Foreign Account Reporting:  Taxpayers who had authority over foreign financial accounts with a combined value in excess of $10,000 at any time during 2017 must e-file FinCEN 114 by April 17th which purposely coincides with the income tax filing deadline; taxpayers who fail to comply receive an automatic 6-month extension.  Individual taxpayers, as well as corporations and partnerships, may also be required to file Form 8938 and attach it to their income tax return if the aggregate value of foreign financial assets exceeds $50K.  NOTE:  CA now conforms to FATCA reporting requirements:  Failure to attach the federal Form 8938 to the state return will result in a $10,000 state penalty in addition to any applicable federal penalties.

Free Application for Federal Student Aid (FAFSA):  In the past, the online application became available January 1st of each year and was generally required to be filed in the spring of the calendar year in which the student intends to enter college.  However, for the 2018/19 academic year, the application has been available as early as October 1st, 2017 and applicants have been allowed to use income information from tax returns that have already been filed in an earlier year; thus, students (parents) may submit 2016 (rather than 2017) tax return information.

Information Returns:  In hopes of combatting identity theft, the IRS now requires that copies of W-2s issued to employees and 1099s issued to independent contractors be submitted with the accompanying Forms W-3 and 1096 by January 31st, 2018. Forms 1098 issued by mortgage companies must now include the outstanding loan balance, in addition to the interest paid. 

Local Business Tax:  Most cities—including the City of Los Angeles – demand that businesses be registered; the attendant tax may sometimes be waived if registration forms are timely filed (February 28th, 2018 for Los Angeles).  NOTE:  In addition to sole proprietors and partners who clearly operate an ongoing enterprise, independent contractors (workers paid via 1099 rather than W-2) are deemed to be “in business” for licensing purposes.  Links to licensing departments in Los Angeles and City of Santa Monica, information for small business owners and much more can be found on a specialty page of my website dedicated to business matters.  TIP:  Some localities may require AirBnB and other short-term rental hosts to submit Business Property Statements for the purpose of assessing an annual tax on the value of personal property and fixtures used in the business.

Medical Expenses:  Medical insurance premiums are tax-deductible (sometimes).  If you are self-employed, you may claim an above-the-line deduction for 100% of the premiums paid, including Medicare premiums withheld from Social Security benefits.  Others must file Schedule A and itemize their deductions to obtain a tax benefit; the aggregate of all medical expenses must exceed 10% of AGI.  Seniors who reached age 65 before year-end 2016 may, this last time, still benefit from the old AGI limit of 7.5%.

As per one of the few retroactive changes, all taxpayers who itemize may deduct medical expenses in excess of 7.5% of AGI for tax years 2017 and 2018.

Charitable Contributions: Taxpayers who itemize may claim deductions for documented contributions to qualified donee organizations up to 50% of AGI.  Excess contributions may be carried-forward and deducted on future returns for up to 5 years.

The AGI limitation has been increased to 60% of AGI for 2018 and beyond.

Qualified Charitable Distribution (QCD):  Seniors over the age of 70½  may elect to make a direct IRA-to-charity transfer, thereby avoiding the inclusion of their Required Minimum Distribution (RMD) in taxable income, minimizing the taxability of Social Security benefits, lowering AGI thresholds for various itemized deductions, and potentially avoiding the Medicare Surtaxes.

Home Office Deduction:  Under the optional safe harbor method, taxpayers may claim a deduction equal to $5/ft² (maximum $1,500) in lieu of separately detailing allowable expenses and depreciation presuming, of course, that they have an area in the home that is used regularly and exclusively for business and that such use is for the convenience of the employer.

While sole proprietors filing Schedule C may still claim the deduction, employees may no longer claim a Schedule A deduction for unreimbursed expenses, including mileage, travel, entertainment, home office and union dues.

Repair Regulations:  In an attempt to standardize and simplify taxpayer reporting, the IRS introduced reporting requirements for business and rental property repairs.  The general rule holds that all tangible property purchased for use in a trade or business – except inventory – must be capitalized, except costs for (a) materials and supplies under $200, (b) routine maintenance incurred to keep property in its ordinarily operating condition, (c) de minimis outlays up to $2,500 for which taxpayer makes an affirmative Safe Harbor election, and (d) maintenance and repair of buildings owned by small taxpayers with outlays of less than $10K.  If costs are expected to exceed the threshold limits, taxpayers may wish to split multiple projects over two calendar years to avoid the capitalization requirement.

Shared Responsibility Payment:  All individuals and their family members are required to have medical insurance; which must be verified and reported on the taxpayer’s income tax return.  If you obtained coverage through the Health Insurance Marketplace, you will receive Form 1095-A documenting coverage maintained during each month of the prior year (2016).  If you purchased insurance directly from an insurance company, you will receive Form 1095-B; if you were insured through an employer plan, you will receive Form 1095-C.  These forms must be provided to you on or before March 2nd.  Since verification of Minimum Essential Coverage is crucial, the filing of your tax return may have to be postponed until Form 1095 is received, even if all remaining data is otherwise available.  In 2017, failure to obtain coverage may cost you a penalty equal to the greater of $695/adult ($347.50/child) or 2.5% of your yearly household income, limited to a family maximum of $2,085.  You can use this calculator to estimate your penalty.

This penalty has been repealed for 2019 and beyond.

Repayment of Premium Tax Credit: Some taxpayers may be required to refund advance credits received during 2017 to subsidize the cost of monthly premiums for insurance obtained through the Marketplace if actual income reported on the tax return exceeds the amount of income used to determine the premium credit when the insurance was purchased.  NOTE:  Even taxpayers who otherwise have no filing requirement must file a tax return to reconcile the advance credit.

Medicare Surtaxes:  The taxes on Earned Income (0.9%) and Net Investment Income (3.8%) remain in effect.

Pass-through Entity Income:  Beginning in 2018, taxpayers may deduct up to 20% of their domestic net “qualified business income” (QBI) which includes income from services and rental real estate but not wage income.  The deduction is available to sole proprietorships and all pass-through business entities but not C-Corps.  The deduction may not be claimed above-the-line to reduce AGI, nor may it be used to reduce the self-employment tax.

The deduction is subject to various phase-outs rules depending on whether the income is derived from a “specified” service business (e.g., healthcare providers, accountants, investment advisors, attorneys, and other consultants) or another source.  Specified service businesses may lose a portion of the allowable deduction if taxable income falls within $157K – 207.5K (Single) or $315K – 415K (MFJ) and lose the deduction altogether if taxable income exceeds the upper-most threshold.  In contrast, non-specified business may still benefit from the deduction if the thresholds are exceed, but the allowable deduction for these high-income earners will be limited by a complex computation based on wage income paid to employees and the unadjusted basis of the depreciable property held by the business.  TIP:  If this sounds like a nightmare to you, I suggest that you contact my office for a personal consultation.  Tax savings for taxpayers in the top income bracket eligible for the full deduction may serve to reduce the effective tax rate from 37 to 29.6%!

Corporate Tax:  The graduated rates previously in effect have been eliminated and the corporate tax rate has been set to a flat rate of 21%.  The corporate Alternative Minimum Tax (AMT) has been repealed.  TIP:  Before you rush to incorporate or convert your existing entity to a C-Corp, take a look at the analysis of pros and cons evaluated by Forbes:

No Benefit to Incorporation for:  Sole proprietor who files Schedule C, rental property owner who files Schedule E, or farmer who files Schedule F (since business deductions have not been affected by tax reform).

Possible Benefit to Incorporation for:  Employees previously eligible to deduct unreimbursed employee expenses on Schedule A may benefit but should note that the lost deductions merely reduce taxable income and are not, in fact, a dollar-for-dollar reduction of your tax liability.  Additionally, your employer may not agree to pay your salary to a corporate entity in lieu of placing you on payroll.  Lastly, workers who are not treated as employees are independent contractors subject to local business registration requirements and business taxes, as well as the self-employment tax which means that the worker must pick up the 2nd half of the FICA taxes previously paid by his employer; at a minimum, that’s an additional cost of 7.65%.  Add to that, you may lose certain fringe benefits such as employer-provided health insurance, parking, employer contributions to retirement plans, amongst other perks.  TIP:  Run the numbers before making a decision.

Possible Benefit to Incorporation for:  A pass-through entity operating a specified service business and your taxable income exceeds the threshold amounts [see above] may benefit; however, taxpayers may be subject to double taxation on business profits (at the 21% flat corporate rate) as well as on dividends and distributions (at the applicable individual rate).  Additionally, you’ll be subject to the legal costs of establishing the new business entity and then will be subject to increased compliance issues as well as the minimum franchise tax imposed by California.

As always there are no easy answers and each situation has to be independently evaluated.  The selection of an appropriate business entity involves tax, legal and many other aspects. TIP: While I can provide you with tax advice, I strongly urge you to consult a competent business attorney when researching your options.

Alimony:  Amounts paid to (or received from) as per divorce decrees executed beginning in 2019 will no longer be deductible to the payer (or taxable to the payee).

Moving Expenses:  The moving expense deduction has been suspended for tax years 2018 – 2025.

Personal Exemptions:  The deduction for taxpayer, spouse and all dependents has been eliminated.

      State & Local Taxes:  The deduction for the aggregate of all state and local income taxes and property taxes has been limited to $10,000, although state and local taxes paid while carrying on a trade or business or rental activity remain fully deductible.  NOTE:  TCJA specifically prohibits a deduction on the 2017 return for prepaid 2018 state and local income tax obligations, although pre-payment of the 2nd installment of the current year property tax bill is deductible.  4th quarter estimated tax payments normally due January 15th but prepaid before December 31st remain deductible as long as the estimate was made in good faith.  Excess pre-payments for 2017 resulting in a tax refund will be includible as income in 2018.

      Mortgage Interest:  Deduction is limited to interest accrued on a maximum of $750K acquisition debt related to a 1st or 2nd home purchased after December 15, 2017.  TCJA has repealed the deduction for interest on all home equity debt.

      Casualty Loss:  Losses are no longer deductible unless incurred in a presidentially-declared disaster zone.

      Miscellaneous Deductions:  Tax preparation and investment advisory fees are no longer deductible.

      §529 Plan Distributions:  Up to $10K withdrawn from college savings accounts may now be used to pay for tuition at qualified elementary and secondary schools, in addition to colleges and post-secondary institutions.

Net Operating Losses:  Carry-backs have been repealed; carry-forwards have been limited to 80% of taxable income.

AMT Exemptions:  The exemption amounts for 2018 have been increased to $70,300 (Single) and $109,400 (MFJ).

      Estate & Gift Taxes:  The estate tax exemption has doubled to $11.2 million; the annual gift tax exclusion has been raised to $15,000; the unified tax rate has been decreased to 35%.