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.
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.
Maybe your spouse helps out at your small corporation without pay. Although wages are taxable and fringe benefits cost your company, you could be missing out on tax-saving opportunities for hiring your spouse. Consider the following:
You’re saving money in the company 401(k), but what about your spouse? If certain requirements are met, your spouse can contribute to the plan while the business deducts contributions made on his or her behalf. Frequently, your spouse can build a tidy nest egg within the tax law’s contribution limits.
If you’re paying a hefty bill for your spouse’s health insurance coverage, hiring your spouse as an employee will likely save money.The amount of your company’s payment is deductible by the business — just like it is for any other employee — even if you’re self-employed.
You typically can’t deduct your spouse’s travel expenses like you can for yourself if he or she is accompanying you on a business trip.However, if there’s a legitimate business reason for your spouse to make the trip, the travel expenses — such as airfare, hotels and 50 percent of the cost of meals — become deductible.
Is your spouse planning to attend school to improve business skills?If he or she enrolls in courses through an educational assistance plan, the cost is generally deductible by your business. For the employee-spouse, annual benefits of up to $5,250 are exempt from tax.
Does your business provide group-term life insurance coverage on a nondiscriminatory basis? Then you know the cost is deductible by the business and the first $50,000 of coverage is tax-free to employees. As a bona fide employee, your spouse can be covered under the plan.
There’s one catch: S corporation owners generally can’t deduct fringe benefits for any employee owning 2 percent or more of the company. This prohibition extends to coverage for an owner’s spouse. Carl Heinemann, your Chattanooga CPA, can help you determine when it makes sense to put your spouse on the payroll.
Suppose a relative wants to borrow money for a business venture or to buy a home. It’s true that family loans can raise problems. But if you’re going to do it, take the tax law into account. Otherwise, you could have an unexpected problem on your hands.
Here’s what to watch out for
It all has to do with “imputed interest” rules that may apply if you don’t charge the going rate of interest on the loan. Essentially, the IRS treats the loan as if interest were required, even if you’re not charging any interest, or you’re imposing an unusually low rate. Thus, the interest is “imputed” to you — the lender — based on IRS figures.
In other words, the IRS treats it like you’ve received taxable interest from the relative, even though you may not be getting a penny. Thus, you could be facing a tax bill that you probably weren’t counting on.
Fortunately, the tax law provides two exceptions to these “imputed interest” rules:
If you lend your relative less than $10,000, you have no tax worries, unless the money is used to purchase income-producing property. You can charge no interest (or an extremely low interest rate) without any tax repercussions.
If the money is a gift, you also don’t have to deal with interest. You and your spouse can each give up to $14,000 ($15,000 in 2018) to an individual each year.
There are additional complexities for some family loans, but those are the main tax rules to address. If possible, stay below the thresholds for either of the two exceptions. Alternatively, charge an interest rate and use a formal loan document resembling one found at a bank. Carl Heinemann, your Chattanooga CPA, can help you with the details.
Are you trying to sell investment or commercial real estate? If you use an installment sale to help sell real estate, you can benefit from tax deferral and possibly lower your overall tax bill. But watch out for a little-known tax trap.
Here’s what to know
Generally, installment sale treatment is automatic for a sale where you receive payments in the tax year of the sale and at least one other tax year. For instance, if you sell real estate in 2017 and receive payments in both 2017 and 2018, you qualify. Part of the tax due on your gain is taxable in 2017 and part is taxable in 2018.
Note that real estate held longer than one year qualifies for favorable treatment of the capital gains tax. The maximum tax rate on long-term capital gains is only 20 percent, compared with the top ordinary income tax bracket of 39.6 percent.
Why an installment sale may be worthwhile
With an installment sale, you may benefit from the lower tax rate in several years by spreading out payments over time. This reduces your overall tax liability.
Caution: If you sell property to a related party that is then disposed of within two years, all the remaining tax comes due (barring certain exceptions). The tax law definition of “related parties” is more expansive than you might think. It includes:
A partnership or corporation in which you have a controlling interest
An estate or trust you’re connected to
Avoid any dire tax results by stipulating in the contract that the property can’t be disposed of within two years.
Finally, be aware that installment sale treatment is only available for gains, not losses. Other special rules may apply, so give Carl Heinemann, your Chattanooga CPA, a call and we can take a look at your specific your situation.