Tax Planning for 2018 going forward - Q&A, no politics!

Parent Cafe
41

@sherpa - the first think you have to look at is how much pass through income is being claimed.

This is in “PART II—DEDUCTION FOR QUALIFIED BUSINESS INCOME OF PASS-THRU ENTITIES”- https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.xml

This section is very confusing, but basically I am interpreting it to mean that if a taxpayer has income from a self-employment, partnership, or other pass-through business, and overall income is below the “threshold” amount ($157,500 for a single taxpayer, twice that for married joint return) – then it is a deduction of 20% of all of the pass-through income. So if someone’s income was derived entirely from one or more pass-through businesses in an among of $100,000 – then that person would have a $20,000. Keep in mind that “taxable” income (TI) will often be LESS than the net income from self-employment – there are various deductions that reduce AGI, plus the standard or itemized deductions which are subtracted from AGI to arrive at TI.

All of the complicated stuff to reduce that 20% kicks in only for higher taxable income amounts. Just as easy shorthand, I’ll call these taxpayers “rich”. (And yeah, I know that someone who has $158K a year in annual income isn’t exactly a bilionaire … I’m just using “rich” and “poor” in this explanation as a simple shorthand to differenitate between above and below threshold taxpayers.)

As I understand it, the original Senate draft said that for rich people, they could only have the lower of either their 20% deduction or 50% of the wages they pay. So maybe that’s where the word “Jobs” ends up in the bill title – this is saying that rich business owners will have to pay out an amount equivalent to at least 40% of their net profits in wages if they want that full 20% writeoff. (Doesn’t matter if they have 20 low paid employees, or 1 very highly paid employee - but they need to be paying out as twice as much to employees as they are claiming as a deduction).

Then the addition changed the formula and said that as an alternative to paying out so many wages, the rich business owner could get to that point by paying combining a figure equal to 25% of the wages they pay out and 2.5% of the cost basis of qualified (undepreciated) property. So let’s say the business owns property acquired for $20 million. – so 2.5% of that is $500K. And lets say that payroll for that company is $200K - so we add in another $50K (25% of payroll) – and that means that business owner can potentially take a $550K writeoff-- but still no more than 20% of his profits from the business.

Compare that to a business with the same payroll - $200K-- but no capital assets. That other business owner is limited to a $100K writeoff at best (50% of payroll) – so that real estate essentially represents $900K in wages that the real estate-owning company doesn’t have to pay. (Because the employer without capital assets would have to pay $1,100,000 total in wages in order to qualify for the same benefit.)

So this looks like a huge windfall for businesses that have extremely high profits and own high value real estate.

I looked to see if there is some upper limit on how much can be taken as a deduction – and maybe ther is, but I can’t find it. I am confused as to how this plays into AMT.

To add one more confounding factor, the rich business owner, with or without real estate, cannot be any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services. (But the “poor” business owner – with “poor” being temporarily redefined for this explanationas having less than $157K in income, or twice that if married – has no such limit).

I really am not certain that my interpretation of this convoluted and complicated set of provisions is accurate – maybe there are other provisions that limit the overall amounts that can be deducted — but I think you can at least see what generated the uproar. (If I am reading the law wrong, I’m probably not the only one. But tax rules really can be complicated to figure out).

42

IIRC, the W4 form doesn’t tell you how much is going to be withheld. So how does this advice help me?

43

Any idea how irrevocable trusts will be taxed under the new plan?

44

"IIRC, the W4 form doesn’t tell you how much is going to be withheld. So how does this advice help me? "

All the W4 does is tell your employer how to do the math and work the withholding tables. You can do the same thing. All you need to know is your expected income, deductions, and tax rates.

45

I’m waiting on a call back from our county tax office about prepaying 2018 property taxes. They’re meeting this morning to discuss the issue since they’ve had “so many” requests, per the tax collection supervisor. Govt. offices will be closed Mon. & Tues., so it will be tough for them to process the extra payments by year end. They usually go by the postmark when recording the date of payment, so it may work out.

We also opened a charitable trust account with Fidelity this week. They made it quick and easy to do online. We get the tax deduction this year, then donations are made to our designated charities, which can be changed, over the next 10 years or however long the assets last. We funded the account with stock. I was initially opposed to the account, preferring to make a large one time donation and be done with it, but dh pointed out several benefits to this approach. For one thing, he’s “required” to make a United Way donation each year (not legally, but under pressure from exec. mgt.) So the account will pay out that contribution each year until dh retires. Someone who donates routinely to their church or any other organization could do the same. (Please know this is my understanding of the account benefits and not tax or legal advice.)

46

@calmom - Thanks. What about your investment income received from a pass through entity. Suppose, for example, that an LLC’s members receive $50,000 in interest income and $40,000 net rental income. Assuming the taxpayers’ AGI is beneath the threshold, would the 20% exclusion apply to both the interest and rental income?

47

I see the bill was signed today instead of waiting for the new year. So sequestration cuts will take effect in 2018. Dies anyone know how this actually occurs? I know, for example, Medicare has cuts – exactly what gets cut and how is it implemented? What else is affected by sequestration?

48

Article in yesterday’s Times about bunching charitable donations.

https://www.nytimes.com/2017/12/20/your-money/tax-plan-donations-charities.html?rref=collection%2Fsectioncollection%2Fyour-money&action=click&contentCollection=your-money&region=stream&module=stream_unit&version=latest&contentPlacement=4&pgtype=sectionfront

49

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3089423 has some ideas of what people and businesses may be able to do.

50

Setting up a donor-advised fund, as recommended in emilybee’s linked article, is a great way to get your charitable deduction now, and dole out your charitable donations over time.

You set up the donor-advised fund. You put your money in, and take your tax deduction. Now the money is no longer yours, but you still control where it goes. At any point, you can direct the fund to make a specified donation to a specified 501©3 charity. You can put more money in at any time, getting the tax deduction when you put the money in, and you can direct donations at any time to any 501©3 charity.

You can donate anonymously, or under the name of your fund, or under your own name.

Check the fine print about lower limits on donations to make sure it works for you. Also be aware that you are forbidden from getting anything of value for a donation from your fund: no gala tickets, no tote bags.

51

Also there’s a good loophole about donating appreciated stocks to a donor-advised fund: you don’t take the capital gains hit, but you get to deduct the full appreciated value.

52

For Seattle/King County residents trying to call to prepay the 2018 tax - sorry, you are SOL.

https://www.seattletimes.com/business/real-estate/king-county-dont-prepay-your-property-taxes-now-to-avoid-tax-hit-next-year/

53

Our township sent a memo to residents that they can’t prepay. At any rate, I don’t know if it make much difference if you have to pay AMT.

54

This was just posted on my town’s website:

“The Receiver of Taxes is able to accept payments for 2018 property taxes beginning December 29, 2017 from 8:30 a.m. - 4:30 p.m. If your intention is to pay prior to the New Year, ONLY in office payments will be accepted. We will provide the tax amount owed. We can ONLY accept the total tax bill owed. We cannot accept an estimated amount, partial payment or an over-payment. We accept only Cash or Check (made out to Receiver of Taxes).

Please Note The Town of Bethlehem’s authorization to accept these payments is premised on the expectation that Albany County will provide the Town of Bethlehem with the Tax Warrant dated on December 29, 2017.

Please be advised that the authority for the town to collect 2018 property taxes on December 29, 2017 does not address the deductibility of such prepaid taxes for income tax purposes, as that issue is under the purview of the Internal Revenue Service (IRS).”

55

Should people give tips to taxing authorities who are working to accommodate early payments of taxes? :wink:

56

OK…so I know what was deducted last year…and how close that came to covering our tax bill in April. I know what our OLD W4 looked like.

Since there currently is NOT a new tax table…with the incomes, etc. I really can’t yet calculate myself how much extra I need to have deducted from each pay.

We went back and forth for years finding the right balance…and TBH, 8m less than thrilled about a shot in the dark now…with the exemptions gone.

I’m guessing my $1800 a year extra income will likely go into the tax deductions.

Lovely.

57

I really think there will be some guidance in January as to how they will determine the paycheck tax payments. We always end up owing because we don’t send in enough anyways, so we’ll just fire a shot in the dark and hope we hit the side of the barn.

58

We’re going to try to pay out our state taxes now. If the check isn’t cashed until January, how will we prove that it was paid in 2017?

59

I’ve worked on major regulation change projects like this. I think you are optimistic to think we will get accurate/useful guidance in January.

60

I don’t see any benefit in making my federal quarterly estimated tax payment early (in 2017). Is there any reason I should?