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Individual income taxes

2018 Tax Changes

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The Tax Cuts and Jobs Act (TCJA) raises many questions for taxpayers looking to plan for the coming year. Below are answers to some of them.

Tax Savings

Can I take advantage of the new deduction for pass-through business income?

The new rules for owners of pass-through entities — partnerships, limited liability companies, S corporations, and sole proprietorships — allow them to deduct 20% of their business pass-through income. The 20% deduction is available to owners of almost any type of trade or business whose taxable income does not exceed $315,000 (joint return) or $157,500 (other returns). Above those amounts, the deduction is subject to certain limitations based on business assets and wages. Different deduction restrictions apply to individuals in specified service businesses (e.g., law, medicine, and accounting).

Can I still deduct mortgage interest and real estate taxes paid on a second home?

Yes, but the new rules limit these deductions. The deduction for total mortgage interest is limited to the amount paid on underlying debt of up to $750,000 ($375,000 for married individuals filing separately). Previously, the limit was $1 million. Note that the new restriction will not apply to taxpayers with home acquisition debt incurred on or before December 15, 2017. Additionally, the deduction for interest on home equity loans (new and existing) is suspended and will not be available for tax years 2018-2025.

Note that the law also establishes a $10,000 limit on the combined total deduction for state and local income (or sales) taxes, real estate taxes, and personal property taxes. As a result, your ability to deduct real estate taxes may be limited.

Are there any changes to capital gains rates and rules that I should know about?

The rules concerning how capital gains are determined and taxed remain essentially unchanged. But since short-term gains (for assets held one year or less) are taxed as ordinary income, they will be taxed at the new ordinary income rates and brackets. Net long-term gains will still be taxed at rates of 0%, 15%, or 20%, depending on your taxable income. And the 3.8% net investment income tax that applies to certain high earners will still apply for both types of capital gains.

Can I still deduct my student loan interest?

Yes. Although some earlier versions of the tax bill disallowed the deduction, the final law left it intact. That means that student loan borrowers will still be able to deduct up to $2,500 of the interest they paid during the year on a qualified student loan. The deduction is gradually reduced and eventually eliminated when modified adjusted gross income reaches $80,000 for those whose filing status is single or head of household, and over $165,000 for those filing a joint return.

I have a large family and formerly got to take an exemption for each member. Is there anything in the new law that compensates for the loss of these exemptions?

The new law suspends exemptions for you, your spouse, and dependents. In 2017, each full exemption translated into a $4,050 deduction from taxable income which, for large families, added up. Compensating for this loss, the new law almost doubles the standard deduction to $12,000 for single filers and $24,000 for joint filers. Additionally, the child tax credit is doubled to $2,000 per child, and the income levels at which the credit phases out are significantly increased. Depending on your situation, these new provisions could potentially offset the suspension of personal exemptions.

I have been gifting friends and relatives $14,000 per year to reduce my taxable estate. Can I still do this?

Yes, you may still make an annual gift of up to $15,000 in 2018 (increased from $14,000 in 2017) to as many people as you want without triggering gift tax reporting or using any of your federal estate and gift tax exemption. But TCJA also doubles the exemption to an estimated $11.2 million ($22.4 million for married couples) in 2018. So anyone who anticipates having a taxable estate lower than these thresholds may be able to gift above the annual $15,000 per-recipient limit and ultimately not incur any federal estate or gift tax. Note, however, that the higher exemption amount and many of TCJA’s other changes to personal taxes are scheduled to expire after 2025, unless Congress acts to extend them.

NJ Tax Amnesty Program -Running Now!

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The Clock is Ticking…NJ Tax Amnesty Program Runs Through Jan. 15, 2019  

Gift from State of NJ

Businesses and individuals with unpaid NJ tax liabilities may be able to get a break on penalties under the Amnesty Program  which is in effect from November 15, 2018 through  January 15, 2019.  The measure applies to all state taxes including  gross income,   corporate business tax and sales and use tax.  However, it does not apply to unemployment  type taxes administered by the Department of Labor.   

 Why should I do this now? Because under this limited-time offer the Division of Taxation will forgive all penalties, and one-half of the accrued interest due at Nov. 1, 2018. 

 Here are some of the details 

  • NJ Amnesty will provide relief for 2008 – 2016 delinquent individual or business tax return filers. 
  • Requests for amnesty must be filed electronically 
  • The Division of Taxation recently mailed a letter to all taxpayers who are known to have amnesty-eligible deficient and/or delinquent accounts 
  • If you didn’t receive a letter and you want to participate, you will need to register or self-report through the Non-Outreach Portal 
  • Federal tax liabilities are not included under the program 

 Is there a hitch? Sort of. The bad news is that if a taxpayer is eligible for amnesty and does not take advantage of it, an additional 5% penalty will be added to the already imposed penalties and interest on the original tax liability.   

To see if this program might be right for you, please contact our Tax Manager, Steven Citron.   

 

 

Tax Planning Tips for the new 3.8% Net Investment Income Surtax

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With a new 3.8% tax on “unearned” income kicking in in 2013, it’s very difficult to limit your tax to just “ordinary” income tax. If your income is earned, you pay 15.3% Self-Employment (Social Security) tax. If your income is un-earned, you now have the new 3.8% Net Investment Income (NII) tax to pay.

Profits from an S corporation are just about the only income that escapes Self-Employment tax as well as the 3.8% NII tax. The S corporation is now an even more attractive form of entity to minimize taxes for owners of certain businesses, depending upon the facts and circumstances. After paying reasonable compensation to the owners, the remainder of the profits flow through to owner’s personal tax returns subject only to income tax, not Self-Employment or NII tax.

 There are several areas you can address to possibly reduce your overall tax. Is your “Reasonable Compensation” unreasonably high? If it is, you may be paying Social Security tax on that compensation unnecessarily. Even if you are over the Social Security wage limit ($113,700 in 2013) you still continue to pay the Medicare tax of 2.9% coupled with the new 0.9% Medicare surcharge for high-wage earnings totaling 3.8%. Find out what is the standard of executive compensation for companies of your size, industry niche and profitability. [Read more…] about Tax Planning Tips for the new 3.8% Net Investment Income Surtax

It’s Official: IRS Allows Gay Couples to File Joint Tax Returns

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As predicted after the  Supreme Court’s ruling on the Defense of Marriage Act (DOMA) in June 2013, the IRS has announced that the government will be issuing regulations that will allow same-sex couples to file joint tax returns.  This will pertain only to the 13 states that recognize same-sex marriage (New Jersey isn’t one of them). They will also be allowed to move freely throughout the country and their filing status will not change.

Tax Tips for Families with Special Needs Children

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Parents of a special needs child face many challenges, not the least of which is the high costs of providing care. Unfortunately, many are unaware that they may be eligible for several tax benefits that can offset some of those expenses. This can result in hundreds, if not thousands of dollars in tax savings. The following are a few key benefits:

  • School Expenses – Ordinarily costs related to providing for a child’s education are not deductible. Not so, however, with special needs children. The unreimbursed cost of attending a “special school” for a neurologically or physically handicapped individual is deductible as a medical expense.  The only stipulation is that the principal reason for enrolling in that school must be to alleviate the handicap through the school’s resources. The deductible expenses associated with the special school include amounts paid for lodging, meals, transportation, as well as the cost of ordinary education that is incidental to the special services the school provides.

 

  • Conferences and Seminars- Parents and guardians of special needs children often attend medical conferences and seminars to educate themselves about their child’s disability. Provided the conference deals specifically with the child’s medical condition, the cost of the conference is deductible as a medical expense.

 

  • Earned Income Tax Credit- The earned income tax credit, a credit designed to encourage the economically disadvantaged to work. It can amount to as much as $6,044 in 2013. The amount of this credit rises incrementally with the number of children one claims. Normally there is an age limit to qualify for this credit, but not for severely disabled children. They can be claimed as “qualified children” even into adulthood.

Pamela Avraham Quoted in Sunday Star Ledger

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The Newark Star Ledger recently turned to Pamela Avraham of Urbach and Avraham, CPAs for her take on the effects of the 2012 FUTA increase for NJ employers . This FUTA increase is now payable in Jan. 2013 and came as a surprise to many employers. Pamela was quoted in the January 20, 2013 edition, describing the challenge that many staffing agencies face due to the increase. Urbach & Avraham is especially attuned to concerns regarding the FUTA increase, as we service many staffing agencies and small businesses. These firms are going to be impacted more significantly, as they tend to have a larger number of low wage employees.