The Tax Cuts and Jobs Act of 2017 may have been signed into law in 2017, but many of the significant changes that made headlines last year are taking effect on tax returns for the first time this year. Because these changes are so far-reaching and the largest in three decades, the tax law’s ultimate impact will vary considerably from person to person and family to family.
As we enter the home stretch before April 15, there are steps filers should take to make sure they’re prepared for these changes. Even with this preparation for 2018 tax returns, filers must be mindful that additional changes are taking effect during the 2019 tax year. Here’s a closer look at the ABCs of filing for 2018 and how-to prepare in advance for 2019.
3 Things to Do as You File
A. Assume there will be changes in your return
Individuals and families who’ve worked with a trusted advisor over the past year will be prepared for the myriad of tax reforms taking effect this year. Even with that guidance, taxpayers must keep in mind all the ways their 2018 taxes may look different than in years past.
A change to the top bracket (down to 37 percent), fewer itemized deductions and exemptions, a standard deduction that has nearly doubled and a $10,000 cap on state and local tax deductions will paint a very different tax picture for many 2018 filers. Even the form used to file (1040) has a new look this year.
B. Be extra thorough on your questionnaire
In recent years, filling out a tax questionnaire is a routine exercise, but that seemingly routine exercise will become a bit more complicated this year. One example is that individuals over 70 and a half may shift their charitable gifting strategy from donating appreciated securities to donating a portion of their required minimum distribution of their retirement accounts. This is a rather drastic change that a tax professional must be mindful of when preparing clients’ 2018 tax returns.
With these types of changes, individuals must be in close communication with their financial advisors and tax accounting teams. Ensure your tax accounting team has all the information it needs to file a return that best aligns with the tax planning strategy you and your financial advisor have decided on. If you’re unsure of what documentation to provide, speak with your team early in the process to avoid any issues, or confusion.
C. Consider additional contributions now (if registered as a business)
For business owners operating pass-through entities, the Section 199A 20 percent deduction for qualified business income (QBI) was a major consideration over the past year. There was confusion over which businesses qualified for the deduction, prompting additional guidance from the IRS and updated regulations. Looking to 2019, these clarifications will be a considerable planning focus for taxpayers earning business income through a sole proprietorship, partnership, S corporation, trust or estate.
But with the time left before tax year 2018 returns are filed, another option for businesses owners to consider is to make additional contributions to Simplified Employee Pension (SEP) plans. SEP plan contributions can be made up to the tax deadline and through extensions and can be a valuable tax planning tool. Contributions can increase opportunities for deductions, which in turn reduces taxable income.
3 Things to do After You File
A. Anticipate even more changes on the horizon
Just as taxpayers get a handle on this year’s changes, they’ll need to start preparing for additional reforms to take effect in 2019. However, these updates are not nearly as extensive as the changes for the 2018 tax year.
For example, taxpayers who get divorced in 2019 will be subject to new alimony rules. Individuals will no longer be able to deduct alimony payments, and individuals receiving alimony will no longer have to include it as taxable income.
One other change to be aware of concerns medical expenses. Beginning in the 2019 tax year, the deduction threshold for medical expenses increases from 7.5 percent to 10 percent of adjusted gross income.
B. Begin planning for next year early
For businesses and families, planning next year’s tax strategy can’t begin soon enough. Advisors will want to see how 199A deductions and charitable gifting shifts affect real returns. By optimizing your tax planning strategies for the year to come, you will (hopefully) see positive outcomes when you go to file your 2019 tax returns.
C. Check your classification (if registered as a business)
The QBI deduction that took effect for the 2018 tax year benefits S corporation owners, but C corporations saw a benefit in a significant tax rate cut from 35 percent to 21 percent. The benefits to a pass-through structure may not be as significant for many businesses given the new tax realities. In 2019, business owners should confirm that their classification best suits their tax planning and retirement strategy.
Wescott advisors play a critical role in tax planning and navigating the uncertainty and opportunity that comes with current and upcoming tax law changes. With the right partner and a little preparation, you can stick to a strategy that capitalizes on the new tax law and avoids any unwanted surprises this April and in the future.
To learn more about Wescott’s tax planning strategies, speak with a team member today.