2018 Itemized Deduction Changes

Due to the recent tax law changes, many more taxpayers will be taking the standard deduction vs itemizing for 2018. The standard deduction  for 2018 is $24,000 for married filing jointly taxpayers (up from $12,700 in 2017). Significant changes to itemized deductions take effect this year. In order to itemize your deductions, the total of those must exceed the allowed $24,000.

  • Medical Expenses – remain deductible to the extent they exceed 7.5% of AGI (must exceed 10% of AGI beginning in 2019).
  • State & Local Taxes (includes state income tax, real estate tax and personal property tax) – limited to $10,000 for both single and married filing jointly taxpayers.
  • Mortgage Interest – interest on loans up to $750,000 of new acquisition debt.
  • Charitable Contributions – the 50% limitation has been increased to 60% for 2018.
  • Miscellaneous – expenses that exceeded 2% of AGI that were deductible have been eliminated. Employee business expenses, investment advisor and tax prep fees are no longer included as itemized deductions.
  • Phase Out – high income taxpayers were subject to phase out limits of itemized deductions previously but the phase out has been eliminated for 2018 – 2025.

 

For further information regarding tax law changes, please contact Jaclyn Ellis, CPA at jellis@bwtpcpa.com or 314-576-1350.

Is Your Business A Specified Service Business?

Tax deduction

The Tax Cuts and Jobs Act (TCJA) created a new deduction for qualified business income. However, business income that comes from a specified service business is not eligible once taxable income reaches a certain limit.

So, what is considered a specified service business? The IRS definition includes businesses that involve performance of services in the field of health, law, accounting, actuarial science, performance arts, consulting, athletics, financial services, or brokerage services. The term also includes businesses that participate in investing, trading, or dealing in securities. Architecture and engineering businesses are excluded from the definition of specified services.

To help further define these specified service business categories, the IRS issued guidance on what would or would not be included  in the definition. Below is a table which illustrates two of the categories:

Field

Includes

Excludes

Health Physicians, pharmacists, nurses, dentists, veterinarians, physical therapists,  psychologists, other similar professionals providing medical services to patients Health clubs or spas, payment processing, research, testing, and manufacture and/or sales of pharmaceuticals or medical devices
Consulting Providing professional advice and counsel to clients to assist the client in achieving goals and solving problems Sales, providing training and educational courses, consulting services ancillary to sale of goods in a business that isn’t a specified service business if no separate payment for the services

 

There are also additional rules that could make a non-specified service business be treated as one, if it provides services to a specified service business and they are both owned by related parties.

If you have any additional questions, please contact Rebecca Bischoff, CPA at 314.576.1350 or rbischoff@bwtpcpa.com.

Are You Eligible for the New Business Income Deduction?

The Tax Cuts and Jobs Act (TCJA) made significant changes to the tax law, most notably the addition of a new deduction for qualified business income.

Qualified business income includes the ordinary income from sole-proprietorships, single-member LLCs, partnerships, S-corporations, and some rental income. It does not include wages, guaranteed payments, or investment income.

If you do have qualified business income, your eligibility for the deduction depends on the type of business and your personal taxable income. If your taxable income is below $315,000 for married taxpayers filing jointly ($157,500 for other filing statuses), you are eligible for the deduction regardless of your type of business.

If your business is a specified service business, you are not eligible for the deduction if your taxable income is over $415,000 for married taxpayers filing jointly ($207,500 for other filing statuses). A specified service business is a business which involves the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services.

If your business does not fall under the definition of a specified service business, you are eligible for the deduction when your income is over $415,000 (or $207,500), subject to certain limitations. The same is true when your taxable income is in the phase-out range of $315,000 to $415,000 (or $157,500 to $207,500).

If you have any additional questions, please contact Rebecca Bischoff, CPA at 314.576.1350 or rbischoff@bwtpcpa.com.

Deducting Mortgage Interest Under the New Tax Law

The Tax Cuts and Jobs Act (TCJA) made significant changes to the tax law. One of the many changes is the deductibility of home mortgage interest. Before the change, taxpayers could deduct mortgage interest on debt up to $1,000,000, plus an additional $100,00 for home equity debt. The IRS interpreted this to mean interest on debt up to $1.1 million could be deducted.

Under the TCJA, the mortgage interest deduction is now limited to interest on debt up to $750,000, with no additional amount for home equity. While this was originally thought to mean interest on home equity debt could no longer be deducted at all, the IRS has clarified that interest on home equity debt is still deductible. However, the proceeds from the home equity loan must be used to build, buy, or substantially improve the home that secures the loan. In other words, taxpayers cannot take out a home equity loan and use the proceeds for another purpose (i.e. pay off credit card debt), if they want to deduct the interest.

It is also important to note that the new limitations apply only to new acquisition debt. Taxpayers who purchased their homes prior to December 14, 2017 may still use the old limitation of $1,100,000 to deduct their mortgage interest.

If you have any additional questions, please contact Rebecca Bischoff, CPA at 314.576.1350 or rbischoff@bwtpcpa.com.

Required Minimum Distributions to Charity

If you are over age 70 1/2, you may be able to reduce your adjusted gross income (AGI) and receive a tax deduction for donating to your favorite charity. Generally, taking a required minimum distribution (RMD) from your traditional IRA increases your taxable income. However, you can choose to have your RMD send directly to a charity which is not included in your AGI. Even more beneficial, this good deed will qualify as a charitable contribution.

Much has been in the news regarding the new tax law and the increase in the standard deduction for 2018. For a married couple filing a joint return, this amount is $24,000. This means your itemized deductions, which include charitable contributions, would have to exceed $24,000 before you receive any benefits.

For a couple whose RMD for 2018 may be $40,000, they can decide to send any or all of the distribution to a charity. Choosing to donate $25,000 will allow them to itemize their deductions and only increase their AGI by $15,000. The limit on the tax free transfer to charity is $100,000 each year.

For questions or additional information, please contact Jaclyn Ellis, CPA at jellis@bwtpcpa.com of 314-576-1350.