The new Section 199A provides self-employed taxpayers with a new deduction. For many, this deduction will be simple to calculate – 20% of Qualified Business Income (QBI). However, Congress included a safeguard to prevent high-income taxpayers from abusing the new deduction. This safeguard can be referred to as the W-2 limitation.

W-2 Limitation

A taxpayer may only deduct 20% of QBI up to a certain limit. This limit is the greater of

1. 50% of the W-2 wages paid by the qualified trade or business, or
2. The sum of 25% of the W-2 wages paid by the qualified trade or business, plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.

For example, if a taxpayer has $200,000 of QBI, his pass-through deduction would otherwise be $40,000 (20% of QBI). Let’s assume that the taxpayer also has $20,000 of W-2 wages from the business. This taxpayer’s may only claim a $10,000 (50% of W-2 wages is the lesser amount) pass-through deduction.

By now you should be wondering how anyone could take the full 20% deduction. Naturally, attached to this provision is an exception that makes the W-2 limitation only applicable to high-income taxpayer’s. See below.

Taxable Income Exception

The new law contains an exception to the W-2 limitation rule discussed above. This exception states that if a taxpayer’s taxable income is below a certain threshold the taxpayer can ignore the W-2 limitation rule.

For 2018, the threshold amount is $157,500 (or $315,000 if married filing joint). This threshold figure will be indexed for inflation in future years. Also, please note that taxable income should be factored without including any potential pass-through deduction.

Phase-ins and Phase-Outs

The taxable income exception threshold discussed above is not absolute. The taxpayer is afforded an additional $50,000 (or $100,000 if married filing joint) to phase-out the deduction. Therefore, taxpayers may still receive a partial deduction if their taxable income is above the threshold amount, but within the phase-out range.

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Before starting your taxes, make sure you have all the necessary information to prepare your return. Here’s a sampling.

Work income.

Your income might include your salary, bonuses, commissions, and payments for freelance or part-time work. Having a list of all your income sources allows you to check off each Form W-2 or 1099 as you receive it. Even if you didn’t receive a form, you still need to report the income you received.

Rental income.

Account for all the rental payments you received from your tenants and for all the expenses you had to pay, including mortgage interest and real estate taxes. Be aware that the house payment portion that goes toward the loan principal is not deductible. Do not forget to take into account the real property depreciation.

Investment income.

Collect documents showing interest, dividends, and investment trades, such as 1099-INT, 1099-DIV, K1 schedules or composite 1099 forms from your broker. Be aware that often times brokers issue amended 1099 forms and it is advisable, before filing your return, to check with your broker that the 1099 you received is the final one.

Business interests.

Maybe you are a partner or a co-owner in a business, set up as a flow through entity and, regardless if your participation is active or passive, you must report your share of the business activity.

Expenses.

You should have all your receipts for property taxes, mortgage and home equity loan interest, childcare expenses, medical bills, tuition, charitable contributions and other potentially deductible or credit-eligible expenses. You’ll also need records of any estimated tax payments.C

Don’t deal with tax issues on your own. Contact us right now to find out how we can provide you with the answers you need. You can also go to the IRS website for more information about tax rules and regulations.

What is the Kiddie Tax?

In 1986 the lawmakers added the Kiddie Tax to the tax code in order to prevent high wealth parents from shifting income-producing investment assets to their children who were in lower tax brackets.

How Did The Kiddie Tax Work in Prior Years?

In prior years, the law taxed all unearned income from a child in excess of a predetermined amount ($2,100 for 2017). You had to add the unearned income of your child to your taxable income to determine the tax rate. Then you used this tax rate on your child’s return to calculate the tax owed. This applied to all children under age 19 (or 24 if a full-time student and the parents provide more than half support).

What is Unearned Income?

Generally, unearned income is income from all sources not considered earned income. Earned income comes from employment or self-employed business activities. The most common form of unearned income is from dividends or interest from investments. For example, your child may have unearned income from dividends on stocks that you purchased in the child’s name.

How Does The New Kiddie Tax Work?

Beginning with tax year 2018, The Tax Cuts and Jobs Act modified the Kiddie Tax in two main ways. First, you don’t add your child’s unearned income to your income to determine the tax rate. Second, you use the rates that apply to trusts and estates.

You can find more information, including the tax rate tables in the instructions for form 8615, Tax for Certain Children Who
Have Unearned Income.

These changes will benefit most children who have modest unearned income. For those in multi-sibling households the benefits are even greater. For example, in prior years all of the siblings’ unearned income would be aggregated to the parents return to determine the tax rate. All of the siblings would be subject to this tax rate irrespective of their actual amount of unearned income. Now, each child will be subject to the tax rate applicable only to his or her unearned income.

While most will benefit from these changes, for some with high amounts of unearned income their tax bill may end up being higher. Given this, it is important to discuss your tax situation and strategy with a qualified tax professional and we are here to help. Give us a call!

Crowdfunding — or funding a project through the online contributions of many different backers — is becoming increasingly popular. If you are considering raising crowdfunding revenue or contributing to a crowdfunding campaign, you will need to address the many tax issues that can arise.

Background

While crowdfunding was initially used by artists and others to raise money for projects that were unlikely to turn a profit, others have begun to see crowdfunding as an alternative to venture capital. Depending on the project, those who contribute may receive nothing of value, a reward of nominal value (such as a T-shirt or tickets to an event), or perhaps even an ownership/equity interest in the enterprise.

Is It Income?

In an “information letter” released in 2016, the IRS stated that crowdfunding revenues will generally be treated as income unless they are:

• Loans that must be repaid
• Capital contributed to an entity in exchange for an equity interest in the entity
• Gifts made out of detached generosity without any “quid pro quo”

The IRS noted that the facts and circumstances of each case will determine how the revenue is to be characterized and added that “crowdfunding revenues must generally be included in income to the extent they are for services rendered or are gains from the sale of property.”

Frequently, the IRS learns of the activity because crowdfunding entrepreneurs have used a third-party payment network to process the contributions. Where transactions during the year exceed a specific threshold — gross payments in excess of $20,000 and more than 200 transactions — that third party is required to send Form 1099-K (Payment Card and Third-Party Network Transactions) to the recipient and the IRS. Payments that do not meet the threshold are still potentially taxable.

If It’s Income

“Ordinary and necessary” business expenses are generally tax deductible, but deductions for expenses are limited if the IRS deems the activity a hobby rather than a trade or business. Generally, the IRS applies a “facts and circumstances” test to determine if you have a profit-making motive, which is necessary for a trade or business.

New Businesses

Favorable deduction rules may be available for certain types of expenses incurred in starting a new business. If eligible, the business may elect to expense up to $5,000 of those costs (subject to phaseout) in the year the business becomes active, with the remainder of the start-up expenditures deducted ratably over a 180-month period.

For Contributors

Campaign contributors should not assume that their gifts qualify as tax-deductible charitable contributions. Tax-deductible contributions must meet certain requirements, including that they be made to a qualified charitable organization. If gifts are made to an individual or non-qualified organization, you will generally need to file a gift tax return for gifts to any one recipient that exceed the gift tax annual exclusion ($15,000 for 2018 and 2019).

These are just some of the potential tax issues that may arise. Consult your tax adviser regarding your specific situation.

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

Do I need to adjust my withholding allowances, given that tax brackets have changed?

You may notice a change in your net paycheck as a result of the tax law, which alters tax rates, brackets, and other items that affect how much tax is withheld from your pay. The IRS has already issued new withholding tables, and your employer should have adjusted its withholding without requiring any action on your part. But you may want to take the opportunity to make sure you are claiming the appropriate number of withholding allowances by filling out IRS Form W-4. This form is used to determine your withholding based on your filing status and other information. The IRS suggests that you consider completing a new Form W-4 each year and when your personal or financial situation changes.

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  (unless used to build an addition to an existing home) 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.

2018 Long-Term Capital Gains Breakpoints

Rate	Single Filers	Joint Filers	Head of Household	Married Filing Separately
0%	Below $38,600	Below $77,200	Below $51,700	Below $38,600
15%	$38,600-$425,799	$77,200-$478,999	$51,700-$452,399	$38,600-$239,499
20%	$425,800 and above	$479,000 and above	$452,400 and above	$239,500 and above

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 new law is gradually reducing the deduction and eventually eliminates it 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.

This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax circumstances are different. Please contact us if you need tax assistance.