Well, we have another tax year under our belts. Many of you are just finding out how the 2018 tax law is affecting you and your business for last year. As always, some of you were winners and some were losers under the new tax law. The real thing you need to be focusing on is how to benefit from it in 2019 and looking forward to the future. Here are some tips to consider.
Can you itemize or are you using the standard deductions? For 2018, many of you may be just finding out that digging for receipts to itemize didn’t really do you any good. The standard deduction for taxpayers in 2019 for single individuals is $12,200 and for married filing joint returns, it is $24,400. Additionally, the 2017 Tax Cuts and Jobs Act (TCJA) added limitations or abolished certain itemized deductions that makes it harder for many to exceed these standard deduction amounts.
Here is a quick discussion of changes to itemized deductions.
Gone are deductions for interest on home equity loans that were not used to substantially improve, acquire or construct a qualified residence. Even if you do have home equity loans that qualify, you need to be able to document the expenditures that were paid out of the proceeds of the loan. Gone are miscellaneous itemized deductions for fees paid on investments, tax preparation, tax prep software, legal tax and estate planning fees, safety deposit boxes.
More importantly, employee business expenses such as business use of your car, or licensing or other fees you pay and are not reimbursed by your employer are no longer deductible. Finally, the limitation of state and local taxes (SALT) to $10,000 keeps many from itemizing. Due to the lack of these deductions, many taxpayers will find that they are not getting any benefit from their charitable donations, both cash and non-cash donations.
How do you make the most of a bad situation? Here are some options:
State and local taxes. If you are paying real estate taxes on land or property held for investment, you can elect to capitalize those and many costs of owning the land. While this doesn’t give you a current deduction for the real estate taxes, it does increase the tax cost basis in the properties that will reduce any gain when you ultimately sell the investments. Examples of costs that could be capitalized are property taxes, interest paid on loans to acquire the properties, costs of mowing lots, etc. The key thing here is that if you exceed the $10,000 annual State and Local Tax Limit, you can effectively get a deduction for taxes in excess of that amount by capitalizing them to the investment properties to which the expenses relate. Also, if you don’t itemize, you can still get a deduction down the road by capitalizing the real estate taxes on investment property. Down-the-road deductions are better than no deduction!
Medical expenses. Medical expenses are deductible in 2019 if the total expenses exceed 10 percent of your adjusted gross income (AGI) on your tax return. If your medical expenses are approaching that 10 percent threshold and you are close to itemizing (exceeding the standard deduction), then you can try to push or pull medical deductions from multiple years into one year. For example, instead of seeing the doctor each January for a checkup, see them in January of the current year and then have the next year’s appointment in the same year by moving the appointment from January to December. You can also incur optional medical expenses, like getting new hearing aids, in a year that you know you are going to have extra medical expenses. That way you may get the medical deduction every other year instead of consistently falling short each year.
TO BE CONTINUED! There are so many things to consider, I’m continuing this article next month. Look for it in the March Oyster Pointer! Be sure to run any ideas raised by this article by your tax preparer.