5 essential steps to becoming debt-free

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.

Want customer loyalty? Improve your waiting room

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.

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.

There’s a new tax credit for paid employee leave

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.

Traditional and Roth IRAs: What changed?

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.

How to get (and keep) great clients

You’ve probably encountered your share of challenging clients. They nitpick. They haggle endlessly about prices and hourly rates. They fuss and fume about every aspect of your work. When the project is over and the goods are delivered, they pay late — or not at all.

How do you screen out time-wasters and garner good clients for your business?

  • Clarify what a “good client” looks like. Although each business will establish its own parameters, at a minimum you’ll want to consider the range of client budgets you’re willing to accept. Say, for example, you run a roofing business. You may decide that projects under a certain budget aren’t worth your time and that projects above a certain size exceed your firm’s level of expertise. Or, if you’re in the business of website design, you might specify the minimum level of technical knowledge you’ll require.
  • Communicate parameters clearly. Use your business website to explain the types of customers you’re looking for. If you plainly state, for example, that you only service clients in a particular geographical area, folks outside your region will tend to filter themselves out. Of course, you can always make exceptions. But the more details you can spell out, including specifics about your pricing, the more likely you’ll narrow the field to the best potential clients.
  • Consider a potential customer’s reputation. Depending on your industry and long-term expectations, you may want to check out a prospective client before taking on a project. Make discreet inquiries of others in your industry group. You may find it helpful to know if the client has been willing to take feedback on past projects, if they respond in a timely manner, or if other businesses have complaints about them.

Good clients form the backbone of any successful business. Be diligent to find and keep the best ones.

How to cut taxes under the new tax act

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.

Can you deduct IRA contributions?

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.

Your roundup of deductible miscellaneous expenses

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
  • Employment-related education
  • 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)
  • Union dues
  • 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.