With the year just starting, I wanted to give some practical applications, suggestions and questions you should be asking yourself or your employer, or changes you should make to internal processes because of changes in the Tax Cuts and Jobs Act.
Miscellaneous Itemized Deductions
The miscellaneous itemized deductions many of you take on your individual returns are now no longer available. Things like unreimbursed business expenses, home office use if you are an employee, and tax return preparation fees are examples.
If you are an employee and you have a lot of unreimbursed expenses and your company is aware of them, you should determine what your average amount of expenses have been. Now, don’t think I’m crazy, but you should suggest to your company that they install an accountable expense reimbursement plan and offer to take a pay cut for the amount of your expense allowance. As long as you use the expense allowance, it should save you taxes – both income tax and your FICA and medicare tax will be lower.
If you are an employer, you should make the changes for your employees. It will save you payroll taxes because you will be matching a lower amount of those taxes.
If you need help with a model to show your employees how it will save them money by taking a pay cut, without hurting their cash flow, let us know. We can design a spreadsheet that will show the savings.
There are some traps to be aware of when setting up an accountable expense reimbursement plan. As you will recall from the last memo, business entertainment is no longer deductible. So, if you reimburse for these expenses, the company will not get a deduction for the amounts reimbursed.
As it relates to the fact that entertainment expenses are no longer deductible, most of you have an account in your chart of accounts called meals and entertainment. I suggest you have three separate accounts now – Client Meals, Entertainment, and Office Meals. That way, depending on final regulations issued by the IRS, you will not have to go back during the year and separate them.
Because of the new higher standard deduction ($12,000 single; $24,000 MFJ) many of you may not be in a position to itemize deductions every year; but, if you combined two years together you may exceed the threshold. If your itemized deductions (property tax, mortgage interest and charitable contribution) will not meet these new thresholds, we should discuss the possibility of “bunching” your property taxes and contributions in alternating years.
For instance, for 2018 since this is the first year, plan to take the standard deduction and do not make any charitable contributions or pay your property taxes. In January of 2019, pay your 2018 property taxes and make the charitable contributions you would have normally made in 2018. Then in December of 2019, pay your 2019 property taxes and make your 2019 charitable contributions. By doing it this way, you have two years of deductions in one year (bunching), and it could allow you to take more than the standard deduction in alternating years.
We will continue to share practical tips occasionally along with our educational tax reform newsletters. If you have any specific questions about your personal situation, please feel free to reach out to any of the tax professionals at WSW and we will be glad to answer any questions you may have.
As a reminder, this bill is extremely new, and we are constantly looking for guidance and interpretations on many of the changes that were made. This was a tax cut and tax reform bill, but what was not accomplished with this bill (unless you are someone who only gets W2 income and does not itemize deductions) is any form of simplification. In fact, there are several provisions in this bill that are quite difficult and cumbersome.
Also, please remember since we are now in tax filing season, none of these changes affect your 2017 tax returns which we are getting ready to prepare for you.
Please be on the lookout for these tax reform memos. I will be sending them out more frequently on specific topics so you will have information to help us plan for your 2018 year.