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.
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.
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.
The IRS recently issued its annual list of the Dirty Dozen tax scams to watch out for throughout the year. Here are three top scam themes to come out of the list, plus ways to protect yourself from them:
1. Phishing: With phishing, a criminal uses the bait of an email or fake website to lure victims into providing personal information. For instance, the sender may pretend to be from the IRS.
In a recent twist, criminals are directing refunds to their victims’ bank accounts, and then using lies, threats and intimidation to convince the victims to hand over the money using various methods to collect the refunds.
To combat phishing:
Report IRS-related expeditions to email@example.com.
Remember that the IRS generally doesn’t initiate contact via email.
Educate yourself about taxpayer rights on the IRS website.
2. Untrustworthy phone calls: The IRS has reminded taxpayers to beware aggressive phone scams from criminals posing as IRS agents. About 12,716 victims have collectively paid more than $63 million through phone scams since October 2013.
Typically, the caller demands that you pay a bogus tax bill in cash, usually through a wire transfer or a prepaid debit or gift card. They may also leave urgent callback requests via robo-calls or phishing emails. The IRS advises the following:
Don’t give any information. Hang up immediately.
Contact the U.S. Treasury Inspector General for Tax Administration (TIGTA) to report the call. Review the IRS Impersonation Scam Reporting. Alternatively, call 800-366-4484.
Report calls to the Federal Trade Commission. Use the FTC Complaint Assistant on the FTC website.
3. Identity theft: Be alert to tactics aimed at stealing your identity — not just during tax filing season, but all year long. Luckily, strides are being made to protect taxpayers. For example, the number of taxpayers reporting ID theft declined from 2016 to 2017 by 40 percent.
The IRS says it will continue to pursue tax returns that use someone else’s Social Security information. But taxpayers can help themselves. Here’s how:
Always use security software with firewall and anti-virus protections.
Don’t click on links or download attachments from unknown or suspicious emails.
Protect personal data.
Finally, treat personal information like cash; don’t leave it lying around. Call Carl Heinemann, your Chattanooga CPA, if you have questions about your tax information safety.
The new Tax Cuts and Jobs Act (TCJA) includes numerous provisions designed to stimulate business growth, including changes in depreciation rules. A business entity can now write off the entire cost of qualified property the year it is placed in service. The following four changes may benefit businesses of all shapes and sizes:
1. Section 179’s increased expensing limit
Under Section 179 of the tax code, a business can expense the cost of qualified property placed in service during the year. The TCJA doubles the expensing limit to $1 million and increases the phaseout threshold to $2.5 million. (Note: The maximum Section 179 deduction can’t exceed the amount of business income.)
2. Increased bonus depreciation
The TCJA also authorizes a 100 percent bonus depreciation write-off for the cost of qualified property, doubled from 50 percent. This change is effective for property placed in service after Sept. 27, 2017. In addition, the new law expands the definition of qualified property to include used property acquired and placed into service at your company. However, the 100 percent bonus depreciation deduction is temporary. It begins to phase out after five years and vanishes completely after 2026.
3. Shortened real estate depreciation period
Generally, building improvements must be depreciated over a lengthy 39-year period. However, a faster 15-year write-off was previously permitted for qualified leasehold improvement property, qualified restaurant improvement property and qualified retail improvement property. The TCJA consolidates these provisions with the intent of providing a 15-year depreciation period for qualified improvement property.
4. Better business vehicle tax breaks
Luxury car rules limit the annual deductions a business can claim for business vehicles. Fortunately, the TCJA increases the business vehicle tax deduction limits for 2018 and thereafter. For instance, the maximum first-year deduction limit for a passenger car is multiplied by more than three, to $10,000 from $3,160. Plus, the vehicle may be eligible for an $8,000 bonus depreciation allowance.
We can help you learn more about these depreciation tax breaks and how they affect your situation. Give Carl Heinemann, your Chattanooga CPA, a call today.
The new Tax Cuts and Jobs Act (TCJA) includes significant changes for individuals and businesses alike, enhancing some tax breaks and eliminating or reducing others. One new provision creates a new tax credit for employers who pay wages for family and medical leaves.
Currently, the new credit has a short shelf life, taking effect in 2018 and only lasting through 2019. However, there’s a chance it will be extended by future legislation.
Eligible employers can claim a credit equal to a percentage of wages paid to qualifying employees on leave under the Family and Medical Leave Act (FMLA).
Here’s how it works
The IRS has yet to issue official guidance, but here are some of the basics:
To qualify for the credit, the employer must provide at least two weeks leave at a rate of at least 50 percent of regular earnings.
The credit percentage ranges from 12.5 percent to 25 percent of the paid leave based on the amount of wages. For instance, the credit is equal to only 12.5 percent of the wages if the employer pays the minimum 50 percent of the regular pay rate, but gradually increases to a maximum of 25 percent if the employer pays the normal wages.
The credit is available only for wages paid to workers employed at the company for at least a year who are paid no more than $72,000 annually in 2017, adjusted for inflation in future years.
Family and medical leave must be offered to both full- and part-time workers.
Employers need to have a written policy that includes two weeks paid leave for family and medical leave at 50 percent or more of wages for full-time employees. And the amount must be prorated for part-time employees.
Leave that is paid for or required under state and local law shouldn’t be considered when determining the amount of paid family and medical leave provided by the employer.
No double dipping
Finally, if the employer claims the credit, they can’t also deduct the wages as regular business expenses. Usually, the credit will be more valuable to employers than the deduction.
If you have questions about how this credit affects your situation, give Carl Heinemann, your Chattanooga CPA, a call.
If you want a tax-advantaged retirement account outside your employer’s plan, you have two main options: a traditional IRA or a Roth IRA. You may prefer one over the other, depending on your short-term savings goals, years until retirement and assumptions about future tax rates.
Traditional IRA vs. Roth IRA basics
You can generally deduct contributions to a traditional IRA, which lowers your tax bill. On the other hand, with a Roth IRA, you pay taxes upfront. So you may have to earn $7,500 pre-tax to sock away the annual maximum of $5,500 in a Roth IRA.
With a traditional IRA, taxes are deferred. When you’re retired and withdraw money, it’s counted as regular income and taxed accordingly. However, with a Roth IRA you’re generally allowed to make tax-free withdrawals in retirement. That means that if you expect to be in a higher tax bracket in the future, a Roth IRA may make the most sense.
Roth recharacterizations: a thing of the past?
When Roth IRAs were originally created in the late 1990s, Congress provided a way to move or “convert” funds from a traditional IRA to a Roth account. Although taxpayers had to pay taxes on the amount converted, some considered the future benefit of tax-free withdrawals preferable to the current benefit of tax-deferred contributions. Congress also let taxpayers change their mind about Roth conversions, and “recharacterize” them back to traditional IRA accounts.
But the Tax Cuts and Jobs Act signed last year eliminated the ability to reverse a Roth conversion using the recharacterization process as of Jan. 1, 2018.
There is some wiggle room left to undo Roth conversions made during 2017, if you complete the recharacterization by Oct. 15, 2018.
Retirement planning can get complicated. If you’d like help evaluating your tax-advantaged account options, give Carl Heinemann, your Chattanooga CPA, a call.