Tax reform and Impact for Individuals

Tax reform and Impact for Individuals

The tax reform bill, officially known as the Tax Cuts & Jobs Act was passed by Congress and signed into law in December 2017. Most provisions take effect for tax years beginning 2018. The following is an overview of many of the provisions in the bill affecting individual taxpayers.

Tax Rates
The tax rates for all income brackets have been reduced. The focus has been on the top rate being reduced from 39.6% to 37% however the tax rates for all tax brackets have been reduced. For example, the 15% bracket is now 12% and the 28% bracket is now 24%. Therefore regardless of your income level, your marginal tax rate should be lower.

Standard Deduction
The standard deduction has been doubled. The deduction is $24,000 for Married Filing Joint, $18,000 for Head of Household and $12,000 for all others. In prior years, approximately 105 million taxpayers or 70% of all filers claimed the standard deduction. Therefore for most taxpayers this increased standard deduction will result in significant tax savings and simply the tax filing process for many more.

Personal Exemption & Child Tax Credit
The personal exemption has been eliminated however the child tax credit has been increased. The tax credit has been increased to $2,000 per qualifying child and the maximum refundable portion has been increased to $1,400. The threshold at which the credit begins to phase out was increased to $400,000 for married taxpayers filing a joint return and $200,000 for other taxpayers.

Mortgage Interest
The home mortgage interest deduction was modified to reduce the limit on acquisition debt to $750,000. The prior law limit was $1,000,000. Mortgage debt on the acquisition of a principal residence prior to 2018 will be allowed the prior law $1 million limit. Interest on home equity loans has been repealed.

State and Local Taxes
Individuals are allowed to deduct up to $10,000 ($5,000 for married filing separate) in state and local income or property taxes.

Miscellaneous Itemized Deductions
All miscellaneous itemized deductions subject to the 2% of AGI limit are repealed.

Medical Expenses
For 2017 & 2018, the threshold for deducting medical expenses was reduced from 10% to 7.5% of AGI. Therefore more taxpayers will be able to claim medical expenses in these years.

Pass-through Income Deduction
There is no tax simplification here. This is complicated and in order to understand it, you first need to know some definitions:

  1. Qualified Business Income (QBI). QBI is generally net income from your sole proprietorship, partnership or S corporation.

  2. Qualified Property. Qualified property is tangible property subject to depreciation used in your business at the end of the tax year.

  3. Specified Service Trade or Business. A specified service trade or business is any business involving the performance of services in the fields of accounting, health, law, consulting, financial services, athletics, or any business where the principal asset is the reputation or skill of one or more employees or owners.
  4. Threshold amount. The threshold amount is the amount above which both the limit on specified business and the wage limit apply. The threshold amount is $157,500 for individual taxpayers and $315,000 for taxpayers filing jointly. Phase-ins apply which means that the benefit decreases as the income increases.

If your taxable income is below the threshold, the deductible amount for each of your business is simply 20% of your QBI with respect to each business.

If your taxable income is above the threshold, you are subject to limitations which are determined by your occupation and a wage & capital limit.

  1. If your occupation involves a specified service trade or business, your deduction phases out as your income exceeds the threshold amount

  2. For all other businesses, the wage and capital limits will apply which may result in a reduced deduction.

Further explanations of the pass-through provisions are beyond the scope of this article.  The tax bill also contains many other provisions not discussed in this article.  If you have questions or want to learn more please contact our office for a consultation.




1099 New Filing Deadline

Make note that the filing deadline for 1099's has been changed to January 31, 2017. 

The IRS has become muchmore aggressive in assessing penalties and the penalties for failing to file 1099's can be very significant.  Therefore we strongly encourage you to make sure you meet this filing deadline. 

Generally, you are required to issue a 1099 for payments made in the course of your trade or business.  This also includes nonprofit organizations.  Form 1099-MISC should be filed for each person or entity to whom you have paid during the year at least $600 in services (including parts and materials), rents, prizes and awards, medical and health care payments, and other income payments.  Payments to a corporation may be excluded.  Additionally, payments for merchandise may be excluded.  Other Form(s) 1099 are required for payments if interest, dividends, royalties, etc.  The filing threshold for these 1099's is $10 in most cases.

As mentioned above, the penalties for failure to file a Form 1099 have increased significantly.  Income tax returns now contain the following questions:

  •    Did you make any payments that would require you to file Form(s) 1099?
  •    If yes,  did you or will you file all required Forms 1099?

Failure to answer these questions truthfully may subject you to additional penalties of perjury.  Therefore it will be important that you answer these questions truthfully.  In the event of an IRS audit, one of the first items verified will be compliance with the filing of Forms 1099.



Breaking Down Section 1031 "Like-Kind Exchanges"


Breaking Down Section 1031 "Like-Kind Exchanges"

My father-in law and I were watching Million Dollar Listing the other day, and the brokers had a seller and a buyer that were trying to get their respective deals to close quickly due to "tax issues." Whenever accounting issues come up in daily conversation, tax nerds, like ourselves, get I thought this would make a good topic for the blog this week. 

What is a 1031 "Like-Kind Exchange" 

Generally speaking, a like-kind exchange is a swap of one business or investment asset for another, and you will have either limited or no tax due at the time of the exchange. Basically, the IRS allows you to change the form of your investment without cashing out or recognizing a capital gain, allowing for your investment to grow tax deferred. There's currently no limit on how many times you or how frequently you roll over the gain from one piece of investment real estate to another. 

There is one catch! You can trigger a gain known as depreciation recapture when depreciable property is exchanged in a 1031. This type of gain is taxed as ordinary income...not good!  If you swap one building for another, you can avoid this recapture, but if you exchange improved land with a building for unimproved land without a building, the depreciation you previously claimed on the building is "recaptured" as ordinary income...hence the term, "like-kind exchange." in order for the swap to qualify as a section 1031 exchange. 

What you need to know when contemplating a 1031 "Like-Kind Exchange" 

  • Provision is only for investment and business property; 
  • "Like-kind" is a VERY broad term, but you should consult an tax-professional before pulling the trigger on an exchange;
  • You can do a "delayed exchange," also known as a Starker exchange; 
  • Two Key Timing Rules:    
  1. You must designate, in writing, a replacement property within 45 days of the sale of your property; and, 
  2. You must close on the new property within 180 days of the sale of the old. 
  • The IRS allows you to designate three replacement properties as long as you eventually close on one of them; and, 
  • If you receive's taxed. 

Section 1031 exchanges can be great for investors, but you have to be wary of the potential tax pitfalls. If you have any questions, feel free to reach out to our tax advisors.  




Here's hoping that college memories last as long as your student loan payments...


Here's hoping that college memories last as long as your student loan payments...

The US News and World Report recently came out with a survey detailing what it is that Millennials want, why we are important, and just why older generations don't understand millennials.  It's a quick skim, but pretty interesting!

Let's set the scene. When I graduated from Baylor, none of these things in this survey were on my radar. The only thing I was really worried about was whether or not I was going to miss the Gilt daily flash sale, or where we were going for happy hour Thursday night. 

I was putting a tiny % of my paycheck into my company's  401(k), making my minimum student loan payments and covering all my other monthly bills, so clearly I thought the rest should be allocated to my shopping budget. Since I had set up all my student loans (which were close to $60K) to auto-pay, I really did not look at them until I had been paying them for 3 years. I got a notice from Wells Fargo thanking me for making my payments on time, and telling me they were reducing my interest rate by .05%...whoop whoop. That was a turning point for me...

I logged into all the different student loan providers and realized how long they were projecting for me to pay off my loans as well as the amount they were showing I would end up paying for the amount I borrowed.  It was terrifying, and I hated every minute of it. I made an excel spreadsheet with the amount owed, and the interest rate I was being charged, and I put the ones with the highest interest rate at the top.

I heard this saying a long time ago, "how do you eat an bite at a time." That was my plan of attack. I was going to stick to my budgets and use all extra income to start to chip away at the elephant of student loans that I had. Within the first year, I paid off the two highest interest rate loans and I was well on my way to paying off the rest. I put any raises and bonuses I received towards paying off my student loans.

In my debt-free journey I got to a point that the interest rate I was paying on the debt was so low, that I could actually make more interest through investments, so I decided to go that route. Your goal may be different, and your goal is to be completely debt-free. Whatever works for you, but the faster you can pay off those student loans the easier you can make financial decisions for the future. No one wants to be paying off their own student loans when they feel like they need to start saving for their own children's college. 

If you're looking for new ways to learn to save money I suggest checking out




Exploring the Tax Differences of Rental Income


Exploring the Tax Differences of Rental Income

I was talking to a group of friends the other day, and someone mentioned that they were considering purchasing a rental property as an investment for the “tax advantages.” Although I don’t have many friends in the stage of life where they are looking for this type of investment, I thought it might be a good topic to discuss.

If you receive rental income for the use of a dwelling, such as a house or an apartment, you deduct certain expenses that correlate to this dwelling on your tax return. These expenses may include:

  • mortgage interest;
  • real estate taxes;
  • casualty losses;
  • maintenance and repairs;
  • utilities;
  • insurance; and, depreciation.

These expenses are netted against the rental income you received in order to reduce the amount of rental income that is subject to tax. If the purpose of your rental is to make a profit, and do not use the dwelling unit as a personal residence, then your deductible rental expenses can actually be more than the rental income – which creates a loss. I know what you’re thinking….”this sounds pretty great! A loss that will reduce the amount of taxes I pay!!!”  However, you should read on, because depending on how your rental activity is classified, your tax picture can look very different! 

Passive vs. Active - What's the Difference?  

Income and losses on your tax return are divided into two categories:

Non-passive – Defined as businesses in which the taxpayer materially participates; and,

Passive – Rentals and businesses without material participation. 

This classification is KEY!

The IRS’s Passive activity rules prevent investors from deducting passive activity losses from their non-passive sources of income. In other words, passive activity losses may only be netted against passive activity income. So if you have a passive rental loss, and no other passive active income, your losses generally are limited by the "at-risk" rules and/or the passive activity loss rules.

But Wait, There are exceptions to this Rule!

rental real estate allowance under IRC § 469(i)(8)

A taxpayer may deduct up to $25,000 in rental real estate losses as long as the taxpayer actively participates and has less than $100,000 in income.  The $25,000 rental real estate allowance under IRC § 469(i)(8) allows individuals to offset losses from rental real estate without necessarily having passive income, but once your income goes over $100,000, the $25,000 offset is limited. 

Short-term rentals with material participation

As most people know, the tax code is extremely complicated, with very specific definitions.The activity is not deemed a rental property (and therefore, not passive income) if:

  • The average period of customer use is 7 days or less; OR,
  • The average period of customer use is 30 days or less and significant personal services are provided (such as maid service, cleaning services, etc.)

If either of the above apply to your rental property, the activity is not considered passive rental activity.  It is treated as a business. If you have material participation in the business, your losses are not limited

There is a qualifying disposition under IRC § 469(g).

If you do not have passive income in a year that you have passive activity losses, your loss is carried forward so that you can apply your passive activity losses in future years that you may have passive activity income. When you sell that rental property, any gain on the sale of that property is classified as passive income, so those carried forward losses can finally be used! 

The taxpayer meets the requirements of IRC § 469(c)(7) for real estate professionals.

This is a very specific definition, but if you, or your spouse, meet these requirements, your losses are also not limited. 

The IRS definitely has many definitions and rules around these requirements, so speak with one of our tax professionals to see if you may fall into one of the exceptions noted above!  


Summer Tax Moves for the Savvy Small Business Owner or Entrepreneur


Summer Tax Moves for the Savvy Small Business Owner or Entrepreneur

Since it is nowhere near April 15th, you, like us, are probably trying your very best to not think about next year's tax season; however, we wanted to give you a few tips to consider during summer that can possibly help with your 2015 tax bill. 

  • Adding Vacation time to a business trip:  Let’s suppose you booked airfare to meet with a client. Generally speaking, you can deduct the cost of your business related expenses, which typically includes airfare, lodging, and 50% of your meals – as long as the primary purpose of your trip is business. Costs attributable to the vacation days (i.e., lodging, meals, and transportation) are not deductible.  If a weekend comes between a Friday and a Monday work day, you can treat Saturday and Sunday as work days!
  • Summer socials for business clients:  You can deduct 50% of the costs attributable to business clients (spouses/dates included), if the entertainment precedes or follows a business meeting.
  • Kids Day Camps:  If your children are under the age of 13, you can claim the “child care credit” for sending them to day camp (overnight camps don’t count here), so you and your spouse can work during the summer months.
  • Office-wide picnic:  Typically meals and entertainment is limited to a 50% deduction, however, a business can deduct 100% of the expenses for a summer picnic if the event isn’t restricted to the higher-ups (basically, don’t lose anyone’s invitation…)
  • Review your portfolio:  This is the time of year you should take a look at your overall financial picture, and determine which investments have been winners in 2015 (Strong US Dollar), and which ones have been losers (hope you don’t have any investments in Greece right about now…)
  • Tidying up your vacation home:  Although qualified expenses can offset rental income, you can’t claim an overall rental loss if personal use exceeds the greater of 14 days or 10% of the rental time. However, time spent cleaning up or maintaining your vacation does not count as personal use, even if the rest of the family comes along!

As usual, record-keeping is the key, so make sure you maintain all receipts records for any deductions you want to claim. Have any questions or want more details, let us know!!