New law provides a variety of tax breaks to businesses and employers
While you were celebrating the holidays, you may not have
noticed that Congress passed a law with a grab bag of provisions that provide
tax relief to businesses and employers. The “Further Consolidated
Appropriations Act, 2020” was signed into law on December 20, 2019. It makes
many changes to the tax code, including an extension (generally through 2020)
of more than 30 provisions that were set to expire or already expired.
Two other laws were passed as part of the law (The Taxpayer
Certainty and Disaster Tax Relief Act of 2019 and the Setting Every Community
Up for Retirement Enhancement Act).
Here are five highlights.
Long-term part-timers can participate in
401(k)s.
Under current law, employers generally can exclude part-time
employees (those who work less than 1,000 hours per year) when providing a
401(k) plan to their employees. A qualified retirement plan can generally delay
participation in the plan based on an employee attaining a certain age or
completing a certain number of years of service but not beyond the later of
completion of one year of service (that is, a 12-month period with at least
1,000 hours of service) or reaching age 21.
Qualified retirement plans are subject to various other
requirements involving who can participate.
For plan years beginning after December 31, 2020, the new law
requires a 401(k) plan to allow an employee to make elective deferrals if the
employee has worked with the employer for at least 500 hours per year for at
least three consecutive years and has met the age-21 requirement by the end of
the three-consecutive-year period. There are a number of other rules involved
that will determine whether a part-time employee qualifies to participate in a
401(k) plan.
The employer tax credit for paid family and
medical leave is extended.
Tax law provides an employer credit for paid family and medical
leave. It permits eligible employers to claim an elective general business
credit based on eligible wages paid to qualifying employees with respect to
family and medical leave. The credit is equal to 12.5% of eligible wages if the
rate of payment is 50% of such wages and is increased by 0.25 percentage points
(but not above 25%) for each percentage point that the rate of payment exceeds
50%. The maximum leave amount that can be taken into account for a qualifying
employee is 12 weeks per year.
The credit was set to expire on December 31, 2019. The new law
extends it through 2020.
The Work Opportunity Tax Credit (WOTC) is
extended.
Under the WOTC, an elective general business credit is provided
to employers hiring individuals who are members of one or more of 10 targeted
groups. The new law extends this credit through 2020.
The medical device excise tax is repealed.
The Affordable Care Act (ACA) contained a provision that required
that the sale of a taxable medical device by the manufacturer, producer or
importer is subject to a tax equal to 2.3% of the price for which it is sold.
This medical device excise tax originally applied to sales of taxable medical
devices after December 31, 2012.
The new law repeals the excise tax for sales occurring after
December 31, 2019.
The high-cost, employer-sponsored health
coverage tax is repealed.
The ACA also added a nondeductible excise tax on insurers when
the aggregate value of employer-sponsored health insurance coverage for an
employee, former employee, surviving spouse or other primary insured individual
exceeded a threshold amount. This tax is commonly referred to as the tax on
“Cadillac” plans.
The new law repeals the Cadillac tax for tax years beginning
after December 31, 2019.
Stay tuned
These are only some of the provisions of the new law. We will be
covering them in the coming weeks. If you have questions about your situation,
don’t hesitate to contact us.
© 2019
Adopting a child? Bring home tax savings with your bundle of joy
If you’re adopting a child, or you adopted one this year, there
may be significant tax benefits available to offset the expenses. For 2019,
adoptive parents may be able to claim a nonrefundable credit against their
federal tax for up to $14,080 of “qualified adoption expenses” for each adopted
child. (This amount is increasing to $14,300 for 2020.) That’s a
dollar-for-dollar reduction of tax — the equivalent, for someone in the 24%
marginal tax bracket, of a deduction of over $50,000.
Adoptive parents may also be able to exclude from their gross
income up to $14,080 for 2019 ($14,300 for 2020) of qualified adoption expenses
paid by an employer under an adoption assistance program. Both the credit and
the exclusion are phased out if the parents’ income exceeds certain limits, as
explained below.
Adoptive parents may claim both a credit and an exclusion for
expenses of adopting a child. But they can’t claim both a credit and an
exclusion for the same expense.
Qualified adoption expenses
To qualify for the credit or the exclusion, the expenses must be
“qualified.” These are the reasonable and necessary adoption fees, court costs,
attorney fees, travel expenses (including amounts spent for meals and lodging)
while away from home, and other expenses directly related to the legal adoption
of an “eligible child.”
Expenses in connection with an unsuccessful attempt to adopt an
eligible child can qualify. However, expenses connected with a foreign adoption
(one in which the child isn’t a U.S. citizen or resident) qualify only if the
child is actually adopted.
Taxpayers who adopt a child with special needs get a special tax
break. They will be deemed to have qualified adoption expenses in the tax year
in which the adoption becomes final in an amount sufficient to bring their
total aggregate expenses for the adoption up to $14,300 for 2020 ($14,080 for
2019). In other words, they can take the adoption credit or exclude
employer-provided adoption assistance up to that amount, whether or not they
had $14,300 for 2020 ($14,080 for 2019) of actual expenses.
Phase-out for high-income taxpayers
The credit allowable for 2019 is phased out for taxpayers with
adjusted gross income (AGI) of $211,160 ($214,520 for 2020). It is eliminated
when AGI reaches $251,160 for 2019 ($254,520 for 2020).
Taxpayer ID number required
The IRS can disallow the credit and the exclusion unless a valid
taxpayer identification number (TIN) for the child is included on the return.
Taxpayers who are in the process of adopting a child can get a temporary
number, called an adoption taxpayer identification number (ATIN), for the
child. This enables adoptive parents to claim the credit and exclusion for
qualified expenses.
When the adoption becomes final, the adoptive parents must apply
for a Social Security number for the child. Once obtained, that number, rather
than the ATIN, is used.
We can help ensure that you meet all the requirements to get the
full benefit of the tax savings available to adoptive parents. Please contact
us if you have any questions
© 2019
Holiday parties and gifts can help show your appreciation and provide tax breaks
With Thanksgiving behind us, the holiday season is in full swing. At this time of year, your business may want to show its gratitude to employees and customers by giving them gifts or hosting holiday parties. It’s a good idea to understand the tax rules associated with these expenses. Are they tax deductible by your business and is the value taxable to the recipients?
Customer and client gifts
If you make gifts to customers and clients, the gifts are deductible up to $25 per recipient per year. For purposes of the $25 limit, you don’t need to include “incidental” costs that don’t substantially add to the gift’s value, such as engraving, gift wrapping, packaging or shipping. Also excluded from the $25 limit is branded marketing collateral — such as small items imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4.
The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (for example, a gift basket for all team members of a customer to share) as long as they’re “reasonable.”
Employee gifts
In general, anything of value that you transfer to an employee is included in his or her taxable income (and, therefore, subject to income and payroll taxes) and deductible by your business. But there’s an exception for noncash gifts that constitute a “de minimis” fringe benefit.
These are items small in value and given infrequently that are administratively impracticable to account for. Common examples include holiday turkeys or hams, gift baskets, occasional sports or theater tickets (but not season tickets), and other low-cost merchandise.
De minimis fringe benefits aren’t included in your employee’s taxable income yet they’re still deductible by your business. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.
Important: Cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and subject to payroll tax withholding regardless of how small and infrequent.
Throwing a holiday party
Under the Tax Cuts and Jobs Act, certain deductions for business-related meals were reduced and the deduction for business entertainment was eliminated. However, there’s an exception for certain recreational activities, including holiday parties.
Holiday parties are fully deductible (and excludible from recipients’ income) so long as they’re primarily for the benefit of non-highly-compensated employees and their families. If customers, and others also attend, holiday parties may be partially deductible.
Spread good cheer
Contact us if you have questions about giving holiday gifts to employees or customers or throwing a holiday party. We can explain the tax rules.
2019 Year-End Tax Planning
As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Year-end planning for 2019 takes place against the backdrop of the landmark Tax Cuts and Jobs Act (TCJA) changes that many individuals and businesses still haven't fully absorbed. For individuals, these changes include lower income tax rates, a boosted standard deduction, severely limited itemized deductions, no personal exemptions, an increased child tax credit, and a watered-down alternative minimum tax (AMT). For businesses, the corporate tax rate has been reduced to 21%, there is no corporate AMT, there are limits on business interest deductions, and there are very generous expensing and depreciation rules. And non-corporate taxpayers with qualified business income from pass-through entities may be entitled to a special 20% deduction.
Year-End Tax Planning Moves for Individuals
- Higher-income earners must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer's approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.
- The 0.9% additional Medicare tax also may require higher-income earners to take year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of a threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case). Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he or she would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don't exceed $200,000.
- Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer's taxable income. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that it, when added to regular taxable income, is not more than the “maximum zero rate amount” (e.g., $78,750 for a married couple). If the 0% rate applies to long-term capital gains you took earlier this year—for example, you are a joint filer who made a profit of $5,000 on the sale of stock bought in 2009, and other taxable income for 2019 is $70,000—then before year-end, try not to sell assets yielding a capital loss because the first $5,000 of such losses won't yield a benefit this year. And if you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains sheltered by the 0% rate.
- Postpone income until 2020 and accelerate deductions into 2019 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2019 that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2019. For example, that may be the case where a person will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or expects to be in a higher tax bracket next year.
- If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA in 2019 if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2019, and possibly reduce tax breaks geared to AGI (or modified AGI).
- It may be advantageous to try to arrange with your employer to defer, until early 2020, a bonus that may be coming your way. This could cut as well as defer your tax.
- Many taxpayers won't be able to itemize because of the high basic standard deduction amounts that apply for 2019 ($24,400 for joint filers, $12,200 for singles and for marrieds filing separately, $18,350 for heads of household), and because many itemized deductions have been reduced or abolished. No more than $10,000 of state and local taxes may be deducted; miscellaneous itemized deductions (e.g., tax preparation fees and unreimbursed employee expenses) are not deductible; and personal casualty and theft losses are deductible only if they're attributable to a federally declared disaster and only to the extent the $100-per-casualty and 10%-of-AGI limits are met. You can still itemize medical expenses but only to the extent they exceed 10% of your adjusted gross income, state and local taxes up to $10,000, your charitable contributions, plus interest deductions on a restricted amount of qualifying residence debt, but payments of those items won't save taxes if they don't cumulatively exceed the standard deduction amount that applies to your filing status.
Some taxpayers may be able to work around these deduction restrictions by applying a “bunching strategy” to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, if a taxpayer knows he or she will be able to itemize deductions this year but not next year, the taxpayer will benefit by making two years' worth of charitable contributions this year, instead of spreading out donations over 2019 and 2020.
- Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2019 deductions even if you don't pay your credit card bill until after the end of the year.
- If you expect to owe state and local income taxes when you file your return next year and you will be itemizing in 2019, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2019. But remember that state and local tax deductions are limited to $10,000 per year, so this strategy is not a good one to the extent it causes your 2019 state and local tax payments to exceed $10,000.
- Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70½. (That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire.) Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Thus, if you turn age 70½ in 2019, you can delay the first required distribution to 2020, but if you do, you will have to take a double distribution in 2020—the amount required for 2019 plus the amount required for 2020. Think twice before delaying 2019 distributions to 2020, as bunching income into 2020 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2020 if you will be in a substantially lower bracket that year.
- If you are age 70½ or older by the end of 2019, have traditional IRAs, and particularly if you can't itemize your deductions, consider making 2019 charitable donations via qualified charitable distributions from your IRAs. Such distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. But the amount of the qualified charitable distribution reduces the amount of your required minimum distribution, which can result in tax savings.
- If you are younger than age 70½ at the end of 2019, you anticipate that in the year that you turn 70½ and/or in later years you will not itemize your deductions, and you don't have any traditional IRAs, establish and contribute as much as you can to one or more traditional IRAs in 2019. If these circumstances apply to you, except that you already have one or more traditional IRAs, make maximum contributions to one or more traditional IRAs in 2019. Then, when you reach age 70½, make your charitable donations by way of qualified charitable distributions from your IRA. Doing all of this will allow you to, in effect, convert nondeductible charitable contributions that you make in the year you turn 70½ and later years, into deductible-in-2019 IRA contributions and reductions of gross income from age 70½ and later year distributions from the IRAs.
- Take an eligible rollover distribution from a qualified retirement plan before the end of 2019 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2019. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2019, but the withheld tax will be applied pro rata over the full 2019 tax year to reduce previous underpayments of estimated tax.
- Consider increasing the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year.
- If you become eligible in December of 2019 to make health savings account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for 2019.
- Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $15,000 made in 2019 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
- If you were in federally declared disaster area, and you suffered uninsured or unreimbursed disaster-related losses, keep in mind you can choose to claim them either on the return for the year the loss occurred (in this instance, the 2019 return normally filed next year), or on the return for the prior year (2018).
- If you were in a federally declared disaster area, you may want to settle an insurance or damage claim in 2019 in order to maximize your casualty loss deduction this year.
Year-End Tax-Planning Moves for Businesses & Business Owners
- Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2019, if taxable income exceeds $321,400 for a married couple filing jointly, $160,700 for singles and heads of household, and $160,725 for marrieds filing separately, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased in–for example, the phase-in applies to joint filers with taxable income between $321,400 and $421,400 and to single taxpayers with taxable income between $160,700 and $210,700.
Taxpayers may be able to achieve significant savings with respect to this deduction, by deferring income or accelerating deductions so as to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2019. Depending on their business model, taxpayers also may be able increase the new deduction by increasing W-2 wages before year-end. The rules are quite complex, so don't make a move in this area without consulting your tax adviser.
- More “small businesses” are able to use the cash (as opposed to accrual) method of accounting in than were allowed to do so in earlier years. To qualify as a “small business” a taxpayer must, among other things, satisfy a gross receipts test. For 2019, the gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts don't exceed $26 million (the dollar amount was $25 million for 2018, and for earlier years it was $5 million). Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments.
- Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2019, the expensing limit is $1,020,000, and the investment ceiling limit is $2,550,000. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for qualified improvement property (generally, any interior improvement to a building's interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. The fact that the expensing deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is held during the year can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of 2019, rather than at the beginning of 2020, can result in a full expensing deduction for 2019.
- Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment—bought used (with some exceptions) or new—if purchased and placed in service this year. The 100% write off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year writeoff is available even if qualifying assets are in service for only a few days in 2019.
- Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs don't have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, consider purchasing such qualifying items before the end of 2019.
- A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2019 (and substantial net income in 2020) may find it worthwhile to accelerate just enough of its 2020 income (or to defer just enough of its 2019 deductions) to create a small amount of net income for 2019. This will permit the corporation to base its 2020 estimated tax installments on the relatively small amount of income shown on its 2019 return, rather than having to pay estimated taxes based on 100% of its much larger 2020 taxable income.
- To reduce 2019 taxable income, consider deferring a debt-cancellation event until 2020.
- To reduce 2019 taxable income, consider disposing of a passive activity in 2019 if doing so will allow you to deduct suspended passive activity losses.
Accelerate depreciation deductions with a cost segregation study
Is your business depreciating over a 30-year period the entire cost of constructing the building that houses your operation? If so, you should consider a cost segregation study. It may allow you to accelerate depreciation deductions on certain items, thereby reducing taxes and boosting cash flow. And under current law, the potential benefits of a cost segregation study are now even greater than they were a few years ago due to enhancements to certain depreciation-related tax breaks.
Depreciation basics
Business buildings generally have a 39-year depreciation period (27.5 years for residential rental properties). Most times, you depreciate a building’s structural components, including walls, windows, HVAC systems, elevators, plumbing and wiring, along with the building. Personal property — such as equipment, machinery, furniture and fixtures — is eligible for accelerated depreciation, usually over five or seven years. And land improvements, such as fences, outdoor lighting and parking lots, are depreciable over 15 years.
Often, businesses allocate all or most of their buildings’ acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. In some cases — computers or furniture, for example — the distinction between real and personal property is obvious. But the line between the two is frequently less clear. Items that appear to be “part of a building” may in fact be personal property, like removable wall and floor coverings, removable partitions, awnings and canopies, window treatments, signs and decorative lighting.
In addition, certain items that otherwise would be treated as real property may qualify as personal property if they serve more of a business function than a structural purpose. This includes reinforced flooring to support heavy manufacturing equipment, electrical or plumbing installations required to operate specialized equipment, or dedicated cooling systems for data processing rooms.
Identifying and substantiating costs
A cost segregation study combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. Although the relative costs and benefits of a cost segregation study depend on your particular facts and circumstances, it can be a valuable investment.
Speedier depreciation tax breaks
The Tax Cuts and Jobs Act (TCJA) enhances certain depreciation-related tax breaks, which may also enhance the benefits of a cost segregation study. Among other things, the act permanently increased limits on Section 179 expensing, which allows you to immediately deduct the entire cost of qualifying equipment or other fixed assets up to specified thresholds.
The TCJA also expanded 15-year-property treatment to apply to qualified improvement property. Previously this break was limited to qualified leasehold-improvement, retail-improvement and restaurant property. And it temporarily increased first-year bonus depreciation to 100% (from 50%).
Making favorable depreciation changes
Fortunately, it isn’t too late to get the benefit of speedier depreciation for items that were incorrectly assumed to be part of your building for depreciation purposes. You don’t have to amend your past returns (or meet a deadline for claiming tax refunds) to claim the depreciation that you could have already claimed. Instead, you can claim that depreciation by following procedures, in connection with the next tax return that you file, that will result in “automatic” IRS consent to a change in your accounting for depreciation.
Cost segregation studies can yield substantial benefits, but they’re not right for every business. We must judge whether a study will result in overall tax savings greater than the costs of the study itself. To find out whether this would be worthwhile for you, contact us.
© 2019
Act soon to save 2018 taxes on your investments
Do you have investments outside of tax-advantaged retirement plans? If so, you might still have time to shrink your 2018 tax bill by selling some investments, you just need to carefully select which investments you sell.
Try balancing gains and losses
If you’ve sold investments at a gain this year, consider selling some losing investments to absorb the gains. This is commonly referred to as “harvesting” losses.
If, however, you’ve sold investments at a loss this year, consider selling other investments in your portfolio that have appreciated, to the extent the gains will be absorbed by the losses. If you believe those appreciated investments have peaked in value, essentially you’ll lock in the peak value and avoid tax on your gains.
Review your potential tax rates
At the federal level, long-term capital gains (on investments held more than one year) are taxed at lower rates than short-term capital gains (on investments held one year or less). The Tax Cuts and Jobs Act (TCJA) retains the 0%, 15% and 20% rates on long-term capital gains. But, for 2018 through 2025, these rates have their own brackets, instead of aligning with various ordinary-income brackets.
For example, these are the thresholds for the top long-term gains rate for 2018:
- Singles: $425,800
- Heads of households: $452,400
- Married couples filing jointly: $479,000
But the top ordinary-income rate of 37%, which also applies to short-term capital gains, doesn’t go into effect until income exceeds $500,000 for singles and heads of households or $600,000 for joint filers. The TCJA also retains the 3.8% net investment income tax (NIIT) and its $200,000 and $250,000 thresholds.
Don’t forget the netting rules
Before selling investments, consider the netting rules for gains and losses, which depend on whether gains and losses are long term or short term. To determine your net gain or loss for the year, long-term capital losses offset long-term capital gains before they offset short-term capital gains. In the same way, short-term capital losses offset short-term capital gains before they offset long-term capital gains.
You may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing your adjusted gross income. Any remaining net losses are carried forward to future years.
Time is running out
By reviewing your investment activity year-to-date and selling certain investments by year end, you may be able to substantially reduce your 2018 taxes. But act soon, because time is running out.
Keep in mind that tax considerations shouldn’t drive your investment decisions. You also need to consider other factors, such as your risk tolerance and investment goals.
We can help you determine what makes sense for you. Please contact Dukhon Tax & Accounting »
TCJA changes to employee benefits tax breaks: 4 negatives and a positive
The Tax Cuts and Jobs Act (TCJA) includes many changes that affect tax breaks for employee benefits. Among the changes are four negatives and one positive that will impact not only employees but also the businesses providing the benefits.Read more
Can you claim your elderly parent as a dependent on your tax return?
Perhaps. It depends on several factors, such as your parent’s income and how much financial support you provided. If you qualify for the adult-dependent exemption on your 2017 income tax return, you can deduct up to $4,050 per qualifying adult dependent. However, for 2018, under the Tax Cuts and Jobs Act, the dependency exemption is eliminated.
Home-related tax breaks are valuable on 2017 returns, will be less so for 2018
Home ownership is a key element of the American dream for many, and the U.S. tax code includes many tax breaks that help support this dream. If you own a home, you may be eligible for several valuable breaks when you file your 2017 return. But under the Tax Cuts and Jobs Act, your home-related breaks may not be as valuable when you file your 2018 return next year.
Make sure repairs to tangible property were actually repairs before you deduct the cost
Repairs to tangible property, such as buildings, machinery, equipment or vehicles, can provide businesses a valuable current tax deduction — as long as the so-called repairs weren’t actually “improvements.” The costs of incidental repairs and maintenance can be immediately expensed and deducted on the current year’s income tax return. But costs incurred to improve tangible property must be depreciated over a period of years.
So the size of your 2017 deduction depends on whether the expense was a repair or an improvement.
Betterment, restoration or adaptation
In general, a cost that results in an improvement to a building structure or any of its building systems (for example, the plumbing or electrical system) or to other tangible property must be depreciated. An improvement occurs if there was a betterment, restoration or adaptation of the unit of property.
Under the “betterment test,” you generally must depreciate amounts paid for work that is reasonably expected to materially increase the productivity, efficiency, strength, quality or output of a unit of property or that is a material addition to a unit of property.
Under the “restoration test,” you generally must depreciate amounts paid to replace a part (or combination of parts) that is a major component or a significant portion of the physical structure of a unit of property.
Under the “adaptation test,” you generally must depreciate amounts paid to adapt a unit of property to a new or different use — one that isn’t consistent with your ordinary use of the unit of property at the time you originally placed it in service.
Seeking safety
Distinguishing between repairs and improvements can be difficult, but a couple of IRS safe harbors can help:
1. Routine maintenance safe harbor. Recurring activities dedicated to keeping property in efficient operating condition can be expensed. These are activities that your business reasonably expects to perform more than once during the property’s “class life,” as defined by the IRS.
Amounts incurred for activities outside the safe harbor don’t necessarily have to be depreciated, though. These amounts are subject to analysis under the general rules for improvements.
2. Small business safe harbor. For buildings that initially cost $1 million or less, qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. A qualified small business is generally one with gross receipts of $10 million or less.
There is also a de minimis safe harbor as well as an exemption for materials and supplies up to a certain threshold. To learn more about these safe harbors and exemptions and other ways to maximize your tangible property deductions, contact us.
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