DETHLOFF & ASOOCIATES BLOG - MOSTLY (BUT NOT ALL) TAX
There was talk of repealing the individual alternative minimum tax (AMT) as part of last year’s tax reform legislation. A repeal wasn’t included in the final version of the Tax Cuts and Jobs Act (TCJA), but the TCJA will reduce the number of taxpayers subject to the AMT.
Now is a good time to familiarize yourself with the changes, assess your AMT risk and see if there are any steps you can take during the last several months of the year to avoid the AMT, or at least minimize any negative impact.
AMT vs. regular tax
The top AMT rate is 28%, compared to the top regular ordinary-income tax rate of 37%. But the AMT rate typically applies to a higher taxable income base and will result in a larger tax bill if you’re subject to it. The TCJA reduced the number of taxpayers who’ll likely be subject to the AMT in part by increasing the AMT exemption and the income phaseout ranges for the exemption:
For 2018, the exemption is $70,300 for singles and heads of households (up from $54,300 for 2017), and $109,400 for married couples filing jointly (up from $84,500 for 2017). The 2018 phaseout ranges are $500,000–$781,200 for singles and heads of households (up from $120,700–$337,900 for 2017) and $1,000,000–$1,437,600 for joint filers (up from $160,900–$498,900 for 2017).
You’ll be subject to the AMT if your AMT liability is greater than your regular tax liability.
In the past, common triggers of the AMT were differences between deductions allowed for regular tax purposes and AMT purposes. Some popular deductions aren’t allowed under the AMT. New limits on some of these deductions for regular tax purposes, such as on state and local income and property tax deductions, mean they’re less likely to trigger the AMT. And certain deductions not allowed for AMT purposes are now not allowed for regular tax purposes either, such as miscellaneous itemized deductions subject to the 2% of adjusted gross income floor.
But deductions aren’t the only things that can trigger the AMT. Some income items might do so, too, such as: Long-term capital gains and dividend income, even though they’re taxed at the same rate for both regular tax and AMT purposes, Accelerated depreciation adjustments and related gain or loss differences when assets are sold, Tax-exempt interest on certain private-activity municipal bonds, and the exercise of incentive stock options.
AMT planning tips
If it looks like you could be subject to the AMT in 2018, consider accelerating income into this year. Doing so may allow you to benefit from the lower maximum AMT rate. And deferring expenses you can’t deduct for AMT purposes may allow you to preserve those deductions. If you also defer expenses you can deduct for AMT purposes, the deductions may become more valuable because of the higher maximum regular tax rate.
Please contact us if you have questions about whether you could be subject to the AMT this year or about minimizing negative consequences from the AMT.
Once upon a time, some parents and grandparents would attempt to save tax by putting investments in the names of their young children or grandchildren in lower income tax brackets. To discourage such strategies, Congress created the “kiddie” tax back in 1986. Since then, this tax has gradually become more far-reaching. Now, under the Tax Cuts and Jobs Act (TCJA), the kiddie tax has become more dangerous than ever.
A short history
Years ago, the kiddie tax applied only to children under age 14 — which still provided families with ample opportunity to enjoy significant tax savings from income shifting. In 2006, the tax was expanded to children under age 18. And since 2008, the kiddie tax has generally applied to children under age 19 and to full-time students under age 24 (unless the students provide more than half of their own support from earned income).
What about the kiddie tax rate?
Before the TCJA, for children subject to the kiddie tax, any unearned income beyond a certain amount ($2,100 for 2017) was taxed at their parents’ marginal rate (assuming it was higher), rather than their own likely low rate.
A fiercer kiddie tax
The TCJA doesn’t further expand who’s subject to the kiddie tax. But it will effectively increase the kiddie tax rate in many cases. For 2018–2025, a child’s unearned income beyond the threshold ($2,100 again for 2018) will be taxed according to the tax brackets used for trusts and estates. For ordinary income (such as interest and short-term capital gains), trusts and estates are taxed at the highest marginal rate of 37% once 2018 taxable income exceeds $12,500. In contrast, for a married couple filing jointly, the highest rate doesn’t kick in until their 2018 taxable income tops $600,000. Similarly, the 15% long-term capital gains rate takes effect at $77,201 for joint filers but at only $2,601 for trusts and estates. And the 20% rate kicks in at $479,001 and $12,701, respectively.
In other words, in many cases, children’s unearned income will be taxed at higher rates than their parents’ income. As a result, income shifting to children subject to the kiddie tax will not only not save tax, but it could actually increase a family’s overall tax liability.
The moral of the story
To avoid inadvertently increasing your family’s taxes, be sure to consider the big, bad kiddie tax before transferring income-producing or highly appreciated assets to a child or grandchild who’s a minor or college student. If you’d like to shift income and you have adult children or grandchildren who’re no longer subject to the kiddie tax but in a lower tax bracket, consider transferring such assets to them. Please contact us for more information about the kiddie tax — or other TCJA changes that may affect your family.
With its many changes to individual tax rates, brackets and breaks, the Tax Cuts and Jobs Act (TCJA) means taxpayers need to revisit their tax planning strategies. Certain strategies that were once tried-and-true will no longer save or defer tax. But there are some that will hold up for many taxpayers. And they’ll be more effective if you begin implementing them this summer, rather than waiting until year end.
Take a look at these three ideas, and contact us to discuss what midyear strategies make sense for you.
1. Look at your bracket
Under the TCJA, the top income tax rate is now 37% (down from 39.6%) for taxpayers with taxable income over $500,000 (single and head-of-household filers) or $600,000 (married couples filing jointly). These thresholds are higher than for the top rate in 2017 ($418,400, $444,550 and $470,700, respectively). So the top rate might be less of a concern. However, singles and heads of households in the middle and upper brackets could be pushed into a higher tax bracket much more quickly this year.
For example, for 2017 the threshold for the 33% tax bracket was $191,650 for singles and $212,500 for heads of households. For 2018, the rate for this bracket has been reduced slightly to 32% — but the threshold for the bracket is now only $157,500 for both singles and heads of households. So a lot more of these filers could find themselves in this bracket. (Fortunately for joint filers, their threshold for this bracket has increased from $233,350 to $315,000.)
If you expect this year’s income to be near the threshold for a higher bracket, consider strategies for reducing your taxable income and staying out of the next bracket. For example, you could take steps to accelerate deductible expenses. But carefully consider the changes the TCJA has made to deductions.
For example, you may no longer benefit from itemizing because of the nearly doubled standard deduction and the reduction or elimination of certain itemized deductions. For 2018, the standard deduction is $12,000 for singles, $18,000 for heads of households and $24,000 for joint filers.
2. Incur medical expenses
One itemized deduction the TCJA has retained and — temporarily — enhanced is the medical expense deduction. If you expect to benefit from itemizing on your 2018 return, take a look at whether you can accelerate deductible medical expenses into this year. You can deduct only expenses that exceed a floor based on your adjusted gross income (AGI). Under the TCJA, the floor has dropped from 10% of AGI to 7.5%. But it’s scheduled to return to 10% for 2019 and beyond.
Deductible expenses may include: Health insurance premiums, Long-term care insurance premiums, Medical and dental services and prescription drugs, and Mileage driven for health care purposes. You may be able to control the timing of some of these expenses so you can bunch them into 2018 and exceed the floor while it’s only 7.5%.
3. Review your investments
The TCJA didn’t make changes to the long-term capital gains rate, so the top rate remains at 20%. However, that rate now kicks in before the top ordinary-income tax rate.
For 2018, the 20% rate applies to taxpayers with taxable income exceeding $425,800 (singles), $452,400 (heads of households), or $479,000 (joint filers). If you’ve realized, or expect to realize, significant capital gains, consider selling some depreciated investments to generate losses you can use to offset those gains. It may be possible to repurchase those investments, so long as you wait at least 31 days to avoid the “wash sale” rule.
You also may need to plan for the 3.8% net investment income tax (NIIT). It can affect taxpayers with modified AGI (MAGI) over $200,000 for singles and heads of households, $250,000 for joint filers. You may be able to lower your tax liability by reducing your MAGI, reducing net investment income or both.
The Tax Cuts and Jobs Act (TCJA) provides a valuable new tax break to noncorporate owners of pass-through entities: a deduction for a portion of qualified business income (QBI). The deduction generally applies to income from sole proprietorships, partnerships, S corporations and, typically, limited liability companies (LLCs). It can equal as much as 20% of QBI. But once taxable income exceeds $315,000 for married couples filing jointly or $157,500 for other filers, a wage limit begins to phase in.
Full vs. partial phase-in
When the wage limit is fully phased in, at $415,000 for joint filers and $207,500 for other filers, the QBI deduction generally can’t exceed the greater of the owner’s share of: 50% of the amount of W-2 wages paid to employees during the tax year, or The sum of 25% of W-2 wages plus 2.5% of the cost of qualified business property (QBP).
When the wage limit applies but isn’t yet fully phased in, the amount of the limit is reduced and the final deduction is calculated as follows:
1. The difference between taxable income and the applicable threshold is divided by $100,000 for joint filers or $50,000 for other filers.
2. The resulting percentage is multiplied by the difference between the gross deduction and the fully wage-limited deduction.
3. The result is subtracted from the gross deduction to determine the final deduction.
Let’s say Chris and Leslie have taxable income of $600,000. This includes $300,000 of QBI from Chris’s pass-through business, which pays $100,000 in wages and has $200,000 of QBP. The gross deduction would be $60,000 (20% of $300,000), but the wage limit applies in full because the married couple’s taxable income exceeds the $415,000 top of the phase-in range for joint filers.
Computing the deduction is fairly straightforward in this situation. The first option for the wage limit calculation is $50,000 (50% of $100,000). The second option is $30,000 (25% of $100,000 + 2.5% of $200,000). So the wage limit — and the deduction — is $50,000.
What if Chris and Leslie’s taxable income falls within the phase-in range? The calculation is a bit more complicated. Let’s say their taxable income is $400,000. The full wage limit is still $50,000, but only 85% of the full limit applies: ($400,000 taxable income - $315,000 threshold)/$100,000 = 85%
To calculate the amount of their deduction, the couple must first calculate 85% of the difference between the gross deduction of $60,000 and the fully wage-limited deduction of $50,000: ($60,000 - $50,000) × 85% = $8,500 That amount is subtracted from the $60,000 gross deduction for a final deduction of $51,500.
That’s not all
Be aware that another restriction may apply: For income from “specified service businesses,” the QBI deduction is reduced if an owner’s taxable income falls within the applicable income range and eliminated if income exceeds it.
Please contact us to learn whether your business is a specified service business or if you have other questions about the QBI deduction.
When it comes to tax law changes and estate planning, the substantial increases to the gift and estate tax exemptions under the Tax Cuts and Jobs Act are getting the most attention these days. But a tax law change enacted in 2015 also warrants your attention. That change generally prohibits the income tax basis of inherited property from exceeding the property’s fair market value (FMV) for estate tax purposes.
Why does this matter? Because it prevents beneficiaries from arguing that the estate undervalued the property and, therefore, they’re entitled to claim a higher basis for income tax purposes. The higher the basis, the lower the taxable gain on any subsequent sale of the property.
Before the 2015 tax law change, estates and their beneficiaries had conflicting incentives when it came to the valuation of a deceased person’s property. Executors had an incentive to value property as low as possible to minimize estate taxes, while beneficiaries had an incentive to value property as high as possible to minimize capital gains, should they sell the property.
The 2015 law requires consistency between a property’s basis reflected on an estate tax return and the basis used to calculate gain when it’s sold by the person who inherits it. It provides that the basis of property in the hands of a beneficiary may not exceed its value as finally determined for estate tax purposes.
Generally, a property’s value is finally determined when
1) its value is reported on a federal estate tax return and the IRS doesn’t challenge it before the limitations period expires, 2) the IRS determines its value and the executor doesn’t challenge it before the limitations period expires, or 3) its value is determined according to a court order or agreement.
But the basis consistency rule isn’t a factor in all situations. The rule doesn’t apply to property unless its inclusion in the deceased’s estate increased the liability for estate taxes. So, for example, the rule doesn’t apply if the value of the deceased’s estate is less than his or her unused exemption amount.
Watch out for penalties
The 2015 law also requires estates to furnish information about the value of inherited property to the IRS and the person who inherits it. Estates that fail to comply with these reporting requirements are subject to failure-to-file penalties. Beneficiaries who claim an excessive basis on their income tax returns are subject to accuracy-related penalties on any resulting understatements of tax.
Contact us if you’re responsible for administering an estate or if you expect to inherit property from someone whose estate will be liable for estate tax. We can help you comply with the basis consistency rules and avoid penalties.
“Going green” at home — whether it’s your principal residence or a second home — can reduce your tax bill in addition to your energy bill, all while helping the environment, too. The catch is that, to reap all three benefits, you need to buy and install certain types of renewable energy equipment in the home.
Invest in green and save green
For 2018 and 2019, you may be eligible for a tax credit of 30% of expenditures (including costs for site preparation, assembly, installation, piping, and wiring) for installing the following types of renewable energy equipment: Qualified solar electricity generating equipment and solar water heating equipment, Qualified wind energy equipment, Qualified geothermal heat pump equipment, and Qualified fuel cell electricity generating equipment (limited to $500 for each half kilowatt of fuel cell capacity).
Because these items can be expensive, the credits can be substantial. To qualify, the equipment must be installed at your U.S. residence, including a vacation home — except for fuel cell equipment, which must be installed at your principal residence. You can’t claim credits for equipment installed at a property that’s used exclusively as a rental.
To qualify for the credit for solar water heating equipment, at least 50% of the energy used to heat water for the property must be generated by the solar equipment. And no credit is allowed for solar water heating equipment unless it’s certified for performance by the nonprofit Solar Rating & Certification Corporation or a comparable entity endorsed by the state in which your residence is located. (Keep this certification with your tax records.) The credit rate for these expenditures is scheduled to drop to 26% in 2020 and then to 22% in 2021. After that, the credits are scheduled to expire.
Document and explore
As with all tax breaks, documentation is key when claiming credits for green investments in your home. Keep proof of how much you spend on qualifying equipment, including any extra amounts for site preparation, assembly and installation. Also keep a record of when the installation is completed, because you can claim the credit only for the year when that occurs.
Be sure to look beyond the federal tax credits and explore other ways to save by going green. Your green home investments might also be eligible for state and local tax benefits, subsidized state and local financing deals, and utility company rebates. To learn more about federal, state and local tax breaks available for green home investments, contact us.
The most effective estate planning strategies often involve the use of irrevocable trusts. But what if you’re uncomfortable placing your assets beyond your control? What happens if your financial fortunes take a turn for the worse after you’ve irrevocably transferred a sizable portion of your wealth? If your marriage is strong, a spousal lifetime access trust (SLAT) can be a viable strategy to obtain the benefits of an irrevocable trust while creating a financial backup plan.
A SLAT is an irrevocable trust that authorizes the trustee to make distributions to your spouse if a need arises. Like other irrevocable trusts, a SLAT can be designed to benefit your children, grandchildren or future generations. You can use your lifetime gift tax and generation-skipping transfer tax exemptions (currently, $11.18 million each) to shield contributions to the trust, as well as future appreciation, from transfer taxes. And the trust assets also receive some protection against claims by your beneficiaries’ creditors, including any former spouses.
The key benefit of a SLAT is that, by naming your spouse as a lifetime beneficiary, you retain indirect access to the trust assets. You can set up the trust to make distributions based on an “ascertainable standard” — such as your spouse’s health, education, maintenance or support — or you can give the trustee full discretion to distribute income or principal to your spouse. To keep the trust assets out of your taxable estate, you must not act as trustee.
You can appoint your spouse as trustee, but only if distributions are limited to an ascertainable standard. If you desire greater flexibility over distributions to your spouse, appoint an independent trustee. Also, the trust document must prohibit distributions in satisfaction of your legal support obligations.
Another critical requirement is to fund the trust with your separate property. If you use marital or community property, there’s a risk that the trust assets will end up in your spouse’s estate.
There’s a significant risk inherent in the SLAT strategy: If your spouse predeceases you, or if you and your spouse divorce, you’ll lose your indirect access to the trust assets. But there may be ways to mitigate this risk. If you’re considering using a SLAT, contact us to learn more about the benefits and risks of this type of trust.
There continues to be much uncertainty about the Affordable Care Act and how such uncertainty will impact health care costs. So it’s critical to leverage all tax-advantaged ways to fund these expenses, including HSAs, FSAs and HRAs. Here’s how to make sense of this alphabet soup of health care accounts.
If you’re covered by a qualified high-deductible health plan (HDHP), you can contribute pretax income to an employer-sponsored Health Savings Account — or make deductible contributions to an HSA you set up yourself — up to $3,450 for self-only coverage and $6,900 for family coverage for 2018. Plus, if you’re age 55 or older, you may contribute an additional $1,000. You own the account, which can bear interest or be invested, growing tax-deferred similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.
Regardless of whether you have an HDHP, you can redirect pretax income to an employer-sponsored Flexible Spending Account up to an employer-determined limit — not to exceed $2,650 in 2018. The plan pays or reimburses you for qualified medical expenses. What you don’t use by the plan year’s end, you generally lose — though your plan might allow you to roll over up to $500 to the next year. Or it might give you a grace period of two and a half months to incur expenses to use up the previous year’s contribution. If you have an HSA, your FSA is limited to funding certain “permitted” expenses.
A Health Reimbursement Account is an employer-sponsored account that reimburses you for medical expenses. Unlike an HSA, no HDHP is required. Unlike an FSA, any unused portion typically can be carried forward to the next year. There’s no government-set limit on HRA contributions. But only your employer can contribute to an HRA; employees aren’t allowed to contribute.
Maximize the benefit If you have one of these health care accounts, it’s important to understand the applicable rules so you can get the maximum benefit from it. But tax-advantaged accounts aren’t the only way to save taxes in relation to health care. If you have questions about tax planning and health care expenses, please contact us.
For tax years beginning in 2018 and beyond, the Tax Cuts and Jobs Act (TCJA) created a flat 21% federal income tax rate for C corporations. Under prior law, C corporations were taxed at rates as high as 35%. The TCJA also reduced individual income tax rates, which apply to sole proprietorships and pass-through entities, including partnerships, S corporations, and, typically, limited liability companies (LLCs). The top rate, however, dropped only slightly, from 39.6% to 37%.
On the surface, that may make choosing C corporation structure seem like a no-brainer. But there are many other considerations involved.
Under prior tax law, conventional wisdom was that most small businesses should be set up as sole proprietorships or pass-through entities to avoid the double taxation of C corporations: A C corporation pays entity-level income tax and then shareholders pay tax on dividends — and on capital gains when they sell the stock. For pass-through entities, there’s no federal income tax at the entity level.
Although C corporations are still potentially subject to double taxation under the TCJA, their new 21% tax rate helps make up for it. This issue is further complicated, however, by another provision of the TCJA that allows noncorporate owners of pass-through entities to take a deduction equal to as much as 20% of qualified business income (QBI), subject to various limits. But, unless Congress extends it, the break is available only for tax years beginning in 2018 through 2025.
There’s no one-size-fits-all answer when deciding how to structure a business. The best choice depends on your business’s unique situation and your situation as an owner.
3 common scenarios
Here are three common scenarios and the entity-choice implications: 1. Business generates tax losses. For a business that consistently generates losses, there’s no tax advantage to operating as a C corporation. Losses from C corporations can’t be deducted by their owners. A pass-through entity will generally make more sense because losses pass through to the owners’ personal tax returns.
2. Business distributes all profits to owners. For a profitable business that pays out all income to the owners, operating as a pass-through entity generally will be better if significant QBI deductions are available. If not, it’s probably a toss-up in terms of tax liability.
3. Business retains all profits to finance growth. For a business that’s profitable but holds on to its profits to fund future growth strategies, operating as a C corporation generally will be advantageous if the corporation is a qualified small business (QSB). Why? A 100% gain exclusion may be available for QSB stock sale gains.
If QSB status is unavailable, operating as a C corporation is still probably preferred — unless significant QBI deductions would be available at the owner level.
These are only some of the issues to consider when making the C corporation vs. pass-through entity choice. We can help you evaluate your options
When you think about recent tax law changes and your business, you’re probably thinking about the new 20% pass-through deduction for qualified business income or the enhancements to depreciation-related breaks. Or you may be contemplating the reduction or elimination of certain business expense deductions. But there are also a couple of recent tax law changes that you need to be aware of if your business sponsors a 401(k) plan.
1. Plan loan repayment extension
The Tax Cuts and Jobs Act (TCJA) gives a break to 401(k) plan participants with outstanding loan balances when they leave their employers. While plan sponsors aren’t required to allow loans, many do. Before 2018, if an employee with an outstanding plan loan left the company sponsoring the plan, he or she would have to repay the loan (or contribute the outstanding balance to an IRA or his or her new employer’s plan) within 60 days to avoid having the loan balance deemed a taxable distribution (and be subject to a 10% early distribution penalty if the employee was under age 59-1/2). Under the TCJA, beginning in 2018, former employees in this situation have until their tax return filing due date — including extensions — to repay the loan (or contribute the outstanding balance to an IRA or qualified retirement plan) and avoid taxes and penalties.
2. Hardship withdrawal limit increase
Beginning in 2019, the Bipartisan Budget Act (BBA) eases restrictions on employee 401(k) hardship withdrawals. Most 401(k) plans permit hardship withdrawals, though plan sponsors aren’t required to allow them. Hardship withdrawals are subject to income tax and the 10% early distribution tax penalty.
Currently, hardship withdrawals are limited to the funds employees contributed to the accounts. (Such withdrawals are allowed only if the employee has first taken a loan from the same account.) Under the BBA, the withdrawal limit will also include accumulated employer matching contributions plus earnings on contributions. If an employee has been participating in your 401(k) for several years, this modification could add substantially to the amount of funds available for withdrawal.
Nest egg harm
These changes might sound beneficial to employees, but in the long run they could actually hurt those who take advantage of them. Most Americans aren’t saving enough for retirement, and taking longer to pay back a plan loan (and thus missing out on potential tax-deferred growth during that time) or taking larger hardship withdrawals can result in a smaller, perhaps much smaller, nest egg at retirement.
So consider educating your employees on the importance of letting their 401(k) accounts grow undisturbed and the potential negative tax consequences of loans and early withdrawals. Please contact us if you have questions.
The massive changes the Tax Cuts and Jobs Act (TCJA) made to income taxes have garnered the most attention. But the new law also made major changes to gift and estate taxes. While the TCJA didn’t repeal these taxes, it did significantly reduce the number of taxpayers who’ll be subject to them, at least for the next several years. Nevertheless, factoring taxes into your estate planning is still important.
The TCJA more than doubles the combined gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption, from $5.49 million for 2017 to $11.18 million for 2018. This amount will continue to be annually adjusted for inflation through 2025. Absent further congressional action, however, the exemptions will revert to their 2017 levels (adjusted for inflation) for 2026 and beyond. The rate for all three taxes remains at 40% — only three percentage points higher than the top income tax rate.
Even before the TCJA, the vast majority of taxpayers didn’t have to worry about federal gift and estate taxes. While the TCJA protects even more taxpayers from these taxes, those with estates in the roughly $6 million to $11 million range (twice that for married couples) still need to keep potential post-2025 estate tax liability in mind in their estate planning. Although their estates would escape estate taxes if they were to die while the doubled exemption is in effect, they could face such taxes if they live beyond 2025. Any taxpayer who could be subject to gift and estate taxes after 2025 may want to consider making gifts now to take advantage of the higher exemptions while they’re available.
Factoring taxes into your estate planning is also still important if you live in a state with an estate tax. Even before the TCJA, many states imposed estate tax at a lower threshold than the federal government did. Now the differences in some states will be even greater.
Finally, income tax planning, which became more important in estate planning back when exemptions rose to $5 million more than 15 years ago, is now an even more important part of estate planning.
For example, holding assets until death may be advantageous if estate taxes aren’t a concern. When you give away an appreciated asset, the recipient takes over your tax basis in the asset, triggering capital gains tax should he or she turn around and sell it. When an appreciated asset is inherited, on the other hand, the recipient’s basis is “stepped up” to the asset’s fair market value on the date of death, erasing the built-in capital gain. So retaining appreciating assets until death can save significant income tax.
Review your estate plan
Whether or not you need to be concerned about federal gift and estate taxes, having an estate plan in place and reviewing it regularly is important. Working with your estate planning attorney we can help you evaluate the potential tax impact of the TCJA on your estate plan.
Over the last several years, virtual currency has become increasingly popular. Bitcoin is the most widely recognized form of virtual currency, also commonly referred to as digital, electronic or crypto currency. While most smaller businesses aren’t yet accepting bitcoin or other virtual currency payments from their customers, more and more larger businesses are. And the trend may trickle down to smaller businesses. Businesses also can pay employees or independent contractors with virtual currency. But what are the tax consequences of these transactions?
Bitcoin has an equivalent value in real currency and can be digitally traded between users. It also can be purchased with real currencies or exchanged for real currencies. Bitcoin is most commonly obtained through virtual currency ATMs or online exchanges. Goods or services can be paid for using “bitcoin wallet” software. When a purchase is made, the software digitally posts the transaction to a global public ledger. This prevents the same unit of virtual currency from being used multiple times.
Questions about the tax impact of virtual currency abound. And the IRS has yet to offer much guidance. The IRS did establish in a 2014 ruling that bitcoin and other convertible virtual currency should be treated as property, not currency, for federal income tax purposes. This means that businesses accepting bitcoin payments for goods and services must report gross income based on the fair market value of the virtual currency when it was received, measured in equivalent U.S. dollars.
When a business uses virtual currency to pay wages, the wages are taxable to the employees to the extent any other wage payment would be. You must, for example, report such wages on your employees’ W-2 forms. And they’re subject to federal income tax withholding and payroll taxes, based on the fair market value of the virtual currency on the date received by the employee.
When a business uses virtual currency to pay independent contractors or other service providers, those payments are also taxable to the recipient. The self-employment tax rules generally apply, based on the fair market value of the virtual currency on the date received. Payers generally must issue 1099-MISC forms to recipients. Finally, payments made with virtual currency are subject to information reporting to the same extent as any other payment made in property.
Deciding whether to go virtual
Accepting bitcoin can be beneficial because it may avoid transaction fees charged by credit card companies and online payment providers (such as PayPal) and attract customers who want to use virtual currency. But the IRS is targeting virtual currency transactions in an effort to raise tax revenue, and it hasn’t issued much guidance on the tax treatment or reporting requirements. So bitcoin can also be a bit risky from a tax perspective.
Give us a call to learn more about tax considerations when deciding whether your business should accept bitcoin or other virtual currencies — or use them to pay employees, independent contractors or other service providers
In many parts of the country, summer is peak season for selling a home, and most areas have seen significant price appreciation in recent years. If you’re planning to put your home on the market soon, you’re probably thinking about things like how quickly it will sell and how much you’ll get for it. But don’t neglect to consider the tax consequences.
Home sale gain exclusion
The U.S. House of Representatives’ original version of the Tax Cuts and Jobs Act included a provision tightening the rules for the home sale gain exclusion. Fortunately, that provision didn’t make it into the final version that was signed into law. As a result, if you’re selling your principal residence, there’s still a good chance you’ll be able to exclude up to $250,000 ($500,000 for joint filers) of gain. Gain that qualifies for exclusion also is excluded from the 3.8% net investment income tax.
To qualify for the exclusion, you must meet certain tests. For example, you generally must own and use the home as your principal residence for at least two years during the five-year period preceding the sale. (Gain allocable to a period of “nonqualified” use generally isn’t excludable.) In addition, you can’t use the exclusion more than once every two years.
More tax considerations
Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, as long as you owned the home for at least a year. If you didn’t, the gain will be considered short-term and subject to your ordinary-income rate, which could be more than double your long-term rate.
Here are some additional tax considerations when selling a home:
Tax basis. To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use.
Losses. A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.
Second homes. If you’re selling a second home, be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.
A big investment Your home is likely one of your biggest investments, so it’s important to consider the tax consequences before selling it. If you’re planning to put your home on the market, we can help you assess the potential tax impact. Contact us to learn more.
IRS examiners use Audit Techniques Guides (ATGs) to prepare for audits — and so can small business owners. Many ATGs target specific industries, such as construction. Others address issues that frequently arise in audits, such as executive compensation and fringe benefits. These publications can provide valuable insights into issues that might surface if your business is audited.
What do ATGs cover? The IRS compiles information obtained from past examinations of taxpayers and publishes its findings in ATGs. Typically, these publications explain: • The nature of the industry or issue,• Accounting methods commonly used in an industry,• Relevant audit examination techniques, • Common and industry-specific compliance issues, • Business practices, • Industry terminology, and • Sample interview questions. By using a specific ATG, an examiner may, for example, be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s normal for the industry or to identify anomalies within the geographic area in which the taxpayer resides.
What do ATGs advise? ATGs cover the types of documentation IRS examiners should request from taxpayers and what relevant information might be uncovered during a tour of the business premises. These guides are intended in part to help examiners identify potential sources of income that could otherwise slip through the cracks. Other issues that ATGs might instruct examiners to inquire about include: • Internal controls (or lack of controls),• The sources of funds used to start the business,• A list of suppliers and vendors,• The availability of business records, • Names of individual(s) responsible for maintaining business records,• Nature of business operations (for example, hours and days open),• Names and responsibilities of employees,• Names of individual(s) with control over inventory, and• Personal expenses paid with business funds.
For example, one ATG focuses specifically on cash-intensive businesses, such as auto repair shops, check-cashing operations, gas stations, liquor stores, restaurants and bars, and salons. It highlights the importance of reviewing cash receipts and cash register tapes for these types of businesses. Cash-intensive businesses may be tempted to underreport their cash receipts, but franchised operations may have internal controls in place to deter such “skimming.” For instance, a franchisee may be required to purchase products or goods from the franchisor, which provides a paper trail that can be used to verify sales records. Likewise, for gas stations, examiners must check the methods of determining income, rebates and other incentives. Restaurants and bars should be asked about net profits compared to the industry average, spillage, pouring averages and tipping. Avoiding red flags Although ATGs were created to enhance IRS examiner proficiency, they also can help small businesses ensure they aren’t engaging in practices that could raise red flags with the IRS.
To access the complete list of ATGs, visit the IRS website. And for more information on the IRS red flags that may be relevant to your business, give us a call.
With the April 17 individual income tax filing deadline behind you (or with your 2017 tax return on the back burner if you filed for an extension), you may be hoping to not think about taxes for the next several months. But for maximum tax savings, now is the time to start tax planning for 2018. It’s especially critical to get an early start this year because the Tax Cuts and Jobs Act (TCJA) has substantially changed the tax environment.
A tremendous number of variables affect your overall tax liability for the year. Looking at these variables early in the year can give you more opportunities to reduce your 2018 tax bill. For example, the timing of income and deductible expenses can affect both the rate you pay and when you pay. By regularly reviewing your year-to-date income, expenses and potential tax, you may be able to time income and expenses in a way that reduces, or at least defers, your tax liability. In other words, tax planning shouldn’t be just a year-end activity.
Certainty vs. Uncertainty
Last year, planning early was a challenge because it was uncertain whether tax reform legislation would be signed into law, when it would go into effect and what it would include. This year, the TCJA tax reform legislation is in place, with most of the provisions affecting individuals in effect for 2018–2025. Additional major tax law changes aren’t expected in 2018. So there’s no need to hold off on tax planning.
But while there’s more certainty about the tax law that will be in effect this year and next, there’s still much uncertainty on exactly what the impact of the TCJA changes will be on each taxpayer. The new law generally reduces individual tax rates, and it expands some tax breaks. However, it reduces or eliminates many other breaks. The total impact of these changes is what will ultimately determine which tax strategies will make sense for you this year, such as the best way to time income and expenses.
You may need to deviate from strategies that worked for you in previous years and implement some new strategies. Getting started sooner will help ensure you don’t take actions that you think will save taxes but that actually will be costly under the new tax regime. It will also allow you to take full advantage of new tax-saving opportunities. Now and throughout the year To get started on your 2018 tax planning, contact us. We can help you determine how the TCJA affects you and what strategies you should implement now and throughout the year to minimize your tax liability.
What 2017 tax records can you toss once you’ve filed your 2017 return? The answer is simple: none. You need to hold on to all of your 2017 tax records for now. But it’s the perfect time to go through old tax records and see what you can discard.
The 3-year and 6-year rules
At minimum, keep tax records for as long as the IRS has the ability to audit your return or assess additional taxes, which generally is three years after you file your return. This means you potentially can get rid of most records related to tax returns for 2014 and earlier years. (If you filed an extension for your 2014 return, hold on to your records at least until the three-year anniversary of your extended due date.)
However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%. What constitutes an understatement may go beyond simply not reporting items of income. So a common rule of thumb is to save tax records for six years from filing, just to be safe.
What to keep longer
You’ll need to hang on to certain tax-related records beyond the statute of limitations: Keep tax returns themselves forever, so you can prove to the IRS that you actually filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one. Hold on to W-2 forms until you begin receiving Social Security benefits. Questions might arise regarding your work record or earnings for a particular year, and your W-2 could provide the documentation needed. Retain records related to real estate or investments as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return (or six years if you want to be extra safe). Keep records associated with retirement accounts until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years.
We’ve covered retention guidelines for some of the most common tax-related records. If you have questions about other documents, please contact us.
When a company’s deductible expenses exceed its income, generally a net operating loss (NOL) occurs. If when filing your 2017 income tax return you found that your business had an NOL, there is an upside: tax benefits. But beware — the Tax Cuts and Jobs Act (TCJA) makes some significant changes to the tax treatment of NOLs.
Under Pre-TCJA, when a business incurs an NOL, the loss can be carried back up to two years, and then any remaining amount can be carried forward up to 20 years. The carryback can generate an immediate tax refund, boosting cash flow. The business can, however, elect instead to carry the entire loss forward. If cash flow is strong, this may be more beneficial, such as if the business’s income increases substantially, pushing it into a higher tax bracket — or if tax rates increase. In both scenarios, the carryforward can save more taxes than the carryback because deductions are more powerful when higher tax rates apply.
However, the TCJA has established a flat 21% tax rate for C corporation taxpayers beginning with the 2018 tax year, and the rate has no expiration date. So C corporations don’t have to worry about being pushed into a higher tax bracket unless Congress changes the corporate rates again.
Also keep in mind that the rules are more complex for pass-through entities, such as partnerships, S corporations and limited liability companies (if they elected partnership tax treatment). Each owner’s allocable share of the entity’s loss is passed through to the owners and reported on their personal returns. The tax benefit depends on each owner’s particular tax situation.
The TCJA changes The changes the TCJA made to the tax treatment of NOLs generally aren’t favorable to taxpayers: * For NOLs arising in tax years ending after December 31, 2017, a qualifying NOL can’t be carried back at all. This may be especially detrimental to start-up businesses, which tend to generate NOLs in their early years and can greatly benefit from the cash-flow boost of a carried-back NOL. (On the plus side, the TCJA allows NOLs to be carried forward indefinitely, as opposed to the previous 20-year limit.)* For NOLs arising in tax years beginning after December 31, 2017, an NOL carryforward generally can’t be used to shelter more than 80% of taxable income in the carryforward year. (Under prior law, generally up to 100% could be sheltered.)
The differences between the effective dates for these changes may have been a mistake, and a technical correction might be made by Congress. Also be aware that, in the case of pass-through entities, owners’ tax benefits from the entity’s net loss might be further limited under the TCJA’s new “excess business loss” rules. Complicated rules get more complicated NOLs can provide valuable tax benefits. The rules, however, have always been complicated, and the TCJA has complicated them further. Please contact us if you’d like more information on the NOL rules and how you can maximize the tax benefit of an NOL. © 2018
Normally when appreciated business assets such as real estate are sold, tax is owed on the appreciation. But there’s a way to defer this tax: a Section 1031 “like kind” exchange. However, the Tax Cuts and Jobs Act (TCJA) reduces the types of property eligible for this favorable tax treatment.
What is a like-kind exchange?
Prior to 2018 Section 1031 of the Internal Revenue Code allowed you to defer gains on real or personal property used in a business or held for investment if, instead of selling it, you exchange it solely for property of a “like kind.” Thus, the tax benefit of an exchange is that you defer tax and, thereby, have use of the tax savings until you sell the replacement property.
This technique is especially flexible for real estate, because virtually any type of real estate will be considered to be of a like kind, as long as it’s business or investment property. For example, you can exchange a warehouse for an office building, or an apartment complex for a strip mall. Deferred and reverse exchanges.
Although a like-kind exchange may sound quick and easy, it’s relatively rare for two owners to simply swap properties. You’ll likely have to execute a “deferred” exchange, in which you engage a qualified intermediary (QI) for assistance. When you sell your property (the relinquished property), the net proceeds go directly to the QI, who then uses them to buy replacement property.
To qualify for tax-deferred exchange treatment, you generally must identify replacement property within 45 days after you transfer the relinquished property and complete the purchase within 180 days after the initial transfer. An alternate approach is a “reverse” exchange. Here, an exchange accommodation titleholder (EAT) acquires title to the replacement property before you sell the relinquished property. You can defer capital gains by identifying one or more properties to exchange within 45 days after the EAT receives the replacement property and, typically, completing the transaction within 180 days.
Changes under the TCJA
There had been some concern that tax reform would include the elimination of like-kind exchanges. The good news is that the TCJA still generally allows tax-deferred like-kind exchanges of business and investment real estate. But there’s also some bad news: For 2018 and beyond, the TCJA eliminates tax-deferred like-kind exchange treatment for exchanges of personal property. However, prior-law rules that allow like-kind exchanges of personal property still apply if one leg of an exchange was completed by December 31, 2017, but one leg remained open on that date. Keep in mind that exchanged personal property must be of the same asset or product class.
The rules for like-kind exchanges are complex, so these arrangements present some risks. If, say, you exchange the wrong kind of property or acquire cash or other non-like-kind property in a deal, you may still end up incurring a sizable tax hit. If you’re exploring a like-kind exchange, contact us. We can help you ensure you’re in compliance with the rules.
The “sandwich generation” accounts for a large segment of the population. These are people who find themselves caring for both their children and their parents at the same time. In some cases, this includes providing parents with financial support. As a result, estate planning — which traditionally focuses on providing for one’s children — has expanded in many cases to include aging parents as well.
Including your parents as beneficiaries of your estate plan raises a number of complex issues. Here are five tips to consider:
1. Plan for long-term care (LTC). The annual cost of LTC can reach well into six figures. These expenses aren’t covered by traditional health insurance policies or Medicare. To prevent LTC expenses from devouring your parents’ resources, work with them to develop a plan for funding their health care needs through LTC insurance or other investments.
2. Make gifts. One of the simplest ways to help your parents financially is to make cash gifts to them. If gift and estate taxes are a concern, you can take advantage of the annual gift tax exclusion, which allows you to give each parent up to $15,000 per year without triggering taxes.
3. Pay medical expenses. You can pay an unlimited amount of medical expenses on your parents’ behalf, without tax consequences, so long as you make the payments directly to medical providers.
4. Set up trusts. There are many trust-based strategies you can use to financially assist your parents. For example, in the event you predecease your parents, your estate plan might establish a trust for their benefit, with any remaining assets passing to your children when your parents die.
5. Buy your parents’ home. If your parents have built up significant equity in their home, consider buying it and leasing it back to them. This arrangement allows your parents to tap their home equity without moving out while providing you with valuable tax deductions for mortgage interest, depreciation, maintenance and other expenses. To avoid negative tax consequences, be sure to pay a fair price for the home (supported by a qualified appraisal) and charge your parents fair-market rent.
As you review these and other options for providing financial assistance to your aging parents, try not to overdo it. If you give your parents too much, these assets could end up back in your estate and potentially exposed to gift or estate taxes. Also, keep in mind that some gifts could disqualify your parents from certain federal or state government benefits. Contact your estate planning attorney to review how these ideas would fit within your estate plan.
f you’re planning on buying a home that you one day wish to pass on to your adult children, a joint purchase can reduce estate tax liability, provided the children have sufficient funds to finance their portion of the purchase. With the gift and estate tax exemption now set at an inflation-adjusted $10 million thanks to the Tax Cuts and Jobs Act, federal estate taxes are less of a concern for most families. However, the high exemption amount is only temporary, and there’s state estate tax risk to consider. Oregon's estate tax exemption is $1,000,000 and Washington's estate tax exemption is $2,000,000.
Current and remainder interests The joint purchase technique is based on the concept that property can be divided not only into pieces, but also over time: One person (typically of an older generation) buys a current interest in the property and the other person (typically of a younger generation) buys the remainder interest. A remainder interest is simply the right to enjoy the property after the current interest ends. If the current interest is a life interest, the remainder interest begins when the owner of the current interest dies.
Joint purchases offer several advantages. The older owner enjoys the property for life, and his or her purchase price is reduced by the value of the remainder interest. The younger owner pays only a fraction of the property’s current value and receives the entire property when the older owner dies. Best of all, if both owners pay fair market value for their respective interests, the transfer from one generation to the next should be free of gift and estate taxes. The relative values of the life and remainder interests are determined using IRS tables that take into account the age of the life-interest holder and the applicable federal rate (the Section 7520 rate), which is set monthly by the federal government.
There are some downsides. The younger owner must buy the remainder interest with his or her own funds. Also, while the tax basis of inherited property is “stepped up” to its date-of-death value, a remainder interest holder’s basis is equal to his or her purchase price. This step-up in basis allows the heir to avoid capital gains tax on appreciation that occurred while the deceased held the property. But, in most cases where estate tax is a concern, the estate tax savings will far outweigh any capital gains tax liability. That’s because the highest capital gains rate generally is significantly lower than the highest estate tax rate.
In a world where many estate planning techniques can be complicated, a joint purchase isn’t. Contact us with any questions.
Here's a link to the lastest scam. It involves erroneous refunds.
While many provisions of the Tax Cuts and Jobs Act (TCJA) will save businesses tax, the new naw also reduces or eliminates some tax breaks for businesses. One break it eliminates is the Section 199 deduction, commonly referred to as the “manufacturers’ deduction.” When it’s available, this potentially valuable tax break can be claimed by many types of businesses beyond just manufacturing companies. Under the TCJA, 2017 is the last tax year noncorporate taxpayers can take the deduction (2018 for C corporation taxpayers).
The basics: The Sec. 199 deduction, also called the “domestic production activities deduction,” is 9% of the lesser of qualified production activities income or taxable income. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts (DPGR).
Yes, the deduction is available to traditional manufacturers. But businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing also may be eligible. The deduction isn’t allowed in determining net self-employment earnings and generally can’t reduce net income below zero. But it can be used against the alternative minimum tax.
Calculating DPGR: To determine a company’s Sec. 199 deduction, its qualified production activities income must be calculated. This is the amount of DPGR exceeding the cost of goods sold and other expenses allocable to that DPGR. Most companies will need to allocate receipts between those that qualify as DPGR and those that don’t unless less than 5% of receipts aren’t attributable to DPGR.
DPGR can come from a number of activities, including the construction of real property in the United States, as well as engineering or architectural services performed stateside to construct real property. It also can result from the lease, rental, licensing or sale of qualifying production property, such as tangible personal property (for example, machinery and office equipment), computer software, and master copies of sound recordings.
The property must have been manufactured, produced, grown or extracted in whole or “significantly” within the United States. While each situation is assessed on its merits, the IRS has said that, if the labor and overhead incurred in the United States accounted for at least 20% of the total cost of goods sold, the activity typically qualifies.
Give us a call to learn whether this potentially powerful deduction could reduce your business’s tax liability when you file your 2017 return. We can also help address any questions you may have about other business tax breaks that have been reduced or eliminated by the TCJA.
Based on questions we’ve received from clients there is some confusion about the new rules for deducting home equity interest under the Tax Cuts and Jobs Act. Starting in 2018 you can only deduct purchase mortgage interest. As of 1-1-18 you can no longer deduct interest paid on home equity debt. Home equity debt is a debt on your residence that was not used to purchase or improve your residence. For example, using a home equity credit line to purchase a car. Purchase mortgage interest is interest on debt that was used to purchase or improve your residence.
What can be confusing is that home equity debt is determined by what the money was used for, not the type of loan. A home equity credit line used 100% to remodel your home will continue to be deductible in 2018. And if you’ve refinanced your primary mortgage in the past and taken out cash that was not used to improve your residence then some of the interest on your primary mortgage will not be deductible starting in 2018.
There are also new limits on the total amount of purchase mortgage interest you can deduct. For debt incurred before 12-14-17 you can deduct the interest on purchase mortgage debt up to $1,000,000 in loan balance. For debt incurred after 12-14-17 you can only deduct interest on purchase mortgage debt up to $750,000.
This is a very brief overview of the rules. Contact us if you’d like to discuss in more detail.
If you haven't yet filed your 2017 Tax Return the US government shut down should have little or no impact on you.
If you have filed your tax return the major impact will be a suspension of processing refunds.
Processing of amended income tax returns and related refunds will also be suspended during the shut down period.
Most taxpayer support services will be suspended during the shut down. So telephone inquiries about tax law and collections will not be answered during the shut down period.
Let's hope our elected officials can come to some sort of agreement quickly to resolve this situation.
This recent article in the Wall Street Journal highlights the importance of keeping accurate records regarding your employees' legal status to work in the United States. An I-9 form must be kept on file for all current employees and for 3 years after an employee leaves. We recommend keeping a copy of the supporting documents provided by employees to support the I-9 form.
An extra step you might consider to ensure an employee's legal status is to use the E-Verify system administered by US Citizenship and Immigration Services. E-Verify is an Internet-based system that compares information from an employee's Form I-9, Employment Eligibility Verification, to data from U.S. Department of Homeland Security and Social Security Administration records to confirm employment eligibility.
Immigration Officials Swarm 7-Elevens, Issue Warning to U.S. Businesses http://on.wsj.com/2mk7ijd
This post covers the changes that will affect business tax returns with suggestions of a few things you can do before year end related to the new tax law.
While most of the provisions won’t go into effect until 2018, you can take a couple of steps now to minimize your total tax bill for 2017.
1) Consider purchasing assets that may qualify for 100% bonus depreciation or the Section 179 expensing election.
2) Deferring income into 2018 is especially relevant this year since many businesses and individuals are expected to have lower marginal tax rates next year under the new bill.
3) Accelerating deductions into 2017 is especially relevant this year since many businesses and individuals are expected to have lower marginal tax rates next year under the new bill.
4) If you think your business will have a net operating loss (NOL) for 2017 try and push as many deductions as possible into the 2017 tax year as starting in 2018, the carryback for NOLs is eliminated and the deduction for NOL carryforwards is limited to 80% of taxable income.
Below are the items in the new tax bill that will affect your business tax return. We’ve not included any of the tax law changes that would only affect larger business taxpayers.
The corporate tax rate changes to a flat 21%. If your corporate taxable income was mostly in the 15% federal tax bracket (under $50,000) this will increase your corporate income tax. If your corporate taxable income was higher than $95,000, you should have a decrease in your federal corporate tax. If your business isn’t taxed as a C Corporation, this doesn’t apply to you.
The corporate Alternative Minimum Tax (AMT) has been repealed. The individual AMT was not repealed. If your business isn’t taxed as a C Corporation, this doesn’t apply to you.
The 80% Dividends Received Deduction (DRD) has been reduced to 65% and the 70% DRD has been reduced to 50%. If your business isn’t taxed as a C Corporation, this doesn’t apply to you.
The maximum Section 179 deduction has increased to $1,000,000.
For the next five years businesses can deduct 100% of all fixed asset acquisitions (other than certain motor vehicles and most real estate). This provision applies to all assets acquired after September 27, 2017.
The threshold for businesses being allowed to use the cash basis of accounting has increased to $25,000,000.
The exception for businesses having to use the completed contract method of accounting for long term contracts has also been increased to $25,000,000.
I’m sure the last thing you want to be doing this Christmas weekend is reading about tax reform. However, Congress has just passed, and the President will soon sign the largest tax reform package since 1986 and there are number of things that you may want to do before December 31, 2017 to deal with the changes that will take affect in 2018.
We’ve listed below a detailed analysis of the individual tax changes, but wanted to give you a few items we feel are time sensitive. Starting with 2018 tax returns the new tax bill limits the deduction for state and local income and property taxes (SALT) to $10,000. This $10,000 SALT limit is the same whether you are single or married. Miscellaneous itemized deductions (investment fees, unions dues, employee business expenses, tax prep fees, etc.) are eliminated. It also increases the standard deduction to $12,000 for a single taxpayer and $24,000 for a married couple. This means that many people who previously itemized will no longer be able to do so.
Here are things you can do in preparation for the new tax situation:
1) If the total of your state income taxes and property taxes are normally more than $10,000 and you will have significant 2017 state income tax due on April 17, 2018 you should pay it before December 31, 2017.
2) If you have an outstanding property tax bill you should pay it before December 31, 2017.
3) If you normally give large amounts to charity you may want to consider paying your 2018 contributions before December 31, 2017 to ensure you get the benefit of the deduction.
4) If possible, you should prepay any 2018 miscellaneous itemized deductions in 2017.
5) Pay your January 1, 2018 mortgage payment early so the payments posts to your account before 12-31-17.
6) Pay business and rental expenses before 12-31-17.
7) If possible, defer income to 2018.
Here is an overview of the items in the new tax bill that will affect your individual tax return. The recently enacted Tax Cuts and Jobs Act (TCJA) is a sweeping tax package. Unless otherwise noted, the changes are effective for tax years beginning in 2018 through 2025.
· Tax rates. The new law imposes a new tax rate structure with seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top rate was reduced from 39.6% to 37% and applies to taxable income above $500,000 for single taxpayers, and $600,000 for married couples filing jointly. The rates applicable to net capital gains and qualified dividends were not changed. The “kiddie tax” rules were simplified. The net unearned income of a child subject to the rules will be taxed at the capital gain and ordinary income rates that apply to trusts and estates. Thus, the child's tax is unaffected by the parent's tax situation or the unearned income of any siblings.
· Standard deduction. The new law increases the standard deduction to $24,000 for joint filers, $18,000 for heads of household, and $12,000 for singles and married taxpayers filing separately. Given these increases, many taxpayers will no longer be itemizing deductions. These figures will be indexed for inflation after 2018.
· Exemptions. The new law suspends the deduction for personal exemptions. Thus, starting in 2018, taxpayers can no longer claim personal or dependency exemptions. The rules for withholding income tax on wages will be adjusted to reflect this change, but IRS was given the discretion to leave the withholding unchanged for 2018.
· New deduction for “qualified business income.” Starting in 2018, taxpayers are allowed a deduction equal to 20 percent of “qualified business income,” otherwise known as “pass-through” income, i.e., income from partnerships, S corporations, LLCs, and sole proprietorships. The income must be from a trade or business within the U.S. Investment income does not qualify, nor do amounts received from an S corporation as reasonable compensation or from a partnership as a guaranteed payment for services provided to the trade or business. The deduction is not used in computing adjusted gross income, just taxable income. For taxpayers with taxable income above $157,500 ($315,000 for joint filers), (1) a limitation based on W-2 wages paid by the business and depreciable tangible property used in the business is phased in, and (2) income from the following trades or businesses is phased out of qualified business income: health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners.
· Child and family tax credit. The new law increases the credit for qualifying children (i.e., children under 17) to $2,000 from $1,000, and increases to $1,400 the refundable portion of the credit. It also introduces a new (nonrefundable) $500 credit for a taxpayer's dependents who are not qualifying children. The adjusted gross income level at which the credits begin to be phased out has been increased to $200,000 ($400,000 for joint filers).
· State and local taxes. The itemized deduction for state and local income and property taxes is limited to a total of $10,000 starting in 2018.
· Mortgage interest. Under the new law, mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000 (down from $1 million), starting with loans taken out in 2018. And there is no longer any deduction for interest on home equity loans, regardless of when the debt was incurred.
· Miscellaneous itemized deductions. There is no longer a deduction for miscellaneous itemized deductions which were formerly deductible to the extent they exceeded 2 percent of adjusted gross income. This category included items such as tax preparation costs, investment expenses, union dues, and unreimbursed employee expenses.
· Medical expenses. Under the new law, for 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5 percent of adjusted gross income for all taxpayers. Previously, the AGI “floor” was 10% for most taxpayers.
· Casualty and theft losses. The itemized deduction for casualty and theft losses has been suspended except for losses incurred in a federally declared disaster.
· Overall limitation on itemized deductions. The new law suspends the overall limitation on itemized deductions that formerly applied to taxpayers whose adjusted gross income exceeded specified thresholds. The itemized deductions of such taxpayers were reduced by 3% of the amount by which AGI exceeded the applicable threshold, but the reduction could not exceed 80% of the total itemized deductions, and certain items were exempt from the limitation.
· Moving expenses. The deduction for job-related moving expenses has been eliminated, except for certain military personnel. The exclusion from income for moving expense reimbursements has also been suspended.
· Alimony. For post-2018 divorce decrees and separation agreements, alimony will not be deductible by the paying spouse and will not be taxable to the receiving spouse.
· Health care “individual mandate.” Starting in 2019, there is no longer a penalty for individuals who fail to obtain minimum essential health coverage.
· Estate and gift tax exemption. Effective for decedents dying, and gifts made, in 2018, the estate and gift tax exemption has been increased to roughly $11.2 million ($22.4 million for married couples).
· Alternative minimum tax (AMT) exemption. The AMT has been retained for individuals by the new law, but the exemption has been increased to $109,400 for joint filers ($54,700 for married taxpayers filing separately), and $70,300 for unmarried taxpayers. The exemption is phased out for taxpayers with alternative minimum taxable income over $1 million for joint filers, and over $500,000 for all others.
As you can see from this overview, the new law affects many areas of taxation. If you wish to discuss the impact of the law on your situation, please give us a call. Our office will be closed Friday December 22, 2017 for the Christmas holiday.
At this time of year, it’s common for businesses to make thank-you gifts to customers, employees and other business entities. Unfortunately, tax rules limit the deduction for business gifts to only $25 per person per year. But there are exceptions. Here are three: 1) gifts to a company for use in the business, 2) incidental costs of making a gift, such as engraving or shipping, and 3) gifts to employees (though other limits apply and they may be treated as taxable compensation). Be sure to properly track and document qualifying expenses.
To ensure that your pet is cared for after your death, consider creating a pet trust. It allows you to set aside funds for the animal’s care. After the pet dies, any remaining funds are distributed among your heirs as directed by the trust’s terms.
Here’s how it works: You create the trust to take effect either during your lifetime or at death. Typically, a trustee will hold property for the benefit of your pet, and payments to a designated caregiver are made on a regular basis. The trust can also mandate periodic visits to the vet.
Tomorrow is Giving Tuesday the non-profit worlds equivalent to Black Friday and Cyber Monday. In preparation for Giving Tuesday and other year end charitable contributions we'll review the IRS documentation requirements for charitable donations.
For cash donations of less than $250 you must have either a bank record or a written receipt from the charity acknowledging the donation.
For cash donations of $250 or more you must have a written receipt from the charity with the following wording or a close equivalent: "No goods or services were received in exchange for this receipt."
If goods or services were received, the charity must give the donor a good faith estimate of the value received. In this case you can only deduct the amount you gave in excess of the fair market value of goods or services received.
For non-cash (Goodwill, Habitat Restore, Salvation Army, etc.) donations the same rules apply. If your total non-cash donations exceed $500 you must also file an additional IRS form.
If you think your total non-cash donations will exceed $5,000 some special rules apply and you should check with us before making the donation.
Scammers are targeting employers by asking that copies of employee's I-9 forms be emailed to a phony U.S. Citizenship and Immigration Service (USCIS) email address.
Employers must have an I-9 form on file for every employee. The I-9 form contains information that would be very valuable to identity theft criminals. There is no requirement to send these forms to USCIS. Any email requests for the forms can safely be ignored. Do not click on any links in these emails.
You can find more information about how long you need to retain I-9 forms and other questions at the USCIS web site.
It’s not completely clear, but a provision on pages 49-52 of the House bill appears to require active owners of “S” corporations to allocate 70% of their flow-through income to ordinary tax rates, and subjects that amount to self-employment tax. In addition, “S” corporations that are personal service type businesses in the fields of healthcare, engineering, architecture, law, accounting, consulting, performing arts or actuaries would have to pay SE tax on 100% of flow-through income. The House bill also removes the limited partner exemption from self-employment tax.
As a service to our clients we offer our Thirteenth annual shredding week. It will be the second full week in December (December 11-15) this year.
If you have old tax returns or other financial documents that you need to shred please bring them by our office between 9:00AM and 5:00PM on Monday December 11th thru Friday December 15th and we will have it shredded for you at no charge. Bring as much as you want, but if you are bringing large quantities please call and let us know so we can make sure our shredders bring a big enough truck.
The largest changes to income tax law since 1986 as proposed are listed below. The stated goal is to have the bill passed by Thanksgiving, so it is important to give feedback to your representatives as soon as possible.
The proposed business tax law changes are not as dramatic as those impacting individual tax returns. The drop in corporate income tax rates and pass-through entity income rates is the most significant. The elimination of the domestic production activity deduction would also affect a significant number of our clients.
1. Maximum corporate tax rates would be reduced to 20% from 35%. For a personal service corporation, the maximum rate would be 25%.
2. Dividends received by a domestic corporation from a specified 10%-owned foreign corporation would be allowed as a deduction in an amount equal to the foreign-source portion of such dividend.
3. A portion of net income distributed by a pass-through entity to an owner or shareholder would be treated as “business income” subject to a maximum rate of 25%. Provisions are included to guard against reclassifying wages as business income to utilize the lower rate.
4. The 100% bonus depreciation (§168(k)) would be extended through Dec. 31, 2022.
5. Section 179 expensing would be increased to $5,000,000 for taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2023. A phase-out would apply if the business places in service more than $20,000,000 of §179 property during the taxable year.
6. The gross receipts test on the use of the cash method of accounting by a corporation or partnership with a corporate partner would be increased to $25,000,000.
7. Interest deduction would be limited for large corporations and partnerships. Businesses with gross receipts of less than $25,000,000 would be exempt.
8. The NOL carryback would be eliminated except for a one-year carryback for eligible disaster losses. The NOL carryforward would be indefinite (currently 20 years) but limited to 90% of taxable income (like AMT limitation now.).
9. Section 199 deduction for income attributable to domestic production activities would be repealed.
10. Self-created property (patent, invention, design, formula, or process) would not be treated as a capital asset.
11. Incentive stock options would be treated like non-qualified stock options (taxed at exercise unless subject to forfeiture or §83(b) election).
12. Section 1031 would apply to real property exchanges only.
13. Rehabilitation credit, work opportunity credit, and disabled access credit would be repealed.
14. No tax-exempt bonds could be issued for professional stadiums.
Please contact us if you would like to discuss the proposals in more detail.
The largest changes to income tax law since 1986 as proposed are listed below. The stated goal is to have the bill passed by Thanksgiving, so it is important to give feedback to your representatives as soon as possible
While the changes in tax rates listed below and elimination of the Alternative Minimum Tax may reduce your taxes the elimination of deductions and credits could also increase your taxes.
Since most of our clients live in either Oregon or California we think the biggest impact will come from the elimination of the state income tax deduction. The limit on the property tax deduction to $10,000 will also impact many of our clients. The elimination of the gain exclusion on the sale of your residence if your AGI is over $250,000 ($500,000 if married filing seperately) could impact some of our clients.
Summary of proposed changes that would affect individual taxpayers:
1. Individual rates would be compressed from the current 7 brackets to 4 brackets: 12%, 25%, 35%, and 39.6%.
2. Personal exemptions would be eliminated.
3. The child tax credit would be increased from $1,000 to $1,600 for a qualifying child. The refundable portion would remain $1,000. A $300 credit would be added for the taxpayer and spouse and other dependents to 2023. The phase-out for the credits would be increased to $115,000 for single and $230,000 for MFJ (currently $75,000 and $110,000, respectively.)
4. The standard deduction would be increased to $12,2002 single, $18,300 HOH and
$24,400 MFJ. The additional standard deduction for the elderly and the blind would be repealed.
5. The phaseout of itemized deductions would be repealed.
6. AMT would be repealed. AMT credit carryovers would reduce regular tax in 2018, and then become 50% refundable 2019–2021. Any unused AMT credit carryover would be 100% refundable in 2022.
7. For sales and exchanges after Dec. 31, 2017, §121 exclusion of gain on the sale of a personal residence would be modified to require that the home be owned and used for five of the last eight years. Section 121 would be modified to phase-out the exclusion based on AGI above $250,000 ($500,000 MFJ).
8. The credits for adoption and plug-in electric vehicles would be repealed.
9. The exclusions for employee achievement awards, dependent care assistance programs, moving expense reimbursement, and adoption assistance programs would be repealed.
10. Education credits would be consolidated into an enhanced American Opportunity Tax Credit (AOTC). The AOTC would remain the same at 100% of the first $2,000 and 25% of the next $2,000. The AOTC would be available for five years (the fifth year at ½ the rate of the first four years.)
11. The deduction for interest on student loans would be repealed. The exclusion for interest on US savings bonds used for higher education expenses would be repealed. The exclusion for employer provided education assistance programs would be repealed.
12. The special rule permitting a recharacterization of Roth IRA contributions as traditional IRA contributions would be repealed.
13. The moving expense deduction would be repealed.
14. The alimony paid deduction would be repealed for agreements executed after Dec. 31, 2017. There would be a corresponding repeal of the provisions providing inclusion of alimony in gross income.
15. The medical expense deduction and the deduction for state and local taxes would be repealed.
16. The mortgage interest deduction would be reduced from acquisition debt amounts of $1,000,000 to $500,000 for new home purchases on or after Nov. 2, 2017. Interest on home equity borrowing after the effective date of the law would be repealed.
17. Mortgage interest deduction would be limited to one qualified residence.
18. The 50% AGI limitation on cash contributions to public charities and certain private foundations would be increased to 60%.
19. Charity mileage would be indexed for inflation (finally.)
20. Miscellaneous itemized deductions for employee business expenses, personal casualty losses, and tax preparation fees would be repealed.
21. The exclusion for housing provided for the convenience of an employer and for employees of educational institutions would be limited to $50,000 and would phase-out beginning at AGI of $120,000. The exclusion would be limited to one residence.
22. The estate, gift, and generation skipping transfer tax exemption amount would be increased to $10,000,000 for decedents dying after Dec. 31, 2017. Estate taxes would be repealed after Dec. 31, 2023.
Please contact us if you would like to discuss the proposal in more detail.
It was announced this morning that the release of the GOP tax reform proposal will be delayed until tomorrow. The announced goal is still to pass the bill in both house and senate by Thanksgiving. So now taxpayers and their advisors will have 21 days to evaluate the most massive revision to the income tax code since 1986. For perspective the 1986 revision took 13 months to negotiate.
The GOP is proposing the most significant changes to the Federal tax code in a generation. They have said they will release their proposal on November 1st with a goal of passing it in both houses and sending it to the president by Thanksgiving. This is not a lot of time for tax professionals and taxpayers to review the proposed changes and evaluate the impact on individual and business returns. We will try and get information to our clients as soon as possible after the proposal is presented, but I would ask the GOP to consider giving interested parties more than 22 days to evaluate this massive overhaul to our tax system.
If you own life insurance policies at your death, the proceeds will be included in your taxable estate. Ownership is usually determined by several factors, including who has the right to name the beneficiaries of the proceeds.
The way around this problem is to not own the policies when you die. However, don’t automatically rule out your ownership either. And it’s important to keep in mind the current uncertain future of the estate tax. If the estate tax is repealed (or if someone doesn’t have a large enough estate that estate taxes are a concern), then the inclusion of your policy in your estate is a nonissue. However, there may be nontax reasons for not owning the policy yourself.
Plus and minuses of different owners: To choose the best owner, consider why you want the insurance. Do you want to replace income? Provide liquidity? Or transfer wealth to your heirs? And how important are tax implications, flexibility, control, and cost and ease of administration?
Let’s take a closer look at four types of owners:
1. You or your spouse. There are several nontax benefits to your ownership, primarily relating to flexibility and control. The biggest drawback is estate tax risk. Ownership by you or your spouse generally works best when your combined assets, including insurance, won’t place either of your estates into a taxable situation.
2. Your children. Ownership by your children works best when your primary goal is to pass wealth to them. On the plus side, proceeds aren’t subject to estate tax on your or your spouse’s death, and your children receive all of the proceeds tax-free. On the minus side, policy proceeds are paid to your children outright. This may not be in accordance with your estate plan objectives and may be especially problematic if a child has creditor problems.
3. Your business. Company ownership or sponsorship of insurance on your life can work well when you have cash flow concerns related to paying premiums. Company sponsorship can allow premiums to be paid in part or in whole by the business under a split-dollar arrangement. But if you’re the controlling shareholder of the company and the proceeds are payable to a beneficiary other than the business, the proceeds could be included in your estate for estate tax purposes.
4. An ILIT. A properly structured irrevocable life insurance trust (ILIT) could save you estate taxes on any insurance proceeds. The trust owns the policy and pays the premiums. When you die, the proceeds pass into the trust and aren’t included in your estate. The trust can be structured to provide benefits to your surviving spouse and/or other beneficiaries.
Please contact us if you'd like to discuss your particular situation in more detail
From Larry's Tax Blog by Larry Brant: http://www.gsblaw.com/larry-s-tax-law/US-Tax-Court-Rule-Jacobs-v-Commissioner