By James O’Rilley, CPA, MST Shareholder – Doeren Mayhew

With over 130 new tax provisions introduced by the Tax Cuts and Jobs Act (TCJA), the tax planning landscape for individuals and businesses alike has changed. Certain strategies that were once tried-and-true will no longer save or defer taxes, while others will stand strong – making revisiting your tax planning strategies a must this year.

To help you optimize your tax position, here are some key tax-planning strategies for both you and your business to consider before the year-end.

Individuals

Rethink Itemized Deductions versus Standard Deductions

The TCJA roughly doubled the standard deduction for individuals. This means that for 2018, joint filers can enjoy a standard deduction of $24,000. However, the new law suspends personal exemption deductions and eliminates or limits many of the itemized deductions. For example, the state and local tax deduction is now capped at $10,000 per year, or $5,000 for a married taxpayer filing separately. In addition, new regulations also temporarily eliminates miscellaneous itemized deductions subject to the 2-percent floor (like tax preparation fees and employee business expenses) and limits the home mortgage interest deduction to home acquisition debt of up to $750,000, or $375,000 for a married taxpayer filing separately.

So, what does this mean for you? If you typically claim the standard deduction, chances are your tax bill will decrease for 2018. Although personal exemption deductions are no longer available, a larger standard deduction, combined with lower tax rates and an increased child tax credit, may result in less tax. Deducting sales tax instead of income tax may also be beneficial if you reside in a state with no, or low, income tax or you purchased a major item, such as a car or a boat.

If you have itemized in the past, this year you may realize the benefits are no longer there. Your itemized deductions might work for state income tax purposes, but not for federal. Depending on the numbers, your estimated quarterly tax payments may need updating or modify your Form W-4 status. Either way, you should do the math to see what makes most sense for your situation.

Use Home Equity Loans for Home Improvements

Before the TCJA, home equity debt interest was deductible up to $100,000 of home equity debt used for any purposes. However, that is not the case any longer. Interest paid on home equity loans and lines of credit is deductible if the funds were used to buy or substantially improve the home that secures the loan. If you used the cash to pay off credit cards or other personal debts, the interest isn’t deductible, even if the payoff occurred prior to 2018. Make sure you are allocating these funds appropriately towards your house to be deductible because they will need to be validated.

Consider Bunching Charitable Donations

If you make charitable tax contributions every year, you may be able to receive a greater tax benefit by bunching deductions. With the elimination and limitation of most major itemized deductions, if you have no mortgage interest or medical deductions, you should consider bunching deductions together. By accelerating your charitable contributions into every other year and taking the standard deduction in the off years, you will likely see a greater overall tax benefit.

Don’t forget, if you are older than 70 ½ years old, you can make direct charitable contributions from your IRA to qualified charitable donations up to $100,000 per year. You can’t claim a deduction for these contributions, but the amounts help lower your taxable income. A direct contribution might be tax-smart if you won’t benefit from the charitable deduction.

Businesses

Maximize the Qualified Business Income Deduction

Individuals who own interests in a sole proprietorship, partnership, LLC, or S corporation may now be able to deduct up to 20 percent of their qualified business income (QBI). However, the deduction is subject to various rules and limitations, such as if the taxable income exceeds the applicable threshold of $157,500 filing for single filers or $315,000 if married filing jointly. The limits fully apply when taxable income exceeds $207,500 and $415,000, respectively.

The QBI deduction isn’t allowed in calculating the owner’s adjusted gross, but it does reduce taxable income. In effect, it’s treated the same as an itemized deduction. It’s important to note, specific service businesses don’t qualify for the deduction. Wage limitations and the service business limitation don’t apply if your taxable income is under the applicable thresholds. In that case, you should qualify for the full 20 percent QBI deduction.

To maximize this deduction, you may be able to adjust your business’s W-2 wages. Also, it may be beneficial to convert your independent contractors to employees where possible, but make sure the benefit of the deduction outweighs the increased payroll tax burden and cost of providing employee benefits.

Leverage Your Depreciation Options

With enhancements to bonus depreciation rules and Section 179 expensing, businesses are now allowed to immediately write-off more of the costs incurred for an expanded list of new or used assets purchased during the tax year.

New regulations for Section 179, now allows for the expensing of up to $1 million or more types of assets, such as equipment, furniture, off-the-shelf computer software and qualified improvement properties placed into service in 2018. Additionally, bonus depreciation has been expanded to 100 percent for qualified property placed into service after Sept. 27, 2017 and before Jan. 1, 2023. And, for the first time, bonus depreciation also applies to used property – as long as it is new to the taxpayer – a break from the past practice of qualifying only “original use” property.

These expanded rules will allow you to write-off more of your operational costs up front and free up more capital to expand and improve future earning potential. It is important to weigh the advantages of taking bonus depreciation versus the Section 179 deduction when determining your tax situation. Remember that claiming bonus depreciation on qualified property is automatic, meaning you need to elect out of bonus depreciation if you do not wish to take the extra deductions. If you miss the election and take regular depreciation, the Internal Revenue Service still calculates as if the bonus depreciation is taken, which may result in leaving money on the table.

Take Advantage of Enhanced Research Credit

Although tax reform did not change the research credit provisions, it did enhance its benefits to taxpayers as a result of lower tax rates, alternative minimum tax (AMT) repeal, modified net operating loss (NOL) limitation and the ability to use the credit to offset certain tax liabilities within limitations.

If you were subject to AMT and unable to use the research credit to offset your income tax liability in the past, you will be able to now. Also, if your business has net operating losses, leveraging the research credit might be a helpful way to offset taxes related to the deduction modification. The credit is complicated to compute and does require the assistance of a CPA, but the tax savings can provide significant value.

Reconsider Like-Kind Exchange

Like-kind exchange, which allows taxpayers to swap an asset for a similar one without triggering a tax obligation, have existed in the tax code for many years. Most commonly used on assets such as real estate, machinery and equipment, like-kind exchange allows taxpayers to continue to reinvest in similar types of property, and not have to pay taxes until cashing in on the property.

Unfortunately, the new law, effective for exchanges completed after Dec. 31, 2017, limits like-kind exchange to only real property held for the productive use in a trade or business (or for investment). Although most real property is like-kind to other real property, (i.e. improved real estate for unimproved real estate, commercial property for residential rental), real property in the United States is not like-kind to real property located outside the United States. Make sure you consider this before entering into a like-kind exchange.

Start Implementing

As you begin your year-end tax planning process, it important to understand that every individual’s and business’s situation is unique. Be sure to consult with your Doeren Mayhew tax advisor on how each of these tax strategies are applicable to your situation.