Tax Changes Coming in 2018

Congress appears poised to enact a major tax reform law that could potentially make fundamental changes in the way you and your family calculate your federal income tax bill and the amount of federal tax you will pay. Keep in mind, however, that while most experts expect a major tax law to be enacted this year, it is by no means a sure bet. So keep a close eye on the news and don't swing into action until the ink is dry on the President's signature of the tax reform bill.

 

Beginning next year, the bill would repeal or reduce many popular tax deductions in exchange for a larger standard deduction. Here's what you can consider doing before year end to maximize your tax benefits:

For taxpayers that itemize:

• Pay the last installment of estimated state and local taxes for 2017 by December 31 rather than on the 2018 due date and prepay real estate taxes on your home.  They are proposing limiting the taxes that can be included in itemized deductions to $10,000.

• Because most other itemized deductions would be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many. If you think you will fall in this category, consider accelerating some charitable giving into 2017.

Timing of business income and deductions:

Due to a general reduction in tax rates and new reduced tax rates on business income in the tax reform bill, it will often be advisable (more often than most years) to defer income and accelerate expenses. So if you have purchases you need to make in the near future, accelerating those expenses into 2017 will likely result in greater tax savings than incurring the same expense in 2018. Similarly, income may be deferred by delaying billings (cash-basis taxpayers) or delaying deliveries (accrual-basis taxpayers).

We have included the proposed tax rates for single and married taxpayers below.  If you would like more details about any aspect of how the proposed legislation may affect you, please do not hesitate to contact us. 

 

FOR MARRIED INDIVIDUALS FILING JOINT RETURNS

      AND SURVIVING SPOUSES:

If taxable income is:          The tax is:

--------------------           -----------

Not over $19,050               10% of taxable income

Over $19,050 but not           $1,905 plus 12% of the

  over $77,400                   excess over $19,050

Over $77,400 but not           $8,907 plus 22% of the

  over $165,000                  excess over $77,400

Over $165,000 but not          $28,179 plus 24% of the

  over $315,000                  excess over $165,000

Over $315,000 but not          $64,179 plus 32% of the

  over $400,000                  excess over $315,000

Over $400,000 but not          $91,379 plus 35% of the

  over $600,000                  excess over $400,000

Over $600,000                 $161,379 plus 37% of the

                                 excess over $600,000

 

FOR SINGLE INDIVIDUALS (OTHER THAN HEADS OF HOUSEHOLDS AND

      SURVIVING SPOUSES):

If taxable income is:          The tax is:

--------------------           ----------

Not over $9,525                10% of taxable income

Over $9,525 but not            $952.50 plus 12% of the

  over $38,700                    excess over $9,525

Over $38,700 but not           $4,453.50 plus 22% of the

  over $82,500                    excess over $38,700

Over $82,500 but not           $14,089.50 plus 24% of the

  over $157,500                   excess over $82,500

Over $157,500 but not          $32,089.50 plus 32% of the

  over $200,000                   excess over $157,000

Over $200,000 but not          $45,689.50 plus 35% of the

  over $500,000                   excess over $200,000

Over $500,000                  $150,689.50 plus 37% of  

                                  the excess over $500,000

 

Health Savings Accounts

For eligible individuals, health savings accounts (HSAs) offer a tax-favorable way to set aside funds (or have their employer do so) to meet future medical needs. Here are the key tax-related elements:

•       contributions you make to an HSA are deductible, within limits,

•       contributions your employer makes aren't taxed to you,

•       earnings on the funds within the HSA are not taxed, and

•       distributions from the HSA to cover qualified medical expenses are not taxed.

 

Who is eligible? To be eligible for an HSA, you must be covered by a "high deductible health plan" (discussed below). You must also not be covered by a plan which (1) is not a high deductible health plan, and (2) provides coverage for any benefit covered by your high deductible plan. (It's okay, however, to be covered by a high deductible plan along with separate coverage, through insurance or otherwise, for accidents, disability, or dental, vision, or long-term care.)

For 2017, a "high deductible health plan" is a plan with an annual deductible of at least $1,300 for self-only coverage, or at least $2,600 for family coverage. For self-only coverage, the 2017 limit on deductible contributions is $3,400. For family coverage, the 2017 limit on deductible contributions is $6,750. Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits cannot exceed $6,550 for self-only coverage or $13,100 for family coverage.

An individual (and the individual's covered spouse as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional "catch-up" contributions for 2017 of up to $1,000.

A high deductible health plan does not include a plan if substantially all of the plan's coverage is for accidents, disability, or dental, vision, or long-term care, insurance for a specified disease or illness, or insurance paying a fixed amount per day (or other period) of hospitalization.

HSAs may be established by, or on behalf of, any eligible individual.

Deduction limits: You can deduct contributions to an HSA for the year up to the total of your monthly limitations (1/12 of the annual maximum contribution) for the months you were eligible. Also, taxpayers who are eligible individuals during the last month of the tax year are treated as having been eligible individuals for the entire year for purposes of computing the annual HSA contribution.

However, if an individual is enrolled in Medicare, he is no longer an eligible individual under the HSA rules, and so contributions to his HSA can no longer be made.

Employer contributions: If you are an eligible individual, and your employer contributes to your HSA, the employer's contribution is treated as employer-provided coverage for medical expenses under an accident or health plan and is excludable from your gross income up to the deduction limitation, as described above. Further, the employer contributions are not subject to withholding from wages for income tax or subject to FICA or FUTA. The eligible individual cannot deduct employer contributions on his federal income tax return as HSA contributions or as medical expense deductions.

An employer that decides to make contributions on its employees' behalf must make comparable contributions to the HSAs of all comparable participating employees for that calendar year. If the employer does not make comparable contributions, the employer is subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period.

An exception to the comparable contribution requirements applies for contributions made on behalf of non-highly compensated employees. Under this exception, an employer may make larger HSA contributions for non-highly compensated employees than for highly compensated employees.

Earnings: If the HSA is set up properly, it is generally exempt from taxation, and there is no tax on earnings. However, taxes may apply if contribution limitations are exceeded, required reports are not provided, or prohibited transactions occur.

Distributions: Distributions from the HSA to cover an eligible individual's qualified medical expenses, or those of his spouse or dependents, are not taxed. Qualified medical expenses for these purposes generally mean those that would qualify for the medical expense itemized deduction. If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it is made after reaching age 65, or in the event of death or disability.

As you can see, HSAs offer a very flexible option for providing health care coverage, but the rules are somewhat involved. Please contact us if you would like to discuss this topic further.