Benjamin Franklin once wrote, “Nothing is certain except death and taxes.” The tax law passed in December 2017, the Tax Cuts and Jobs Act, may just be the law that proves that reference to taxes. Though there were a number of thought-to-be positive parts of the new law, some of the changes may, indeed, actually increase one’s tax bill without proper planning.
Two areas should be of concern to many. The first is the elimination of the personal exemption, formerly $4,050 per person. The standard deduction for individual income tax filers was raised substantially, from $12,700 to $24,000 for married couples filing jointly and for surviving spouses, from $6,350 to $12,000 for single filers and for married filing separately, and from $9,350 to $18,000 for heads of household. A family of four, therefore, would be losing personal exemption deductions of $16,200 while picking up only $11,300 more in the standard deduction (not considering possible extra tax reductions for the child tax credit).
This change could result in an increase in income tax liability. Earlier this year, employers were given lower income tax withholding tables without considering this issue, meaning some employees are paying in less now, but could be owing more than they did in a prior year. All employees should certainly analyze their situation to be sure they aren’t caught by surprise when their tax return is filed.
A second area of concern and an even bigger change with respect to the standard deduction may catch upper income tax filers by surprise. Those taxpayers who normally itemize deductions may no longer have enough to itemize, considering the higher standard deductions above. Without planning, that would mean that one’s home mortgage interest expense, sales and property tax deductions, as well as charitable contributions may no longer specifically provide income tax relief.
Income tax advisors should be consulted about all strategies that might helpfully affect one’s income tax liability, but there are three potential strategies for making the most of potential income tax deductions.
- Deduction bunching: For most taxpayers who itemize, this may be the simplest strategy for all potential itemized deductions. Keeping in mind that miscellaneous itemized deductions, such as employee business expenses, moving expenses, tax preparation expenses, brokerage account expenses, etc., are no longer deductible. There may be some saving grace for property taxes, sales tax on large purchases (automobiles, boats, etc.) and charitable contributions. By “doubling up” on deductions in these categories every other year, postponing or advancing big ticket purchases from one year to another or moving one year’s deductible expenses into or out of the next tax year (and, therefore, paying two years’ deductions in one year), some deductible itemized deductions may be salvaged every other year.
For instance, rather than paying property taxes and charitable donations in December annually, push the current year’s expenses into January of the next year and then pay the next year’s expenses in December of that next year, which results in a doubling up of deductible itemized deductions. (One important caution here: the new law limits one year’s deductions for sales, income and property taxes to $10,000.)
- Strategy #2, a little more complicated, is using a donor-advised fund in a community foundation, such as the Waco Foundation, for charitable donations. By giving two or more years’ of donations to the donor-advised fund, the multiple-year charitable donation may allow a large itemized deduction in one year and then the community foundation can distribute the funds to the donor’s charities in the following years as the donor directs.
- Strategy #3 would be restricted to individuals over 70½ who are being required to take distributions (Required Minimum Distributions or RMDs) from their Individual Retirement Accounts (IRAs). Such RMDs normally add to taxable income; however, if the retired taxpayer directs the administrator of his/her IRA to distribute some or all of his/her IRA directly to the charity in the form of a Qualified Charitable Distribution (QCD), the distribution will NOT be taxable to the individual. If the taxpayer had taken the distribution into his/her personal income and THEN given to charity, he/she would have income to report and would also have a charitable deduction, but if the taxpayer is not able to itemize deductions, he/she would be accounting for taxable income without an offsetting deduction.
By using the QCD, the taxable income is avoided. With that avoidance comes reduced income and income tax, and the reduction could reduce future Medicare premiums, which are based on a taxpayer’s prior year’s income. Reducing reportable income could also result in increased deductions (which must exceed a percentage of reportable income) and tax savings from reducing the amount of Social Security income subject to tax.
Not every charitable organization is qualified to receive a QCD from an IRA or a donation from a donor-advised fund in a tax-advantaged way. For instance, organizations such as supporting foundations may not be able accept these types of donations, and taxpayers and their IRA administrators should be wary of this small wrinkle. Also, year-end paperwork from the IRA administrator may not clearly indicate the nature of the IRA distribution, so taxpayers need to be cautious about clearly explaining IRA charitable distributions to their tax preparers.
The bottom line “takeaway” from the issue of higher standard deductions is that taxpayers should review their 2018 tax situation well before year end and consult their tax advisors for the best tax minimization strategy. Though fees paid to personal tax advisors are no longer deductible, the potential tax savings from a careful review of the new law’s impact on one’s personal situation could be well worth the advisor’s time and fee.
We may not be able to avoid death, but there is still a way to avoid, or at least legally minimize, personal income taxes.
Harry Harelik, CPA, CFRE, CGMA
Harry Harelik is a graduate of the University of Texas at Austin, where he earned his BBA in accounting in 1971 and his MPA in taxation in 1972. He earned his CPA designation in 1974. In addition to previously being a 30 year local self-employed CPA, he began work as the Executive Director of the McLennan Community College Foundation in 2001. He earned his CFRE (certified fund raising executive) certification in 2006 and was designated as a chartered global management accountant (CGMA) in 2014. He served as executive director of the McLennan Community College Foundation for almost 16 years until his retirement in 2017.
Harry has continued his work in the nonprofit community as a consultant to nonprofit organizations in fundraising and governance and is teaching courses at Baylor University as part of their Continuing Education nonprofit management offerings and, as well, is an adjunct accounting faculty member at McLennan Community College. He also continues to consult in the community on income tax and financial planning issues. He has spoken on various nonprofit topics at the Nonprofit Network and is a frequent contributing columnist for the Waco Tribune Herald. Harry is a member and past president of The Central Texas Chapter of CPAs, and is a member of the Texas Society of CPAs, the American Institute of CPAs and the Heart of Texas Estate Planning Council. He is president of the Waco Symphony Association; a life member of the board of Keep Waco Beautiful; and a patron of the Waco Civic Theatre, the Waco Community Band, the MCC Visual and Performing Arts and the Baylor Theatre, with a strong interest in the cultural life of McLennan County and the city of Waco.
The Texas Society of CPAs held its Advocacy Day and Midyear Board and Members Meeting in Austin the last week in January. In addition to visiting with our legislators to remind them of the importance of continuing the Texas State Board of Public Accountancy and CPA licensure in Texas, we got to hear from Mark Peterson, AICPA executive vice president – advocacy, about what we might expect to see coming out of Washington, D.C.
With the major parties splitting control of the House, Senate and the presidency, the likelihood of anything big happening (think Affordable Care Act, Dodd Frank Act or Tax Cuts and Jobs Act that happened when one party controlled all three) is small. But the split leadership does have implications on what we can expect to see or not see in the coming couple of years.
- Democratic control of the House means changes to SOX 404(b) requirements, such as changing the metrics for companies exempt from compliance, are less likely to occur.
- PCAOB will continue to push to make disciplinary proceedings public even though such disclosure could negatively impact due process for affected firms.
- There will be continued interest in anti-money laundering legislation, which sounds fine, except that innocent CPAs may get caught in the crossfire if the legislation is not written well.
- Expect to see a push to make arbitration agreements unenforceable. Whether this is good or bad depends on your perspective, but no matter what your perspective is, businesses, not just CPAs, will be very interested in this issue.
- Immigration is clearly a hot-button issue and questions about how many people with special skills, including backgrounds in artificial intelligence, data analytics and other skills highly sought after by audit and accounting firms, should be allowed to come to the U.S. under special visa programs will likely get caught up in any movement, or lack thereof, on the issue.
- Finally, CPAs wondering what services they can and should provide to legal Marijuana businesses in states where the law has changed might see some movement. Bills have been filed to amend the federal controlled substances act to state that if you comply with state law, you are not in violation of federal law.
Like TXCPA in Austin, AICPA works hard on your behalf in Washington, but nothing can replace the personal touch of a constituent talking to their legislator. If you are interested in any of these issues, contact your representative and senators and let them know how you feel.
While there are a few CPA politicians, many CPAs would rather have a root canal than engage in politics. We want to take care of our clients, manage our businesses and, most importantly, get things done. Most of the time, that works and CPAs can go about their business without really worrying about what is happening in the political arena, but this year is not like most years.
On the national level, CPAs are having to deal not only with significant changes to the tax code due to changes passed by politicians, they are also having to deal with no one at the IRS being able to help with questions. The simple facts are the IRS is caught up in the government shutdown, non-essential employees have not been furloughed and apparently answering questions about the new tax law is not considered essential. I guess we can at least be happy that giving refunds is considered essential, so the IRS will be recalling workers to process those checks and deposits. CPAs may not know what to put in the return, but once the return is filed, our clients will get their refund.
While the need to ask the IRS questions occurs every year, this year is the worst possible year for a shutdown, because no one has ever dealt with these provisions before. There is no other CPA who might be able to help in place of the IRS, because the CPA dealt with the issue in the past. With no one to answer questions, there will be a lot of people flying blind as to how to get things done right until things get fixed.
At the state level, here in Texas, the politicians will decide if they want to retain the Texas State Board of Public Accountancy (TSBPA) and, therefore, your CPA license. If the Board is not retained, then Texas will have no state-licensed CPAs. The good news is the sunset commission has recommended keeping TSBPA. The better news is the governor, lieutenant governor and speaker of the House seem to be getting along and focusing on mainline issues rather than controversial ones. The hope is that such cooperation continues and we don’t go through what doctors did two years ago when it took a special extended session to get the Medical Board retained so doctors could continue to be licensed in the state.
This might cause you to wonder how CPAs can do their job and deal with politics, but that is where the Texas Society of CPAs (TSCPA) helps. TSCPA advocates for CPAs with politicians every day, so CPAs can focus on their clients and businesses. If you want to see what TSCPA is doing for you, you can follow the Tax Policy Committee on the TSCPA Exchange to see how they are advocating for you with the IRS. At the state level, you can follow what’s going on at the legislative session by reading Last Week in the Legislature published every Friday. As the saying goes, just because you don’t take an interest in politics doesn’t mean politics won’t take an interest in you, but in the case of CPAs, we have TSCPA on our side to help when politics gets interested in us.
Many people go through career transitions during various parts of their life, learning new and leveraging existing skills. After a 40-year career in the corporate world with great companies having both financial and operational roles, I decided to look at various options of owning my own business.
When one decides to start down the business ownership trail, there are three options:
- Start a business from scratch – This was the highest risk option given the number of new businesses that fail in the first two years
- Buy an existing business and improve it – After research, I found the prices of existing businesses to be too high based on the cash flows those businesses were generating
- Buy a business system and process called a franchise – I spent much time looking at various products and services in the franchise world and decided to buy into a shared office and co-working brand titled Office Evolution out of Colorado
Why the shared office and co-working space business? My focus, besides turning around businesses, is helping those companies grow. This business model allows that business-to-business customer base with providing the atmosphere for growth for small and mid-sized companies. There was also an opportunity with this franchise to just have one employee – coming from managing up to 300 people globally, that was really attractive to me.
So what about the shared office market?
- Flexible office space market demand is currently 1 percent of the commercial real estate market, but it is projected to triple in size in the near future
- Some projections have this market growing to 5 percent and 10 percent of the market
- Small businesses are the primary driver, which are the job creators in the economy
- The gig economy plays right into this market
- Even larger companies avail themselves of available project demand space, as well as decentralizing their office footprint
The industry was dominated for years by Regus, which has over $2.7 billion in revenue. Recent entries into this market of WeWorks, Premier Business Centers and Office Evolution round out the top four companies in the space.
I opened my first Office Evolution location in Southlake, Texas in April 2018, and am pleased with the demand I have seen in the market. Learning a lot from this first location, I’m now looking at applying that learning to future locations.
I would encourage people who are about to enter into career transitions to look for opportunities to invest and grow. There are many different avenues out there to pursue. One of the keys is to be patient to search for what it is you would really like to do and then review the available options of getting there.
Bob Fox, CPA, is a strategic advisor, turn around strategist and growth consultant who transitioned to entrepreneurship after 30 years with Halliburton. He is an active member of TSCPA’s Fort Worth Chapter and co-chair of the chapter’s Members CPE Day Committee. His Office Evolution location is on State Street in Southlake, Texas.
What will 2019 bring?
First off, the new lease standard is in effect for public companies and the revenue standard is now mandatory for private companies. And the big changes aren’t over. While the biggest changes from the new financial instruments and credit loss standards are reserved for companies in the financial services industry, all companies will have to spend time in 2019 preparing to deal with some aspect of the changes required by the standards.
2019 will also be the first year of filing taxes under the new rules passed at the end of 2017. There will be a lot of confused taxpayers learning that previous deductions are no longer allowed or necessary. Seeing that doubled standard deduction in an actual return will make many people realize that tracking interest expense, state taxes and charitable deductions is no longer needed. At first, people might be upset, but once they realize that completing their taxes is easier, I think many people will find even more to like about the tax changes.
Of course, CPAs won’t be dealing with those easy tax returns. CPAs provide services to clients with more complex tax situations and personal businesses. They will be dealing with new depreciation rules, new limits on interest deduction, operating loss deduction changes, and new BEAT and GILTI rules impacting any business that operates internationally, which, of course, can be almost any business in our connected world these days.
The audit report will change to include Critical Audit Matters or CAMs. The concept of providing more information about the audit has been implemented in other countries to considerable success. CAMs bring increased relevance to the audit report and have the beneficial side effect of increasing pride in the auditors themselves.
And finally, financial planners will likely have to deal with increased volatility and spooked clients in 2019. The markets ended 2018 in one of the most volatile times in the past decade and 2019 looks to pick up where 2018 left off. Financial planners will definitely be earning their money this year keeping clients calm and invested for the long haul.
2019 will definitely be “interesting times,” but that is what makes being a CPA such fun.
New Year’s is nearly upon us and many people start thinking of resolutions to make. Resolutions can be about anything, but often resolutions are focused on some form of personal improvement – be it physical, spiritual or mental. People want to change for the better and while we often joke about the failure to carry through on resolutions, people do successfully change for the better. I saw a quote recently from Anne Bronte that stated, “It is never too late to reform, as long as you have the sense to desire it and the strength to execute your purpose.”
I wonder, though, if that is possible in today’s world. People bring up something someone said when the person was young or over a decade ago and imply that those words are what the person really believes even today. Social media enables the research, but the core issue is do people really believe other people can change. If people believe that the past is who someone is today, then people must also believe no one can ever change. No one can go from being a persecutor of a cause to the most prolific advocate of that cause. No one can rise from failure as a young adult to being a leader to stop tyranny in the world. No one can go from joining a profession because it is about numbers and turn into a prolific writer who produced over 400 blogs.
I do believe people can change and I also believe that the only way to change is to have a discussion. That means people need to be willing to share thoughts, words and beliefs, but doing so makes one vulnerable. If people are attacked for asking insensitive questions because they do not know any better, then no one will ever be able to change. In order to really make society better, we have to change the way people pile on in social media. Instead of sitting back and being relieved that the trolls are not attacking you, we all need to take action and tell the trolls to go back into their holes and allow people to have open, honest, learning conversations, because that is the only way people will change and make the world a better place.
Maybe that is the resolution we all need to make for 2019.
“It’s the most wonderful time of the year,” and the time when children (and adults) write letters to Santa Claus in hopes of getting a couple of really cool items Christmas morning. In that spirit, I thought we might have a little fun putting together a CPA wish list for 2019.
10) A regular session reapproval of the Texas State Board of Public Accountancy.
9) An increase in the number of accounting graduates taking the CPA exam.
8) Legislation eliminating the need to file state tax returns when someone works in a state for one day.
7) A Congress that funds the IRS so the help line can provide help instead of courtesy disconnects.
6) A Financial Accounting Standards Board that finally eliminates a disclosure without adding any in the process.
5) An IRS delivering regs that make sense and explain what Congress meant in the new tax law.
4) States and territories passing individual and firm CPA mobility.
3) Computer systems that don’t crash on April 14.
2) Clients delivering all needed documentation accurately and on time.
1) A beautiful spring day – on April 16!
I hope everyone has a great holiday season!