Estimated income taxes in 2018

The most common question that I have been asked in the past month is,

“What should I do with my estimated income tax payments for 2018 in light of the new income tax laws?”

The answer that I usually give is,

“Relax and do nothing differently than in 2017. For most people, the new income tax laws gave you some benefits and took away some benefits and in the end, there will be little noticeable change in your income tax return for 2018.”

However, there are a few circumstances when you may want to act to prevent a problem at the end of 2018:

  1. You had a large refund or amount due for 2017. Then I would suggest that you change your income tax deductions or estimated income tax payments accordingly. You can increase or decrease your deductions at work or you can increase or decrease your quarterly remittances.
  2. You anticipate a significant change in your income or deductions for 2018. By this I mean that your income or deductions will change your taxable income by more than 20%. As soon as you become aware of this change, I recommend that you contact your financial adviser and income tax accountant and determine what changes you should make to your estimated income tax payments for 2018.

If you don’t have one of these two situations, I would strongly recommend that your 2018 estimated income tax payments be the same as 2017. That is you should end up paying the same amount in 2018 as you paid for 2017.

Be sure to make all your quarterly remittances on time. As difficult as this may be, it is far less painful than having a big tax bill when you file your income tax return.

Advertisements

Is Clothing Deductible?

One of the most common questions I receive is,

“Is my work clothing deductible? I have to dress up for my job.”

Tuxedo
NOT Deductible

The short answer is NO! When you go to work, you can’t go naked, you have to be wearing clothes so they are not a deduction for income tax purposes. Even if you have to dress up in business professional dress, it is still not deductible.

However, uniforms and work clothes can be deductible in certain circumstances.

  1. If you have to wear protective clothing so that you or your regular clothes do not get dirty or damaged, then the protective clothing is a deduction. For example, a mechanic wears coveralls, a lab technician wears a lab coat or a race car driver wears protective clothing. These are all examples of protective clothing that must be warn to protect the individual from ruining his regular clothing.
  2. Lab Tech
    Deductible

    If you wear a uniform or a piece of clothing with your employer’s name and/or logo on it, it is deductible. A waitress, a delivery driver or a repair person who wears a specific uniform while working would be able to deduct that cost.

  3. If you wear work clothes that are not protective or are not uniforms, it is unlikely that they are deductible. However, if they meet ALL three of these requirements, you are permitted a deduction:
    1. must be required as a condition of employment and
    2. must NOT be adaptable to everyday usage and
    3. must NOT be worn for personal use
Elf Costume
Deductible

For example, the IRS has denied musicians who wore flashy clothes on stage, a restaurant host who had to wear a tuxedo to work, a waiter who had to dress in “all black” and a public speaker who had to dress up in a business suit when giving a speech. They all claimed that they had to wear these clothes for work but in each case the IRS said that the clothing could also be worn for personal use, so the deduction was denied.

Income Tax Refunds

I know that you all dream of a big income tax refund and what you can do with it. It could be spent on a weekend away or a down payment on a new car or an afternoon at Nordstrom (well maybe women think this).

But here is another and maybe better idea. You can have part or all of your refund deposited directly into your IRA account by the IRS. This means that you can save for your retirement but it would be relatively pain free.

Of course, you will fall under the normal limits of $5,500 per person with some other restrictions. However, you won’t have to save the money to fund your IRA.

I can’t tell you how important it is to save for retirement. Most Americans are no longer on Defined Benefit Pension Plans but on the Defined Contribution Pension Plans. This requires two things that many people are not good at: saving and investing wisely. You (not your company) must save enough and invest it to grow into enough to live on for probably 20 or 30 years after you retire.

A happy retirement is a dream that most of us share but few of us actually get to enjoy. No matter how old you are today, now is the best time to save and invest for retirement.

If you want help, see my book “ACHIEVING FINANCIAL FREEDOM” which is available on Amazon.

AFF Cover

Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act passed both houses of Congress on December 20, 2017. This is the most sweeping change to the income tax laws since 1986. The tax bill affects taxpayers from all levels from low income to high income earners. The provisions of the new tax law will not apply to income tax year 2017. Strangely, all the changes affecting individuals expire after 2025.

The main area of change for individuals is to greatly reduce the use of Schedule A Itemized Deductions on individual income tax returns. Currently about 30% of taxpayers use Schedule A but that will probably be reduced to under 10% of all taxpayers.

 

 

Tax Cuts and Jobs Act

   

Old

New

Business

Corporate tax rates are 15%, 25%, 34%, 39%, 34%, 35%, 38%, 35% Corporate tax rate is a maximum rate of 21%
Alternative minimum tax Eliminated
Depreciation rules Allows businesses to expense the cost of new equipment used in the business
Interest expense Limits interest expense deduction to 30% of income
Research & Development credit No change until 2022 when they will have to be amortized over 5 years
Companies owe US taxes on all income earned in any country Companies will not be taxed on foreign earnings. However, they will be required to pay a tax on previous earnings held offshore of 15.5% on cash assets and 8% on non-cash assets
  New deduction of 20% of “qualified business income” from partnership, S-corporation or sole proprietorship and REITs

 

 

Individuals

Current tax rates:

10%, 15%, 25%, 28%, 33%, 35%, 39.6%

New Tax Rates:

10%, 12%, 22%, 24%, 32%, 35%, 37%

Current personal exemption is $4,050 Eliminated
Standard Deduction is $6,300 for Single and $12,600 for Married Filing Jointly Standard Deduction is $12,000 for Single and $24,000 for Married Filing Jointly
Tuition waivers for grad students are tax free No change
Child Tax Credit Child Tax Credit raised to $2,000 of which $1,400 is refundable
Child Tax Credit for Single up to $75,000 and Married Filing Jointly up to $110,000 Child Tax Credit for Single up to $200,000 and Married Filing Jointly up to $400,000
Section 529 Section 529 distributions limited to $10,000 per student per year. The funds can be used for K-12 as well as college
  New nonrefundable credit of $500 for qualifying dependents who are not qualifying children

 

Deduction for student loan interest up to $2,500 No change
Moving expenses Eliminated except for active duty military
Educators deduction is $250 No change
Electric vehicle credit is $7,500 No change but limited to first 200,000 cars sold by each manufacturer
Gain on sale of principal residence is $250,000 for Single and $500,000 for Married Filing Jointly No change
Long-term capital gains tax rates are 0%, 15% and 20% No change
Health Insurance Mandate that everyone must have pay for a minimum level of health care Eliminated after 2018
Estate tax rate is 40% No change
Estate tax exemption is $5.5 million per person Doubles the estate tax exemption from $5.5 million per person to $11 million per person
Alimony is deductible by payor and taxable to payee For individuals who get divorced after 2018, alimony is not deductible by payor or included in income of payee
Alternative Minimum Tax starts at $54,300 for Single and $84,500 for Married Filing Jointly Alternative Minimum Tax starts at $70,300 for Single and $109,400 for Married Filing Jointly

Schedule A

Medical deductions above 10% of AGI Medical deductions above 7.5% of AGI
State income tax deduction These deductions are limited to $10,000 total for either property taxes and income taxes or property taxes and sales taxes per tax return (same for Single or Married Filing Jointly)
State and local sales tax deduction
Property tax deduction
Mortgage interest deduction limited to interest on first $1,000,000 Mortgage interest deduction limited to interest on first $750,000 on new purchases after December 16, 2017. Includes first and second residences
Interest on HELOC allowed up to $100,000 HELOC interest no longer deductible
Charitable deductions limited to 50% of income Charitable deductions limited to 60% of income.
Casualty and theft losses Limited to presidentialy declared disaster
Job expenses and miscellaneous deductions Eliminates job expenses and miscellaneous deductions
Tax preparation fee deductible Eliminated

 

 

2018 Income Tax Brackets

Tax Rate Single Married Filing Jointly
10% tax bracket $0-$9,525 $0-$19,050
12% tax bracket $9,526-$38,700 $19,051-$77,400
22% tax bracket $38,701-$82,500 $77,401-$165,000
24% tax bracket $82,501-$157,500 $165,001-$315,000
32% tax bracket $157,501-$200,000 $315,001-$400,000
35% tax bracket $200,001-$500,000 $400,001-$600,000
37% tax bracket $500,000- $600,001-

Seminar – Income Tax Issues for Small Business

Are you a small business owner?

Do income taxes and the big bad IRS scare you?

We have a solution!

Income Tax Issues for Small Business: Seminar with Bruce Raine

November 30th, Thursday 12:00pm – 1:30pm

VW Tax Picture

Victory Workspace, 100 School Street, Danville

Topics included in seminar:

  • Business use of home
  • Business use of vehicle
  • Deferring, avoiding and evading income taxes
  • Pension plans
  • Depreciation
  • Meals deduction

Contact Bruce Raine to register for this event. Space is limited: Bruce@IncomeTaxServicesofSanRamon.com or (925) 336-4518

Section 179 Depreciation

If you are not familiar with Section 179 Depreciation, then you are in for a nice surprise. Section 179 is an incentive program designed to encourage Cooling, System, Air Conditionersmall businesses to purchase tangible, personal property (no real estate) to make them more profitable in the coming years. The underlying reason for Section 179 is to stimulate economic growth in the US economy.

 

Basically, Section 179 Depreciation means that you can deduct a lot more depreciation in the first year of an asset’s life. This only applies to assets placed in productive use and not assets that are held for investment. Vehicles are subject to slightly different rules.

Here is what it looks like for 2017:

100% Depreciation on assets up to $500,000

This means that under Section 179, the first $500,000 in new or used assets that you purchase and place in service before December 31, 2017 can be depreciated 100% in 2017.

Normal Depreciation on assets between $500,000 – $2,000,000

If you spend more than $500,000 but less than $2,000,000, you can claim normal depreciation on these assets using Modified Accelerated Cast Recovery System (MACRS) rules.

Bonus Depreciation on assets between $500,000 – $2,000,000

If you spend more than $500,000 but less than $2,000,000, you can claim Bonus Depreciation of 50% in 2017 but only for new assets. Used assets are subject to Section 179 but not Bonus Depreciation.

Phaseout of Section 179 between $2,000,000 – $2,500,000

If you purchase more than $2,000,000 in 2017, then you lose the Section 179 deduction at the rate of $1 for every $1 above $2,000,000. That means that the Section 179 deduction is lost once you reach $2,500,000.

Recapture of Depreciation

You must remember that if you sell an asset you must recognize any recaptured depreciation. Let’s say that you purchase an asset with a five-year life but expense it all in year one under Section 179 Depreciation rules. Then in year three, you sell the asset. Whatever the proceeds were in year three would be recaptured depreciation since the tax basis of the asset is zero since you took the Section 179 in the year that you purchased the asset.

While many people find depreciation rules rather difficult to understand, the rules around the Section 179 Depreciation are straight forward.

Home Office Expenses and S Corporations

Do you use a portion of your home as a Home Office where you perform some of your House, Home, Residence, Residentialwork? If you answered “Yes” to this question, then you may be entitled to a deduction on your income tax return.

To qualify, the space that you use for business must be “regularly and exclusively” used for business. If this is the case, then you can get a deduction for a Home Office.

There are two methods which can be used:

  • Simplified Method – you measure the square footage of the space that you use and multiply that number by $5 per square foot. This is obviously the easy way of doing it but generally yields a smaller deduction.
  • Actual Expense method – you measure the square footage of the space that you use and divide that by the square footage of the entire living space in your house (not your garage just living space). Then using Form 8829 Expenses for Business Use of Your Home, you can calculate the deduction.

 

The next question for a Home Office is, “What is the nature of your relationship to the business?”

  • Employee of a business that you don’t own – use Form 2106
  • Business owner who is a sole proprietorship – use Schedule C
  • Real estate investor – use Schedule E
  • Partner in a partnership – use Schedule E
  • Employee of your own S Corporation – use monthly reimbursement

 

Notice that if you own a S Corporation, then you can get a tax-free reimbursement and your S Corporation gets a deduction. That means that you get reimbursed for a portion of your home expenses that you would spend under normal conditions. These include mortgage interest, property taxes, insurance, utilities and repairs and maintenance. You already get a deduction for mortgage interest and property taxes on Schedule A. If you use a portion for the Home Office deduction, then the amount that you can claim on Schedule A is reduced by the amount claimed for the Home Office deduction.

 

To use this method, you should set up an Accountable Reimbursement Plan. This is a company policy stating what will be reimbursed and any restrictions. This is a simple form and calculation used to account to your employer for your expenses.