“Revenons à Nos Moutons,” or Getting Back on Track

17 October 2018

I was recently reminded of a French expression, “revenons à nos moutons.” It comes from La Farce de Maître Pathelin, an anonymously authored medieval play. In this 15th century comedy, the protagonist purposely misleads a judge by bringing two cases before him. Once concerns sheep, the other, sheets.

The judge, true to life, becomes confused, and tries to focus on the case about sheep by saying, repeatedly, “mais revenons à nos moutons – literally, “but let’s return to our sheep.”

Since that time, the expression has come to mean, “let’s get back on track / back to the subject at hand / back on topic.”

In that vein, therefore, let’s get back to talking about tax planning. The year 2018 has about 10 weeks remaining.

I am a big believer in tax planning – it’s one of my favorite ways to help people. Tax planning, in a nutshell, has a two-pronged benefit:

• Devising and implementing strategies to minimize your income tax liabilities, and

• Making sure you have all your ducks in a row before tax time.

This year, there are quite a number of changes to tax law, some of which provide opportunities for tax savings, and some of which might have an impact on your tax liabilities. Examples include:

Qualified Opportunity Zones and Qualified Opportunity Funds

• Opportunity Zones (O-Zones) are designed to spur economic development by providing tax benefits to investors. First, investors can defer tax on any prior gains until the earlier of the date on which an investment is sold or exchanged, or December 31, 2026, so long as the gain is reinvested in a Qualified Opportunity Fund (O-Funds). Second, if the investor holds the investment in the O-Fund for at least ten years, the investor would be eligible for an increase in basis equal to the fair market value of the investment on the date that the investment is sold or exchanged. Any tax due on capital gains invested in the O-Fund within the 180-days is deferred until the fund is divested, or December 31, 2026, whichever occurs first.

• If investment in O-Fund is held at least 5 years, there will be a 10 percent basis step up, while if the investment is held at least 7 years, the basis step up will be 15 percent.

• If the investment in the O-Fund is held for at least 10 years, the taxpayer is exempt from paying any capital gain on the sale of the newly created O-Fund investment.

Limited Deduction for State and Local Taxes Paid

• The limit on deductions for state and local taxes, now capped at $10,000. For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) limits an individual taxpayer’s annual SALT (state and local tax) deductions to a maximum of $10,000, with no carryover for taxes paid in excess of that amount.

• As a result of this limitation, several high-tax states implemented workarounds to enable residents to mitigate its impact, such as the establishment of charitable funds. Taxpayers could contribute to these funds and obtain a tax credit in exchange. However, the IRS has issued proposed regulations, applicable to such contributions made after August 27, 2018, which would effectively eliminate this workaround.

New Income Tax Brackets and Rates for 2018

The attached table illustrates the new brackets and rates for married couple filing jointly for 2018.

New 20% Deduction for Qualified Business Income

IRS explains the 20% deduction for qualified business income. The IRS has issued regulations on the new 20% deduction for qualified business income (QBI) created by the TCJA, also known as the pass-through deduction. Here’s a summary of the basic rules:

• For tax years beginning after Dec. 31, 2017, taxpayers other than corporations may be entitled to a deduction of up to 20% of their QBI from a domestic business operated as a sole proprietorship, or through a partnership, S corporation, trust or estate. This deduction can be taken in addition to the standard or itemized deductions.

• In general, the deduction is equal to the lesser of:

A. 20% of QBI plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income, or

B. 20% of taxable income minus net capital gains.

I cannot recommend too strongly that you use the fourth quarter of 2018 to develop a 2018 tax plan, if you haven’t already done so, and to review your tax plan, if you have one.

In addition, due to the recent market correction of ~3%, we believe it’s a good time to review the allocation of all investment and / or retirement accounts, to ensure your assets are both as productive and protected as possible. It’s all about balance – in more than one sense.

What are some ways you have found to take advantage of the new opportunities and protect yourself against changes that could otherwise negatively affect you? Please click here to share your thoughts with me – I would love to hear from you!

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Until next Wednesday –



2018 Tax Brackets - Married, Filing Jointly