Many businesses and individuals alike still have questions regarding the new federal tax bill, and what it means for filing your taxes from 2018 and beyond. At Robert Hall, our team of enrolled agents are working overtime to address your many concerns, and make sure you’re prepared for the new regulations.
To help keep you informed of some of the broad changes and the situations where professional help is advisable, we interviewed our staff of tax professionals, to glean further insight. Here are some of their valuable recommendations:
What are the top things individual tax payers should do to prepare for the changes from the tax bill?
Robert Hall Team: Make sure to max-out deferred compensation (i.e. retirement savings plans), to potentially drop yourself into lower income brackets. The maximum employee deferral for 2018 is $18,500 per person. There is also a maximum catch-up contribution of $6,000, which is only available to participants age 50 and over. There was also a $1,000 increase to the total contribution limit for 2018, which now comes to $55,000. The max deferred compensation includes employee contributions, matching contributions, bonuses and other deferred compensation. If you are over age 50, you can also add your catch-up contributions to this number, bringing the max total deferred contribution limit to $61,000 for 2018.
And most importantly, meet with your tax advisor to plan for how the new federal regulations specifically impact you and your current and future financial goals.
What are some tips on how corporate/business tax payers should prepare for the changes from the tax bill?
RH: For S corporations and flow-through entities, make sure your individual taxable income is under $157,500 if filing single, or under $315,000 if married filing jointly, in order to receive the 20% net revenue credit. Also, make sure you qualify for it before deciding to not pay the tax.
The income thresholds are based on each business owner’s income level, not on the total taxable income of the business. If the owner’s taxable income is below this threshold, then the calculation is a flat 20% deduction of the pass-through income. If the owner’s taxable income exceeds the threshold, the qualified business deduction is calculated as the lesser of 20% of its business income, or 50% of the total wages paid by the business to its employees.
From your perspective, what are the biggest/most significant tax changes?
RH: For us, the most significant differences are: changes to the individual and corporate tax rates; changes to the standard deduction (for single filers and married filing joint couples); changes to the mortgage interest deduction (see below); and changes to the Alternative Minimum Tax (AMT).
Under the new law, the number of taxpayers affected by the AMT is estimated to drop by 96%, so only about 200,000 Americans are expected to owe the AMT in 2018, compared to the 5.25 million who would have been affected under the old tax law. This is changing due to higher exemption and phaseout levels, as well as fewer tax breaks under the regular code.
Does the new tax bill make it harder or easier to file taxes? Is an Enrolled Agent (EA) needed even more now, or less?
RH: It’s not easier or harder, as we’re still following a set of rules; it’s just a new set of rules to adhere to. As for needing an Enrolled Agent, unless the taxpayer is trained and up to date with what’s changed, an EA is highly recommended.
Will California/L.A. residents be faced with a different tax impact than other places in the country?
RH: Yes, State of California income tax is no longer tax-deductible. California, which has high real estate prices in many places, is also expected to be impacted to the changes in mortgage interest and property tax deductions.
How will the real estate/mortgage-related changes impact Californians specifically?
RH: The impact won’t be as bad as everything thinks. At $140,000, most people are normally subject to alternative minimum tax (AMT), and AMT caps the amount of property tax and state income tax that one can deduct, anyway. If they were on line 45, page 2 of their 1040, and were subject to AMT, they could back out pretty much all of their property tax and their state of California income tax. If AMT was high, it wouldn’t affect their federal tax return.
However, since the California income tax is not deductible, but their property taxes are, anyone who owns a property that’s over a million dollars, their primary residence property taxes will be capped. And if they were subject to AMT, it wasn’t even fully deductible for them in the first place.
Do you believe buying real estate in places like L.A. and NY has become less attractive now?
RH: No, since most people who live in states like California don’t move there for the real estate; but rather, because it’s more desirable. California, is after all the sunny state!
What are the popular misconceptions about the new tax bill?
RH: The biggest ones are that property taxes and mortgage interest aren’t tax deductible anymore. When it comes to mortgage interest, if you buy a home between now and 2026, you can deduct the interest on up to $750,000 in mortgage debt used to purchase or improve it as an itemized deduction. This limit is applicable to home purchases made after December 14, 2017. Anyone who took out a mortgage before that date will still be able to deduct interest on up to $1 million in debt (the old cap), for that home, even if they refinance.
As for property taxes, under the old law all property taxes paid to state and local governments could be claimed as an itemized deduction, provided you didn’t pay the AMT. You could also deduct state and local income or sales taxes. The new tax law, however, combines these “SALT” taxes into one and limits the total for the deduction to $10,000, for both individuals and married couples.
What do you think the net impact of the new legislation will be?
RH: Without focusing on just California residents, and speaking nationwide, most Americans will benefit from the changes, and will pay less in tax. For individuals, the biggest savings comes from lower tax rates, a doubling of the standard deduction, the phaseout of the AMT and a bigger child tax credit. But, it’s important to note that these come at the price of personal exemptions and some popular deductions.
Do you have any other advice for clients?
RH: Speak to your tax consultant right away. With all the recent changes, it’s critical to discuss your situation with someone who will make sure you’re following the new code, and possibly even benefiting from it. Our team at Robert Hall can help!
Don’t let the new tax laws catch you by surprise next year! Call us today at (818) 242-4888 or schedule your free 30-minute consult now. Robert Hall & Associates is a leading tax preparer and consultant serving Glendale, Burbank, Pasadena and the Greater Los Angeles area. Our team of enrolled agents can give you the crucial professional advantage you need to benefit from the federal government’s recent tax overhaul.
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