2018 Year-End Tax Savings Moves – now is the time!
2018 Year-End Tax Savings Moves – now is the time!
David Knittel | Director of Tax | PracticeCFO
I know, I know, it’s only November and who wants to think about their taxes in November?! After all, the 2018 tax filing deadlines are still 5 – 6 months away and you have plenty of other pressing issues right now like how to get your fantasy football team back on track, President Trump’s latest tweet, or what happened in the latest episode of your favorite reality show. I get it. Taxes aren’t fun. But the reality is addressing your taxes now may result in you putting more money in your pocket and I think we can all agree that is fun. Tax planning is done before year-end. Tax reporting is done in March and April when the details have already been firmly established. By acting now, you will have two months to implement any strategies that can impact your tax liability. If you wait until after year-end, you will find yourself standing on the dock watching the preverbal tax savings ship sail away.
The Tax Cuts and Jobs Act made many significant changes to the tax code including the removal of several long-standing deductions as well as personal exemptions, the addition of some new deductions and credits, a reduction across the board in tax rates, and a much larger AMT exemption. For the most part we believe our clients will find themselves paying less taxes in 2018 than they did in 2017 on the same amount of income. This is one reason that we encouraged our clients to prepay as many expenses as they could in 2017 and postpone any income possible to 2018. While the change in tax rates between 2017 and 2018 made this an even greater opportunity the strategy of legal income shifting is a mainstay in tax planning every year because it can defer the payment of taxes for an entire extra year. We will look some of these tried and true methods as well as some brand-new opportunities created by the new law.
- Qualified Business Income Deduction:
- This is the big change for 2018 and presents an opportunity to potentially shave off 20% of your practice’s income without paying any tax on it. However, there are some major limitations to the applicability of this deduction for doctors. Basically, if your total taxable income is below $315,000 ($157,500 if single) you can take the deduction. If your income is above $415,000 ($207,500 if single) you cannot take the deduction. If you land in between the two numbers, you can take a partial deduction.
- If your income fluctuates around these two numbers, one strategy will be to “bunch” more income in one year causing an artificially high-income year in the hope of creating artificially low income the following year. In doing so you may be eligible for the deduction for one of the two years rather than missing it for both years.
- If you purchased a significant amount of assets during the year you may be able to take advantage of the enhanced 179 and bonus depreciation provisions (discussed next) to reduce your income below the $315,000 level to take full advantage of the 20% deduction.
- New liberalized asset expensing options:
- Section 179 deduction can be taken on up to $1,000,000 of assets placed in service during the year. These assets include equipment, fixtures, and qualified improvements
- 100% bonus depreciation is also available and can now be used on assets that are purchased used as long as they are new to you.
- Bonus and 179 have different specific which can make one more or less beneficial than another depending on the circumstances. If loans are used to pay for the assets we generally recommend not taking large amounts of 179 or bonus, however, if the use can help you qualify for another tax benefit, such as the 20% business deduction, it deserves a second look.
- Entertainment expenses:
- Taking patients on a company funded golf outing or baseball game is now a thing of the past. The new law puts the kaibosh on the previous 50% deduction for these expenses which are now non-deductible. However, the IRS has clarified that business meals at the entertainment sight are still 50% deductible as long as they are identified separately from the cost of the entertainment. If paying for entertainment and a meal make sure the meal is paid for separately or is specifically identified on your receipt in order to maintain the deduction.
- Accelerate Deductions:
- Paying some of your practices early 2019 expenses (rent, supplies, insurance, etc) in December of 2018 will shift the deduction into 2018 and allow you to postpone paying tax another year.
- Pro Tip: paying the 2019 expenses with a credit card will allow you to deduct the expense in December without actually spending the cash until the following month.
- Postpone Income:
- You may be able to postpone income into the following year by billing for some December patients in January or putting off some cases to the new year. Remember, if you actually receive the money it is taxable whether you put it in your bank account or not. But if the client has not yet paid you are not taxed until you receive the cash.
- Retirement plans: If you don’t currently have a retirement plan, we can help set one up and determine which type of plan offers to the best options for your unique situation. By setting up the plan before year-end you will have access to more plan options to allow you to make tax deductible contributions for 2018.
- Home Office: Set up a home office to be used regularly and exclusively to perform the administrative functions of your practice. This will allow you to deduct a proportional amount of otherwise non-deductible personal expenses such as property insurance, utilities, repairs or rent. By doing this your home office may qualify as your main place of business which will allow a deduction for travel back and forth to your practice which otherwise would be considered a non-deductible commuting cost. Have your practice reimburse you for the calculated costs of your home office.
- Rent your home to your practice: Not many people are aware of this rule but If you facilitate company parties or staff meetings at your personal residence you can have your practice rent your home for the day and reimburse you for the expense. Your personal residence can be rented for up to 14 days per year without you having to report the income on your personal tax return. The expense will be fully deductible to your practice. Likewise, if you use your home to store client records or other files related to your business have your practice reimburse you for the use of the storage space.
- Get reimbursed for expenses paid personally: Sure, this is a simple one but it gets overlooked often. Be sure to have your practice reimburse you for any company expenses that you may paid out of pocket or with a personal check or personal credit card. Often times expenses are paid personally for the sake of convenience and then forgotten about and never reimbursed.
- Timing of capital gains:
- For taxpayers whose income fluctuates below and above $250,000 ($200,000 if Single) try to take any capital gains during years when you are under $250,000 and not above. Capital gains at this income level are taxed at 15% but an additional 3.8% Medicare tax will apply to any investment income (capital gains, dividends & interest) in excess of $250,000.
- Alternatively, if you already know that you will be having a large capital gain (sale of stock of maybe even your practice) try to keep your total income below $250,000. You may be able to take 179 deduction on new assets in your practice or maybe put off a new case to the following year. Taking a gain on the sale of your practice over several years in an installment sale may also be an option.
- If there is a certain event that will cause your income to be below $77,200 (maybe you purchased a practice and took large depreciation deductions or are in the first year of a start up before producing a profit) consider selling any appreciated stock to take advantage of a possible 0% income tax rate. That’s right, you may be able to take these gains tax free.
- If your income is over $479,000 capital gains become taxed at 23.8% (20% + 3.8%). If you have the ability, defer capital gains until years with less income.
- Solar Credit: The solar credit squeaked through in the law and is still one of the best credits going. At a rate of 30%, the benefit can be almost viewed as a dollar for dollar deduction for the entire cost of the project. To top it off, the solar credit is allowed against AMT. It just doesn’t get much better. In order to take the credit in the current year the project must be completed before year-end.
- Child Care Credit: If you pay for childcare expenses for children under 13 in order to allow you or your spouse to work you may be eligible to take a credit for a portion of up to $6,000 in childcare expenses. This credit, unlike most, does not fully phase out as income increases. No matter the amount of your income you can always take a credit of at least 20% of $3,000 in expenses for one child or $6,000 in expenses for two or more. Expenses eligible for the credit are limited to the amount earned by either spouse.
- If in the process of filing for divorce it is important to note that alimony payments will not be tax deductible (and receipt of payments will not be taxable) for agreements entered into after 2018. That being the case it may be advantageous to lock down the agreement before the end of the year.
- Health Savings Account contributions: If you utilize a High Deductible Health Plan set up and fund a Health Savings Account. Tax deductible contributions for 2018 can be made of $6,900 for a family and $3,450 for an individual. The contributions are made pre-tax and can be withdrawn tax free if used for qualified medical expenses. Catch up contributions of $1,000 can be made for an individual over 55.
- New personal residence mortgage interest limit: If you are purchasing a new home in 2018 and have cash available to make a larger down payment consider that the new mortgage limit is $750,000 rather than $1.1 million. If your mortgage interest is deductible your 4.5% interest rate may only be costing you only 2.5% if you are in the top federal and California tax brackets. This effective cost of capital may make it pretty easy to find an investment that will provide you a greater return than paying down your mortgage. However, for any mortgage balance above $750,000 you will have to add another 2.5% on your required return to make it worth investing rather than making a larger down payment.