Katie Collins, a Practice Integration Advisor with Buckingham Strategic Wealth, helps dentists order their financial lives and reach financial peace of mind so they can better focus on what truly brings them joy.
“The days are long but the years are short.” Becoming a new mother this year, this statement has never rang truer to me. But, as we once again head into another year-end, I would guess that business owners might feel the same way. Some of you may have just filed your 2017 tax returns, and here we are again talking about year-end tax planning. As we discussed last year, we feel this time of year is one of the most important for tax strategy purposes. This is a time when you can actually think about and plan for your taxes. Once the calendar turns, your options for ways to reduce your taxes may be limited.
My colleague, Mike McAninch, discussed the Qualified Business Income tax deduction in his latest blog post. This is a new deduction that came out of the Tax Cuts and Jobs Act of 2017, passed last December. This provision allows certain taxpayers to deduct as much as 20% of their pass-through income on their personal return. You should think about spending time discussing this deduction with your accountant to determine if you qualify for it. It is income driven, so now would be a good time to review your projected income for 2018 with your accountant. If your income looks like it could fall within the range of this deduction, you may want to use the fourth quarter to review other deductions you can take to ensure you’ll qualify for it.
Other changes from last year’s tax legislation may also affect you this year. Here are just a few items to consider:
- The deduction for state and local income taxes and real estate taxes is limited to $10,000 total. We are seeing clients in New Jersey, New York, Illinois and California (just to name a few states) that are feeling this limitation. These states tend to have higher state income taxes and higher property taxes. Some taxpayers may be losing the federal tax benefit of paying those other higher taxes.
- Deductibility for home mortgage interest is now limited to $750,000 of indebtedness for purchases occurring after Dec. 14, 2017. For homes purchased before Dec. 15, 2017, the limit is still $1 million. Any taxpayer with a balance on their HELOC should confirm with their accountant whether that interest is still deductible.
- Miscellaneous itemized deductions have been repealed under the new law. Two of the big components of this were the deductibility of investment management fees and employee business expenses.
To combat the changes to the above Schedule A deductions, the Tax Cuts and Jobs Act of 2017 does increase the standard deduction for those married filing jointly from $12,000 to $24,000. The hope is that the increase will help minimize the deductions some taxpayers may have just lost.
Another change from the 2017 tax bill was that tax rates dropped in 2018 – the highest rate now being 37% instead of 39.6%. We’ve reviewed some clients’ tax estimates for 2018, and even though they may have lost some deductions, the change in tax rates may actually drop their total tax bill. After some of the preceding changes, fewer taxpayers may be subject to the AMT tax, which may help lower your overall tax bill as well.
While the changes I’ve discussed today are just a few of those reflected in the new tax law, they will likely touch a lot of dentists. This is why we strongly encourage our clients and our readers to talk with their accountant about their estimated 2018 tax bill. On brief reflection, how might these changes affect your own taxes and any planning might you be able to do before year-end?
If you have questions or would like to discuss this topic further, please don’t hesitate to reach out to schedule some time. As always, if there are specific topics you’d like us to cover in Finance32, please send us an email!