529 Plans: What’s all the Buzz?

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.

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


  •  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.

2018 Tax Reform Impact on 2017 Income Taxes

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.

Passport and Taxes

The Internal Revenue Code has a new addition that provides additional repercussions for not paying your taxes. There is a new section called “Revocation or Denial of Passport in Case of Certain Tax Delinquencies”. While it is still uncertain on how aggressively they will enforce this, the new section of the code allows the IRS to rescind existing passports, not issue new passports, or deny renewal if certain tax delinquencies exist.  Our Wilmington NC CPA explains more.

Who Does This Apply To?

For those who already have an existing installment agreement or other payment plan with the IRS, this does not apply. However, for those with a $50,000 or more debt to the IRS that has not been resolved, this could affect your travel plans in the future. The $50,000 threshold includes not only taxes, but penalties and interest as well. With late tax payment penalties plus interest being able to exceed over 25% of the tax owed, $50,000 in debt to the IRS is not as large a figure as taxpayers may think.

This Code Affects Domestics Travelers Too

This section of the Internal Revenue Code comes after a new law that may require passports for domestic travel as well. It is related to the Real ID Act that wants to create a national standard for state-issues IDs. The TSA could require passports instead of driver’s licenses to get on a flight in 2016. While this will not apply to all states, travelers from Minnesota were recommended to get passports by January 2016 to fly. North Carolina IDs meet the national standard, but it may be “better safe than sorry” to start carrying them.
The best thing to do to avoid these issues is resolve any outstanding tax debt issues with the IRS. At a minimum, Adam Shay Wilmington NC CPA can help ensure you are set up on a payment arrangement to avoid revocation of your passport or any future issues obtaining one for travel. We also provide tax resolution services to help reduce or eliminate late payment penalties and interest.

Tax Extenders Passed!

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.

Start Ups and Stock Opportunities

The official closing of the 2015 tax season passed over a month ago.  Its passing provides a lot of items to reflect on. This tax season taught me more than any, that our proactive approach is essential to client tax optimization. As CPAs we serve our clients the best when we know about business or personal financial decisions before they happen. A big part of the strategy is why we recommend having a strong team. This can include an attorney, insurance agent, loan officer, financial planner, and of course the CPA. The focus on this team is to promote collaboration between all the members. Collaboration allows us to plan and optimize our clients’ tax situations. Recently, collaboration with a financial planner reminded me of how important the team is and I wanted to share the experience.

Imagine a business owner in the start up phase of a business. They are spending a lot of money to make their business grow and not seeing a lot of return. Like most owners in the start up phase, they want to maximize the tax benefit of the money they funded the business with. Assume this business owner is married and they are a dual income household.  Prior to starting the business they are in the 25-28% Federal tax bracket. Due to the start up and opening of their business, they generated losses that drove their taxable income into the 15% tax bracket. In addition to taxable compensation the couple also has a brokerage account with various stock investments.

Why is this important?

At the 15% tax bracket, qualified dividends and long term capital gains (for Federal tax purposes) are taxed at 0%. That’s right, 0%! The business owner has stock that they have held for a significant period of time (long term treatment is a year or more). Their financial planner has wanted to get them into another strategy, but did want them to take the significant tax hit. These initial years of the business, until it turns profitable, are ideal times to make those strategy changes. The financial planner can sell the investments and the taxpayer reports the long term capital gain and pays 0% tax at the Federal level. Everyone is happy. While state taxes will still be due; with NC taxes being reduced to 5.75% for 2015 I believe this is a good trade off. If those same stocks were sold when the couple was in the 25-28% bracket they would have paid the additional 15% for Federal taxes.

While not every client is starting a business, or has significant capital gains they would like to capitalize on, or could benefit from this strategy, this is a good example of why it is important to have a strong team that collaborates to get you the best results possible. We recommend you consult all members of your team about any strategy that you take.


NC Personal Income Tax Changes for 2015

As a North Carolinian, we have seen some dramatic tax law changes over the past couple of years.  It seems as though our government is attempting to make our state more tax friendly. It was nice to see the recent updates to North Carolina tax law for individuals. There were three main areas of change: restoration of the medical expense deduction, increase in standard deduction, and income tax rate decrease.

1. Restoration of Medical Expense Deduction: Before 2013 legislation, North Carolina’s itemized deduction was based on the federal calculation. In 2013, North Carolina limited these deductions to just charitable contributions, real property taxes paid, and mortgage interest (taxes and mortgage interest limited to $20,000 as well as removing medical expenses from this list of allowed itemized deductions.

Starting again in 2015, individuals that itemize on the federal level will be able to deduct medical and dental expenses on the state level as well. This will be very helpful to those who have high out of pocket medical costs.

2. Increase in Standard Deduction: Starting in 2016, the North Carolina standard deduction will increase to $15,500 (from $15,000) for married filing jointly. For single, it will increase to $7,750 (from $7,500).

3. Rate reduction: The North Carolina tax rate has dropped each year and will continue to do so. For 2014, it was 5.8%. For 2015 and 2016, it will be 5.75%. In 2017, it will be 5.499%. This was huge for our state as the top tier used to be as high as 7.75%.

This is a very positive change for North Carolina. Stay tuned for more updates.

First Time Homebuyer Credit Repayment

If you purchased a new home between 2008 and 2010 (2011 if you were in the armed forces), then you probably took a first-time homebuyer credit on your tax return in the corresponding year.  While this was a great incentive from the government to boost spending, a lot of the taxpayers are now dealing with the consequences of taking that credit.

If you purchased your home and took the credit in 2008, there are different rules that apply.  The credit in 2008 was, in essence, a loan that the taxpayer had to repay back in equal installments over the course of 15 years.  If you sell the home within 15 years of purchasing the home, then you are required to pay back the entire credit in the year of sale.  If the sale is not to a related party, then you only have to repay the credit up to the extent of the gain on the sale of the house.  If the sale is to a related party, then you have to repay back the entire amount of outstanding credit balance (total credit received less any amounts previously repaid).  The maximum credit allowable in 2008 was $7,500.

For homes that were purchased in 2009 and 2010, and for which the first-time homebuyer credit was taken, you do not have to repay back the credit, unless the home is sold, or if other various events listed below occur.  The rules are a little different for these years.  If the home is sold to a related party within 36 months of buying the home, then the full amount of the credit must be repaid.  Similar to the 2008 rules, if the home is sold within 36 months to a non-related party, the credit only has to be repaid to the extent of capital gain recognized on the sale.  The maximum credit allowable in 2009 and 2010 was $8,000.

For any of the years that taxpayers are eligible for this credit, if the home ceases to be their main home (either within 15 years for 2008 or 3 years for 2009 and 2010), then some type of credit repayment will be triggered.  Examples are:

–          You sell the home – credit must be repaid in year of sell (see paragraphs above for related vs. non-related party).

–          You transfer the home to a spouse or former spouse in a divorce settlement – in this case the spouse would become responsible for repayment of the credit if the home is sold within the allotted time frames.

–          You convert the entire home to a rental or business property – credit must be repaid in year of conversion.

–          You converted the home to a vacation or second home – credit must be repaid in year of conversion.

–          You no longer live in the home for the greater number of nights in a year – credit must be repaid in year of occurrence.

–          Your home is destroyed or condemned – credit must be repaid.

–          You lose your home in foreclosure – credit must be repaid only to extent of gain.


We have had issues with tax returns being rejected for electronic filing because of repayment of the first-time homebuyer credit.  In one scenario, the IRS had applied all of the repayment to the taxpayer, and none of the repayments to the spouse.  Because the IRS thought the spouse still had a balance due, the IRS was looking for the spouse to keep paying back the credit.  In reality, the taxpayers had overpaid the credit, and were due a refund.  We were able to get the issue resolved with the IRS over the phone.

There is a tool on the IRS website to look up the original credit taken, how much has been repaid, how much is still due, and the required annual installment repayment amount.  You can find this at: https://sa.www4.irs.gov/irfof-fthb/.

Please let us know if you have any questions, or if we can be of any assistance to you.

Education Tax Credits

This is a great time of year – kids are back in school and Fall is just around the corner.  However, I am sad that summer is over and traffic is terrible!  Some of you may have sent your kids off to college, and with that comes potential tax credits.  Please note that the income limits presented below are the 2014 limits and will most likely increase for 2015 tax returns.

American Opportunity Tax Credit

This credit is available to taxpayers with modified adjusted gross income below $180,000 for married filing jointly and $90,000 for single individuals.  The maximum credit allowed is $2,500 per student and is available for four post-secondary education years.  Also, 40% of this credit may be refundable, while the remainder would be non-refundable.  If a credit is non-refundable, that means that the refund can only reduce tax to $0 – i.e. it cannot generate a refund.  If a credit is refundable, then it can generate a refund.

Lifetime Learning Credit

The Lifetime Learning Credit is available to taxpayers with modified adjusted gross income below $128,000 for married filing jointly and $64,000 for single individuals.  The maximum credit is $2,000 per return and is available for all years of postsecondary education.  Also, this is a non-refundable credit.

Tuition and Fees Deduction

If you are not eligible for either of the education credits, then you may be eligible for the tuition and fees deduction.  Rather than receiving a credit to reduce tax owed, this reduces your taxable income.  The maximum deduction is $4,000 of qualified expenses.  The deduction is available to taxpayers with modified adjusted gross income below $160,000 for married filing jointly and $80,000 for single individuals.  This is a good option to have when you may not be eligible for the other 2 credits.


Both of the credits and the tuition and fees deduction require that the expenses are qualified.  Basically, this means that the expenses have to be for tuition, enrollment fees and course materials.  Some expenses that are not qualified would be room and board and meals.

You can always compare the 3 options to see which provides you the greatest tax savings.  If the credit provides you the greatest savings in one year, you do not have to do the same in the following year if another option gives you better tax savings.  In other words, you make the decision on which one to use every year.  If you choose to use a credit, then you cannot use the tuition and fees deduction in the same year.  If you have any questions regarding education credits or the tuition and fees deduction, always feel free to discuss with your tax advisor.

Net Investment Income Tax (NIIT)

One of the more recent taxes we have seen enacted is the net investment income tax.  This tax took effect in 2013 to help fund the Affordable Care Act.  First of all, it is important to note that this is an additional tax.  The tax is equal to 3.8% of the lesser of:

1.)    The individual’s net investment income OR

2.)    The excess of the individual’s modified adjusted gross income over the threshold amount ($250,000 for a joint return and $200,000 for a single return).

Another important note to point out is that estates and trusts are also subject to the net investment income tax (NIIT, as we accountants call it for short).

The following items are some of the components of investment income: interest, dividends, capital gains, rental and royalty income, nonqualified annuities and passive activity income.  Rental income can be exempt from the NIIT if the taxpayer is a real estate professional and materially participates – there are certain criteria that have to be met to qualify for the exemption.  If income is exempt for regular income tax, then it is also exempt for purposes of NIIT, such as tax-exempt interest and gain from sale of principal residence.  Other exemptions include wages, unemployment income, alimony, and social security benefits.

There are some deductions that may be taken against net investment income to reduce the income subject to the NIIT.  Some of the deductions include investment interest (only the amount that was allowed as an itemized deduction), investment expenses related to the production of investment income, state and local income taxes imposed that are allocable to the net investment income, fees paid for tax preparation allocable to the investment income, and other miscellaneous itemized deductions allocable to investment income.

Please feel free to contact us if you have any questions about the net investment income tax.