The Tax Cuts and Jobs Act of 2017 has been signed into law. This tax legislation, is complex and voluminous in its approximately 1100 pages in its final form. Click the link at the bottom of this email to gain an understanding of its complexity. I will be doing what I can to identify the opportunities it'll offer you and your business in the next few weeks.
This new tax law will virtually impact every individual and business taxpayer in new, and in some cases, significant ways not seen in over 30 years since the Tax Reform Act of 1986. As is always the case with new tax laws, every tax payer will be affected one way or the other. I am here to help determine how you will be affected and to guide you in a new direction if needed.
Also, for every tax client, as we prepare your 2017 tax returns, we plan to calculate what your 2017 federal tax would have been if the new tax had been effective for 2017. This will give you some real information so you can assess how you and your business are affected by this massive federal tax reduction legislation.
There are some things that should be done before December 31st to get the existing tax benefit.
1) Pay your property taxes due in April before December 31, 2017. In 2018 state taxes plus property taxes are limited to $10,000. Standard deduction will be $12,000 single and $24,000 married in 2018. So if your total taxes areover $10,000 it's better to pay the property taxes that are due in early 2018, now. However, if you are subject to the Alternative Minimum Tax, as so many of you are, then there is no benefit to this.
2) Pay your 2017 State taxes before December 31. If your income has gone up, you usually owe taxes with your tax return or you forgot to pay in estimated taxes - you will want to pay in your State taxes now. As stated above, if your total State and Property taxes are more than $10,000 you will not get the full deduction in 2018. You may need to use your 2016 state tax amount to determine an approximate amount due to the state for 2017. Paying more than is due is abetter option than paying less, as you will get a refund on what you overpay, but you will not get the current benefit if you wait until 2018 to pay. You cannot pay your 2018 state taxes, as the new law specifically prohibits doing this.
3) If you have significant Miscellaneous Itemized Deductions, that were subject to 2% Floor, like Investment Fees, Employee Business Expenses, Tax Prep Fees, you will want to prepay as many of those before December 31, as you can. If you are like many in the Entertainment Industry with income from W-2s but many business expenses, like Union Dues, Commissions, etc, you should try to prepay as many of those in 2017, as there are no more Misc Item Deductions in 2018.
4) If you are a taxpayer, paid by W-2 but incurring a lot of business expenses, you may want to see if you can be paid as an independent contractor. Unfortunately, most studios will not do this. But if you can get some income on a 1099 vs a W-2, you might be able to deduct some of those expenses. Consideration of forming an LLC or S-corporation might be prudent.
5) The most complex part of the new tax law is regarding, so called Pass Thru entities. For the purposes of this law they include Sole Proprietors filing a Sch C. Very simply, income from these entities can take a deduction of the lesser of 20% of business income or 50% of wages paid (no wages necessary for Sch C). Medical, Legal, Accounting, Actors, Directors and a few others are not eligible for this, unless their total Adjusted Gross Income (this means all your income including Interest, Rental, Social Security, Unemployment, etc) is less than $157,500 or $315,000 filing married.
6) Make Charity Donations before December 31, 2017. If you have low Itemized Deductions, then you would want to pay charity in 2017. Making a donation this year may get you a deduction you might not get next year, especially if you will be under the new higher Standard Deduction amount. If your tax bracket will fall next year, you may also want to pay Charity in 2017 and get a higher benefit from the deduction.
7) The marginal tax brackets will drop for most people. The only group this for which this is not the case is Single taxpayers with taxable income between $157,500 and $413,000. However, since so many of these taxpayers are in AMT, it is hard to say whether it is good or bad generally. The AMT exemption is rising. The State Tax allowed is being limited, which is what put so many in AMT, so it is unlikely AMT will play much of a factor under the new tax laws.
8) How each state reacts to the new law is a huge uncertainty. So, you may still want to keep track of your Misc Item Deduction and other items that are limited for the IRS, but allowed for State tax filing.
Here are a few links:
While I know there is a lot of uncertainty out there at this time our office is closed from the 22nd of December through the 1st of January for the holidays.
I will be answering only urgent emails next week, however it may take a day or so for me to do so.
In spite of all this I hope everyone has a wonderful holiday season and a happy and prosperous new year.
The Team at Sorenson Business Consulting, Inc.