Surprise! You May Qualify for These 2018 Tax Breaks
This year, I recommend you give your tax preparer an extra dose of love and grace. Every certified public accountant I know is scrambling to learn the new tax law and make sure their clients can benefit. However, there are only so many hours in the day, so we recommend being pro-active in planning for 2018 taxes. Here are two law changes of which you should be aware.
Qualified Business Income (QBI) Deduction
If you have your own business that is not a C-Corporation, and your total income is less than $415,000, you may be eligible for a Section 199A qualified business income (QBI) deduction. (If you are a W-2 employee or your income is significantly above $415,000, this wrinkle in the new tax law likely doesn’t apply.)
The QBI deduction is subject to many limitations, but in summary, it is a 20% deduction on net business income. The goal of this deduction is to create some fairness, because most C-corporations qualify for a 21% top tax rate. If you have an inkling you may qualify for this deduction, we recommend you set up an appointment with your CPA as soon as possible. The deduction is for NET income. That means if you have a business, you may have the ability to lower your net income in order to qualify for the credit. Your CPA will likely be most familiar with your business and can suggest ways to ensure you fall into the net income range to qualify for this deduction. You do NOT want to be thinking about this in December. The time to act is NOW.
Child Tax Credit
In the past, most AFG clients didn’t take the child tax credit. Either incomes were far too high to qualify, or the children were long gone. Now, under the new tax law, way more people may qualify, including retirees if they have a qualifying relative they support.
This new $2,000 credit begins to phase out at $400,000 of modified adjusted gross income (MAGI) for joint filers. For all other filers, the phase out begins at $200,000. Assuming all the qualifying child definitions are met, this credit applies for kids under age 17. There are specific rules related to support, place of abode, etc. We recommend you bring any changes in your family situation to the attention of your CPA or tax preparer.
For example, you may have a grandchild in your household, stepchildren, or other dependents that could qualify you for this credit. Even if the person you are supporting is not a child, there is another $500 credit available for each dependent that may not qualify for the above credit. This includes the taxpayer or spouse’s lineal ancestors, step parents, and many others. It also includes children 17 to 18, or up to 23 for full-time students.
Again, there is a litany of questions to make sure a taxpayer qualifies. However, in this age of blended families and multiple families living in one-household, it is worth going over your situation with your CPA.
Take the Time to Plan
We wanted to highlight these two opportunities to make sure you have ample time to plan if there were any additional steps you could take between now and the end of the year. Not all situations merit a special meeting with your tax preparer. However, we recommend bearing in mind the story of the man who married the young widow with three children. They planned a romantic wedding on New Years Eve, to take place after the stroke of midnight. Because he never discussed his plans with his CPA (who would have advised him to move the time back to about an hour before midnight), he lost out on about $20,000 of tax savings. Moral of the story: forewarned is forearmed, so plan accordingly.
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