Tax Planning Time

Tax planning noteNow is the ideal time to schedule a tax planning session. Your 2017 tax return outcome is still fresh, and it’s early enough in the year to take advantage of the numerous tax law changes taking place in 2018. Here’s a brief overview of some of the new tax issues that you need to plan for now.

 

 

 

Check Income
Tax rates for both individuals and small businesses have changed substantially. Income tax deductions have also changed drastically, including a nearly doubling of the standard deduction and elimination of personal exemptions and miscellaneous itemized deductions.It’s important to review your income tax withholding schedule to see where you fall in the new income tax bracket structure. Small adjustments here could save you hundreds.
Check Bunching
Because of the changes to the deductions structure, using itemized deductions may now require bunching two or even three years of expenses into one tax year. Things like donations to charity and medical expenses that you may have spread across several years are now better bunched into a single year to maximize your tax savings.If you typically take care of medical expenses or charitable donations at a regular time every year, hold off this year until you have a new tax-efficient plan.
Check SALT (State and local taxes)
There’s now a $10,000 combined total cap on deductions of state and local income, sales and property taxes, which is going to impact a lot of people, especially in high-tax states. This may be a big factor to account for if you’ve relied on this deduction in the past.Get an analysis done to see how much larger your tax bill is going to be because of the cap on SALT taxes. There may not be much you can do about it, other than changing where you live and own property, but you’ll need to have a clear picture of how it will impact your tax return in 2018.
Check Mortgage interest changes
There are several new rules changing how mortgage interest is deducted. You can no longer deduct the interest on mortgage indebtedness greater than $750,000. And you can no longer deduct interest on mortgage indebtedness that wasn’t spent directly on buying, building or substantially improving your home.If you have previously claimed a home equity loan interest deduction, you’ll need to review how this will affect your itemized deductions.

These are just a few examples of things that you’ll need to review in the wake of the largest tax law change in more than 30 years. Take some time this summer to make sure you have a plan in place.

Tax Cuts and Jobs Act Update

Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (TCJA) was passed by Congress in a hurry late last year, and the IRS has been working to implement the changes for 2018. Here are the latest answers to some of the most common questions about the tax overhaul:

Check Is home equity interest still deductible?The short answer is: Not unless you’ve used the money to buy, build or substantially improve your home.

Before the TCJA, homeowners were able to take out a home equity loan and spend it on things other than their residence, such as to pay off credit card debt or to finance large consumer purchases. Under the old tax code, they could deduct interest on up to $100,000 of such home equity debt.

The TCJA effectively writes the concept of home equity indebtedness out of the tax code. Now you can only deduct interest on “acquisition indebtedness,” meaning a loan used to buy, build or substantially improve a residence. If you took out a home equity loan pre-2018 and used it for any other purpose, interest on it is no longer deductible.

Check I’m a small business owner. How do I use the new 20 percent qualified business expense deduction?

Short answer: It’s complicated and you should get help.

Certain small businesses structured as sole proprietors, S corporations and partnerships can deduct up to 20 percent of their qualified business income. But that percentage can be reduced after your taxable income reaches $157,500 (or $315,000 as a married couple filing jointly).

The amount of the reduction depends partly on the amount of wages paid and property acquired by your business during the year. Another complicating factor is that certain service industries including health, law, consulting, athletics, financial services and accounting are treated differently.

The IRS is expected to issue more clarification on how these rules are applied, such as when your business is a mix of one of those service industries and some other kind of business.

Check What are the new rules about dependents and caregiving?There are a few things that have changed regarding dependents and caregiving:

Check Deductions. Standard deductions are nearly doubled to $12,000 for single filers and $24,000 for married joint filers. The code still says dependents can claim a standard deduction limited to the greater of $1,050 or earned income plus $350.
Check Kiddie Tax. Unearned income of children under age 19 (or 24 for full-time students) above a threshold of $2,100 is now taxed at a special rate for estates and trusts, rather than the parents’ top tax rate.
Check Family credit. If you have dependents who aren’t children under age 17 (and thus eligible for the Child Tax Credit), you can now claim $500 for each dependent member of your household for whom you provide more than half of their financial support.
Check Medical expenses. You can deduct medical expenses higher than 7.5 percent of your adjusted gross income as an itemized deduction. You can claim this for medical expenses you pay for a relative even if they aren’t a dependent (i.e. they live outside your household) as long as you provide more than half of their financial support.

Stay tuned for more guidance from the IRS on the new tax laws, and reach out if you’d like to set up a tax planning consultation for your 2018 tax year.

When an Extension May Make Sense

Form 4868

While you should try to file a tax return by April 17, sometimes delaying your filing date until Oct. 15 with a tax extension makes sense.

 

When to file an extension:

One thing to remember: an extension to file your return is NOT an extension to pay your taxes. If you owe any tax to the IRS, pay it by April 17 to avoid penalties.

Check Missing or incorrect information. If one of the forms you need to file your return has an error on it, it is often better to receive a corrected form before filing.
Check Recharacterizing Roth IRA rollover amounts. If you’ve rolled funds from a traditional IRA into a Roth IRA, you may want to reverse it later if the investments lose value. This so-called recharacterization process can be done up to the extended tax filing date of Oct. 15, and in many cases it makes sense to wait until then. Note that 2017 is the last tax year you can use the recharacterization process, which was eliminated for future years by the Tax Cuts and Jobs Act.
Check Making self-employed retirement donations. The self-employed can use an extension to buy time to fund a SEP IRA. This extended time frame does not apply to traditional IRAs and Roth IRAs.
Check Avoiding late-filing penalties. If you fail to file a tax return, two tax penalties come into play: a late-filing penalty and a late-payment penalty. By filing an extension, you can push out the potential late-filing penalty for another six months even if you cannot yet pay the tax.

 

Know the Top IRS Tax Scams

Gloved hand stealing social security cardEvery year the IRS releases its list of the most common tax scams. They include ploys to steal personal information, talk people out of money, or engage in questionable tax activity.

Here are 10 of the top scams:

Check Phishing. Fake emails or websites claiming to represent the IRS, for the purpose of stealing personal information. The IRS will never try to contact you via email about a bill or refund.
Check Phone scams. Scammers impersonating IRS agents over the phone. These impersonators may threaten you with arrest if you don’t make immediate payment for fake tax bills. Don’t fall for it — the real IRS makes contact via a letter and never threatens or demands immediate payment.
Check Identity theft. Using a stolen Social Security number to file a fraudulent return and claim a refund. The IRS said it’s making great progress on reducing this scam, with identity theft reports down 40 percent from a year ago.
Check Fake charities. Some fraud uses the mask of charitable activity to get you to donate funds to fake organizations. Only donate to legitimate charities registered with the IRS.
Check Inflated refund claims. Many taxpayers are wooed by tax refund services offering payouts that seem too good to be true. Cheap tax preparation services that promise unrealistic refunds are illegal and often get taxpayers in trouble.
Check Padded deductions. Tax returns that try to reduce tax by overstating deductions such as charitable deductions or business expenses.
Check Falsifying income to claim credits. Improper use of the Earned Income Tax Credit (EITC), meant for eligible low-income taxpayers. The IRS has been cracking down on EITC fraud in recent years.
Check Abusive tax shelters. Some fraudsters peddle complex tax avoidance schemes known as tax shelters, which they portray as legal tax strategies. Make sure you get an independent opinion on any complex tax schemes.
Check Frivolous tax arguments. Frivolous arguments to avoid paying taxes (for example, arguing a personal vacation is a business expense) can be penalized by up to $5,000 per tax return.
Check Offshore tax avoidance. Using offshore bank accounts and complex international tax structures to avoid paying taxes is still a common scam on the radar of IRS auditors.

 

Alert: Expired Tax Breaks Revived for 2017

Mortar board and money

Congress passed a federal budget bill in early February that revived many expired tax breaks for the 2017 tax year. They include a deduction for education expenses as well as several tax breaks for homeowners.

If you have not yet filed your 2017 tax return, please be aware these changes are retroactive to the beginning of 2017. If you have filed, your return may be amended to capture any tax benefits that apply to your situation.

Review these tax breaks to see if they apply to your situation:

Check Tuition and fees deduction. If you paid qualified tuition or expenses related to higher education, you may be able to deduct as much as $4,000 of those costs. This can be done on a regular return (without itemizing). The deduction is capped at $4,000 for single filers with adjusted gross income (AGI) of $65,000 or less ($130,000 married filing jointly) and capped at $2,000 for single filers with AGI of $80,000 or less ($160,000 married filing jointly).
Check Mortgage insurance deduction. If you paid mortgage insurance premiums, you can once again deduct those amounts as an itemized deduction. This deduction begins to phase out for taxpayers with AGI of $100,000 or more.
Check Mortgage debt forgiveness exclusion. If qualifying mortgage debt on your primary residence was discharged or forgiven, you can exclude that amount from your income.
Check Energy-efficient home improvement credit. Energy-efficient home improvements (such as upgrades to windows, or heating and cooling systems), may be eligible for a tax credit equal to 10 percent of the amount paid, up to $500.

 

 

Staying Organized Before and After Tax Time

File folder

Organizing your tax records not only makes filing your tax return easier, it also helps you find the financial documents you need throughout the year. Whether you’ve already filed your tax return or are about to, here are some tips to get organized.

Go with the flow (of your tax return)

Try organizing your records in the same order as they are required to fill out your 1040 individual tax return. Here are common categories and items to be collected in each:

Two Income. Copies of W-2s, 1099s, Social Security statements, interest income and investment income.
Three Charitable donations. Charitable donation receipts, separated by cash and noncash contributions. Include a copy of your charitable activity mileage log, if you have one.
Three Medical and dental. All documents related to medical expenses. You may also include a note calculating your medical deduction threshold (which is 7.5 percent of your adjusted gross income during 2017 and 2018).
Two Other itemized deductions. All proof of other itemized deductions, including state and local tax statements, mortgage interest, casualty and theft losses, unreimbursed business expenses and other miscellaneous itemized deductions. Note that miscellaneous itemized deductions are eliminated after the 2017 tax year, but keep all records for this tax season on file.
Three Business and hobby activity. Keep separate records for each hobby and business activity. Include records of related investments, expenses and mileage logs.
Three Education. Records of all education expenses for tuition, fees and materials (such as books or music instruments).
Three Investments. Records of investments in tax-advantaged retirement accounts, as well as contributions to investable accounts such as health savings accounts (HSAs) and 529 education savings plans. Also include records of capital gains and losses, particularly for tax-loss harvesting purposes.
Three Odds and ends. Put all the miscellaneous receipts that don’t fit anywhere else into this file. Depending on your situation, you may be able to get tax breaks for a variety of expenses.

Bonus tips:

Two How long should you keep your records? For tax filings, the IRS requires you to keep your records on hand for at least three years after you file. Some states require you to keep records longer than that and the federal government can ask you to keep records for six years if you understate your income.
Three Keep track by going digital. If keeping track of your tax records year after year sounds like a chore, at least things are easier in the digital age. You can scan your paper records and keep them digitally, but remember to keep your records backed up and secure from identity theft.
Three Make a checklist. If you’re still waiting for some tax forms to arrive, go back to last year’s return and make a checklist of all the forms you received. Add items for any new accounts or vendors you added since then and check off the forms as they arrive.
As always, should you have any questions or concerns regarding your situation please feel free to call.

 

 

Tax Quiz: So You Think Our Taxes Are Crazy?

Pencil and quiz

With the passing of the Tax Cuts and Jobs Act, many taxpayers are still adjusting to the new rules. Think U.S. tax laws are nuts? See if you can guess the answers to this quiz about some of the craziest taxes from around the world.

Question This tax in England had to be changed because it was making people sick. What was being taxed?

a. Fruit
b. Windows
c. Footwear
d. Fresh water
e. Winter garments
Answer b. Windows. In the late 1600s England established a tax on home windows. As a result, people sealed up their windows and built new homes with fewer windows, which reduced ventilation. The lack of fresh air was identified as a cause of poor health and the tax was repealed… but not until 1851, nearly two hundred years later!
Question In France, this tax is considered to have contributed to the start of the French Revolution. Can you name what was taxed?

a. Beer
b. Wine
c. Salt
d. Cheese
e. Snails
Answer c. Salt. The French salt tax, called the gabelle, is one of the most hated taxes in French history. Before the French Revolution, as many as 3,000 taxpayers were jailed and even executed for engaging in “faux saunage,” or salt fraud, to avoid paying tax on the widely used commodity.
Question This substance produced by the citizens of ancient Rome became a source of tax revenue for the Roman Empire in the 1st century. Can you name it?

a. Wine
b. Graffiti
c. Beer
d. Bread
e. Urine
Answer d. Urine. At that time, urine was collected and taxed as it was processed to create ammonia, which was used to tan hides and clean clothing.

Question Canada used taxation to keep out Chinese immigrants in the 1880s. What approach did they use?

a. Chinese ship embargo
b. Chinese head tax
c. Tax on all Chinese goods
d. Chinese housing tax
Answer b. The Chinese head tax. After the completion of the Canadian Pacific Railway, many of the Chinese laborers wished to stay in their newly adopted country, but Canada did not want them. The tax collected more than $23 million until the Chinese Immigration Act of 1923 banned most Chinese immigration into Canada.

Question Gas taxes are one thing, but what about flatulence taxes? Name the jurisdictions that impose a per-cow tax to offset the greenhouse gases created by a cow’s odorous output.

a. Denmark
b. Ireland
c. California
d. All the above
Answer d. All of the above. By some estimates, as much as 18 percent of the emissions of the greenhouse gas methane come from farm animals, especially cows. As a result, many governments have decided to place emission taxes on cows.

Taxes and Virtual Currencies

Virtual Currencies

What you need to know

Virtual currencies are all the rage lately. Here are some tax consequences you must know if you decide to dip your toe in that world.

The IRS is paying close attention

The first thing to know is that the IRS is scrutinizing virtual currency transactions, so if you live in the U.S. you’ll have to report your transactions in Bitcoins and the like. Despite some early misconceptions, virtual currency transactions can be traced back to their owners by governments and other cyber sleuths.

If you decide to use or hold virtual currencies, carefully report and pay tax on your transactions. Act as if you are going to be audited, because if you don’t, you just might be!

It’s property, not money

Note that the IRS doesn’t treat Bitcoin or other virtual currencies as money. Instead, they are considered property. That means that if you are paid in Bitcoin, you will have to report it as income based on its fair market value on the date you received it.

And, if you sell Bitcoin, you have to pay tax on your gain using the cost (basis) of when you received it. The IRS has said that if Bitcoin is held as a capital asset, like a stock or a bond, then you would pay capital gains tax. Otherwise, if it is not held as a capital asset (for example if it is treated as inventory that you intend to sell to customers), it would be taxed as ordinary income.

Example: Craig Crypto bought a single Bitcoin on Dec. 29, 2016 for $967. After holding it as an investment (capital asset) for more than a year, Craig sold his Bitcoin for $14,492. He reports and pays 15 percent tax as a capital gain on his profit of $13,525.

Be aware of the risk

In addition to the increased oversight by the IRS, virtual currencies are at risk of virtual theft with no recourse to a government agency like the Federal Deposit Insurance Corporation, which insures U.S. bank balances.

If you need help with any tax questions related to virtual currency transactions, don’t hesitate to call.

New Tax Legislation Requires Planning

Seven Tax Reform Areas

Though many taxpayers appreciate the income tax cuts in the Tax Cuts and Jobs Act (TCJA) passed late last year, others are skeptical that it will simplify their tax planning. With every simplification, there are many more tax issues that still require planning to realize extra tax benefits. Here are seven of them:

Point 2 Planning for all the moving parts
In many ways, the TCJA gives with one hand and takes away with the other. The “giving hand” provides a lower income tax rate structure and a higher standard deduction, while the “taking hand” gets rid of personal exemptions, suspends many itemized deductions and limits deductions that remain. There are many variables that determine whether you come out ahead or behind and a tax planning session can help you figure it all out.
Point 2 Getting creative and flexible about itemizing
Many itemized deductions remain the same, others were eliminated completely and some have new limits. For example, while charitable contributions are still a qualified deduction, there is now a $10,000 combined cap on state, local and property tax deductions. The new constraints mean considering creative solutions to maximize these deductions. One idea is to make better use of the donation of appreciated stock as part of your charitable giving.
Point 3 Dealing with new complexity in small business ownership
Small business owners and sole proprietors will have to do a complicated calculation to see how much of the 20 percent reduction to pass-through qualified business income they can take. It depends on your profession and your expenditures on capital and wages. This calculation can get complicated very quickly.
Point 4 Understanding the newly changed “marriage penalty”
The disadvantage for married couples within the tax code is still very much in place, but it is changing. For instance, the marriage penalty that had given unfavorable income tax rates to married joint filers when compared to single individuals goes away in the TCJA for most income levels. But it rears its head again in the $10,000 combined state, local and property tax limitation, which does not double for married joint filers. This is something you’ll have to plan around.
Point 5 Getting credit for your kids
There are many new tax benefits for parents in the TCJA. The child tax credit doubles to $2,000 and the phaseout threshold jumps to $400,000 from $110,000 previously for joint filers, making it available to more taxpayers. Dependents ineligible for the child tax credit can qualify for a new $500 per-person family tax credit. On top of that, distributions from 529 education savings plans can now be used to pay private school tuition for K-12 students.
Point 6 Adjusting to disappearing tax breaks
If your tax planning was built on any of the following expiring tax provisions, you’ll have to change your plan: personal exemptions; miscellaneous itemized deductions; home equity interest; alimony deductions (expiring in 2019); the additional child tax credit; theft and casualty losses; and the domestic production activity deduction (DPAD).
Point 7 Facing the old complexities
Many areas of the tax code remain largely the same and contain both potential pitfalls and opportunities to find tax savings: Managing capital gains and tax-loss harvesting; charitable activity deductions; and a tax-advantaged retirement strategy are just a few areas where you can unlock extra value with smart planning.

The big changes to tax reform this year may be disconcerting at first, but in change there is opportunity. After the dust settles on the 2017 tax season, get ready to take a detailed look at what 2018 tax reform means for you.