Solarity Credit Union recently put on a business tax seminar with Soelberg & Associates, Certified Accountants, and Meyer, Fluegge, & Tenney. There was some great information and questions we didn’t want you to miss out on if you couldn’t make it, so here are the highlights—don’t forget to look at the powerpoint presentation from Soelberg & Associates for the details.
Solarity Credit Union and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. For capital gains, be sure to consult your CPA.
Tax Bracket and Tax Rate Changes for 2018
- Most tax filers will pay tax using a new tax bracket and tax rate structure. However, the tax rates remain progressive meaning tax rates rise as income increases.
- In comparison to previous tax brackets and tax rates, the new rates due to the Tax Cuts and Jobs Act are slightly lower and the brackets are generally slightly broader.
Pre TCJA (Tax Credit and Job Act) Rates were: 10%, 15%, 25%, 33%, 35%, 39.6%
New Rates are now: 10%, 12%, 22%, 24%, 32%, 35%, 37%
2018 tax rates & brackets for each filing status:
Under the 2017 tax brackets and rates:
A single taxpayer with $40,000 of taxable income would be in the 25% tax bracket and would have a tax liability of $5,739.
Under the 2018 tax brackets and rates:
A single taxpayer with $40,000 of taxable income would be in the 22% tax bracket and would have a tax liability of $4,740.
Personal & Dependent Exemptions are Eliminated
In 2017, taxpayers claimed a personal exemption for themselves, their spouse (if married filing jointly) and each qualifying child or qualifying relative. Each exemption reduced taxable income by over $4,000 in 2017.
New Credit for Non-Child Dependents Available Through 2025
The TCJA allows a new $500 non-refundable credit for dependents who do not qualify for the child tax credit. Taxpayers can claim this credit for children who are too old for the child tax credit, as well as for non-child dependents.
Standard Deduction Increases through 2025
- $12,000 (single)
- $18,000 (head of household)
- $24,000 (married filing jointly)
Health Care Penalty Eliminated
The penalty for failure to obtain health insurance coverage (the individual mandate) will be eliminated beginning in 2019. Taxpayers who did not have coverage in 2017 or 2018 will continue to owe a penalty for those years unless they qualify for an exemption.
Self-Employed Taxpayers May Claim a New Deduction for Qualified Business Income
Self-employed taxpayers can deduct up to 20% of qualified business income from a sole proprietorship, partnership, or S corporation. There are a few limitations placed on the deductions, but many small businesses will be able to benefit.
Example: A self-employed taxpayer has taxable income of $60,000. All of the income is from the business. The qualified business income deduction is $12,000 ($60,000 x 20%).
Investment property—Is that Qualified Business Income? Yes.
- Limitation on how much you pay for wages.
- Partial wages limitation
- 2.5% original purchase and you rent, and make income you qualify for 2.5% of the cost of the home
American Opportunity Tax Credit (AOTC)
This credit is for qualified education costs for the first four years of college. The maximum credit per student is $2500. To be eligible the student must be
- Working to get a degree or educational certificate
- Be taking half-time credits or more
- Not exceed four years of college where they claimed the tax credit
- Student must not have any felony or drug convictions at the end of that tax year
Open Discussion and Q&A
After the presentation by the accounting firm, we opened the floor up for discussion. We pulled the most beneficial information from that discussion and have it here for you to read and go over. Remember to reach out to your accountant for further questions.
Short Term Capital Gains
These do not benefit from any kind of special tax rate—they are taxed at the exact same rate as your ordinary income.
If you can hold onto your investment or asset for more than one year, you can get a reduction on your tax rate. For 2017 these rates are 0, 15, and, 20%.
Commercial Real Estate Appreciation—Long term versus short term gains overview
- Qualified improvement property can now be written off
- Energy efficient credit is gone at individual level
Capital Gains—essentially they are the same 15% tax bracket
- Long-term gains are taxed at 0 still (even with new tax bracket) top brackets are 20%
- Depreciation schedule is the same
Q: New tax laws allow someone to be a passthrough employee through an LLC with the tax rate being 20%—Is this true? If so what are the pros and cons?
A: You would be a partner or member, not a passthrough employee and you would get a 20% deduction.
Pro: You get that 20% deduction.
Con: You have the costs of setting up the LLC.
Special Note: Make sure your income isn’t over the $315k limitation (married filing). Downside you have to pay attention to where you are at for taxes. Strategize and take advantage so pay attention. Anything below this the opportunities won’t be as big. Lots of strategies to bring that income down—limits are only for certain disfavored service providers.
Q: How many years for long-term property gain?
A: 1 year 1 day to get long-term capital gain tax rates. Depends on underlying asset but property is one year and 1 day.
Q: Is the mortgage interest deduction being taken?
A: No. If the property is for business it will be deductible still. Don’t panic, the changes are for personal.
Q: 1031 have they changed?
A: No, they have not changed at all.
Q: What business entity is most favorable with new tax laws?
A: A C-Corp if you can keep the money in it for a long time.
We know there are a lot of other questions out there, so don’t hesitate to contact your accountant so they look at your individual situation.
*Information provided by Soelberg and Associates, PS and Meyer, Fluegge, & Tenney, PS.