will not benefit from itemizing on their federal returns any longer. Most of the returns that we saw this year will pay lower income tax bills many are $2K or more in tax savings. However, for State of Alabama return nothing major has changed so if you have been itemizing you should continue to gather and submit the same information that you are accustomed to gathering. Don’t get lazy or you’ll end up losing a large portion of your federal tax saving to the state.
A Qualified Charitable Distribution (QCD) permits annual direct transfers to a qualified charity totaling up to $100,000 of tax-deferred IRA savings. An owner cannot receive a distribution from the IRA to then contribute to charity and qualify. QCDs offer advantages over taking a taxable IRA distribution and then contributing the proceeds of that distribution to a charity. That’s because taxable IRA distributions must be included in adjusted gross income. This can cause:
Income taxes on Social Security benefits can increase,
Adjusted gross income (AGI) limitations on annual charitable deductions can defeat current deduction of the charitable contribution of IRA distribution proceeds (carryovers to a limited number of future tax years is available),
AGI limitations trimming itemized deductions can apply, and
Medicare insurance premiums can increase.
The bottom line is if you over 70 1/2 making charitable contributions and taking IRA distributions you should look at this as a tax reduction strategy.
The 2018 standard mileage rates are:
Business – 54.5 cents
Moving or Medical – 18 cents
Charitable – 14 cents
As always you need a good mileage log.
For years the gain on the sale of residence was taxable as a capital gain. Back in the day folks would buy a more expensive home to avoid the capital gains tax. In mid 1997 (I’m writing about this in 2016 because I still get questions about it) the law changed. Now single people are allowed to exempt up to $250,000 per sale every 2 years. That is $500,000 for a married couple.
The law is fairly straight forward. It must be your primary residence for 2 of the previous 5 years and you can take the exemption every 2 years. If your holding period is less than two years then your exemption is prorated based on the time you live in the property. There are some potential caveats that can come into play if you rent the property for some period of time prior to selling. It makes flipping a property while you live in it a real income opportunity.
Many people can not itemize their deductions on the federal income tax return because the standard deduction is just so high that it is often better than itemizing. However, in Alabama it takes a lot less to itemize because the standard deduction is lower and FICA taxes (Social security and Medicare) are deductible as itemized deductions for Alabama purposes. This means that income alone may be enough to create itemized deductions for state purposes. That is where I see many people be a little lazy.
There are several deductions that most people have and they are good deductions if you are having to itemize anyway. Car Tag Tax, Real Estate Tax, Charitable Contributions, and Mortgage Interest are all deductible expenses that have no AGI limits. That makes them pound for pound equal. The only big deal about mortgage interest is that it is typically much large than the others. What I often see is people itemize on state just because of their FICA tax but they forget their car tags, property taxes, or contributions and when we mention it they just say oh don’t worry about it. I get that a little. They have come down, waited to get their taxes filed and now they don’t want to wait to go dig up that stuff. But, if those things totaled to $1,000 (not uncommon) that is a $50 bill their throwing away. I bet they would say something if my bill went up $50.
Medical deductions are the least useful of all deductions you can take as itemized deductions because they have a 10% of AGI limitation before they become deductible. Medical may help on your state return even if it isn’t useful on the federal. In AL the AGI limit is 4% for 2015. However, some people will still benefit because of the new out of pocket limits made standard by the NOT SO ACA. Most folks keep up with checks, or prescription receipts, Dr receipts and so on. That is a good idea but here is a secret. Auditors prefer the annual print outs that are available from your pharmacy or health care providers. I personally think it is more laziness than anything else on the auditors part but it doesn’t really matter. Those reports make their job quick fast and in a hurry and when you are being audited that is a good thing. So get the reports and log your medical miles too http://www.tmicpa.com/mileage/. One other thing to consider to maximize this deduction is bunching your medical expenses into a single year when possible.
I know the headline sounds a little crazy but let me set the stage for you. I had a client today that had a couple of 1099’s he received from a manufacturer of a product he sells. He had rightly reasoned that regardless of the tax he had to pay on the money he was money to the good. Here is where the story takes a strange turn. A peer of his had the same opportunity to receive the same type of incentive but had chosen not to take the extra money due to the tax implications. Worse yet, his taxpreparer had told him it was a waste of time to take the money because of the taxes it was costing him. My client had a great analogy on taking the money. If I give you a $100 bill and then you have to give me $50 in return will you take the money or consider it a waste of time? I am glad to know that my client was smart enough to grasp the concept. I am embarrassed that anyone giving out that kind of advice can somehow find enough client’s to stay in business. If you have received this kind of advice come on over to the light. I am here and ready to help you keep more of what you earn.
Hiring your children to help you in your business is a smart tax planning strategy. The IRS says that children under 18 are not subject to social security, medicare taxes, or FUTA taxes. The State of AL says they are exempt from SUI until they are 21 and the same applies to FUTA. They are subject to Federal and State income taxes but a little planning can make sure you don’t exceed certain threshold amounts which would create the need to file a federal or state tax return. For some it may even be worth the filing for the tax savings.