Tim's Top Individual Tax Questions
In this episode of The Bottom Line, EisnerAmper Private Business Services Group manager, Tim Schuster, discusses some of the individual taxation questions he’s receiving from clients in the wake of tax reform. Tim tells us about the impact on deductions including itemized, state and local, mortgage interest and qualified business income.
Dave Plaskow: Hello and welcome to The Bottom Line. This podcast examines the everyday business and finance issues faced by closely held and private businesses. We hope to provide you with news you can use in what we like to think of as a jargon-free zone. I’m your host Dave Plaskow and with us is Tim Schuster, a manager in EisnerAmper’s Private Business Services Group. In our last episode we discussed some of the more common business tax questions that Tim has received from clients as a result of the recent tax reform legislation. Today, we’ll look at the individual tax side of things. Hey Tim.
Tim Schuster: Dave, it’s a pleasure.
Tax reform. So, John Q. Public – a lot of questions out there on the individual level. What are the questions that you are most often getting from your clients specifically?
TS: Well, let’s start with my big take away from tax reform and that is that the overall rates have decreased and we still have seven brackets. Across the board personal exemptions have been repealed. Standard deductions, in most cases, have doubled and child care credits have increased.
TS: You know we can talk more specifics later in this podcast on other items as well.
DP: Sure. Are there any other limitations to itemized deductions?
TS: Yes there are. Medical expenses have been expanded for a couple of years by lowering the adjusted gross income limitation back down to 7.5%, like it was a couple of years ago. Currently, it’s 10% for the 2017 tax-filing season. The charitable-contribution adjusted-gross-income limit increased from 50% to 60%. Personal casualty losses have been repealed, except for federally declared disaster areas. All deductions that were subject to 2% floor have been repealed. Some examples of this are investment fees, miscellaneous deductions and job expenses. As a side note, in adjustments for AGI, moving expenses have been completely repealed except for military personnel.
DP: What’s another question you’re getting a lot?
TS: Especially where we are in New Jersey, the new rules for state and local deductions. You know, this impacts a lot of our residents, New York residents, Connecticut listeners. State and local and property tax deductions are now limited to only $10,000. So what does this actually mean? If your real estate taxes paid and assessed were $15,000 and you paid in about $14,000 in state income taxes, you’re limited to a deduction of only $10,000, that’s it - completely capped.
DP: Anything on home ownership?
TS: Absolutely. Mortgage interest is limited to $750,000 of acquisition indebtedness and, this is huge, there has been a partial repeal of deductions of home equity loan indebtedness. It is allowed if it is used for improvements to the home. Under the old law you could take up to $100,000 for anything, which is, if you buy a car, you buy a boat, credit cards and so forth.
DP: What about the new QBI deduction?
TS: This thing is the new kid on the block – section 199(a), or qualified business income deduction. I’m going to try to keep this brief as this subject is extremely voluminous and is extraordinarily technical, but the qualified business income deduction is a new deduction meant for S corporations, limited liability companies, partnerships, and sole proprietorships, commonly known as flow through entities, taken at the individual level, not the entity, regardless of whether you itemized. The deduction is calculated at 20% of the trade business income of those entities. There are limitations based on the owner’s taxable income, W2 salaries of the business and whether or not the business is a service or non-service business.
DP: Got it.
TS: This is probably the most complicated portion of the new law, so …
DP: Remember, jargon free zone!
TS: I know, that’s why I’m trying to keep it there. Business owners who might be able to take advantage of this should be speaking to their tax advisors now, and hopefully it’s one of us. So there may be some tax strategies and planning moves that could be considered now that may not be available if you wait until the end of the year.
DP: And lastly, is there a limitation of taxpayers providing professional services for QBI?
TS: Absolutely, yes. Professional services are defined as those in specific services: consulting, athletics, financial services, brokerage services, accounting, law and actuarial sciences, performing arts and medical services. Engineers and architects are excluded for whatever reason. Without getting too much into the weeds, if you are in the service industry and your taxable income is below $315,000 if you’re married filing jointly, or $175,000 single, you will qualify. Anything over that you may want to consider some tax planning. Again, I really want to emphasize this – these are brand new tax calculations and I highly advise you start having these conversations now with your tax advisor.
DP: Well Tim, that’s some good front-line experience and information that you’ve got there.
DP: How about segueing into one of your New Jersey historical fun facts?
TS: It would be my pleasure. So New Jersey has been deemed the crossroads of the revolution as more battles of the Revolutionary War were fought in New Jersey than any other colony. Not far from where we’re recording this was George Washington’s famous crossing of the Delaware River on Christmas night, which was symbolic on our quarter back in 1999, if I remember correctly.
DP: Tim, thanks again for all this information.
TS: My pleasure.
DP: And thank you for listening to The Bottom Line as part of the EisnerAmper podcast series. If you have any questions, or there’s a topic you’d like us to cover, email us at contact@EisnerAmper.com. And visit EisnerAmper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.