Some of our readers may want to know whether Tesla is going to be taken private at $420/per share in the near future. While this has been all the rage over the past week in the media, some other rather important news was announced last week that will impact many of us. Related to recent tax law changes, the IRS issued additional guidance and proposed regulations on the Section 199A deduction.
By now most of us know that the Tax Cuts and Jobs Act of 2017 (TCJA) went into effect beginning in 2018. As a result, there have been significant changes to some tax laws that many people should know.
While we outlined some tax arbitrage strategies in our May 2018 post, arguably the hottest topic of the Tax Cuts and Jobs Act is the new qualified business income (QBI) deduction under Section 199A. Individuals who own interests in pass-through businesses (a sole proprietorship, partnership, LLC, or S corporation) may be able to deduct up to 20 percent of their qualified business income. Unfortunately, the guidance is still somewhat complicated and the deduction is subject to various rules and limitations. However, here are a few things you need to know:
Maximum deduction: 20% of net business income (after expenses), or 20% of taxable income (less capital gains), whichever is lower
If your taxable income (after deductions) is < $315,000 (married) / $157,500 (single) anyone with a small business can participate
If your taxable income (after deductions) is > $415,000 (married) / $207,500 (single), you cannot participate if your business is engaged in:
4) Appearance and Endorsement Compensation
6) Financial Services (securities, investment management, trading)
9) Performing Arts
If you feel any of this may apply to you (or you're uncertain), you should contact your financial advisor and/or tax preparer. This is because the new 199A tax law dives into other areas that relate to real estate deductions, how to manage multiple businesses, and how to treat other qualified business income just to name a few.
In addition to Section 199A, here are a some other areas of TCJA that we have been discussing with our audience:
Under TCJA, the state & local income tax ("S.A.L.T") is capped at $10,000, which also includes sales and property taxes. If you live in one of the following states, you are likely to be most affected: California, Illinois, New Jersey, New York, and Texas.
Personal Real Estate
Home equity loan interest is no longer deductible unless it was for substantial improvements. This is then treated as "acquisition debt" and still subject to limits. Another change is that the mortgage interest deduction is now limited to the first $750k of debt on your home.
Qualified Tuition Plans
While some may have been hesitant to use 529 plans in their college planning, the Tax Cuts and Jobs Act has made the 529 vehicle much more attractive. It can now be used to pay for tuition at an elementary or secondary private, public or religious school, up to a maximum of $10,000 per year. For anyone paying tuition for their children or grandchildren to attend elementary or secondary schools, you may want to revisit 529 plan options.
The doubling of the standard deduction and other changes will prevent some tax payers from itemizing in 2018 as well as benefiting from this increased limit. However, one way individuals can address this is to bunch two years of charitable contributions into one year. It may also be best to set up donor-advised funds. This will allow a tax payer to claim a charitable tax deduction in the funding year and schedule gifts over the next two years or other multiyear periods. By taking advantage of the deduction when tax payers are at a higher marginal tax rate, they can defer actual payouts from the fund until later.
These are just a few common areas where some tax payers may want to focus on. Over the next few months, we will continue to discuss more topics to help you understand where tax planning opportunities may exist for you.
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