The good news is that the new tax law, the Tax Cuts and Jobs Act, includes lower tax brackets and a near doubling of the standard deduction. However, there is also much uncertainty looming regarding the new tax law, as several provisions within the Tax Cuts and Jobs Act (TCJA) remain unclear. Changes to income, confusion regarding itemized deductions for state and local taxes, and other unclear provisions have already caused some taxpayers complications. The new tax law makes strategic tax planning for 2018 more important than ever.
You Need Strategic Tax Planning
Changes to Income
Total income isn’t the same as it used to be. Beginning in 2018 earned income, interest and dividend income, retirement plan income, IRAs, and annuities will all qualify for new, lower rates as part of your total income. Big changes to alimony will be coming in 2019. The biggest rule change for adjustments to income involves eliminating the deduction for moving expenses, except for active-duty military personnel moving pursuant to a military order.
Of all the changes to income, the new law’s biggest change for most business owners will be a new kind of income from pass-through businesses. The tax code has always recognized that there are different types of income, and as such treated them differently.
- Ordinary income is what you earn from your work or business.
- Investment income is income you earn from your portfolio.
- Passive income is income from activities where you don’t “materially participate.”
With the new tax law, Congress has created a fourth type of income, qualified business income (QBI). As part of your total income, your business profit and loss may qualify for this new “qualified business income” income deduction.
This new income category will allow businesses, S-corp, Partnership, and Sole Proprietorship, to deduct 20% of pass-through income, calculated on an activity-by-activity basis, from your taxable income for the year.
Of course, there are limits to this new deduction, but there are also several ways to maximize the new benefit. As a business owner, learning how to maximize QBI is just one reason why you need strategic tax planning, this year more than ever. Just a few ways business owners can take advantage of QBI include:
- Create W2 income
- Segregate side income into a separate entity
- Move contract employees to W2 employees
A Tax Blueprint® from Financial Gravity is a proactive, strategic tax reduction plan that is customized specifically for you and your business and will help you realize the best way to maximize QBI and all the other changes to income the new tax law creates.
State and Local Income Tax
A big change to the tax law that could affect many taxpayers is the cap on state and local income tax (SALT) deductions. Previously this deduction was unlimited, but the TCJA imposed an annual limit of $10,000 on this deduction beginning in the 2018 tax year.
Lowering the SALT deduction could result in how some states raise revenue. States could grant state tax credits to encourage residents to make charitable contributions to certain funds, they could switch to employer-side payroll taxes, or they could implement business franchise taxes. While charitable contributions could let ‘donors’ sidestep the $10,000 deduction limit, the other options would create table options that businesses could deduct.
State and local taxes aren’t the only itemized deduction that will see big changes. While changes to casualty losses don’t lend themselves to planning strategies, changes to medical and dental expenses, mortgage interest, and charitable gifts all have opportunities for strategic tax planning to lower your taxes.
Build Your Future
Don’t wait to see how the new tax laws will affect you, make a proactive plan to maximize the new law to your advantage. A strategic tax plan should be a business essential, and it’s likely one that you aren’t using. Think of building your future like building a house. You start with the right design, your Tax Blueprint®, a plan that is specifically created for you and your business.
With your design in hand, you can start building. Saving money on taxes so you can focus on growing your business and building the future you want. Financial Gravity can do the heavy labor with our Tax Operating System®. We implement your strategic tax plan, taking care of the work, and making it easy for you.
With uncertainty and complications surrounding the new tax law, it is more important than ever to utilize strategic tax planning. Financial Gravity is here with a quick free assessment to start your Tax Blueprint process. Don’t wait to start saving money on your taxes. Contact us today to get started on your personal strategic tax reduction plan!