Category Archives: Tax Tips

Saving for school? Check out the updated 529 plan

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:

  1. 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.
  2. 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
  • Books
  • 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.

Consider these unexpected medical deductions

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:

  • Acupuncture
  • Alcoholism treatment
  • Artificial teeth
  • Birth control pills
  • Breast pumps and supplies
  • Chiropractors
  • Guide dogs and other service animals
  • Hearing aids
  • Lead-based paint removal
  • Medical care for transplant donors
  • Oxygen and oxygen equipment
  • Pregnancy tests
  • Psychiatric care
  • Smoking-cessation programs
  • Special diet foods prescribed by physician
  • Telephone equipment for the disabled
  • Vasectomies
  • 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.

How to nail down the historic structures credit

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.

How to salvage a casualty loss deduction

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.

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.

Don’t fall for these 3 IRS Dirty Dozen scams

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 phishing@irs.gov.
  • 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.

4 new and improved depreciation tax breaks

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.