President Donald Trump’s 2017 tax overhaul brought with it many changes that will affect the way Baton Rougeans do business, take out deductions and make investments. They’ll see the law’s effects come April, when tax returns are due.
In the meantime, CPAs and accountants like Jon Leblanc, tax director at Postlethwaite and Netterville, are waiting to see how Tax Year 2018 shakes out to give their clients the best advice for how to prepare for Tax Year 2019. Apparently, it’s quite the undertaking.
“These are arguably the biggest tax law changes since 1986,” Leblanc says. “Nobody knows what’s going to happen to rates in the future, but what we do know is these are some of the lowest rates we’ve seen in awhile.”
At the same time, however, some tax return icons, such as charitable donations, will remain the same, while others, like the non-deductibility of entertainment expenses, sunset in 2026, barring future legislation.
Until then, Leblanc offers these tips on planning ahead for your 2019 taxes, based on what’s happening in 2018.
Monitor your full taxable income situation
(not just the income you’re getting from a qualified business)
Starting this tax year, owners of pass-through businesses—sole proprietorships, partnerships, S corporations, LLCs and LLPs—are eligible to deduct from their personal income taxes up to 20% of their qualified business income, potentially leaving room for savings and confusion.
The deduction is phased out for those whose income exceeds $157,000, or $315,000 if they’re married and filing jointly with a spouse. Totally ineligible are specified business services whose taxable income exceeds $207,500, or $415,000 if married and filing jointly. This means that one year, you could get the 20% pass-through deduction, but get phased out the next year. While this makes figuring the pass-through deduction into your tax bills difficult to plan, Leblanc says, it reinforces the importance of monitoring your full taxable income situation.
Consider an accountable reimbursement plan for your employees
Last year’s Tax Cuts and Jobs Act eliminated miscellaneous itemized deductions for unreimbursed work-related expenses—such as travel and mileage costs, meals and entertainment, required uniforms, etc.—from an employee’s individual tax return. To alleviate this tax burden for your workplace, consider setting up an accountable reimbursement plan. The plan is simply a formal arrangement to advance, reimburse or provide allowances for “ordinary and necessary” business expenses.
Here’s how it works: Employees should every month substantiate the expenses, including amounts, times and places, then return any advances or allowances they can’t substantiate within 120 days. In addition to saving receipts, employees should document the details of their expense.
Track standard and itemized deductions
In Tax Year 2018, more people will likely take the standard deduction versus the itemized deduction. That’s because of the new cap on the amount of state income and property tax that can be deducted from federal income tax. Essentially, medical costs, mortgage interest rates and charitable contributions will determine whether or not you itemize.
To be ahead of the game in 2019, keep tabs on whether or not you took the standard deduction in 2018. It’ll give you a better picture of what you can expect in future years. If you’re around that $24,000 range (where the standard deduction sits right now), you might not take the itemized deduction for Tax Year 2019, depending on some of the other variable expenses you’re putting out there.
Be smart about donations
If you do find out that you’re not itemizing in 2018, direct your money from an IRA to a charity through a Qualified Charitable Distributions. This isn’t new, but it’s a good way to lower your taxable income.
“Anyone taking the standard deduction can still benefit from a qualified charitable distribution,” Leblanc says. “This allows the taxpayer to make a charitable contribution with pre-tax dollars, and it’s particularly helpful for anyone subject to a required minimum distribution.”
Invest in a Qualified Opportunity Zone
Want to defer some capital gains taxes and revitalize blighted areas in your community? Look into reinvesting your capital gains into one of the 150 Qualified Opportunity Zones in Louisiana. It’ll become a hotter topic next year, Leblanc says, since it gives developers, companies and individuals the option to defer their capital gains taxes.
Taxpayers have 180 days from the date of the sale or exchange of an appreciated property to invest a realized gain—typically a capital gain—into a Qualified Opportunity Zone Fund, which then invests in Qualified Opportunity Zone Property. You can potentially save on your taxes in three ways: a tax deferral through 2026, no tax on 10% or up to 15% of deferred gains, and no tax on appreciation. Talk with your CPA to determine which option works best for you.