Now that the massive new Tax Cuts and Jobs Act (TCJA) is finally the law of the land, what should you do? Every situation is different, but here are several practical suggestions for improving your tax outlook for 2018 and beyond:
Adjust your withholding. There are “winners” and “losers” due to changes in tax rates, the increased standard deduction, the loss of personal exemptions and cutbacks and repeals of deductions. We can help you figure out how this will affect your situation. Depending on your needs and wants, you may end up increasing or decreasing your take-home pay by revising your W-4.
Make your move. Pulling up stakes just because of new laws is a drastic reaction. However, if you were planning to move soon anyway, now may be the time to do it if you reside in a high-tax state. The TCJA limits the annual state, local and property tax deduction to $10,000 for itemizers. If you do move, remember that job-related moving expenses are no longer deductible.
Pile up medical expenses. The threshold for deducting medical expenses is rolled back to 7.5 percent of adjusted gross income (down from 10 percent) for 2017 and 2018. If you can clear the lower hurdle this year, schedule routine doctor and dentist visits or finally undergo that surgery you’ve been putting off. The extra expenses will boost your medical deduction.
Tap a 529 plan for private school. The new law expands the use of 529 education savings plans to cover private elementary and secondary schools. It’s not just for college or grad school anymore. Distributions are exempt from tax, but be careful. Make sure you’ll still have enough money in the account to pay for higher education.
Finally, coordinate your tax strategies into an overall plan for 2018. This is a better approach than trying to cash in on tax breaks one at a time. Give Carl Heinemann, your Chattanooga CPA, a call and we can help.
It’s 2018, so it’s too late to cut your 2017 tax bill…right? Wrong. If you qualify, you can deduct all or part of a contribution to a traditional IRA made before April 17, 2018 on your 2017 tax return. If you don’t qualify for a deduction you may contribute to a Roth IRA instead. In that case, the contribution is nondeductible.
With either type of IRA, you can contribute up to $5,500 ($6,500 if you’re age 50 or older) for the 2017 tax year.
1. Traditional IRAs: The deduction for contributions phases out if your income exceeds certain levels and you participate in a 401(k) or other employer-provided retirement plan (or your spouse participates). Distributions are generally taxable, and a 10 percent penalty usually applies to distributions before age 59½.
Contribution tip: If you file your 2017 return early enough, you can use your tax refund to fund a deductible contribution. The IRS doesn’t mind as long as the IRA money is deposited by April 17.
2. Roth IRAs: The ability to contribute to a Roth IRA phases out if your income exceeds certain levels, depending on your filing status. Unlike traditional IRAs, you can never deduct Roth contributions, but distributions after age 59½ are generally exempt from tax and the 10 percent penalty.
Although there are numerous other factors to consider, you may contribute to a traditional IRA if your goal is to reduce your 2017 tax liability, while you may prefer a Roth IRA if your goal is to secure tax-exempt payouts in retirement. No matter which approach you take, the due date for contributions for the 2017 tax year is April 17, even if you obtain a filing extension.
What do you call those deductible expenses that don’t fit squarely into any other category? The IRS refers to them as “miscellaneous” expenses. If you qualify, you can deduct the excess above 2 percent of your adjusted gross income (AGI) on your 2017 tax return. For instance, if your AGI for 2017 is $100,000 and you incurred $3,000 in miscellaneous expenses, your deduction is $1,000.
Under the Tax Cuts and Jobs Act (TCJA), the miscellaneous expenses deduction is suspended from 2018 through 2025. However, you can still deduct these expenses on your 2017 tax return.
The list of expenses is long and varied, but you can generally break them down into two groups: production-of-income expenses and unreimbursed employee business expenses.
1. Production-of-income expenses: This group includes fees relating to tax and financial planning and assistance. Some common items are as follows:
Accounting, legal or tax fees to produce or preserve income
Appraisal fees for charitable contributions and casualty losses
Custodial fees for income-producing property and IRAs
Fees paid to collect interest or dividends
Hobby expenses (up to the amount of hobby income)
Safe deposit rentals to store non-tax-exempt securities
Tax assistance expenses for services, periodicals, manuals and other materials
Tax return tip: The cost of having your 2017 tax return prepared qualifies as a deductible miscellaneous expense.
2. Unreimbursed employee business expenses: The second group of miscellaneous expenses consists of unreimbursed employee business expenses. It includes the following items:
Cellphones and home computers (when required for employment)
Dues paid to professional societies
Home office expenses as employee
Malpractice insurance premiums
Subscriptions to professional journals and magazines
Travel and entertainment expenses (limited to 50% of cost of business meals and entertainment)
Work clothes or uniforms
The cost of searching for employment may also qualify as a deductible miscellaneous expense, even if you don’t get the job.
This deduction is no longer available in 2018, so take advantage of it now on your 2017 tax return if you can. Questions? Call Carl Heinemann, your Chattanooga CPA, and we can help you.
The Tax Cuts and Jobs Act (TCJA) does much more for businesses than lower corporate tax rates. With careful planning, your small business may realize big tax benefits under the new law. Here are several tax-saving opportunities for 2018:
Place assets in service. Under Section 179, a business can now deduct the cost of up to $1 million of qualified assets a year, doubled from $500,000. But the Section 179 deduction is still limited to the amount of income from the business activity. Also, the TCJA doubles the 50 percent bonus depreciation deduction to 100 percent for 2018, giving your small business greater flexibility.
Consider buying a new business car. The TCJA also increases depreciation deductions allowed for cars used for business driving. Specifically, it hikes the annual limits for luxury cars for each year in service. For instance, the first-year write-off for a car jumps from $3,160 in 2017 to $10,000 in 2018, not even counting bonus depreciation. If you’re shopping for a new business car, now’s a good tax time to buy.
Manage pass-through income. For taxpayers owning a business taxed as a pass-through entity — like a partnership, S corporation or sole proprietorship — the new law creates a brand-new deduction generally equal to 20 percent of the business income. This effectively lowers the tax rate for owners. There have been conditions put in place to avoid abuses, especially for professionals and other taxpayers providing services. By keeping income below the thresholds of $157,500 for single filers and $315,000 for joint filers, you may benefit from the maximum 20 percent deduction.
Cash in on other business tax breaks. Finally, you can still take advantage of various deductions and credits (albeit with certain tweaks), including tax breaks for research activities, interest deductions, net operating losses (NOLs) and a new temporary credit for family and medical leave wages.
Call Carl Heinemann, your Chattanooga CPA, today and we can help you develop the best tax strategies for your situation.
According to a 2017 American household credit card debt study, the average American household with credit card debt has a balance exceeding $15,000. If this sounds all too familiar, you may consider consolidating several balances into a single home equity line of credit, or HELOC. Here are the pros and cons of this approach:
Interest rates tend to be lower. A HELOC is based on your home equity, the difference between the value of your home and your outstanding mortgage. Because a HELOC is secured by your home (your house becomes collateral for the debt), a lender takes on less risk and may offer a variable line of credit at a substantially lower rate than you’ll get with an unsecured credit card.
It’s easier to manage payments. By paying off credit card balances using a single HELOC, you may find it easier to keep track of monthly due dates. No more late payment fees because you missed one.
Your home is on the line. By pooling your credit card balances into a single line of credit, you’re not getting rid of debt — you’re trading one form of debt for another. If you fail to make payments on time, lenders can foreclose on your house.
Setting up a HELOC can be expensive. Depending on the financial institution, fees for setting up a home equity line of credit may approach the closing costs on a home purchase.
Before signing up for a HELOC, research all your options for consolidating and/or liquidating high credit card balances. For example, you might use the “snowball method” to pay off low balance credit cards first or implement a 3-year plan to settle your debts.
Regardless of the method you choose, taking steps to modify poor spending habits is often the smartest way to climb out of credit card debt and secure a debt-free financial future.
Business clients often prefer to be billed for purchases rather than paying upfront. That means you may need to establish receivable accounts for most business-to-business transactions. Unfortunately, it also means cash flow complications or worse if you take on commercial clients who don’t pay on time, or at all.
Luckily, you can minimize the risk of delinquent accounts by creating strong payment and credit policies. Consider these four methods:
Credit eligibility standards. Research new clients by purchasing business credit reports or contacting credit departments in your industry. Before extending credit, confirm that they have made good on previous obligations.
Credit terms. Consider industry practices and the creditworthiness of individual customers when crafting your policy. In some industries, new customers might start with a “net 30” standard, allowing them 30 days before payments become delinquent. But one size doesn’t necessarily fit all. Your best customers may warrant longer payment terms, such as 60 to 90 days. Some industries have their own billing practices, such as the construction industry, where customers are usually billed with a series of invoices.
Clear documentation. Requirements for purchase orders, contracts, credit applications, sales agreements and invoices should all be documented and made clear to the client. The policy should include examples of each type of form, and specify the circumstances under which each would be appropriate and/or mandatory. Having formal procedures in place will make clear to your clients that you are diligent about the payment process and expect timely payment.
Collections. Your policy guidelines should explain in clear language the steps you’ll take if an account becomes delinquent. You should provide information on late fees, charges, overdue notifications and when delinquent accounts will be reported to credit agencies and/or turned over to a collection agency.
A good credit policy will help you start to get a handle on your cash flow. Questions? Give Carl Heinemann, your Chattanooga CPA, a call.
If you commute back and forth to work every day, you typically can’t deduct any of your travel costs, such as gas for your car or commuter fares. The IRS says these commuting expenses are nondeductible personal expenses. However, there are some special situations when your commuting costs may be deductible:
1. Business stops. It may be convenient to stop at a business client’s office on the way to work or going home. In this case, you can deduct the cost of the commute between the client’s location and your regular place of business.
2. Multiple business locations. Maybe you work for a company with separate branch offices or other business sites. If you drive between two or more business locations during the course of the day, the cost of the travel is deductible.
3. Long-distance travel. Normally, you may commute to a nearby workplace. But you might have to go to a distant business location for a few days, weeks or even months on occasion. As a result, you don’t go to your regular job site. The IRS allows you to deduct daily travel costs of this long-distance commute.
4. Temporary assignments. Finally, you might be required to work at a far-flung business location for a long stretch. To accommodate this work, you might stay near the job site in a hotel and return home on weekends. If the assignment lasts less than one year, you may deduct your meals and lodging expenses (subject to certain limits). Best of all, you can usually deduct the cost of your weekend trips home.
If you pay the commuting costs yourself, they are deducted as miscellaneous expenses on your personal return. The deduction for all miscellaneous expenses, including unreimbursed employee business expenses, is limited to the excess above 2 percent of your adjusted gross income (AGI). There are also potential commuter benefits available through your employer.
Give Carl Heinemann, your Chattanooga CPA, a call if you have questions about deducting your commuting expenses.
If you are divorced and have young children, there’s a good chance that you are paying or receiving alimony or child support (or both) under a divorce decree. What’s the difference? The distinction is important to the IRS.
Currently, alimony is deductible by the party who pays it and taxable to the party who receives it. Child support is neither deductible nor taxable.
Depending on what side of the fence you’re on, you should negotiate for payments to be characterized as either “alimony” or “child support” as part of a divorce agreement.
How to qualify for alimony deductions
Just saying that payments are alimony won’t suffice. According to the IRS, these are the requirements that must be met if you’re hoping to qualify for alimony deductions:
You don’t file a joint return with your ex-spouse
Payments are made in cash or an equivalent
Payments follow the instructions of a divorce or separation agreement
The agreement doesn’t designate the payment as not being alimony
You and your spouse aren’t members of the same household when the payment is made
There’s no liability for making the payment after your spouse dies
The following alimony payments aren’t considered deductible:
Non-cash property settlements in a lump-sum or installments
Payments that are a spouse’s part of community property income
Payments to keep up the property owned by the person paying alimony
Use of the property owned by the person paying alimony
The terms can often be worked out to the satisfaction of both parties. For instance, the deduction for alimony can be valuable to someone who pays alimony and earns more while the taxable income may not cause any dire consequences to someone who earns less.
According to the new tax bill, alimony will not be deductible or taxable starting in 2019. This may also affect divorce and separation agreements executed in 2018 and modified in 2019 and beyond.
Keep these rules in mind when your 2017 tax return is filed. We can help you determine tax issues related to your alimony payments. Give Carl Heinemann, your Chattanooga CPA, a call.
Once you’ve retired, you may think you have it made, especially if you’ve managed to save enough money through IRAs and employer-sponsored plans like 401(k)s. But you still have to meet the tax obligations for required minimum distributions (RMDs).
Essentially, you must take a certain amount of money every year from IRAs and qualified plans after reaching age 70½, whether you want to or not. Otherwise, the IRS can assess a penalty equal to 50 percent of the amount that should have been withdrawn, on top of the regular tax that is due. Keeping that in mind, here are three little-known rules relating to RMDs:
1. Starting date: Technically, RMDs don’t have to begin until April 1 of the year following the year in which you turn 70½. For example, if you turned 70½ this year on July 15, you don’t have to take an RMD for the 2017 tax year until April 1, 2018. However, RMDs are due by Dec. 31 of each subsequent year (after you turn 70½), so you would have to make a “double payment” in 2018 if you don’t take an RMD in 2017.
2. Amount of RMDs: The amount of the RMD is based on your account balance in the prior tax year and special life expectancy tables provided by the IRS. In other words, RMDs for 2017 are generally based on account values as of Dec. 31, 2016, and your life expectancy. The financial institution handling your account will usually do the calculation for you if you ask.
3. “Still working” exception: If you’re still working for the employer providing a 401(k) where you’re required to take an RMD, you can skip this obligation if you don’t own 5 percent or more of the company. But you still must take RMDs from any other employer plan where you have assets, and from all of your IRAs.
These are just three factors that may affect RMDs this year. The stakes are high, so make sure you comply with all the rules. Call Carl Heinemann, your Chattanooga CPA, if you have questions about tax obligations related to your RMDs.
Ideally, you should try not to tap your 401(k) or IRA accounts before it’s time to retire. But life happens. In certain situations, you may need to withdraw a portion of your nest egg while you’re still working full time. Here are three scenarios where this may be the case — and possible alternatives to avoid tapping your retirement accounts too soon:
You’re drowning in high-interest debt. Your retirement plan may allow for a 401(k) loan that can be used to pay off expensive credit card accounts. Although the loan is paid back to your own account (paying yourself the interest), this solution has some disadvantages. For one thing, money that’s withdrawn from your 401(k) account isn’t available for long-term growth. Also, should you lose your job, the loan may become due immediately.
If you can’t settle the debt right away, you may be subject to a 10 percent early withdrawal penalty and regular income taxes on the outstanding loan balance. Consider paying off debts using other funding sources as it may be a more prudent solution.
You’re facing foreclosure on your home. The hit to your credit score can be devastating if you default on a mortgage. But, again, using your retirement nest egg should be considered a last resort. You may be better off working with your lender to revamp your mortgage. Consider extending the term or renegotiating the interest rate to reduce monthly payments.
You’re heading back to college. If you need to retool for a new career, the IRS allows you to make penalty-free withdrawals from your IRA accounts before age 59½ if the money is applied toward higher education expenses. But be aware that the same rules do not apply to 401(k) accounts. If you haven’t reached age 59½ and use funds from a 401(k) to cover college expenses, early withdrawal penalties and income taxes may apply.
The best way to avoid penalties is to understand the rules around retirement account withdrawals. Give us a call to learn more about tax penalties you may face if you withdraw funds early from retirement accounts. Carl Heinemann, your Chattanooga CPA, can help you create the best plan for your situation.