December 29, 2018

Individual Preparation for Tax Season

Here are a few tips we’ve put together to help Individuals in preparation to Tax Season.

Consult a Professional-

You should always consult a tax professional to discuss their tax liability. Be careful in trying to interpret tax code language on your own without professional assistance. Although there are many good tax softwares out there if you are not an accountant’s a tax professional you could leave thousands of dollars on the table.

Consider hiring a professional to give you the advice necessary to lower your tax bills, and give you ideas or options that could help you lower your tax liabilities or even get a bigger refund.

The new TCJA 2018 has been the largest overhaul to tax rules ever, therefore we encourage you to consider seeking professional advice on navigating your tax liabilities and expenses.

Call or make an appointment today.

IPS Accounting Services LLC

(843) 637-7100

We have put a checklist together to help you get organized.

Here are some highlights of the changes that can help you plan better.

The TCJA roughly doubles the standard deduction:

So for 2018, joint filers can enjoy a standard deduction of $24,000. However, the new law suspends personal exemption deductions and eliminates or limits many itemized deductions. For example, the state and local tax deduction is capped at $10,000 per year, or $5,000 for a married taxpayer filing separately (MFS).

Miscellaneous itemized deductions:

Also, the miscellaneous itemized deductions subject to the 2%-of-AGI floor like tax preparation fees and employee business expenses are eliminated, and for home acquisition debt, if incurred after 12/15/17, mortgage interest is deductible only with respects to up to $750,000 ($375,000 MFS) of such debt. For clients who typically claim the standard deduction, their tax bill will likely decrease for 2018.

Although personal exemption deductions are gone, a larger standard deduction, combined with lower tax rates and an increased child tax credit plus a new tax credit for non-child dependents, may result in less tax. We also found that clients who itemized last year won’t itemize this year, or they may be able to itemize for state, but not federal, income tax purposes. You will need to run the numbers to assess the impact. Depending on the results, you may need to adjust your estimated quarterly tax payments or adjust your tax withholding by submitting a new Form W-4 to your employers.

Optimize a child’s 2018 income under the new kiddie tax rules:

TCJA changed how the kiddie tax is computed. Before 2018, unearned income in excess of a threshold amount was taxed at the parents’ applicable tax rate. Now, the income tax rates for estates and trusts apply instead of the parents’ tax rate. So, the kiddie tax computation is no longer tied to the parents’ return and rates.

The key to planning for the kiddie tax is understanding how a child’s income, both unearned (investment) and earned income is taxed. One of the most beneficial kiddie tax planning strategies is recognizing enough income to take full advantage of the child’s standard deduction or, for long-term capital gains and qualified dividends, the taxable income thresholds within which such income is taxed at a 0% rate.

Revisit qualified tuition plans (QTPs):

QTPs, also called 529 plans, are a great way to ease the financial burden of paying for college. Before the TCJA, earnings in a QTP could be withdrawn tax-free only when used for qualified higher education at colleges, universities, vocational schools or other postsecondary schools. QTPs can now be used to pay for tuition at an elementary or secondary public, private, or religious school, up to $10,000 per year. If you are paying tuition for your children or grandchildren to attend elementary or secondary schools, we encourage you to either set up or revisit their 529 plans.

Bunch charitable contributions:

The TCJA temporarily increases the limit on cash contributions to public charities and certain private foundations from 50% to 60% of AGI. While the AGI limit likely applies to a few of your clients, the doubling of the standard deduction and changes to key itemized deductions will prevent many clients from itemizing in 2018 and beyond. One way to combat this is to bunch or increase charitable contributions in alternating years. We suggest that you up donor-advised funds. This will allows you to claim a charitable tax deduction in the funding year and schedule grants over future years.

Finalize a divorce before 2019 to deduct alimony:

For divorces and legal separations that are executed come into legal existence due to a court order after 2018, the alimony-paying spouse won’t be able to deduct the payments, and the alimony-receiving spouse won’t include them in gross income or pay federal income tax on them. So, if deductible/taxable alimony is desired, as it often is when the alimony payor is in a higher tax bracket than the recipient, finalization by 12/31/18 is essential.

Review last year’s 1040:

A review of last year’s Form 1040 is often a great source of tax-saving ideas for you in the current year.

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