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.
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.
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.