Monthly Archives: June 2018

Can you deduct medical expenses you paid for your relative?

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.

Your roadmap to business travel deductions

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.

Zero in on target work credits this summer

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
  • Ex-felons
  • 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 like-kind exchanges still viable when selling property?

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.

5 essential steps to becoming debt-free

Americans hold more than $1 trillion in credit card debt and over twice that much in loans, according to the Federal Reserve. After mortgages, student loans are the second largest source of debt, and auto loans aren’t far behind. It’s no wonder many Americans have almost nothing set aside for emergencies or retirement.

Fortunately, you don’t have to be part of this trend. One recent survey found that more than 25 percent of Americans are living debt-free. It’s not an impossible dream. Of course, getting there will take discipline and a specific strategy. Here’s a starter plan for getting out of debt once and for all:

1. Know what you owe. Go to the websites of your lenders and card issuers. Identify your outstanding balances, interest rates and minimum monthly payments. Copy the information to a spreadsheet or piece of paper. Post the figures above your desk or on your refrigerator. Update the balances as they’re paid down.

2. Craft a plan. Develop a strategy for liquidating those accounts. You might opt for paying off high-interest cards first or focus on balances you can get rid of quickly. Do whatever works to maintain momentum.

3. Stop borrowing. Summer’s here. Will you splurge for a tropical vacation using credit cards? Bolster your odds of becoming financially independent by paying cash, even if that means going with a cheaper option.

4. Prepare for emergencies. Make a concerted effort to build up a rainy-day fund with enough cash to cover at least three months of expenses. An emergency stash will help you steer clear of debt when the unexpected happens.

5. Learn to budget. Besides loan and credit card payments, you need to buy groceries, put gas in the car and keep the electricity on. So it’s important to monitor cash flow. Understanding and documenting regular income and expenses can help you gauge progress toward your financial goals.

Want customer loyalty? Improve your waiting room

The waiting room experience can be either a deal breaker or a first step toward long-term customer loyalty. If you subject your clients to stressful and uncomfortable delays in an unpleasant environment, you may lose them forever. On the other hand, a few carefully chosen amenities and consistently applied practices can keep them coming back — even when waiting is unavoidable.

Take these customer-focused waiting room ideas into consideration:

  • Offer free Wi-Fi. Customers expect to stay connected, whether to chat on social media, answer emails or create spreadsheets. Talk to your internet provider about setting up a guest network that’s separate from your secure internal system. If necessary, increase bandwidth to make internet browsing faster. Post the guest network name and password in plain sight.
  • Make seating comfortable and clean. Sit in your waiting room chairs for half an hour. Do you feel pain? If so, it’s time to shop for replacements. Ditto if the chairs are stained and shabby. Provide smaller chairs for children and leave plenty of space between chairs so customers don’t feel hemmed in.
  • Take care with television. Depending on your clientele, consider limited programming that fits your customers’ interests. A hair salon, for example, might offer channels featuring beauty tips. An accounting office might program market updates and world news. If children will be present, keep programming lighthearted. And use closed captioning to reduce noise.
  • Make it pleasant and efficient. Create a stress-reducing environment by using green plants, natural lighting and landscape artwork. Set tables at an appropriate height for filling out paperwork.
  • Communicate expectations. When the hostess at your local restaurant says the wait will be an hour, you’re provided with options. You can leave your name, shop at a nearby store, and return later. Provide a similar experience for your customers. If the wait will be longer than originally expected, apologize.

Your time is valuable. Let customers know that you respect their time, too.