5 Steps to Gain Full Benefit from the New Tax Law

Tax filing is just around the corner.  The impact of the biggest overhaul of the U.S. tax code in three decades has arrived and it will spread far and wide.  The Tax Cuts and Jobs Act became law in December 2017.  

What’s at stake?  Individual income taxes are the federal government’s single biggest revenue source. In fiscal year 2017, which ended Sept. 30, the individual income tax is expected to bring in roughly $1.7 trillion, or 50% of all federal revenues, according to the Congressional Budget Office.  The Federal government needs you!

Who pays taxes?  The US individual income tax system is progressive — thus those with higher incomes pay at higher rates.

• In 2016, the top 1%, having an adjusted annual gross income of $480,800 or higher, paid about 37% of federal income taxes. That means 892,000 Americans pick up 37% of the tab.
• The top 10 %, having an adjusted gross income over $139,700, paid about70% of federal income taxes.  Thus7 million Americans, less than 1% of our population, paid 70% of that bill.
• The top 50% paid 97% of total Federal individual income taxes.
• That means that the bottom 50%, those having an adjusted gross income of less than $38,700, paid only 3%.

So who pays taxes to the Federal government – chances are you do!

Now how to take advantage of the new tax law.

The income tax game has changed.  Here’s 5 ways to maximize your tax benefits –

1. Calculate your 2018 tax liability based on your 2017 income. By doing this you will determine the impact of the following changes:
   • Individual Income Tax rates have dropped. We still have 7 different tax brackets.  Some stayed the same; some decreased 1% to 4%.  The highest tax rate dropped from 39.6% to 37%.
   • Alternative Minimum tax limits increased – fewer will be affected
   • Increased the standard deduction from $12,700 to $24,000 for married and $6,350 to $12,000 for single, but dropped the personal exemptions
   • For those who benefit from itemizing there are changes….
     1. Now there is a cap of $10,000 on state & local taxes.
     2. Interest on home equity lines is limited to money actually used to purchase or improve your home.
     3. No miscellaneous itemized deductions such as employee job expenses, investment fees or tax prep fees. No limitations based on high incomes
   • The Child tax credit has changed, expanding from $1000 to $2000 for those under 17. $500 for other dependents and higher income limitations.
   • Penalty for the Health insurance mandate is gone as of 1/1/2019 –still here for 2018.
2. Will it benefit you to itemize this year? The rules changed.  The old standby of paying your real estate taxes and 4^th quarter State estimate by December 31 – will benefit fewer taxpayers this year.    If you are a construction worker paying for your tools and travel expenses – these are no longer deductible.  Be sure to take into account Wisconsin tax credits.
3. If you report business income on your personal tax return, review your expected tax benefit of the new 20% pass-through deduction for qualified business income. There is the opportunity to avoid paying income taxes on 1/5th of your business income.  However, the calculation is complex.  There are limits on service business income and different calculations for those over $315,000 and $157,500 of taxable income.  Review your current tax structure to provide the lowest tax liability.  To take full advantage – you may need to take steps to bring your adjusted gross income below the limits.
4. If you have a business, review the impact of new tax law changes to determine if you need to change your sales approaches or adjust other business decisions. Consider items such as:
   • Loss of entertainment deductions (sporting tickets, golfing fees, charity events, etc.)
   • Meals provided to employees are now 50% deductible
   • Passenger vehicles have a higher depreciation deduction this year. It went from $17,300 over 5 years to $50,000.
   • Business dues are not deductible
   • Increase bonus depreciation and Sec 179 expensing is increase to $1 million.

5. Get a tax projection done your estimated 2018 taxable income. Determine if you can take any actions to minimize your tax liability.  The more taxes you pay the more opportunity this step will provide.

Take control of your tax situation by taking one or all of the above steps to improve your tax situation.  This information is for discussion only.  This is a brief recap and do not rely upon as tax advice.  Majority of the items mentioned have very specific requirements.  The IRS is providing clarification on many of the new changes and it will be 18 months before we have final regulations.

Happy taxes.

Mary Guldan-Lindstrom