{8 minutes to read}  Before getting into the article, I would like to remind readers that enrollment season is now open. It’s this time of the year when you have the opportunity to enroll for your health care insurance and other employer-offered benefits. Now let’s continue.

This past Tax Year is arguably one of the most talked about. In my opinion, this is mainly due to the high level of uncertainty that was brought about by the new tax rules — Tax Cuts and Jobs Act (H.R.1) — coupled with the accessibility of information through the various social media platforms. We no longer need to take a trip to the local library to get information; information is available at our fingertips. 

While the information is accessible to most of us, vast amounts of that information are gathered from unreliable sources or resources. Most taxpayers who have filed their 2018 tax returns, and have seen the results, are now aware that everything they heard was not necessarily true.

The intent of this article is to paint broad strokes over the areas that affect individuals and small businesses, and offer a way to look ahead to 2020 with a clearer action plan.

Small Business Taxpayers

Small business includes entrepreneurs and independent contractors. As noted in an earlier article, H.R.1 added IRC 199A to the tax code, which is a tax deduction for business owners of “pass-through” entities. H.R.1 essentially provides a 20% deduction from your taxable income (coming from the business) to these owners which includes any business that is:

• Partners of partnerships (K-1 box 1): The deduction is not allowed on any guaranteed payments.
• S corporation shareholders (K-1 box 1): The deduction is not allowed on an S-Corp owner salary. (Most S-Corp owners are required to take a salary from the company via payroll.)
• Single-member LLC
• Sole proprietorships (Sch. C, Sch. E and Sch. F filers) who are individuals, estates, or trusts. The Schedule E activity must be a trade or business (including rentals).

The above types of taxpayers may be limited to the deduction if their personal taxable income exceeds $321,450 (married filing jointly)/ $160,725 (single). There will be no 20% deduction if your taxable income exceeds the cap of $421,450 (married)/$210,725 (single).

These above income thresholds are also important for other personal tax planning. There is an approximately 10% tax rate hike when you shift from one income tax bracket to the next. Consider tax planning to mitigate your tax impact. 

Personal (Individual) Taxpayers

Taxpayers with W-2 earnings who were accustomed to getting a refund may have noticed that they received a lower refund at the time their returns were prepared. They were most likely withholding less during 2019 for each paycheck, which means they were taking home a little of that “expected refund“ each pay period.

The most dreaded deductions change were SALT (state and local tax), job-related itemized expenses, and the limitation on the mortgage interest deduction. Notwithstanding these limitations, a vast number of taxpayers were not affected as greatly as expected, since they were no longer subject to that hidden tax, i.e. AMT in 2018 (as in prior years).

Who Benefited the Most From the Current Tax Rules?

For individual taxpayers, families benefit the most. It can be argued that the new tax law supports procreation (i.e. families with children, human beings). Sorry, no pets; at least not yet.

For small businesses – the 20% deduction for pass-through entities (such as LLC, partnership, S-Corp, sole proprietor) is a great tax savings. Having proper books and records is important to maximize your tax impact.

What Have We Learned From the Past Tax Year?

What Can We Implement in 2020 From What We Have Learned?

While most taxpayers don’t take advantage of some simple planning steps to reduce the taxes they pay, 2020 gives us another opportunity to begin to do so. Here are a few simple strategies: 

• Small businesses: Develop a proper accounting system that allows you to track your business income and expenses. A Profit and Loss and a Balance Sheet are important reports for a business of any size and are necessary for getting a loan, refinancing a mortgage, etc.
•  Employees: It is enrollment season for various payroll-type deductions, such as healthcare, 401(k) changes, and others. Maximize your deductions via payroll, which is often much more lucrative than trying to maximize them on your tax returns. 
• Retirement plan savings: Most retirement tax planning is tax-deferred. There are other tax planning strategies that allow you to keep and maintain your wealth — one of which is Whole Life insurance.
• Investment Income: Monitor your investments strategically by managing your gains, losses, interest, and dividends. Also, keep in mind that you may no longer be able to deduct management costs such as advisors’ fees.
•  Donations: Most of us tend to be passionate about specific causes that are not necessarily state-designed, however, donating to state-designed causes may be more tax beneficial.
• Daycare and dependent expenses: Your caretaker information is needed for deduction (tax ID#, name, address, etc.)

Let Us Take a Step Toward Real Change

We generally cannot undo a decision made, a word said, an offense imposed; however, we may be able to control its impact. Now let’s look ahead.  

Accept the challenge to make 2020 the year we take a look at our finances more closely with greater clarity. While this can be viewed as a play on words and unrelated to taxes, most of us wish for 20/20 vision. Having 20/20 vision does not mean we see everything perfectly; however, it does offer the ability to see more clearly; thus leading to more power over the decision making process. According to Wikipedia, 20/20 is often described as visual acuity and commonly refers to the clarity of vision; that is how clearly a person sees. In my opinion, when we can see more clearly, we feel more empowered and we make better and wiser decisions.

I like what Saint Luke penned in Luke 14:28 (paraphrase): Before we make a decision, first take the time to count the cost to see if we can afford it. Most of us have some control over the taxes we pay, yet we give up our control when we choose to not take the time to properly plan our next steps. Lack of planning leads to un-affordable tax bills and ultimately results in less money in our pocket and more in the pockets of others (the IRS; the state taxing authorities).

In which pocket would you choose to place your funds?

Please don’t hesitate to reach out to schedule a tax planning consultation, bookkeeping, and inquiry about other services I offer. I am here for you.

With gratitude,

Nadine Riley, CPA
Founder, Masterpiece Accounting Group
Phone: (212) 966-9301
Email: info@mpagroupllc.com