It’s Finance Friday! Bil Lako, CFP® answers your questions about the economy, taxes and your money. This week’s questions from Twitter:
Twitter Question: The new tax law does not allow for itemized deductions for charitable donations such as for church, veteran organizations, The Salvation Army, etc. Is there a way to claim these deductions on your taxable income for 2018?
First, this is not accurate. The new law does allow for charitable deductions. There was an initial proposal that would not have allowed for them to be deductible, but when it became a law that provision had been removed. Keep in mind, just because it is deductible does not mean you will get to use it. The Standard Deduction has been increased to $24,000 for married filing jointly.
So, if your itemized deductions do not add up to $24,000, then you will want to take that standard deduction as this will save you more in taxes.
Twitter Question: Why Don’t the Wealthy Pay Their Fair Share?
Are you serious with this question? I guess it depends on your definition of fair share. According to the Tax Foundation, the top 1% pays more than the bottom 95% combined. That’s right, combined! Is that fair? Also, according to the Tax Foundation, the top 1% paid a total of $542.64 billion of the $1.3 trillion taken in by the Treasury. That is more than 40% of the total taxes collected. Is that fair? Did you pay 40% of your income in the Treasury? I don’t think so.
By the way, this does not include state taxes, local taxes, property taxes, FICA taxes, and sales tax. Again, I ask are you serious with this question? The problem with the government is not how much tax the wealthy pay but how much the government spends. I deal with this from my clients from time to time. It is generally not an income problem but rather a spending problem.
Twitter Question: How is Social Security Taxed?
This is truly an “it depends” answer. Social Security can be taxed from zero to 85% depending upon your Adjusted Gross Income (AGI). I would suggest you have your tax adviser run a quick projection to give you an idea.
Some food for thought: Do not take Social Security early if you are still planning to work and earn more than $13,000 annually. There is a penalty on top of the tax. Now if you are not going to have earned income, I would suggest you consider taking it early. Why? Most people say hold off until full retirement age or age 70 as the amount will be so much higher.
But remember, Social Security does not allow you to name a beneficiary. Therefore, if you waited until age 70 and you passed away the next day, you and your heirs would collect nothing. If you would have taken the benefits early, say age 62, you would have been collecting the funds for eight years. Those funds could have been saved to an account that could have passed to your heirs. Just something to consider.
William G. Lako, Jr., CFP®, is a principal at Henssler Financial, a financial advisory and wealth management firm that has been delivering comprehensive financial solutions to its individual, corporate, and institutional clients for 30 years. Mr. Lako is a Certified Financial Planner™ professional.
EYE ON YOUR MONEY: Not All Business Tax Cuts Are Simple
One of the key promises during President Trump’s campaign was to lower taxes for businesses from 35 percent to 15 percent and eliminate the corporate alternative minimum tax. The final version of the tax bill did eliminate the corporate alternative minimum tax, and lowered the tax for corporations to 21 percent in 2018. Furthermore, businesses organized as “pass-throughs” could get taxed at a less than 30 percent rate.
Taxes are never simple – despite the promise to simplify the tax code
Pass-through businesses are your LLCs, partnerships, S corporation, and sole proprietorships, in which the entity is not subject to income tax. Owners are taxed individually on the income, calculating tax on their share of the profits and losses. Because these business owners were at the mercy of their individual tax rates, some business owners could be taxed as much as 39.6 percent, not including the phase out of itemized deductions for high income earners.
In the finalized bill, pass-through businesses receive a 20 percent deduction of their qualified business income. Because taxes are never simple—despite the promise to simplify the tax code—the deduction is actually the lesser of: 20 percent of the taxpayer’s “qualified business income” or the greater of: 50 percent of the W-2 wages with respect to the business, or 25 percent of the W-2 wages with respect to the business plus 2.5 percent of the unadjusted basis of all qualified property.
OK, you want this in English. Qualified business income is income less ordinary deductions that you earn from a pass-through business, such as an LLC, sole-proprietorship, S corporation, or partnership. This does not include wages you earn as an employee. Let’s say you have an LLC (not a “specified service” trade or business), and your share of the qualified business income is $500,000. Multiply that by 20 percent and you get a deduction of $100,000. Woo hoo! Not so fast. There are limitations on the calculation that were added to prevent abuse of the rules.
How does this work? Let’s look at the example of your LLC of which you only own 40 percent. The company produced $1.25 million in ordinary income. The company paid W-2 wages of $455,000 and holds $200,000 in property. Your allocation of the wages is $182,000 and 50 percent of that is $91,000. One more calculation: 25 percent of the W-2 wages with respect to the business plus 2.5 percent of the unadjusted basis of all qualified property—in our example, this comes to $47,500 ($45,500 + $2,000). You’ve got two numbers: $91,000 and $47,500. The greater of the two is $91,000. This is your income limitation. So, your deduction on your $500,000 qualified business income is now $91,000 versus the simple 20 percent. Mindboggling, isn’t it? And this example was highly simplified for your convenience.
Now, not every LLC is making $1.25 million. Lots of small businesses make around $125,000 a year. There is an exception for you! If your taxable income is less than $157,500 or $315,000 for married filing jointly, you should be able to ignore the W-2 income limitations.
To make things more complicated if you are part of a “specified service” trade or business you will be faced with a phase out.
Wait, what? Yes, “Any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees.” Will be deemed to be a “specified Service”.
This means if your income is above $207,500 for individuals and $415,000 for joint filers you will not be eligible for the deduction. Welcome to simpler taxes.
William G. Lako, Jr., CFP®, is a principal at Henssler Financial, a financial advisory and wealth management firm that has been delivering comprehensive financial solutions to its individual, corporate, and institutional clients for 30 years. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.
FINANCIAL FRIDAYS: What’s Bugging You This Tax Season?
Just months after President Trump signed his sweeping overhaul of the nation’s outdated tax code into law, many Americans are left wondering how the new tax cuts will directly impact their bank accounts.
The reduced rates not only spurred major financial investments from the nation’s leading corporations -such as AT&T, Starbucks, Disney, Walmart, and others- but also drastically changed the way millions of Americans filed their income taxes.
How has the new law impacted you and your family? What questions do you have for Sean and Bil Lako?
Send us your questions now on FACEBOOK and TWITTER and we’ll answer LIVE ON-AIR during our ‘Financial Fridays’ segment, exclusively on the Sean Hannity Show.