New tax brackets for 2018
Alternative minimum tax (AMT)
When the AMT is triggered, the taxpayer must add back certain items and recalculate their tax at an established flat rate. They will pay the higher of the two amounts. If you paid AMT last year but do not owe it now, you may be eligible for a credit. Note that these exemption amounts are $70,300 for single filers, $109,400 for married filing jointly and $54,700 for married filing separately.
New standard deduction
The standard deduction was raised for all taxpayers in 2018.Those filing individually or as married filing separately will see a standard deduction of $12,000 while those filing jointly will see a deduction of $24,000.The standard deduction is $18,000 for taxpayers filing as head of household.
Tax laws affecting higher-income taxpayers
Tax reform suspended the overall limit for itemized deductions for tax years 2018-2025.
Net investment income tax (NIIT)
- NIIT is a 3.8% tax on a broad range of income sources such as interest, dividends, capital gains, rental and royalty income, non-qualified annuities and passive business revenue. It affects individuals, estates and trusts above certain income levels.
-Taxpayers are subject to NIIT if their modified adjusted income exceeds $250,000 married filing jointly, $200,000 single or head of household and $125,000 married filing separately.
Taxpayers are subject to an additional 0.9% Medicare surtax on wages and self-employment income in excess of $250,0000 for married filing jointly, $200,000 single or head of household and $125,000 for married filing separately.
For the 0.9% additional Medicare surtax, withholding is required only on wages above $200,000. If a couple’s combined income exceeds $250,000, it’s possible no Medicare surtax was withheld if each spouse earned below $200,000. This may result in under-withholding (and possible penalties). Ask your CPA whether you should pay estimates.
• Maximize your retirement plan contributions to minimize income. For tax year 2018, the limit for 401(k)s (if you are under age 50) is $18,500. The limit is $24,500 if you are age 50 or older.
• Take full advantage of employer-sponsored programs that allow you to set aside pre-tax dollars for child care or medical expenses.
• Ask your CPA whether you will likely be subject to the AMT and how to minimize the impact.
• Shift to investments that are not subject to NIIT (e.g., exempt bonds).
• Offset any capital gains by harvesting losses in your taxable brokerage account.
Your CPA can advise you more on these and other strategies.
Self-employed or own a business?
Tax planning for your business is more important than ever with the new tax law. Be sure that your books and records are in good order (or contact your CPA for bookkeeping assistance) so you can review planning opportunities with your CPA.
Purchases of equipment
• Bonus depreciation — A deduction of 100% of the cost of qualified property can be deducted in the first year of acquisition. In 2023, this percentage will decrease 20% until it becomes 0% in 2027.Used property is now included as qualified property.
• Section 179 — For tax year 2018, businesses can deduct up to $1million of business property (computers, office furniture.) placed in service during the tax year. This deduction now includes the purchase of certain improvements to commercial real property.
Deduction for business income
Some businesses will qualify for a 20% deduction of qualified
Evaluate your health insurance options to determine if you are eligible for a deduction for self-employed health insurance premiums (medical, dental or long-term care plans).
Consider establishing a qualified retirement plan, such as:
· SEP IRA: May contribute up to the lesser of25% of net income or $55,000
· 401(k): Employee deferral plan, plus profit sharing
Meals and entertainment expenses
Expenses defined as entertainment are no longer deductible. However, business meals that meet certain criteria will still be deductible (generally 50% of the expense) as they have been in the past. Make sure that you have these items segregated in your books and records.
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