Student loan debt is unarguably one of the fastest growing deficits today. With amounts exceeding one trillion dollars (and growing every second), student loan debt nearly doubles our nation’s credit card and auto loans debt. It’s no surprise that people are faced with anxiety when determining how, when and what to put away for their kids’ educations. Many vehicles are available for college savings including Coverdell ESAs, ROTH contributions and savings bonds. However, the most recognized plan on the market today are 529 plans.

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions. There are many attractive features of 529 plans including:

  • Tax-deferred and tax-free savings.
  • Depending on state laws, there may be additional tax incentives available.
  • Preferred financial aid (FAFSA) treatment.
  • Inexpensive, simple and does not expire.

The new tax reform provides additional benefits of 529 plans:

  • Broadening the definition of “Qualifying Schools” to include private and religious K-12 schools (limited to $10,000 toward tuition expenses only).
  • The capability to roll 529 funds into an ABLE account.

So, we have established the benefits of 529 plans. Now the question is: how does one choose a plan? Unfortunately, the performance of a 529 plan cannot be accurately predicted. Therefore, deciding factors are weighted heavier on taxes, price and the investment selection available. A large misconception is that you need to purchase a 529 plan that is specific to your home state. This is not true. You do not need to use your state’s 529 plan and your choice of a 529 plan also has no affect on where your child attends college.

A couple resources to help with the 529 search are Morningstar and Savingforcollege.com. Morningstar uses a Gold, Silver and Bronze scale to evaluate the pros and cons of 62 popular plans. They use “five pillars” to determine the rating (Process, People, Parent, Performance and Price). For more information on the Morningstar 529 visit www.morningstar.com.

A second resource is Savingforcollege.com. Like Morningstar, Savingforcollege.com also uses a scale to rate various 529 plans. Instead of the Gold, Silver and Bronze scale, a “Graduation Cap” scale is used. Each plan is rated based on their Performance, Costs, Features and Reliability and given anywhere between one and five “Graduation Caps.” For more information, visit www.savingforcollege.com.

As with any major life decision, it is very important to consult with a professional prior to making a final decision. Adam Shay CPA PLLC can refer clients to a financial advisor that specialize in choosing and setting up a college savings plan that will work for you and your family.

There were many notable changes with 2018 income tax reform.  In this post, we will cover the personal changes that will affect Schedule A Itemized Deductions. The concept will be similar for all taxpayers, but we will focus on Married Filing Jointly Taxpayers. These provisions will be in effect from 2018 – 2025.

As a refresher, taxpayers can either take the standard deduction or itemize. Some items that have shown up on Schedule A deductions are: medical and dental expenses (there is a calculation to arrive at the deductible portion), taxes you paid, interest you paid, charitable contributions, casualty and theft losses, and miscellaneous expenses. When choosing whether to take itemized or standard deductions, you would choose which ever option is more beneficial.

Here are the changes:

  1. One of the deductions on Schedule A (Itemized deductions) is “Taxes You Paid”. It includes state taxes you paid, real estate taxes, and personal property taxes. For 2018, this deduction will be capped at $10,000. Because of this, itemized deductions could decrease.
  2. If you buy a home between now until 2026, you can deduct the mortgage interest on up to $750,000 in mortgage debt. Note that this cap affects homes purchased after December 14, 2017. If you purchased a home before then, you are grandfathered in and can use the prior $1 million cap. Deducibility of Home equity interest is suspended.
  3. The portion of medical expenses that exceeds 7.5% of Adjusted Gross income can be added to itemized deductions for 2017 and 2018. For 2019 and onward, it will increase back to 10%.
  4. Miscellaneous itemized deductions are suspended (Schedule A Itemized Deductions including unreimbursed employee expenses, income tax preparation fees, investment advisory fees).
  5. Casualty losses will be only for losses in a federally declared disaster area. Note – there is a calculation for this.
  6. The standard deduction increased from $12,700 to $24,000 (for Married Filing Joint taxpayers).

With all of these changes combined, you may find that it is more beneficial to take the standard deduction, but it is important to provide your CPA with all information so that this determination can be properly made.

With 2018 tax reform, we have received more and more questions- why shouldn’t I switch to a Corporation?  In most cases the answer is simple – it’s not many situations where double taxation is advantageous.

C Corp basics

C Corps have many unique properties. First, they are the most complex form of business. They require the most effort to set up and maintain each year. Because C Corps have been around so long, the laws regarding their operations and liability protection are well established. C Corps are owned by shareholders who, in most cases, cannot be held liable for the actions of the corporation.

C Corp taxation

When it comes to taxes, the C Corp pays income tax on its income. C Corps have much more generous rules regarding employee benefits for shareholders. Many times, officers of C Corps can have benefit packages that significantly outweigh their actual salary. Many of these benefits are either limited or not available to owners of other business types. C Corps do have some drawbacks though. While figuring its tax amount, it does not get to deduct the amounts paid to shareholder as dividends. As an example, if a C Corp has $100,000 in operating profit and then pays out $60,000 in dividends to its shareholders, it is taxed on the full $100,000. That means that corps must be careful to not pay more dividends than they afford since they need to maintain enough cash to stay afloat and cover taxes.

Here is where the pain hits home though for owners of small C Corps. That $60,000 in dividends gets added to their personal tax returns as additional income. So their personal taxable income jumps up along with their tax bill. The term double taxation comes from the fact that both the C Corp and the individuals pay income tax on the dividend income.

Another major drawback to a C Corp happens in years where the business generates a loss. Let’s say you run a C Corp and just had a rough year. You paid yourself just enough of a salary to live on ($50,000), but overall the C Corp lost $200,000. With most business types, you would be able to net those two numbers together to produce a net loss of $150,000 when calculating your personal taxable income. But with a C Corp, the loss gets stuck inside of the C Corp. That means you will still pay tax on your $50,000 salary, but the C Corp’s $200,000 loss does not help you at all. Having a C Corp in a couple of down years can cost tens of thousands of dollars in extra tax.

Who should have a C Corp?

If a C Corp’s income is subject to double taxation, who would ever set one up? The answer is almost always large businesses. It is quite rare that a C Corp is the right answer for a small business or an independent professional. There are cases where it makes sense for a small business, but those are few and far between. Large businesses rely on the C Corp’s structure and ability to sell stock to be able to raise funds. They rely on its proven liability history and its ability to provide benefits to officers. If your net income is over or approaching $1 million per year, 2018’s corporate income tax rate of a flat 21% is low enough that you may want to have a competent tax advisor prepare a comparison of tax structures for you to see if switching to a C Corp makes financial sense.

For everyone else

Unless you have a large company or a specific need for a C Corp, there are many other options that can fit your needs much better (and much cheaper!). LLCs are an incredibly flexible option that allow us to make tweaks to your tax plan as needed. Paired with the proper tax election, an LLC can meet the needs of many small businesses.

How can we help

Selecting the right business entity and taking advantage of every legal tax strategy provides you with a competitive edge in the marketplace. If you aren’t 100% sure you have the right structure in place, or if you aren’t sure you are taking advantage of your structure to the fullest, please contact us. We have competent professionals who can guide you through the process and make sure you aren’t missing opportunities that your competitors are taking.

At Adam Shay CPA, PLLC we are a strategic partner, priding ourselves on being more than a boring once-a-year accountant or tax preparation firm. We have joined our crypto accounting services with tax preparation, ensuring you get the most well-rounded service available.

Cryptocurrency is a digital currency transferred between peers and confirmed in a public ledger through a process called mining. These digital currencies only exist electronically and to date don’t have a central issuing authority or regulatory body. Cryptocurrencies are exchanged internationally on a global ledger called the blockchain. This ledger holds the history of every crypto transaction ever made.

Cryptocurrency got its start with Bitcoin in 2009, and today it is estimated that there are over 1,000 cryptocurrencies being traded around the globe. Ethereum, Ripple, Litecoin, Cardano, Stellar, ZCash are some examples of popular coins today.

Calculating your capital gains or losses for your cryptocurrencies isn’t always straightforward. We have extensive knowledge of the tax complications that exist with Bitcoin and cryptocurrency. Whether you simply transact or are a miner, investor, or day trader, we have the expertise to assist you with your unique situation. We are ready to help you in all of your crypto tax, compliance, and strategic planning needs.

Did you know that the IRS issued a policy notice in 2014 outlining that virtual currencies are taxable as property? Many investors incorrectly believe that digital currencies fall under loopholes or exemptions to the tax code and this is far from the truth. The IRS is ramping up enforcement against cryptocurrency investors, and even going after investors retroactively as far back as 2013. Bring your questions to our experienced CPAs today to ensure you are compliant and getting the best tax planning and advice.  If you have a cryptocurrency related tax problem, we can help!

A Whole New Ballgame:
Tax Reform Effects on Individuals and Businesses

Click Here to download a pdf version of this 2018 Tax Reform Guide!

For most taxpayers, the sweeping changes to federal tax laws enacted by Congress at the end of 2017 will be most apparent when it comes time to report 2018 income. But smart taxpayers will make an effort to understand these changes in advance, since many of the decisions we make are based upon past tax consequences that no longer apply. Now that we can no longer rely on a lot of those assumptions, it’s a good time to dive in for a closer look at the new tax laws and think about the wisest course to plan for your financial journeys in 2018 and beyond. You’ll also pick up some strategic tax planning tips that can reduce future taxes.

This guide is intended to give an overview of the new tax reform law, organized to highlight those changes likely to have the most significant impacts on the individual and business activities of our clients. It would be impossible (not to mention tedious) to give a comprehensive accounting of all the changes large and small – the final language in the reconciled conference report was 1,097 pages. It will take several years, if not a decade, before regulations are firmed up as tax court rulings provide interpretive guidance to all the changes to the tax code. However, some things we do know for sure. Many of the rates and formulas have changed to a significant degree so that old assumptions are now playing into a whole new ballgame, creating multiple traps for the unwary. Here is an overview of the most important changes to the tax code that you’ll need to understand right now.

Tax Reform Effects For Individual Taxpayers

1. Changes to Income Tax Brackets

There are still seven federal income tax brackets — but at slightly lower rates and adjusted income ranges. Here’s a peek at two of the most common filing categories, comparing old vs. new tax brackets:

Rates for Single Taxpayers

Rates for Married Filing Jointly

Source: Skye Gould/Business Insider

New Brackets & Tax Rates For Other Filing Status

2. Increased Standard Deduction, Fewer Itemized Deductions

One of the goals of tax reform was simplification for the individual taxpayer based on this proposition: increase standard deductions to reduce the number of taxpayers itemizing deductions.

High income earners with qualifying deductions may still find it advantageous to itemize, even though limits have been placed on many of the items they’ve fully deducted in the past.

State and local taxes limitation: The state and local income tax deduction will be limited to $10,000 annually for most filing statuses. (Married Filing Separately is $5,000 each.) This will hurt anyone living in areas with high state and local tax rates, and higher income earners ($200,000+) no matter where they live.

Mortgage interest: Mortgages closed after 12/15/17 (or 4/1/18 if a written contract existed prior to 12/15/17) will have mortgage interest limited on mortgages greater than $750,000. Existing mortgages will be treated as they were, with a $1,000,000 threshold for interest limits. Debt that is refinanced for loans exisiting prior to 12/15/17 is grandfathered in, with some qualifications.

Home equity loan interest: Starting with 2018 income tax returns, interest on home equity lines of credit is no longer deductible. If you had planned on using funds from a HELOC for seeding other types of investments, you will need to factor in that higher debt cost. Second mortgages used for substantial home improvements still qualify for the mortgage interest deduction.

2% limitation: The 2% of Adjusted Gross Income (AGI) limitation on miscellaneous itemized deductions (tax prep fees, investment management fees, unreimbursed work expenses) has been eliminated.

Casualty and theft losses: This deduction has been eliminated, unless the loss takes place in a federally declared disaster area or if the loss is used to offset a casualty gain. This is a good time to check your casualty insurance policies to make sure all your real and personal property is adequately covered, since you can no longer use such losses to reduce taxes.

Moving expenses: Moving expenses are no longer tax deductible, unless the taxpayer is in the armed forces and the move is due to a permanent station change.

Charitable donations: These are still deductible, but you will only receive the tax benefit if you itemize. If you can itemize then it makes sense to itemize and claim your charitable contributions.

Athletic Ticket Donations: The 80% deduction that could be taken for charitable contributions which provide seating priority benefits is no longer available.

The combined effect of all the above means that fewer people will itemize their deductions. To that extent, one major tax simplification goal will have been achieved.

3. No More Personal Exemptions

Whereas before you could deduct personal exemptions of $4,050 for yourself and everyone in your household (subject to phaseouts), these personal exemptions are now eliminated. This elimination is intended to be offset by the increase in standard deduction. Eliminating personal exemptions will have the most significant impact on families with more children, especially those with dependent children over the age of 17 (such as college students).

4. Other Changes Affecting Taxable Personal Income

Child Tax Credit: The child tax credit (previously $1,000 per child per child under age 17) has been increased to $2,000 per qualifying child. They’ve also increased the phase-out levels to $400,000 for Married Filing Jointly (MFJ) and $200,000 for Single filers.The refundable portion of the child tax credit (where you might receive back more in a refund than you paid in taxes) is limited to $1,400 per child. A $500 credit is allowed for any dependent who is not a qualifying child.

529 Savings Plans: They’re not just for college any more. Starting in 2018, $10,000 per student can be used for elementary through high school tuition. College use of a plan does not face the $10,000 annual limit.

Child Tax Rates: The “Kiddie Tax” – where a dependent child’s investment income was taxed at the typically higher rates of their parent – has been modified.

Alternative Minimum Tax: The dreaded Alternative Minimum Tax (AMT) has higher exemption amounts and while it still exists, it is expected to impact fewer individuals.
Gift taxes: The gift tax exclusion has been increased to $15,000, from $14,000.

Estate Taxes: The Estate Tax exemption has increased to $11,200,000 for individuals, and $22,400,000 for married couples.

Due to the last two changes described, high net worth individuals may want to consider revisiting their estate and gifting strategy.

5. Changes that Start in 2019 and Beyond

If you’re getting divorced, alimony related payments won’t be counted any more. Beginning with divorce settlements and agreements enacted in 2019 and later, payments related to alimony agreements are no longer deductible for the payer, and will not be considered income to the recipient. Anything in place before 2019 will be grandfathered in (meaning still deductible on one side and taxable income on the other side).

You’ll no longer pay a penalty if you don’t purchase individual health insurance; the Affordable Care Act “Individual Mandate” goes away. The shared responsibility payment owed if a taxpayer doesn’t enroll in a health insurance plan is repealed, starting in 2019.

Some of the changes are temporary. Most of the individual tax rate changes are scheduled to revert back to the old code after 2025.

Tax Reform Effecting Business Owners, Professional Corporations & Real Estate Investors

1. C Corporations Deserve a Closer Look

C Corporation income is now taxed at a flat 21%. This includes many types of small businesses and personal service corporations such as medical, legal and accounting practices, which were previously taxed at a flat 35%. Dividends paid from a C Corporation will still be taxed at the individual level, but the decreased C Corporation rate makes them more attractive. Some C corporations meeting certain conditions qualify their shareholders for a capital gain exclusion on sale of corporate stock, increasing their advantages even further.

C Corporations are excluded from the new rules on Qualified Business Income, discussed below.

 

2. A Big New Tax Cut on Pass-Through Business income.



Qualified Business Income (QBI) Under Tax Reform

Pass-through income from sole proprietorships, S corporations or entities such as LLCs that are a qualified trade or business can receive up to a 20% deduction of their income that is generated from the qualified trade or business. Income from real estate assets would typically fall under QBI tax treatment. The end result of the QBI deduction is a lower income tax rate on the pass-through business income. One of the wrinkles is that S Corporation shareholder wages do not count as qualifying business income (i.e. they do not receive a 20% deduction). Do not interpret this to mean that S corporations are going to necessarily be less advantageous than other pass-through options. The IRS still requires S Corporation shareholders to take a reasonable salary.

The QBI deduction is very complicated and convoluted, despite Congress’ stated goals of simplification. One of the points of confusion is how different types of businesses are treated differently for the QBI deduction phaseout.

QBI Deduction Limitations
If personal taxable income is greater than $315,000 for MFJ, or $157,500 for other statuses, then the 20% QBI deduction can be limited.
For many businesses subject to the limitation, the 20% deduction is limited to the greater of
1) 50% of the W-2 wages paid for business , or
2) The sum of 25% of W-2 wages plus 2.5% of the unadjusted basis of all qualified business property that hasn’t been fully depreciated.

QBI Deduction Limitation That Is Treated Differently
For QBI deduction limitation purposes, most service based businesses or those businesses whose primary asset is the reputation of the owner or an employee(s) are treated differently. (Think law firms, doctors, dentists, etc — but architects and engineers don’t fall under this definition.)
For these types of businesses, the 20% QBI deduction is phased out between $315,001-$415,000 for Married Filing Jointly, or $157,501 to $207,500 for individuals and heads of household. It’s not subject to the the QBI deduction limitations previously referenced; it is simply phased out, and the benefit is lost. This phaseout can result in a mind-boggling, almost 70% effective marginal tax on income earned above the phase-out range as the deduction is lost on income that was previously eligible.

3. Other Changes Affecting Business Taxes

Depreciation

  •  Computers are no longer considered listed property, which will make them easier to depreciate more quickly.
  • The annual 179 depreciation limit was increased to $1,000,000 (up from $510,000). The phaseout threshold was increased to $2,500,000.
  • 100% bonus depreciation is allowed on both used and new property.

All of this means it will be easier to expense business equipment in the first year.

Accrual Method of Accounting
As of 2018, both C corporations and flow-through entities (partnerships and S corps) can use the cash method of accounting for tax purposes if average 3 year gross receipts are less than $25,000,000.

Uniform Capitalization Rules (UNICAP)
The UNICAP rules for inventory calculations now only apply where the three-year gross receipt average is greater than $25,000,000.

Business interest deductions
Limited to 30% of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) for businesses that have averaged greater than $25,000,000 in revenue over the last 3 years. Motor vehicle dealers using loans for floor plans are not subject to this limitation.

Net Operating Losses (NOLs)
Can no longer be carried back- they can still be carried forward, but carry-forward can only offset 80% of taxable income.

1031 like-kind exchanges
Now allowed only for real estate.

Domestic Production Activities Deduction
Eliminated for 2018, except for C corporations which have until 2019.
No more full deductions for fringe benefits – Items like office food for employees are now subject to a 50% M & E deduction limitation. The company-paid entertainment expense deduction is eliminated. (Office parties just got a lot more expensive.)

Knowledge is Empowering, While Smart Planning Wins the Day.

Even in normal times, learning how to minimize your tax liability is both an art and a science. In this year’s rapidly changing tax environment, it’s essential that you work with a CPA firm whose professionals understand both you and how the tax laws and regulations are changing, and may continue to change. It’s reckless to assume from the headlines that you will be better off under the new tax laws; there are still too many moving parts.

Don’t assume that any previous tax structuring you’ve done is still optimal. Whatever you do, don’t wait until 2019 to discover that you could have done something today to lower your taxes significantly for all of 2018. We look forward to helping you assess your situation, weigh your options, and to help with making any structural changes that can minimize your annual tax bills going forward.

Our 2018 Tax Reform Challenge

At Adam Shay CPA, PLLC, we have set an audacious goal for 2018: We are striving to save our clients a combined $1 MILLION on their 2018 income taxes!

It’s a tough challenge, but we’re ready. We’ll be looking under every rock and crevice of the new tax code to find every possible savings for every single one of our clients that engages us for this purpose, in order to meet our cumulative million dollar goal and to help our clients maximize their post tax cash flow.

To participate in our Challenge:
1.Book an appointment this spring for a Tax Reform assessment.
2. Call (910) 256-3456 or email [email protected] to inquire about our full suite of business and personal income tax services.
3. Attend one of our tax reform webinars.
4. Share this guide with a friend who needs help navigating the new tax reform provisions.

To stay connected and updated join our email newsletter.

Update 12/28/17 4:37 PM

There have been lots of questions about prepaying property taxes this week.  The IRS issued guidance on Wednesday that in order for paid property taxes to be deductible in 2017 they have to have already been assessed- i.e. a bill needs to exist against which to apply a payment.  Stated another way, you can not assume your 2018 property tax bill (in New Hanover County that bill would be the one due 1/5/19) will be the same as the current one, prepay it in 2017, and claim the deduction for it.  Most people should be OK with what you’ve been doing (paying existing property tax bills) but we wanted to spread the word in case you are thinking about getting crazy with your prepayment of property taxes.



Update 12/23/17 9:45 AM

The tax reform bill has now been signed into law.

Business Owners

On the business side, the name of the game (where you can) is to defer income and accelerate expenses. On the income side if you have receipt of income you need to recognize it as income. Something easier to control is accelerating expenses (paying expenses for the future now). You can’t prepay too far into the future (beyond 12 months) or else you no longer have an expense but instead have a prepaid asset. You can only deduct expenses for service related contracts (think cleaning service) for those services provided within 3 1/2 months. If you are considering a prepayment of an expense, consult with us first to make sure there are not any surprises that will cause issues down the road. For example, there are special considerations regarding prepayment of rent.

One of the 2017 tax law changes on the business side is that for equipment bought and placed in service after 9/27/17 (yes, that’s the correct date) you can claim 100% bonus depreciation (expense the entire amount) for both new and used (new to you) equipment. Vehicles have some other limitations- so if you are looking at a business vehicle for this provision be sure to let us know.



Update 12/20/17 4:25 PM

All the bill is waiting on is for signature from the President.  That may not happen until early 2018, due to budget rules and impacts.  A new update with some thoughts focused on itemized deductions is below:


Itemized vs Standard Deductions

One of the big changes of the 2018 income tax reform is that fewer people are going to itemize their income tax deductions due to increases in the standard deduction (differences in standard deduction shown below).  Itemizing deductions means deducting things like medical expenses, state and local taxes, mortgage interest, and charitable contributions, among others.   In addition, if you itemize in 2018 and beyond, the state income, property, and real estate tax deductions are capped at $10,000 per year.  Finally, itemized deduction subject to the 2% of your Adjusted Gross Income (AGI) limitations will not be available beyond 2018.  This includes items like individual tax preparation, unreimbursed work expenses, financial advisor fees. If your standard deductions are greater than your itemized deductions then you want to take the standard deduction to minimize your income tax.

What does this mean for me in 2017?

In general, income tax rates in 2018 will be lower than 2017 – providing an opportunity for tax arbitrage.  Stated another way, a deduction in 2017 is worth more than a deduction for the same situation in 2018.  We recommend evaluating how close to the new standard deduction you will be.  Will you itemize in the future?  Should you be paying additional state and local taxes in 2017 (be careful of the Alternative Minimum Tax)?  Should you be making more charitable contributions in 2017?

We know tax preparation fees, unreimbursed employee expenses, investment advisor fees will not be deductible on individual income tax returns in 2018 and beyond (they will still be for businesses).  Should and can you pay those in 2017?

What does this mean for me in 2018 and beyond?

Again, you’ll need to evaluate how close you are to the standard deduction threshold.  If you are over the threshold, then continue business as usual with your itemized deductions.  If you are close to or below the itemized threshold, consider paying 2 years of real estate taxes in one year (assuming it doesn’t push you over the $10,000 tax deduction limit), consider the timing of start of year and end of year mortgage payments, and consider doing charitable contributions for multiple years in one year.  In short, while it may appear that there is not a way to get a benefit out of itemized deductions, if you are smart about it and craft your strategy you may be able to do so.

As always, tax advice and tax planning are specific to your situation.  This document is intended to educate you on some of the issues tax reform planning ideas for 2017 and beyond.  Please reach out to us so that we can help you with your specific situation and ensure that you are making the appropriate decisions and taking the appropriate action before year-end.



Update 12/18/17 7:47AM:

The federal income tax reform situation is still pretty fluid.  However, it is expected that it will pass congress and get enacted into law.  Most of the changes are for 2018 and beyond, however you may still want to consider 2017 actions before the year is up.

  • Evaluate your 2016 federal income tax return.  Did you itemize deductions (does your return include a Schedule A after the first two pages of your 1040)?  If not, there’s not a lot specific to 2017 and income tax reform that you can do for income tax planning.
  • If you did itemize, how close was your itemized amounts to the new 2018 itemized minimums ($12,000 for single, $24,000 for a married couple)?  If below these new thresholds for your filing status, you may not end up itemizing in the future and may need to cram in as many additional itemizations as you can in 2017.  You do, however, have to be careful of impacts of Alternative Minimum Tax (AMT) on your itemized deductions.  In layman’s terms, with AMT your income tax is calculated a second way and you are assessed the worst tax of the two scenarios.
  • How much did you itemize in taxes you paid (line 9 of Schedule A)?  Under the new tax code, the deduction for state income, property, and real estate taxes will be limited to $10,000 annually.  If you have been close to or exceeded $10,000, you may want to consider what state income taxes or property taxes you can pay in 2017 since you will be losing part of the deduction in 2018.  The new bill specifically spells out that you can’t prepay 2018 state income taxes to get a 2017 federal deduction, but does it make sense for your scenario to prepay 2017 state income taxes?  Upcoming property taxes?  If so, how much?  Again, this is an area where you want to be really careful of any unexpected AMT impact.
  • There is potential tax arbitrage between 2017 and 2018 income tax rates.  As much as you have control over it, you may want to consider deferring income and accelerating expense in 2017. Realize, however, that you have to recognize income when you have constructive receipt of the income.

As always, tax advice and tax planning are specific to your situation.  This post is intended to educate you on some of the issues regarding 2017 and income tax reform.  Please reach out to us so that we can help you with your specific situation and ensure that you are making the appropriate decisions and taking the appropriate action before year-end.

If you own a rental property, do you know if you have taken all of the possible deductions?  The number one item that I see most commonly missed for a rental property on self-prepared tax returns is depreciation.  You are allowed to depreciate residential rental property over 27.5 years and commercial rental property over 39 years.  To calculate the depreciation, you will need the cost basis of the property, which is what you paid for it.  Make sure you allocate a portion of the basis to land, another common error on tax returns.  The land portion is not depreciable.

Why is it important to depreciate the property?  Whenever you sell or dispose of the property, you have to calculate gain or loss on the property.  Gain or loss is calculated in the following manner:

Sales Price

Less Cost Basis (including land)

Plus Accumulated Depreciation

= Gain/Loss

If there is a gain, the accumulated depreciation is recaptured and taxed at ordinary income tax rates, up to the amount of the gain.  If there is any balance remaining after the depreciation recapture, the remainder is taxed at favorable capital gains tax rates.  If the IRS were to calculate the gain on the property, they would treat the property as if it had been depreciated, and you would not get to deduct the missed depreciation as an expense, but would pay ordinary tax rates on the accumulated depreciation calculated up to the amount of gain.  Therefore, you want to make sure you are getting that depreciation deduction every year.

You may be very concerned at this point if you have not been taking depreciation, but fear not because we have some solutions for you.  The first option is to amend prior year tax returns to deduct the depreciation on the tax returns.  There is a drawback to this option: you can only amend tax returns filed in the prior 3 years, so if depreciation was missed prior to those 3 years you would still be missing out on the depreciation.

The second option to catch up missed depreciation is to file a 3115 Application for Change in Accounting Method.  Filing this would allow you to capture any missed depreciation as far back as necessary, versus only being able to go back 3 years for amended returns.  The form is filed with the current tax return and all of the depreciation is deducted in the current year as a Section 481(a) adjustment.  The 3115 is a very in-depth form, so do not try this at home!  You will want to use a tax professional to handle the 3115.

If you are reading this and want to take advantage of the 3115 or amending returns to capture missed depreciation, our accountant Wilmington NC will be happy to assist you.

Let us lay out a scenario. You are a self employed individual. You are meeting with your tax accountant to complete your taxes by April 15 and are told that you owe a bundle in taxes for the year. In addition to the thousands you owe (that is due by April 15), your tax accountant advises you to also make your first estimated tax payment for the current year(also due April 15).

You simply do not have the money. You get set up on a payment plan to pay the balance due and because you are paying off this amount, you surely cannot make estimates for this year. At this rate, it feels as though you will never catch up. Does this sound familiar? Let’s talk about the vicious cycle of taxes and why estimated tax payments are important.

Estimated tax payments are due April 15, June 15, September 15, and January 15 (Note: The 4th quarter payment is due in the following year). Particularly, if you are a self employed individual, you should be making estimated tax payments. If you do not, with 100% certainty, you WILL owe every year. When you are self employed, your income has no withholding. You are on the hook for federal tax, state tax, but also self employment tax on this income.

To illustrate, think back to a time when you were a W-2 employee. Your actual pay was $2,000 but by the time you got your check, it felt like only a small portion was deposited in your account. The difference between your gross check and net check was a result of all those taxes are being taken out each paycheck. When you transition over to a position where you are getting a 1099, you are now considered self-employed and are responsible for paying these taxes on your own. This is a very important concept to understand.

We believe that proper planning starting in the beginning of the year can alleviate the illusion that you do not have the available funds to pay taxes at year end. I say illusion, because if your business is profitable, you did have the money at some point, you just spent it on something other than taxes. If you choose to put aside funds and pay as you go, you will never have such a large balance at year end. Being proactive and making the estimated payments will leave you from having a large amount due at year end, as well as help you to avoid associated underpayment penalties.

We attempt to explain this to clients before they get caught up in the vicious cycle. If you are already at the point where you are in the cycle, there is a way out. This will take planning and budgeting, but it will be worth it in the end. Please let us know if you have questions.

What is an IP PIN?

IP PINs are designed to prevent an individual from filing a fraudulent tax return by using someone else’s social security number. It is a six digit number that is entered with the tax return and is required for filing for eligible individuals. If the IP PIN is not entered and the return is electronically filed, it will be automatically rejected by the IRS. Paper filed returns are manually checked for this IP PIN and will be returned if the submission does not include it.

Why Would I Receive an IP PIN?

• Individuals that were a victim of identity theft and the IRS has resolved the case.
• Individuals that receive an IRS letter inviting you to “opt-in” to get an IP PIN.
• Individuals that file a federal tax return last year as a resident of Florida, Georgia, or the District of Columbia. These individuals would have to apply for an IP PIN and would not receive a letter automatically.

IP PINs letter were mailed this week for 2015 individual tax returns. We were notified that these IRS letters included an error that says the IP PINs are for the 2014 tax return when in fact, they are to be used for the 2015 tax returns. The most important thing to do is to provide these to your tax professional when received. Please contact us with any questions you have regarding your IP PIN.

We are excited about the most recent bill the President has signed. All parties have finally agreed and the President has signed the Protecting Americans from Tax Hikes Act of 2015, also known as the PATH Act. The Act not only extends numerous provisions, but also makes at least 20 provisions permanent.

Key Highlights:

  • Many tax provisions previously expired in 2014 have been extended for 2015 and 2016 or even made permanent beyond that.
  • Section 179 and bonus depreciation tweaks help business owners.
  • Several small tweaks for individual taxpayers to provide credits and/or deductions.
  • W2 forms must now be filed with the IRS on same date they are due to employees (1/31).


Probably the most pertinent provision that was made permanent and the provision that business owners wait on every year is Section 179. First of all, the deduction is retroactively reinstated for all of 2015 and then is permanently extended after this year. Using Section 179, taxpayers will be allowed a $500,000 annual deduction, with a $2,000,000 phase-out threshold. This is much improved from the previous $25,000 deduction limitation. After 2015, the $500,000 deduction and $2,000,000 threshold will be indexed every year for inflation. The Section 179 deduction is also permanently available for qualified real property, which includes qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. For 2015, there is a $250,000 limitation on qualified real property, but after 2015, there is no limitation.

Bonus depreciation was not permanently extended. Rather, it has been retroactively reinstated for 2015 and extended through 2019.

In 2014, the IRS passed a de minimis safe harbor rule that allowed taxpayers without an applicable financial statement to directly expense (instead of having to depreciate) assets that cost under $500, rather than having to list them on the depreciation schedule. Effective 1/1/16, the de minimis safe harbor amount increases to $2,500. The IRS did say that they will not challenge use of the $2,500 de minimis amount for periods before 2016 as long as certain requirements are met.

The following are other business notable provisions that were made permanent (note – only some of the permanent provisions have been highlighted):

  • Research & Experimentation Credit.
  • 15-year straight-line cost recovery for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.
  • 5-year waiting period for S Corporations to Avoid Built-In Gains Tax.
  • Enhanced Charitable Contribution Deduction for Food Inventory.

The following are other individual notable provisions that were made permanent (note – only some of the permanent provisions have been highlighted):

  • $3,000 earned income threshold for computing the 15% Refundable Child Tax Credit.
  • American Opportunity Tax Credit (credit available for up to $2,500).
  • Earned Income Tax Credit for Qualifying Individuals with 3 or more qualifying children.
  • $250 deduction for certain expenses of elementary and secondary school teachers (after 2015, the amount will be indexed every year for inflation).
  • Election to deduct state and local general sales tax as itemized deduction instead of state and local income taxes.
  • Tax-free IRA Distributions to Charities of up to $100,000 for those at least 70½.

The following are notable provisions that were retroactively reinstated for 2015 and extended through 2019 (note –only some of the permanent provisions have been highlighted):

  • Work Opportunity Tax Credit.

The following are notable provisions that were retroactively reinstated for 2015 and extended through 2016 (note –only some of the permanent provisions have been highlighted):

  • Income Exclusion for Discharge of up to $2,000,000 of Qualified Principal Residence Indebtedness.
  • Qualified Higher Education Expenses Deduction (up to $4,000).
  • Deduction of Mortgage Insurance Premiums as Qualified Residence Interest.
  • Energy-Efficient Home Improvement Credit.

 

The PATH Act also created some new provisions. Employer copies of W-2s, W-3s, and 1099s will be due by January 31 (the same date that forms are due to recipient). Also, after 2015 1098-T Forms will only include qualified tuition and related expenses actually paid, versus previous forms that could report amounts billed or paid. In relation to education expenses, after 2015 anyone claiming the American Opportunity Tax Credit will have to report the employer identification number of the educational institute on their tax return.

The PATH Act is great news for taxpayers and tax practitioners, as it will remove uncertainty moving forward about items such as the Section 179 deduction. If you have any questions about the PATH Act, or provisions that may affect you, please feel free to contact us.