01 Apr CPA CLIENT BULLETIN SELECT April 2018
Special report on tax planning under the Tax Cut and Jobs Act of 2017
Patience is prudent
Know your true tax rate
Rethinking retirement contributions
Regard Roth conversions carefully
Are state and local taxes reasons for relocation?
Positive prognosis for medical deductions
Home equity hassle
New tax deduction for pass-through entities
Factoid : Up to standard
IRS data for 2015 returns show that 69.2% of taxpayers took the standard deduction, 29.5% took itemized deductions, and the others had income too low for any deductions.
Did you know ?
In 1913, when the 16th Amendment instituted the federal income tax, the form and directions fit on four pages. The top tax rate was 7%. Since then, the peak rate has been as high as 94% in 1944 and as low as 28% from 1988–1990.
Source: Bradford Tax Institute
Article: Patience is prudent
The Tax Cuts and Jobs Act (TCJA) of 2017, passed at year end, has been called the most extensive tax legislation in more than 30 years. It’s certainly far reaching, covering individual income taxes, business income taxes, and estate taxes. The new law has many tax saving opportunities as well as possible pitfalls.
Trying to grasp everything in the TCJA can be overwhelming. Therefore, it’s best not to panic; don’t rush into tax motivated actions just because of gossip or opinions you hear. There’s no need to act rashly this early in the year.
That said, it is important to understand what’s in the TCJA and what it might mean to you. Consider this issue of CPA Client Bulletin as a place to start. You’ll find explanations of some key portions of the law as well as tax planning ideas.
One issue is not sufficient to cover the new law, so we’ll keep you posted throughout the year as uncertainties are addressed and new strategies emerge. Of course, if you have questions about the TCJA and possible planning tactics, please call our office for a personalized response.
Article: Know your true tax rate
It has been widely reported that the TCJA lowers federal income tax rates for many people. The highest tax rate, for example, has fallen from 39.6% to 37%. Many people who are in lower brackets also stand to benefit.
Example 1: Alice Young had $100,000 of taxable income in 2017. As a single filer, Alice was in the 28% tax bracket. If Alice has that same $100,000 in taxable income in 2018, she will be in a 24% bracket. Indeed, Alice could add as much as $57,500 in taxable income this year and maintain her lower 24% tax rate.
Not for everyone
However, there are some quirks in the new tax rates. Some people actually face higher rates.
Example 2: Brad Walker had $220,000 of taxable income in 2017, which put him in a 33% tax bracket. With the same income in 2018, Brad will face a 35% tax rate.
In addition, the federal tax rates such as 24% or 35% are just one factor in determining the true rate you’ll pay by adding taxable income, or the true amount you’ll save with a tax deduction. Many people owe state or even local income tax, which might be fully or partially deductible on a federal tax return or not deductible at all. Various other provisions of the tax code will also impact your marginal tax rate—the percent you’ll owe or save by adding or reducing taxable income.
Knowing your true tax rate can help you make knowledgeable financial decisions, some of which are explained elsewhere in this issue. By starting with your 2017 tax return and incorporating your expectations as well as your plans for 2018, our office can help you determine the value of tax related actions.
Article: Rethinking retirement contributions
The TCJA generally lowered federal income tax rates, with some exceptions. Among the ways in which lower rates impact tax planning, they make unmatched contributions to traditional employer retirement plans less attractive.
Example 1: Chet Taylor has around $100,000 in taxable income a year. Chet contributed $12,000 to his company’s traditional 401(k) in 2017, reducing his taxable income. He was in the 28% tax bracket last year, so his federal tax savings were $3,360 (28% of $12,000). An identical contribution this year will save Chet only $2,880, because the same income would put him in a lower 24% bracket.
Not everyone will be in this situation.
Example 2: Denise Sawyer has around $200,000 taxable income a year. Denise contributed $12,000 to her company’s traditional 401(k) in 2017, reducing her taxable income. She was in the 33% tax bracket last year, so her federal tax savings were $3,960 (33% of $12,000). An identical contribution this year will save her $4,200 because the same income would put her in a higher 35% bracket.
Considering the changes in tax rates, participants in employer sponsored retirement plans should review their contribution plans. If your company offers a match, be sure to contribute at least enough to get the full amount. Otherwise, you’re giving up a portion of your compensation package.
Beyond that level, decide whether you wish to make unmatched tax-deferred contributions to your traditional 401(k) or similar plans. The value here is tax deferral and the ability to compound potential investment earnings without paying current income tax. Deferring tax at, say, 12%, 22%, or 24% in 2018 will be less desirable than similar deferrals were last year, when tax rates were 15%, 25%, or 28%.