By Frank Stitely, CPA, CVA Stitely & Karstetter, CPAs Tax Reform: How to Make the Tax Reform Act Work for You and Your Clients By Frank Stitely, CPA, CVA Stitely & Karstetter, CPAs

The Tax Lady Says… The New Tax Act created lots of winners and losers.

And the winners are… Business owners People without a lot of itemized deductions People with children under 17 years of age People who used to pay alternative minimum tax Everybody (to some extent)

Business Owners!!!! 20% pass thru deduction for: Sole proprietors S corporations Partnerships Limited by industry and income phase outs Expanded depreciation deduction 21% C corporation flat tax rate Qualified Opportunity Zone companies

People without many itemized deductions New higher standard deduction Single $12,000 Head of Household $18,000 Married $24,000 Additional deduction for the elderly $1,600 for single $2,600 for married

People with rug rats (children) New $2,000 credit per rug rat under age 17 New $500 credit for other dependents Higher phase out for the credit $200,000 AGI (single) or $400,000 AGI (married)

People who used to pay AMT What is the Alternative Minimum Tax? The AMT primarily affected people in the $200K to $500K income range. Now it primarily affects people with greater than $1 million in income. Many people were able to use AMT credit carryforwards.

Everybody (let’s party)!!!!!!! 3% rate cut (2.6% for the highest bracket) Expanded tax brackets. More income is taxed at lower brackets.

And the losers are… Employees with W-2 income greater than $500,000 with lots of exemptions Salespeople and employees with lots of business expenses People with large investment management fees People (and companies) with net operating losses DINCs (double income, no kids)

High W-2 income Under withheld from new IRS withholding tables State and local tax deduction limited to $10,000 State and local income taxes (high tax states really hurt) Real estate taxes Personal property taxes

Salespeople and Employees with Business Expenses Unreimbursed expenses are no longer deductible Area with highest incidence of tax cheating Treasury recovers money from cheating IRS can redirect money spent auditing this

People with Large Investment Management Fees Investment management fees are no longer deductible. Tax preparation and legal fees (nonbusiness) are no longer deductible.

People (or businesses) with large net operating losses Losses can only be carried forward. Losses can only offset up to 80% of income. Losses from 2017 or prior are still usable as before.

DINCs (double income, no kids) Personal exemptions are gone. $10,000 limitation on state and local taxes. BTW, kids should not claim themselves anymore, if possible.

Maximizing the gain, minimizing the pain Maximizing the the 20% pass thru deduction Fixing salary withholding Reclaiming business expenses for salespeople and employees Bunching itemizing deductions

Maximizing the 20% pass thru deduction No one is a consultant anymore Few firms are truly consultants under the tax code. Change NAICS codes, business descriptions and web sites to remove “consulting.” Look at S corporations vs. partnerships vs. sole proprietorships. High income owners need salaries expense to avoid phase out. Sole owner S corporations have salaries. S corporation salaries – how low can you go? Owner salaries reduce the deduction. Why zero salary won’t work. Pension considerations with reduced salaries. Plans based on % of salary may not be as good anymore. 401(k) plans may be a way to keep salaries low but pension contribution higher than with an SEP.

Fixing salary withholding Example of the problem Family W-2 income $250K with $25K federal withholding Withholding is only 10% of income (not going to work) Ending up owing $10K - $15K (and not very happy) People, who got tax cuts, sometimes owed more money. Withholding went down more than taxes. Withholding tables still reference exemptions, when exemptions don’t exist anymore. Nobody knows what an exemption is at this point for withholding purposes. Focus on average tax rate to adjust withholding. May need a professional to do this. (Math is hard.)

Reclaiming business expenses for salespeople and employees Get employer to reimburse for expenses in exchange for lower gross compensation. Unwillingness to do this says a lot about the employer. Win-win for everybody May wish to become independent contractor. Run the numbers first!!! Must pay both halves of Social Security and Medicare Great potential pension benefits 20% pass thru deduction

Bunch deductions for two years into one year. Bunch deductions to maximize deductions in years when you can itemize. Take the standard deduction in others. Medical expenses Charity Mortgage interest (extra payment) Charity deduction through RMD (required minimum distribution from IRA) The only sensible way to donate if you’re over 70 years old. Money goes directly from IRA to charity. Limited to $100K. Deduction from gross income – not an itemized deduction. Reduces income for all kinds of areas – like taxability of Social Security and deductible medical expenses.

Questions???????????? The Tax Lady thanks you for supporting the Loudoun Estate Planning Council. Please contact her care of: Frank Stitely, CPA, CVA fstitely@skcpas.com (703) 818-8284