The tax term head of household is one of the more misunderstood tax phrases inside the U.S. tax code. However, if your situation warrants head of household status, there are two big tax benefits. First, a higher standard deduction. Second, lower effective tax rates for virtually every income level. This is great, but only if you qualify.

Three key qualifications

There are three specific rules to qualify for the head of household status:

• You are not married. First, you need to be unmarried or considered unmarried as of the last day of the year. Unmarried means single, divorced or legally separated per a court order. You can also be considered unmarried if you are legally married, but you and your spouse are separated and live in different residences for the last half of the year.​
• You pay half of the cost to keep up your home. Second, you need to support yourself. You do this by showing that you provide at least half the cost to keep up your home. The IRS provides a worksheet to help you calculate this, but the idea is to add up household costs and determine that you pay more than half throughout the year. Here are examples:
  • Costs to include: Rent, mortgage interest, property taxes, homeowners insurance, repairs, utilities and food eaten in your home.
  • Costs not to include: Clothing, education, medical expenses, vacations, life insurance and transportation.​
• There is a qualifying person living with you for at least half the year. This can be the most complicated of the three requirements. Essentially, you have a dependent that is supported by you. So if you can claim a person as a dependent and they live with you for six months, you probably meet this requirement. Beyond your son or daughter, a qualifying person can be a sibling, parent, grandchild, grandparent and other relatives. There is also a special rule for caring for your parent. You may be eligible as head of household even if your parent doesn’t live with you, as long as you provide more than half the cost of keeping up their home.

Making the right decision on filing status can save you thousands of dollars, but you have to know the rules. If you have questions regarding your current situation or have a life change that may qualify you for the head of household filing status, feel free to call.

The IRS recently announced key tax figures for 2019, using information based on the Consumer Price Index published by the Department of Labor. Use these early figures to start developing your tax strategies for next year.

Tax Brackets: There are currently seven tax brackets ranging from 0 percent to 37 percent. Each of the income brackets increases between 1.8 and 2 percent.

Standard Deductions:

Other Key figures:

Caution: Remember, these early IRS figures are prior to any potential tax law changes currently under consideration in Washington D.C.

For the first time in six years, limits for IRAs are rising. 401(k) accounts and IRAs will see an increase of $500 in contribution maximums for 2019. Check out the table below for the details:

How can you take advantage?

Contributing the full amount allowable to a retirement plan will maximize your tax savings and increase your compound interest earnings potential. Need help making these contributions a reality? Here are some ideas:

• Contribute your raise or bonus. A great time to contribute to a retirement plan is when you receive a raise or bonus. It allows you to take some or all of the additional income and invest in your future without changing your current lifestyle. Your investment will go even further if your employer offers a plan that matches your contribution.
• Cut your spending. Start by reviewing your ongoing expenses and creating a budget. Maybe you have a subscription you can cancel or a service provider you can contact to negotiate a lower rate. Then look for ways to reduce your spending on day-to-day expenses – like food, for example. Some ideas to lower food costs are bringing lunch to work, skipping the coffee shop, limiting dinner out at restaurants and shopping at less expensive grocery stores. Use this money to fund your account.
• Add a side job. At some point, there are only so many expenses you can cut. Picking up some side income might be the way to go. Whether it’s a part-time retail job or starting your own small business, the additional income might be enough to get you to your savings goal. ​
• Automate your contributions. Most plans offer a way to contribute automatically. If you have a plan through work, check to see if it has an auto-escalation feature that increases contributions over time. If you are investing in an individual plan, set up auto contributions to pull from your bank account on a monthly basis.

Working through these ideas now gives you a great chance to take advantage of the benefits of funding new or existing retirement accounts. Why not take full advantage of the tax benefits they provide? Please call if you have any questions.

The Social Security Administration announced a 2.8 percent boost to monthly Social Security and Supplemental Security Income (SSI) benefits for 2019. The increase is the largest in seven years, and is based on the rise in the Consumer Price Index over the past 12 months ending in September 2018.

For those still contributing to Social Security through wages, the potential maximum income subject to Social Security tax increases 3.5 percent this year, to $132,900. A recap of the key amounts is outlined here:

2019 Key Social Security Benefits

What does it mean for you?

• Up to $132,900 in wages will be subject to Social Security taxes, up $4,500 from 2018. This amounts to $8,239.80 in maximum annual employee Social Security payments. Any excess amounts paid due to having multiple employers can be returned to you via a credit on your tax return.
• For all retired workers receiving Social Security retirement benefits the estimated average monthly benefit will be $1,461 per month in 2019 – an average increase of $39 per month.
• SSI is the standard payment for people in need. To qualify for this payment you must have little income and few resources ($2,000 if single/$3,000 if married).
• A full-time student who is blind or disabled can still receive SSI benefits as long as earned income does not exceed the monthly and annual student exclusion amounts listed above.

Social Security & Medicare Rates

The Social Security and Medicare tax rates do not change from 2018 to 2019.

Note: The above tax rates are a combination of 6.20 percent Social Security and 1.45 percent for Medicare. There is also 0.9 percent Medicare wages surtax for those with wages above $200,000 single ($250,000 joint filers) that is not reflected in these figures. Please note that your employer also pays Social Security and Medicare taxes on your behalf. These figures are reflected in the self-employed tax rates, as self-employed individuals pay both halves of the tax.

Too often taxpayers receive tax surprises at year-end due to actions taken by mutual funds they own. What can add insult to injury is the unsuspecting taxpayer who recently purchases the shares in a mutual fund only to be taxed on their recent investment. How does this happen and what can you do about it?

Tax surprises

Towards the end of each year, many mutual funds pay a dividend to the holders on record as of a set date. The fund might also distribute funds deemed as capital gains based upon buying and selling activity that takes place in the fund throughout the year. This can create many problems:

• Taxable paybacks. If you purchase shares in a mutual fund just before a distribution of dividends, part of your purchase includes the dividends that are effectively paid right back to you. Not only will the asset value of your recently purchased shares in the mutual fund go down after the distribution, but you will owe tax on a distribution that is effectively your own money!
• Kiddie tax surprise. Many taxpayers purchase mutual funds in their children’s names to take advantage of their lower-tax rates. By keeping their child’s unearned income below $2,100 the tax is low or non-existent. A surprise dividend or capital gain could expose much of this unearned income to higher tax rates.
• The $3,000 loss strategy. Each year, you may take a net of up to $3,000 in investment losses. Your losses can offset high rates of income tax with correct tax planning. But first, these losses need to offset capital gains. If you receive a surprise capital gain, you could be reducing the effectiveness of this tax strategy.

What to do

Here are some ideas to help reduce this mutual fund tax surprise:

• Limit year-end activity. Plan your mutual fund moves with this year-end surprise in mind. Consider reviewing and rebalancing your funds at the beginning of the year to avoid fund purchases just prior to dividend distributions.
• Research your mutual funds. If you wish to avoid a year-end surprise, do a little research on your mutual funds to anticipate what will happen with the fund. Check out the historic trends of your funds to determine which are most likely to issue a surprise Form 1099 DIV or Form 1099 B (capital gain/loss).
• Use the knowledge to your benefit. If you like a fund and it has a practice of creating taxable events each year, consider investing in these funds within a retirement account. That way the tax implications can be part of your retirement planning.

No one likes a surprise at tax time. The best course of action regarding your mutual funds is to consult with an expert who can help you navigate the options that are best for you.

When you win a prize, there are really two winners: you and the taxing authorities. Should you be fortunate enough to win that trip of a lifetime to the French Riviera in your new yacht, here is what you need to know.

Other considerations and tips

Should you receive a prize during the year, here are some tips to consider:

Remember should you be lucky enough to win a prize, ask for help to determine whether this “other income” could create a tax problem.

Want to jump start your child’s retirement with a million dollar tax-free account? Consider this:

The million dollar idea

As soon as your child begins to earn income, open a Roth IRA and set a contribution goal to reach before they graduate from high school. Assuming an eight percent expected rate of return, the investments made by age 19 will grow to FORTY times its value by the time they reach 67 (current full retirement age). For example, $2,500 invested before graduation will be $100,000 at retirement. If you can bump that up to a $25,000 investment before graduation, at retirement it will be worth $1 million!

Why it works

Compounding interest occurs when interest is earned on the interest generated from the initial contribution. The more time the investment has to grow, the more exponential growth will occur. By starting to save prior to graduating from high school, the investment will have almost fifty years of compounding growth.

Even better, while contributions to Roth IRA’s must be after-tax contributions, any earnings are TAX-FREE as long as the rules are followed! Simple to say, but how do you get $25,000 into a child’s Roth IRA? Here are some tips.

Tips to achieve the goal

• Hire your child. Roth IRA contributions are limited to the amount of income your child earns, so earned income is key. If you own your own business or even make some money on the side, consider hiring your child to help with cleaning the office, filing or other tasks they can handle.
• Look for acceptable young age work ideas. Baby sitting, yard work, walking pets, shoveling, and lawn work are all good ideas to get your child earning some income at a younger age. Cash based income is harder to prove, so don’t forget to keep track of the income and consider filing a tax return, even if not required.
• Leverage high school years. Ages 15-18 will be when your child has their highest earning potential before graduation. Summer jobs, internships and part-time jobs during the school year can produce a consistent income flow to contribute to the Roth IRA and still provide spending money.
• Parent or grandparent matching idea. The income earned by your child doesn’t have to be directly contributed by them to the Roth IRA – it simply sets the contribution limit. Make a deal that for every dollar of income your child saves for college, a parent or grandparent contributes a matching amount to their Roth account. College and retirement savings in one!

By helping your child get a head start on saving, it should ease any anxiety regarding retirement and help them focus on school, starting their career, and other personal development goals. If you have questions about Roth IRA’s or any other tax-related issues, please call to discuss them.

Small business owners have a number of options on how to organize their business for tax purposes. Many small, single owner, businesses are not incorporated, and are deemed “sole proprietors”, in the eyes of the IRS. Other business entities, like C corporations, are taxed as a separate entity with distributions to owners taxed a second time as dividends. Still others are deemed “pass-through” entities like S corporations, Partnerships and Limited Liability Companies (LLC).

Pass-through entities

Pass-through entities do not pay taxes at the company level. Instead, the business tax return reports the net income to the IRS, but then distributes the taxable income to their respective owners via a K-1 tax form. Each individual owner then reports their share of the K-1 net income on their individual tax return and pays the tax on this and any other personal income.

Generally, business owners like pass-through entities because:

• The business income is taxed once instead of twice as in the case of C corporations.
• The business format provides owners a level of legal protection that is not available by doing business as a sole proprietor.

What you should know

• Individual tax rates. Changes in individual tax rates have an impact on the amount of tax paid by all small businesses that are organized as pass-through entities.
• New 20 percent deduction. Starting in 2018, a new 20 percent qualified business income deduction is available for pass-through entities and sole proprietorships. There are limitations and other complexities involved, but the bottom line is many small business owners will see a tax break.
• Can you pay the tax? Small pass-through businesses must pay income tax on all their business profits. However, the business entity is NOT required to distribute cash from the company to help pay the tax. So pass-through owners could see a tax bill without money to pay the tax.
• Minority shareholder caution. Minority shareholders in pass-through entities are doubly cursed. They not only may not receive distributions to pay taxes due, but they are often precluded from selling their shares, and they do not have enough ownership to require distribution of funds through shareholder voting.
• Very popular business entity type. According to the IRS the S corporation formation is a popular business entity type with 4.6 million S corporations in 2014 – roughly twice the amount of C coporations. LLCs are quickly becoming the new entity of choice with growth from 120,000 in 1995 entities to over 1 million entities today.

If you have any questions regarding your current small business organization or are looking to start a small business and need help choosing the best entity for your situation, please call.

Most income you receive is taxable income that is reported to you and to the federal/state tax authorities. However, renting out your home or vacation property on a short-term basis can be done tax-free if you follow the rules.

Would someone want to rent your property?

Sure it sounds good, but why would someone want to rent your property? Here are some ideas:

Know the risks

The hassle factor needs to be considered prior to taking advantage of this free income opportunity. Having a proper rental agreement, damage deposit, and insurance are key factors to consider. Also remember that if you rent out your property for more than 14 days, all rent received is taxable and rental income rules apply. And don’t forget to review any local regulations prior to renting your property.

Home rental sites like VRBO and Airbnb can help you better understand your options for renting your property.

There are few things as frustrating as not being paid what is owed to you. If it becomes clear the debt is not going to be paid, you might be able to recoup some of the lost money via a tax deduction. The IRS has two classifications for bad debt: business and non-business, each with its own deductibility rules.

Business bad debt

In order to be considered a deductible business bad debt, the IRS states that the debt must be closely related to your trade or business. Business bad debt is typically unpaid customer invoices, but it can also include business-related loans. To qualify as a deduction, these two statements must be true:

• The amount is already included as income or as an asset
• The debt is considered to be partially or completely worthless

There are many ways to determine the worthlessness of a debt, but at a minimum, you should be able to produce a recap of collection efforts. You need to show the IRS that you did everything you could to collect the debt. If you determine the bad debt is valid, you can deduct it as a business expense.

Non-business bad debt

All bad debt not defined as business-related, is classified as non-business. For a non-business bad debt deduction, the debt must be considered 100 percent worthless. There is no partial deduction available. In addition, you need to prove that the debt is a loan intended to be repaid and not a gift – especially if loaned to a friend or family member. The best way to prove this is with a signed agreement.

If you determine the bad debt is valid, you can report the amount as a short-term capital loss. The loss is subject to capital loss limitations and you need to submit a statement with your tax return that includes the following:

• Description of the debt
• Amount of the debt and when it became due
• Name of the debtor
• Business or family relationship between you and debtor
• Efforts you made to collect the debt
• Why you decided the debt was worthless

While no one wants to be in a position to write off debt, it’s nice to know that you can at least benefit from a tax deduction. If you find yourself in this situation or are planning to loan funds in the future, call to set up a plan of attack.