The recent tax law changes are on the top of many minds, so Triumph brought in Bruce Berndt of Berndt CPAs to discuss some key updates that all clients should be aware of. Bruce owns and manages a CPA firm in Madison, Wisconsin, providing entrepreneurs with a competitive edge.
Below Bruce describes the biggest changes to different sections of tax law in the 2017-2018 year.
Most of the law changes are effective in January 2018 and most of them are for a 10-year period because the government can only put in laws that go for 10 years. The biggest change happened in 2018, where they did some extenders and brought back a lot of the energy credits, which were disallowed. The other big thing for 2017 is, for business clients, that they put in a bonus depreciation which is effective September 2017 and allows businesses to virtually write off new or used equipment 100%.
Standard versus itemized deduction would probably be the biggest change for most individual tax filers. In the past, you were able to take state and local tax, real estate tax, Wisconsin income tax and those all would be basically just put through on your 1040 as an itemized deduction. With the new tax law, it changes that. It eliminates all personal exemptions and combines the state and local tax to a $10,000 limit. On top of the $10,000, you then can take medical expenses, mortgage interest, etc. However, if you’re married filing joint, you’re going to look at $24,000 and see if those limited itemized deductions will be greater. What I really see happening for 2018 and beyond is that more and more people will just be using the standard deduction versus itemizing.
Charitable contributions, I would say, are almost unchanged. There are some small, minor limitations. Some things that were 50% are now 65%, but for the most part, charitable contributions remain unchanged. However, whether you can ultimately use them with the new $24,000 allowance is going to be questioned because again state and local taxes are limited to $10,000.
Mortgages and home equity lines of credit (HELOCs) are where there are really some big changes because mortgage interest deductions in the past were limited to $1 million. It didn’t matter how many different homes you would have. The new law basically says that for any new mortgages taken out in 2018, the limit is now $750,000. Home equity loans – HELOCs – are no longer deductible if not used for direct purchase improvements of your home. Mortgage insurance is no longer deductible in 2018. What you’re really going to see is that people who are looking for second homes, a lot of them will look at rentals and set it up as a rental versus a second home to get around the $750,000 limits.
Estate tax has had a minor change in one area — gifting. Annual gifting per person has gone from $14,000 to $15,000 per person for 2018, However, the biggest change has come for federal purposes. They have virtually doubled the exemption, so every individual now has a little bit over $11 million. If you’re a married couple, it’s over $22 million, so looking at the estate tax as part of your legacy has changed and everyone should be looking at and working with their financial advisors as well as their estate attorneys to make sure that they can take advantage of these new limits.
In a lot of different versions, there are going to be some different changes to dividends and capital gains. However, dividends, interest, etc. really are unchanged from the prior law.
Pass-through entities can be s-corporations, partnerships, sole proprietors, or LLCs. Therefore, they don’t pay the tax themselves; they pass it through to the owners. In the new law, starting in 2018, there’s a 20% exclusion of taxable income for certain business owners. In general, if you sell your time by the hour – so financial advisors, attorneys, accountants, etc. – this new law does not apply but comes with a phase-out when taxable income of a married couple is between $315,000 and $415,000. Engineers, architects, etc. are carved out so it does apply to them but the limitations of the 20% are going through to the individual shareholder’s tax return. In general, if your taxable income is less than $315,000, these benefits should be beneficial to you. If it is more than $315,000, then some sort of the 20%, or some portion of the 20%, can either be 100% or partially used.
Contributions to capital from non-owners is another thing for real estate or real estate developers. As they work with municipalities, they had opportunities to get tiff financing, low interest loans if they were through the government, or even a contribution of property or land. In the past, those things would be a contribution to their entity. Under the new law, effective 2018, those are now all taxable income. The economics of those gifts or transfers from government units are now taxable. Therefore, you have to plan for that when you’re looking at your return on investment.
Business gifts and entertainment has a change that will affect every business owner and there’s a lot of misinformation regarding it. With meals, if you’re taking somebody to a restaurant, that has always been 50% and it is 50% again. The biggest change is in entertainment. If you’re taking a client or a guest to, say, a Packer game or a Badger football game, in the past those tickets would be subject to 50% deduction. Under the current rules, everything to do with entertainment is now non-deductible 100%. There are a lot of accounting issues that will have to be taken care of to make sure that everything is properly classified in your books and records.
A lot of the rules and definitions are still being written, but if you are a pass-through business subject to the new 20%, one of the things that would be critical is to look at how that could impact you and how that could save taxes in the future. The other major change is for manufactures, contractors, etc. that had DPAD — basically creating something and having taxable income — which is a 9% credit on the federal tax return, that has now been eliminated 100%; The 20% will help off-set some of that but it will not be a 20% gain.
Triumph would like to thank Bruce for helping us on providing information on tax law changes. We would also like to remind you that these are pretty significant changes that affect many of us. We encourage you to seek the help of a professional tax advisor to walk through how these may changes impact your individual situation.
Disclosure: Securities and investment advisory services offered through registered representatives of MML Investors Services, LLC, Member SIPC. 525 Junction Road, Suite 8100N, Madison, WI 53717, 608-829-0015. Triumph Wealth Management is not a subsidiary or affiliate of MML Investors Services, or its affiliated companies. The views and opinions expressed are those of Bruce Berndt are his own and may not accurately reflect those of MML Investors services, or its affiliated companies. CRN202003-227222