Now that your teens are heading back to school this fall, it’s a good time to start planning for their higher education. That means you may be interested in a Section 529 plan account that provides tax-favored savings.
And if you have younger children you’ll be happy to know that a recent tax law change has opened up Section 529 plans to kids attending elementary and secondary schools.
Here’s what you need to know about 529 plans
Section 529 plans are sponsored by individual states, state agencies or educational institutions. There are two basic types:
Prepaid tuition plans: You acquire units or credits used toward future education at current prices. So you end up locking in tomorrow’s education costs today.
Education savings plans: The plan invests in a portfolio for each participant’s account. Investment earnings vary and are then used to pay education costs.
With either type of plan, if you fund an account for a beneficiary (like your child or a grandchild), there’s no current tax due on the earnings within the account. And when the beneficiary finally enters school, payments for qualified expenses are exempt from tax. The list of qualified expenses includes:
Tuition and fees
Supplies and equipment
Reasonable costs of room and board
Your younger children may now benefit
Beginning in 2018, the tax breaks for 529 plans are extended to tuition payments for grades K-12 at public, private or religious schools. For example, if you send your child to a prestigious college prep school, you can tap into the Section 529 account to pay for the tuition – with no tax consequences.
However, there is a limit for these younger kids. Plan contributions can only be used for up to $10,000 in school expenses annually.
It’s helpful to note that you can roll over unused 529 plan funds for a beneficiary to an account for another beneficiary. This might benefit families who have one child completing college and another in high school.
Call Carl Heinemann, your Chattanooga CPA, if you have questions about 529 plans and how you can save with other education savings accounts and tax credits.
It may be easier to qualify for a medical deduction in 2018 than before, assuming you’ll itemize deductions. Specifically, the threshold for deducting unreimbursed medical and dental expenses has been lowered to 7.5 percent of adjusted gross income (AGI). That means only the excess amount above the threshold is deductible.
At the same time, other tax law changes increasing the standard deduction and reducing the tax benefits of itemized deductions might complicate your tax situation. As a result, a sizable medical deduction could tilt the scales in favor of itemizing.
Look beyond typical medical deductions
Certainly, you should bunch medical expenses in 2018 when it suits your needs. But you don’t have to only count on typical costs for doctor visits and prescription drugs.
Deductions for a wide variety of less common expenses have been approved by the IRS or the courts in the past, including amounts paid for the following:
Birth control pills
Breast pumps and supplies
Guide dogs and other service animals
Lead-based paint removal
Medical care for transplant donors
Oxygen and oxygen equipment
Special diet foods prescribed by physician
Telephone equipment for the disabled
Wigs for mental health purposes (e.g., to compensate for loss of hair due to an illness or medical treatment)
Note that the costs may be large or small. For instance, deductions have been allowed for installing a swimming pool to alleviate the taxpayer’s asthma as well as clarinet lessons to correct a child’s overbite.
Remember that the medical deduction threshold reverts to 10 percent-of-AGI in 2019. If you expect to clear the 7.5-percent mark in 2018 and will still be itemizing, move nonemergency expenses like medical exams and dental cleanings into this year. Otherwise, defer elective expenses to 2019, when you might have a shot at a deduction.
Give Carl Heinemann, your Chattanooga CPA, a call if you’d like help determining your tax savings with your medical deductions.
Are you thinking of renovating a building you own in an historic part of town? Before you start knocking down walls, find out if the building qualifies as an historic structure. It could result in a tax credit reducing your bill by thousands of dollars.
However, be aware that beginning in 2018 recent tax law changes affect the credits for building renovations.
Claiming the credit
While the 10 percent credit for rehabilitating buildings placed in service before 1936 is no longer available for expenses incurred after 2017, you may continue to claim a separate credit that’s equal to 20 percent of qualified expenses for renovating historic structures.
For instance, if you spend $100,000 to update a brownstone with historic character, you may be able to cut $20,000 off the cost. Under the latest tax laws, this credit must be taken ratably over five years. That means a $4,000 credit is claimed each year for five years. So it’ll take a little longer to recoup your costs.
Unlike the rehab credit, it may be easier to qualify for the historic structure credit than you think. For example, there are no age restrictions or wall retention rules. And it doesn’t have to be a place where George Washington slept or an antebellum mansion. But there are two key requirements:
The building must be listed on the National Register of Historic Places or located in a registered historic district and certified by the Secretary of the Interior. Currently, more than 90,000 buildings are listed.
The rehabilitation must be certified as retaining the original historic character (but not necessarily the original use) of the building.
Finally, certain complex transitional rules may apply to projects that were underway before 2018. Call us if you have questions about your renovation projects and whether or not you’re qualified to claim this credit.
You’ve likely heard about the volcanic eruptions in Hawaii and how they’ve caused extensive damage to the property of several U.S. taxpayers. And as we head into hurricane and tornado seasons, other disasters are likely. Luckily, there’s a silver tax lining in the dark clouds: You may qualify for a casualty loss deduction, despite recent tax law changes.
Deduction changes starting in 2018
The casualty loss deduction has generally been suspended for 2018 through 2025, but you can still claim a loss for damage in an area formally declared as a federal disaster area. These include Hawaii during the volcano eruptions or the hurricane damage areas in the U.S. Southeast last year.
The deduction is limited to the excess unreimbursed loss above 10 percent of your adjusted gross income (AGI), after subtracting $100 for each casualty event.
Example: Your AGI is $100,000 and a severe storm resulted in $50,000 of damage to your home. If you received $30,000 in insurance proceeds, the amount eligible for the casualty loss deduction is $19,900 ($50,000 – $30,000 – $100). That means you can deduct $9,900 ($19,900 – 10 percent of AGI, or $10,000).
Note that the tax law changes don’t affect deductions for unreimbursed losses to business property — they don’t need to be in a federally declared disaster area to be deductible. Those business losses remain deductible without regard to any AGI limit or $100-per-event floor.
Special rules may apply
Individuals may take advantage of a special rule for disaster-area losses: If it suits your needs, you can choose to deduct a disaster-area loss in the tax year preceding the year of the event instead of the year the event actually occurs. As a result, you may get your tax money even sooner.
Should you open a Health Savings Account (HSA)? Not surprisingly, the answer depends on many factors. For instance, if you’re in good health and can afford a high-deductible insurance policy, HSAs may offer significant advantages. Think about the following as you consider an HSA:
The plus side
HSAs can reduce your tax bill. You contribute pre-tax dollars, the money grows tax-free, and you make tax-free withdrawals for qualified medical expenses.
HSAs can lower health insurance premiums. Because HSAs work in tandem with high-deductible health plans (HDHPs), premiums are generally lower. That’s because you, rather than the insurer, cover more of the costs until the deductible is met.
HSAs can bolster retirement investments. ASome HSAs allow you to invest in mutual funds after the account balance reaches a certain threshold. Because the balances accrue (unlike Flexible Spending Accounts that require you to spend the funds annually), an HSA can grow over time.
Changing insurers can be risky. If you or a family member suffers from a chronic health condition, switching to an insurance company with a high-deductible policy may not be feasible or advisable.
Out-of-pocket costs will likely increase. The upfront costs of a high deductible can sting. For 2018, the insurance deductible for a family must be at least $2,700 to qualify for an HSA. Although your insurance may cover routine preventative care, you’ll be on the hook for most medical costs until the deductible is met at the start of each coverage year.
Withdrawal options may be limited. If you withdraw funds for non-qualified expenses before age 65, you’ll be hit with a 20 percent penalty in addition to regular income taxes.
Bottom line? If you have the financial resources to cover out-of-pocket healthcare costs, an HSA can be a great tax-advantaged tool. Just be sure to compare the benefits and pitfalls alongside your own situation.
Some losses are inevitable when you decide to extend credit to your customers. That said, unless you are willing to forgo the credit part of your sales, you’re going to have to figure out ways to control your bad debt losses.
How to get a handle on bad accounts
Once you have extended credit to a customer, you have a stake in continuing the relationship even if you suspect there might be trouble in the near future. You don’t want to crack down on a good customer too hard too soon, yet you don’t want to be taken advantage of by someone who has become unable or is unwilling to pay. The problem is distinguishing between slow pay and no pay.
What you need is an early warning system to detect a credit problem in the making. This can help you stop additional sales to that customer and begin collection procedures in earnest. You can begin building this system by considering these signs that something may be amiss with a account:
Erratic payments. The customer has begun paying erratically, settling up on smaller invoices while larger ones just get older, at the same time disputing specifications or terms.
Poor communication. The customer fails to return your phone calls.
Unavailable information. Your requests for updated financial information are ignored.
Increased credit requests. The customer places jumbo orders and presses you for more credit.
Any one of these signs could be an indication that more account problems may be coming down the line. If you’re concerned about a client account, make it a point to speak to your client directly about the account. It may help clear up misunderstandings about payment expectations.
New tax laws lowered the medical deduction threshold for 2018 to 7.5 percent of adjusted gross income (AGI) from 10 percent. But that’s still a pretty high bar to clear. Fortunately if you scour your records, you may find expenses to put you over the top — including amounts paid for relatives.
Here’s what counts for medical deductions
An expense generally counts toward the medical deduction threshold if it involves medical care for yourself or immediate family. Medical care costs can include such things as surgeries to equipment such as wheelchairs.
Medical expenses you’ve paid on behalf of other family members may also count, but it can get tricky. Typically, you can deduct medical expenses if the relative would have qualified as your dependent.
To have a relative qualify as your dependent, you must provide more than half of the relative’s annual support. He or she also can’t have more gross income than the $4,050 personal exemption listed in the tax code.
However, their expenses still count toward your medical deduction if they fail the dependency test solely because they had more gross income than the personal exemption limit.
Here’s an example: Mom receives $5,000 in annual income from investments, but her rent costs her $12,000 a year. So you help her out by paying the $7,000 difference. Although she wouldn’t qualify as your dependent due to the gross income limit, you still provide more than half of her support. If you then pay a $1,000 medical bill for Mom, the expense is added to your total.
Double-check to see if you can benefit from this little-known rule for medical expenses. The deduction threshold returns to 10 percent of AGI in 2019, so this may be your last chance. Give Carl Heinemann, your Chattanooga CPA, a call for assistance.
If you have a business trip lined up to a charming city or summer resort, you may end up tacking on a few days of vacation while you’re there. And guess what? Most expenses will remain tax-deductible if you stay within the tax law boundaries.
Deducting your business-vacation travel expenses
To claim deductions for domestic business travel, the primary purposes of the trip must be related to business. Simply put, you must clearly spend more time on business than pleasure. Clearly separate your travel days on your calendar between “business days” and “personal days.”
When it comes to writing off expenses, start with airfare or other round-trip transportation, lodging and 50 percent of the cost of your meals. Add on incidentals like cab fare to a business meeting. Just remember that costs related to the vacation part of the trip, such as extra hotel nights and sightseeing excursions, are nondeductible.
Here are a few hints for maximizing deductions on the trip:
Keep a close watch on business versus pleasure days. If the IRS ends up deeming the trip a disguised vacation, no deduction is allowed.
The 50 percent deduction for business entertainment has been eliminated. The IRS is expected to issue guidance on how this change affects deductions for meals with clients.
Don’t go overboard. You can’t deduct expenses that are lavish or extravagant. That means you probably shouldn’t splurge on the penthouse suite.
Keep business travel expense records. Without receipts and other proper records, your deductions are in jeopardy.
Know the rules around traveling with your spouse. Generally, travel expenses related to a spouse accompanying you on the trip are nondeductible unless there’s a valid business reason, such as when your spouse also works for your company.
Call Carl Heinemann, your Chattanooga CPA, if you’re thinking about adding a vacation to a business trip. We can help you understand what will and won’t be deductible.
Is your company looking to hire new employees or take on extra help for the summer? If you hire workers from groups of people the government identifies as having major barriers to employment, you may be eligible for tax credits.
The Work Opportunity Tax Credit (WOTC) is one such credit recently extended through 2019. In addition, long-term unemployment benefit recipients who have been unemployed at least 27 weeks were added to the list of target groups with unemployment barriers.
Currently, the nine eligible groups that are part of the WOTC include:
Temporary Assistance for Needy Families (TANF) recipients
Unemployed veterans, including disabled veterans
Designated community residents living in empowerment zones or rural renewal counties
Food stamp recipients
Vocational rehabilitation referrals
Supplemental Security Income (SSI) recipients
Long-term unemployment recipients
In most cases, the credit for someone working at least 120 hours during the year equals 25 percent of their first-year wages up to $6,000, for a maximum credit of $1,500. If the employee works at least 400 hours, the credit jumps to 40 percent of first-year wages up to $6,000, for a $2,400 maximum.
The credit amount can be even higher for hiring military veterans. The maximum may reach as high as $9,600 for hiring a veteran with a disability.
Keep in mind the special rules for hiring young people to work during the summer. The WOTC can be claimed for hiring individuals aged 16 or 17 who reside in an empowerment zone or enterprise community. For work performed between May 1 and Sept. 15, the credit generally equals 25 percent of first-year wages up to $3,000, for a maximum of $750. But if the individual works 400 hours or more, the credit increases to 40 percent of first-year wages up to $3,000, for a $1,200 maximum.
To qualify for the WOTC, workers must be certified by the appropriate state authority. Give Carl Heinemann, your Chattanooga CPA, a call for details.
Are you selling real estate or other investment or business property like collectibles or cars? Generally, you’ll owe capital gains tax on a gain, but you might arrange a Section 1031 exchange of “like-kind property” instead. If certain requirements are met, tax is deferred until you sell the replacement property … if ever.
But the Tax Cuts and Jobs Act (TCJA) throws a curveball into the mix. Beginning in 2018, the tax benefits of Section 1031 exchanges are eliminated, except for swaps of real estate (transitional rules may apply).
Here’s what you should know when swapping
No current tax is due on a Section 1031 exchange of like-kind properties, except for any “boot” received. Boot is the term used to describe the cash used or mortgage debt assumed to even out a real estate swap.
For example, say you exchange a building worth $1 million for one worth $950,000. If the other party kicks in $50,000 in cash, that is the boot you would owe capital gains tax on in the year you received it. Assuming it’s a long-term gain, the maximum tax would be $10,000 (20 percent of $50,000).
It’s good to keep in mind that the definition of “like-kind” real estate properties is expansive. For instance, you can exchange an apartment building for a warehouse or even vacant land. However, to qualify for tax deferral, you must meet two strict deadlines:
You must identify or actually receive the replacement property within 45 days of transferring ownership of the relinquished property.
You must receive the title to the replacement property within 180 days or your tax return due date plus extensions for the tax year of the transfer.
Because it’s unusual for two investors to each own property the other wants, like-kind exchanges often involve multiple parties. A qualified intermediary may help facilitate an exchange.
Although the TCJA eliminates tax deferral on non-real estate exchanges after 2017, if replacement property was identified before 2018 you can still qualify for a tax-deferred exchange if the title is transferred by this year’s deadline. Call Carl Heinemann, your Chattanooga CPA, if you have questions.