The following summarizes a few of the key provisions of the Act that affect individuals and businesses as we understand it. It should be noted that most of the provisions affecting individuals will sunset starting in 2026, while those affecting businesses are generally permanent. We have provided insight into some of the potential planning opportunities and considerations.
Deductions. The following are the key provisions impacting individual income tax deductions, effective for taxable years 2018 through 2025:
– The standard deduction has been doubled to $24,000 for married couples ($12,000 for individuals) and the personal exemption is eliminated.
– Miscellaneous itemized deductions that were subject to the 2% floor (e.g., certain unreimbursed employee business expenses, tax-related expenses and investment-related expenses) are suspended.
– The overall limitation on itemized deductions is eliminated.
– The Alternative Minimum Tax (AMT) for individuals is maintained with a higher exemption level of $109,400 for married couples ($70,300 for individuals). Additionally, AMT exemption phase-out thresholds are increased to $1,000,000 for married couples ($500,000 for individuals). Given the increased exemption and phase-out thresholds as well as the limitation of certain itemized deductions, many clients may find that they are no longer subject to AMT.
Clients who hold incentive stock options (ISOs) may benefit from exercising those options in years when they do not have AMT liability.
– The deduction for state and local taxes (SALT) has been limited. Taxpayers can deduct up to $10,000 in the aggregate for property, income and sales tax. The Act states that taxpayers may not take a deduction in 2017 for prepayment of state or local income tax imposed for taxable years beginning after December 31, 2017.
– The mortgage interest deduction has been limited.
a) Taxpayers can deduct interest on mortgage debt up to $750,000 of acquisition indebtedness for a newly acquired principal or second home.
b) Existing mortgages are grandfathered up to the current $1 million limit. A mortgage will be considered grandfathered into the $1 million limit if: (1) with respect to a principal or second home, the debt was incurred on or before December 15, 2017, or (2) with respect to a principal residence only, (a) the taxpayer entered into a written binding contract on or before December 15, 2017 to close on the purchase of such residence before January 1, 2018, (b) the home is actually purchased before April 1, 2018, and (c) the debt is incurred on or before April 1, 2018.
If a mortgage incurred on or before December 15, 2017, is refinanced, the refinanced debt will also be considered grandfathered into the $1 million limit up to the amount of the original mortgage outstanding at the time of the refinancing, subject to certain limitations relating to the term of the indebtedness.
c) Interest on home equity loans or home equity lines of credit (new or existing) is no longer deductible.
Clients should consult with their tax advisers regarding the deductibility of any new or refinanced mortgage indebtedness.
– The medical expense deduction has been retained. Such expenses are deductible to the extent they exceed 7.5% of adjusted gross income for 2017 and 2018. The adjusted gross income limitation increases to 10% in 2019 and thereafter.
– The child tax credit has been increased to $2,000 per child, refundable up to $1,400.
– For taxpayers who sign divorce agreements after December 31, 2018, alimony will no longer be deductible by the payer or taxable to the recipient. For existing agreements that are modified after that date, the parties may expressly choose to adopt this new rule. If they do not, alimony on agreements entered into before December 31, 2018, but modified after will continue to be deductible by the payer and taxable to the recipient.
Clients may wish to consult with family law counsel to determine whether a divorce decree may be modified to take into account the new tax law relating to alimony payments.
– The deduction for charitable gifts is retained and expanded to allow taxpayers to deduct up to 60% of their adjusted gross income for gifts of cash to public charities.
Clients who are charitably inclined, but who will not have sufficient itemized deductions in future years to exceed the increased standard exemption may wish to make a large charitable gift prior to year-end in order to maximize the charitable income tax deduction in 2017. For the same reason, in future years, clients may also benefit by bunching multiple years of charitable gifts in a single year. This strategy may work particularly well for clients who give annually as they may contribute the charitable sum to a Donor Advised Fund (DAF) and then make grants periodically in future years according to their original giving plan.
– The personal theft loss deduction is repealed and the personal casualty loss deduction is limited to losses incurred in disaster areas.
– Moving expenses are only deductible for individuals who are on active military duty and move pursuant to a military order.
529 Plans expanded. Effective for distributions made after December 31, 2017, 529 accounts may distribute up to $10,000 per student per year for tuition at a public, private or religious elementary or secondary school.
Carried interest. Any capital gain recognized by a taxpayer upon the sale or exchange of an "applicable partnership interest" that was received in connection with the performance of services will be treated as short-term capital gain unless the taxpayer has held the partnership interest for at least three years. The language of the Act also suggests that a taxpayer's share of capital gain attributable to the sale of an underlying asset held by the partnership for less than three years will be treated as short-term capital gain. Finally, the Act appears to contain anti-abuse rules intended to prevent the taxpayer from transferring the partnership interest to a related party in order to circumvent these provisions.
Repeal mandate for individual health insurance. The law imposing a penalty on individuals who don't purchase healthcare insurance coverage is effectively repealed by reducing the penalty to zero. This change does not take effect until 2019.
1031 exchanges. The law continues to permit the deferral of taxes on the proceeds of the sale of real property when those proceeds are properly reinvested in similar property ("like-kind exchanges"). Beginning in 2018 this deferral is not available for other types of property.
Roth IRA re-characterizations. Beginning in 2018, a conversion from traditional IRA to a Roth IRA can no longer be re-characterized back to the traditional IRA.
*This report is provided for informational and educations purposes only.
We are working thru many of these changes and updating our programs and systems in order to be prepared for the 2018 tax season. We expect further guidance, additional rules and regulations in 2018 that will help clarify and expand on the framework of the Act. We hope that you have found this information informative.
Starting a Business This Summer? Here are Four Tax Tips
New business owners may find the following five IRS tax tips helpful:
1. Business Structure. An early choice to make is to decide on the type of structure for the business. The most common types are a sole proprietor, partnership, and corporation. The type of business chosen will determine which tax forms to file.
2. Business Taxes. There are four general types of business taxes. They are income tax, self-employment tax, employment tax, and excise tax. In most cases, the types of tax a business pays depends on the type of business structure set up. Taxpayers may need to make estimated tax payments. If so, use IRS Direct Pay to make them. It’s the fast, easy and secure way to pay from a checking or savings account.
3. Employer Identification Number (EIN). Generally, businesses may need to get an EIN for federal tax purposes. Search “EIN” on IRS.gov to find out if the number is necessary. If needed, it’s easy to apply for it online.
4. Accounting Method. An accounting method is a set of rules used to determine when to report income and expenses. Taxpayers must use a consistent method. The two most common are the cash and accrual methods:
a. Under the cash method, taxpayers normally report income and deduct expenses in the year that they receive or pay them.
b. Under the accrual method, taxpayers generally report income and deduct expenses in the year that they earn or incur them. This is true even if they get the income or pay the expense in a later year.
Here are some other deductions available to the self-employed:
Business Use of a Home: If a client uses part of his home regularly and exclusively for administrative, managerial and other business-related activities, he can claim a home office deduction. Expenses that qualify include utilities, rent, mortgage interest, depreciation, and cleaning. Overall, the deduction is based on the square footage of the home used for the business.
Automobile Expenses: If your client travels for business purposes, he may deduct the dollar value of miles traveled, even for short distances. He can claim the actual expense incurred or use the standard mileage rate prescribed by the IRS, which is 54 cents in 2017. However, the IRS allowable mileage rate may change from year to year. Air, bus and train fares related to work also can be written off.
Health Insurance Premiums: Self-employed clients are allowed to deduct what they pay for medical insurance for themselves and their families, and it doesn’t matter if they itemize. It also doesn’t matter how high their income is, but remember that they are not allowed to take this deduction if they are eligible for health insurance through a spouse’s job.
Self-Employment Taxes: Clients have to pay the full 15.3 percent self-employment tax to cover Social Security and Medicare, but they are allowed to write off one-half of what they pay. Just as with health insurance premiums, they do not have to itemize in order to qualify for this deduction.
Contributions to a SEP IRA: Clients can increase their nest eggs and save on their taxes by making contributions all the way up to the filing deadline and deduct contributions as a business expense. For 2017, business owners can contribute up to 25 percent of income or $54,000 to their SEP IRA.
Helpful Tips to Know About Gambling Winnings and Losses
Taxpayers must report all gambling winnings as income. They must be able to itemize deductions to claim any gambling losses on their tax return.
Taxpayers who gamble may find these tax tips helpful:
Gambling income. Income from gambling includes winnings from the lottery, horse racing, and casinos. It also includes cash and non-cash prizes. Taxpayers must report the fair market value of non-cash prizes like cars and trips to the IRS.
Payer tax form. The payer may issue a Form W-2G, Certain Gambling Winnings, to winning taxpayers based on the type of gambling, the amount they win and other factors. The payer also sends a copy of the form to the IRS. Taxpayers should also get a Form W-2G if the payer withholds income tax from their winnings.
How to report winnings. Taxpayers must report all gambling winnings as income. They normally should report all gambling winnings for the year on their tax return as “Other Income.” This is true even if the taxpayer doesn’t get a Form W-2G.
How to deduct losses. Taxpayers are able to deduct gambling losses on Schedule A, Itemized Deductions, but keep in mind, they can’t deduct gambling losses that are more than their winnings.
Keep gambling receipts. Keep records of gambling wins and losses. This means gambling receipts, statements, and tickets or by using a gambling log or diary.
Check Withholding Now to Avoid Surprises at Tax Time
The federal income tax is a pay-as-you-go system. Employers generally withhold tax from workers’ wages. Taxpayers also often have taxes withheld from certain other income including pensions, bonuses, commissions and gambling winnings.
People who do not pay tax through withholding, like the self-employed, generally pay estimated tax. In addition, those who earn income such as dividends, interest, capital gains, rent, and royalties are usually required to make estimated tax payments.
Each year, because of life events like changes to household income or family size, some people get a larger refund than they expect while others find they owe more tax.
To prevent a tax-time surprise, the IRS offers these tips:
New Job. When starting a new job, an employee must fill out a Form W-4, Employee's Withholding Allowance Certificate. Employers use this form to calculate how much federal income tax to withhold from regular pay, bonuses, commissions and vacation allowances. The IRS Withholding Calculator tool on IRS.gov is easy for taxpayers to use to figure how much tax to withhold to avoid surprises.
Estimated Tax. People who have income not subject to withholding may need to pay estimated tax. Those expecting to owe $1,000 or more than taxes withheld from their wages may also need to make estimated tax payments to avoid penalties. The worksheet in Form 1040-ES, Estimated Tax for Individuals, helps to figure the tax.
Life Events. A change in marital status, the birth of a child or the purchase of a new home can change the amount of taxes a taxpayer owes. The Managing Your Taxes After a Life Event page on IRS.gov provides resources to explain the tax impact of these changes. In most cases, an employee can submit a new Form W–4 to their employer anytime.
Making the Most out of Miscellaneous Deductions
Miscellaneous deductions are tax breaks that generally don’t fit into a particular tax category. They can help reduce taxable income and the amount of taxes owed. For example, some employees can deduct certain work expenses like uniforms as miscellaneous deductions. To do that, they must itemize their deductions instead of taking the standard deduction on their tax return.
Here are several tips from the IRS about miscellaneous deductions:
The Two Percent Limit. Most miscellaneous costs are deductible only if the sum exceeds 2% of the taxpayer’s adjusted gross income (AGI). For example, before being able to deduct certain expenses, a taxpayer with $50,000 in AGI must come up with more than $1,000 in miscellaneous deductions. Expenses may include:
Unreimbursed employee expenses.
Job search costs for a new job in the same line of work.
Work-related travel and transportation.
The cost paid to prepare a tax return. These fees include the cost paid for tax preparation software. They also include any fee paid for e-filing a return.
Deductions Not Subject to the Limit. Some deductions are not subject to the 2% limit. They include:
Certain casualty and theft losses. In most cases, this rule is for damaged or stolen property held for investment. This may include property such as stocks, bonds, and works of art.
Gambling losses up to the total of gambling winnings.
Losses from Ponzi-type investment schemes.
Taxpayers can’t deduct some expenses. For example, personal living or family expenses are not deductible. To claim allowable miscellaneous deductions, taxpayers must use Schedule A, Itemized Deductions. For more about this topic, see Publication 529, Miscellaneous Deductions. Get them on IRS.gov/forms at any time.
Hawaii General Excise Tax:
What are the due dates for filing periodic GET returns?
The due date for filing periodic returns (Monthly, Quarterly and Semi-annually) is the 20th day of the month following the close of the tax period. For example Monthly filer, filing for the month of January, the due date is February 20th, Quarterly filer, filing for the period ending March, the due date is April 20th and a Semi-annual filer, filing for the period ending June, the due date is July 20th.
What is the due date for filing an annual GET return?
The due date is the 20th day of the fourth month following the close of the taxable year. For the calendar year filers, the due date is April 20th of the following year.
How much self-employment tax will I pay?
Self-employment taxes are comprised of two parts: Social Security and Medicare. You will pay 6.2 percent and your employer will pay Social Security taxes of 6.2 percent on the first $128,400 of your covered wages. You each also pay Medicare taxes of 1.45 percent on all your wages - no limit. If you are self-employed, your Social Security tax rate is 12.4 percent and your Medicare tax is 2.9 percent on those same amounts of earnings but you are able to deduct the employer portion. You will pay an additional 0.9% Medicare tax on the amount that your annual income exceeds $200,000 for single filers, $250,000 for married filing jointly, and $125,000 married filing separate.
Hawaii Low Income Credit for Household Renter:
A taxpayer must cross less than $30,000 and have paid at least $1000 in rent at their principal residence in Hawaii during the tax year. This does not include payment of utilities, parking and use of the land only. The property you are renting must be subject to real property taxes. This means that state low-income housing military housing, school dors, and shelters do not qualify for the credit. In order to receive this credit, you must provide the name and GE Tax number of your landlord