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New Tax Law Issues for 2018

Filing Your 2018 Tax Return

Next year, taxes must be filed on or before April 15, 2019. For the last few years, that iconic date was extended because it fell on a legal holiday or a weekend, but it lands on a Monday in 2019.1 While there’s been significant debate regarding how the new tax law will affect Americans across the income scale, we should then have a better idea of how we may be personally impacted by the changes.

Highlights of the new tax law include:2

  • Lower individual tax rates
  • Increased standard deduction ($12,000 single; $24,000 married filing jointly)
  • Increased child tax credit ($2,000)
  • Elimination of dependent and personal exemptions
  • Elimination of some itemized deductions
  • $10,000 cap on the combined deduction for state income taxes, sales and local taxes, and property taxes
  • 20 percent deduction for “pass-through” entities (e.g., sole proprietorship, partnership, S corps)

In light of these changes, it’s a good idea to conduct a midyear review to see if there are ways to take advantage of the new changes or discover any potentially negative situations. If you’re not sure how you might be affected, consult with a tax professional. It may be worth reviewing your 2017 return to consider what new rules may affect your unique situation.

1 TimeAndDate.com. April 24, 2018. “Tax Day in the United States.” https://www.timeanddate.com/holidays/us/tax-day. Accessed May 29, 2018.
2 TurboTax. April 24, 2018. “How Will Tax Reform Affect My Refund Next Year?” https://blog.turbotax.intuit.com/tax-reform/how-will-tax-reform-affect-my-refund-next-year-33055/. Accessed May 29, 2018.

Money Saving Tips

Self-Employment Deductions

Some of the biggest beneficiaries of the new tax law are those who are self-employed. For people in or near retirement, it may be worth considering a self-employment venture to stay intellectually and socially engaged — not to mention the potential tax advantages.1

The following list provides an overview of tax benefits — both new and old — enjoyed by self-employed individuals:2

Self-Employment Tax Deduction

One of the biggest drawbacks of working for yourself is that you have to pay both your portion and the employer portion of FICA taxes. In 2018, this equals a 12.4 percent Social Security tax (6.2 percent employer plus 6.2 percent employee) of the first $128,400 of net income, plus a 2.9 percent Medicare tax (1.45 percent employer plus 1.45 percent employee) on every dollar of net income. That equals 15.3 percent in addition to your regular income-tax rate.3

At first glance, that’s a heavy toll for becoming your own boss. Fortunately, 50 percent of those FICA employment taxes (the “employer” portion) can be deducted on your tax return.4

Qualified-Business Income Deduction

While the corporate tax rate was reduced to 21 percent, this doesn’t help self-employed business owners whose income is taxed at their personal income-tax rate. To help level the playing field, the new tax law allows for a 20 percent deduction on this income — also referred to as pass-through qualified business income (QBI). The deduction is available to businesses structured as sole proprietor, partnership or S corporations.5 However, there are certain limitations and ambiguities in the code so it’s a good idea to work with a tax professional when the 2019 tax season approaches.

Home-Office Deduction

The home office deduction still exists for self-employed folks for whom their home is their principal place of business and, in most cases, the designated space is used regularly and exclusively for their business.6

Retirement Plans

If self-employed taxpayers save for retirement with an individual 401(k) plan, simplified employee pension (SEP) or other type of qualified plan, contributions may be deductible and earnings have the opportunity to grow tax-deferred until withdrawn.7

Office Supplies

Standard business expenses such as office supplies are generally deductible.8

Depreciation

Supplies that have a lifespan of more than one year — such as a computer — may be deducted as a depreciated capital expense even if used in the business owner’s personal life. The new tax law increased the depreciation rate from 50 to 100 percent on equipment bought and placed into service after Sept. 27, 2017. You can learn more about this deduction via IRS Publication 946, “How to Depreciate Property.”9

Educational Expenses

If you take classes, attend workshops or seminars, pay dues to join a professional organization, or even purchase books and periodicals to help you learn about your business, these expenses may be deductible.10

1 MoneyTips.com. Jan. 19, 2018. “Top 15 Tax Deductions For The Self-Employed.” https://www.moneytips.com/top-15-tax-deductions-for-the-self-employed. Accessed May 29, 2018.
2 Ibid.
3 Accounting Coach. “What is the self-employed person’s FICA tax rate for 2018?” https://www.accountingcoach.com/blog/what-is-the-self-employed-persons-fica-tax-rate-this-year. Accessed May 29, 2018.
4 MoneyTips.com. Jan. 19, 2018. “Top 15 Tax Deductions For The Self-Employed.” https://www.moneytips.com/top-15-tax-deductions-for-the-self-employed. Accessed May 29, 2018.
5 Ibid.
6 Ibid.
7 Ibid.
8 Ibid.
9 Ibid.
10 Ibid.

Planning Tip

Pass-Through Business Deduction

Small sole-proprietorship business owners, partnerships and S-Corp filers could see a significant change in next year’s tax return. Companies structured to receive pass-through income could benefit from a new deduction, enabling certain small business owners to potentially reduce their taxable income by an additional 20 percent.1

The new rule applies to business owners whose taxable income is:2

  • Less than $157,500 (individuals)
  • Less than $315,000 (married couple)

Above these thresholds, the deduction is phased out for people who own a “service business” (e.g., health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage services). The pass-through deduction is not available for service business owners with taxable income above $415,000 (if married) and $207,500 (for singles).3

For nonservice providers above the thresholds, how the deduction is determined (or even if it is available) depends on several different factors.4

1 David Flores Wilson. Investopedia. April 24, 2018. “7 Ways the New Tax Law May Impact You.” https://www.investopedia.com/advisor-network/articles/7-ways-new-tax-law-may-impact-you/. Accessed May 29, 2018.
2 Stephen Fishman. NOLO. “The 20% Pass-Through Tax Deduction for Business Owners.” https://www.nolo.com/legal-encyclopedia/the-new-pass-through-tax-deduction.html. Accessed June 18, 2018.
3 Ibid.
4 Ibid.

The content provided in this newsletter is designed to provide general information on the subjects covered. Neither our firm nor its agents or representatives may give tax advice. Be sure to speak with a qualified professional about your unique situation.