Happy New Year!  The new tax bill became law yesterday, and while many questions remain to be answered, we are here to help you work through them.  In this newsletter we are providing you with:

1. A brief explanation of key changes that may impact you.

2. Some planning tips, including actions you can take before the end of the year.

3. A link to our 2017 Tax Data Organizer, which you need to complete and send to us prior to your tax appointment for your 2017 taxes.

We look forward to working with you again in 2018!

THE NEW TAX BILL

The tax bill is brand new, and many experts (including the IRS) are still trying to understand all the consequences and interpret the language.  We will continue to update you with more information as the IRS issues guidance clarifying the bill's provisions.  In the meantime, below are a few key changes that may impact your 2017 and 2018 taxes.

• Individual rates will range from 10% to 37%, and the corporate tax rate will be 21%.  New tax rates can be found here:  New Tax Rates.
• The standard deduction will increase to $12,000 for single taxpayers, $24,000 for married filing jointly, and $18,000 for head of household.  As a result, many taxpayers who were previously itemizing deductions (including mortage interest, state and local taxes, charitable donations, etc.) will no longer itemize, and instead will take the standard deduction.
• Personal and dependent exemptions are eliminated.
• The Child Tax Credit is enhanced and a new Family Tax Credit was enacted.
• Mortgage interest deductions will be limited to underlying indebtedness of up to $750,000 ($375,000 for married filing separate) for home purchases beginning December 15, 2017 and no deduction will be allowed for equity debt.
• Personal deductions for state income tax and/or property tax will be capped at a maximum of $10,000.
• No deduction will be allowed for miscellaneous itemized deductions subject to the 2% floor including unreimbursed employee expenses, tax preparation fees and investment advisory fees.
• The exclusion for moving expense reimbursements and the moving expense deduction will generally be eliminated.
• The ACA individual mandate will be eliminated and the shared responsibility payment is $0.
• AMT for individuals will be retained, but the exemption amounts are increased, and the corporate AMT is repealed.
• The gift and estate tax is retained with an increased exemption amount.

TAX PLANNING TIPS

While much remains to be interpreted, there are a few actions you can explore to potentially reduce your tax liability for 2017:

1. Pre-pay your property taxes.  If you have the cash flow, we recommend paying your Spring 2018 property taxes by 12/31/2017.  Depending on whether or not you are in "AMT", you may get a benefit on your state return only, or both state and federal.  Beginning in 2018, only $10,000 of all state and local taxes, including property taxes, will be deductible.

2. Make 2018 Charitable Contributions Now.  Given the increased standard deduction, many taxpayers will no longer benefit from charitable contributions.  As such, we advise yout to make your 2018 contributions by 12/31/2017 in order to get a potential deduction that may not help you in the future.

3. Pay for 2018 Unreimbursed Employee Expenses Now.  Begining 1/1/2018, W-2 employees will no longer be able to deduct unreimbursed employee expenses.  If you have taken such deductions in the past, and are able to pay for 2018 expenses now, you should do so.

4. Explore Converting Rental Properties into LLCs.  If you own rental property that shows profit, please contact us.  It may be advantageous for you to convert ownership to an LLC in order to benefit from the preferential tax treatment the new tax law gives certain pass through entities.

SHOULD I INCORPORATE?

Many of you have asked if it makes sense to convert sole proprietorships into S Corporations or LLCs to take advantage of the new lower corporate tax rate.  While everyone's tax picture is unique, below is some information that may help you in considering the pros and cons:

• The lower corporate tax rate only applies to "C" Corporations, not solo corporations ("S Corps") or LLCs.
• All S Corps allow the owner to pay themselves a "reasonable wage" from the net profit of the business (on which all payroll taxes are paid), and then to pass through a dividend of the remaining profit which is not subject to payroll taxes.  This can be a tax savings mechanism, but depends on the amount of the dividend, and other pieces of your tax picture.
  • Some S Corps and LLCs will enjoy preferential tax treatment as "pass through entities."  The benefit is that 20% of the net profit of the pass through entity is tax free.  The remaining profit is taxed at a maximum rate of 29.6%.  HOWEVER, our current understanding is that "personal service providers" are excluded from this preferential treatment.  The legislation explicitly excludes accountants and attorneys but otherwise does not define "personal service provider."  While we hope the IRS will issue guidance on who qualifies as a "personal service provider," historical IRS interpretation of that category indicates it is unlikely that mental health professionals, executive coaches and other similar service providers would qualify for the preferential pass through tax treatment.
• California charges a minimum annual fee for both S Corporations and LLCs of $800.
• S Corporations must file a separate tax return.  We charge a minimum of $750 to do an S Corporation tax return, in addition to our regular personal tax return fee. 
• LLCs have a state filing requirement.  We charge $100 to do this paperwork.

If you have questions about incorporating, please feel free to email or call or discuss when we meet to do your 2017 taxes.