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Time to go through your tax records?

Chances are you’re a little confused about what to keep and what to throw when it comes to tax and financial records. No worries. It’s time to sort through what you’ve got and keep only the important stuff. Here’s what to keep in mind:

  • Keep records that directly support income and expense items on your tax return. For income, this includes W-2s, 1099s and K-1s. Also keep records of any other income you might have received from other sources. It’s also a good idea to save your bank statements and investment statements from brokers.
  • The IRS can audit you within three years after you file your return. But in cases where income is underreported, they can audit for up to six years. To be safe, keep your tax records for seven years.
  • Retain certain records even longer. These include records relating to your house purchase and any improvements you make. Also keep records of investment purchases, dividends reinvested and any major gifts you make or receive.
  • Hold on to copies. Keep copies of all your tax returns and W-2s in case you ever need to prove your earnings for Social Security purposes.

Please call our office if you have questions.



The new tax act means big changes for taxpayers

The Tax Cuts and Jobs Act was passed at the end of December 2017 with some of the most sweeping changes taxpayers have seen in 30 years. Here are a few big changes to come out of the new act — and what you can do about it.

  1. The medical expense deduction threshold was lowered to 7.5 percent.

The tax reform bill retroactively lowers the threshold to deduct medical expenses in 2017 to 7.5 percent of adjusted gross income. The previous threshold was 10 percent. This new 7.5 percent threshold remains in place for 2018, but reverts back to 10 percent in the following years.

What this means: You may want to consider using the medical expense deduction this year. If there are any qualified medical expenses you can make (drug purchases, medical equipment, etc.) to push you over the new, lower threshold, consider doing so in 2018.

  1. The healthcare individual mandate penalty stays in place until 2019.

The shared responsibility penalty (also known as the individual mandate) in the Affordable Care Act is effectively repealed by the tax reform legislation, but not right away. The penalty is set to zero in 2019, but remains in place for 2018.

What this means: You still need to retain your Forms 1095 this year in order to provide evidence of your healthcare coverage. Without proof of coverage, you may have to pay the higher of $695 or 2.5 percent of your income. Unless there are further changes coming, 2018 may be the last year you’ll need to worry about the individual mandate penalty.

More changes to consider for 2018 tax planning

We’re experiencing some of most significant tax law changes since the 1980s. There will be a lot of things to consider for tax planning this year. Here are some of the most significant:

  • Reduced income tax rates
  • Doubled standard deductions
  • Suspension of personal exemptions
  • New limits on itemized deductions, including:
    • Combined state and local income, property and sales tax deduction limited to $10,000
    • Casualty losses limited to federally declared disaster areas
    • Elimination of miscellaneous deductions subject to the 2 percent of adjusted gross income threshold
  • Boosts to:
    • The child tax credit ($2,000 in 2018)
    • A new $500 family tax credit
    • 529 education savings plan expansion for K-12 private school education
    • The estate tax exemption​ (doubled)

Stay tuned

There will surely be more details on the tax reform changes and how they are implemented by the IRS in the weeks to come. In the meantime, contact us if you have urgent questions regarding your situation.



2017 Tax Reform: last-minute year-end moves in light of Tax Cuts and Jobs Act

Congress is enacting the biggest tax reform law in thirty years, one that will make fundamental changes in the way you, your family and your business calculate your federal income tax bill, and the amount of federal tax you will pay. Since most of the changes will go into effect next year, there’s still a narrow window of time before year-end to soften or avoid the impact of crackdowns and to best position yourself for the tax breaks that may be heading your way. Here’s a quick rundown of last-minute moves you should think about making.

Lower tax rates coming.

The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers, effective for the 2018 tax year. Additionally, many businesses, including those operated as pass-through, such as partnerships, may see their tax bills cut.

The general plan of action to take advantage of lower tax rates next year is to defer income into next year. Some possibilities follow:

  • If you are about to convert a regular IRA to a Roth IRA, postpone your move until next year. That way you’ll defer income from the conversion until next year and have it taxed at lower rates.
  • Earlier this year, you may have already converted a regular IRA to a Roth IRA but now you question the wisdom of that move, as the tax on the conversion will be subject to a lower tax rate next year. You can unwind the conversion to the Roth IRA by doing a recharacterization-making a trustee-to-trustee transfer from the Roth to a regular IRA. This way, the original conversion to a Roth IRA will be cancelled out. But you must complete the recharacterization before year-end. Starting next year, you won’t be able to use a recharacterization to unwind a regular-IRA-to-Roth-IRA conversion.
  • If you run a business that renders services and operates on the cash basis, the income you earn isn’t taxed until your clients or patients pay. So if you hold off on billings until next year-or until so late in the year that no payment will likely be received this year-you will likely succeed in deferring income until next year.
  • If your business is on the accrual basis, deferral of income till next year is difficult but not impossible. For example, you might, with due regard to business considerations, be able to postpone completion of a last-minute job until 2018, or defer deliveries of merchandise until next year (if doing so won’t upset your customers). Taking one or more of these steps would postpone your right to payment, and the income from the job or the merchandise, until next year. Keep in mind that the rules in this area are complex and may require a tax professional’s input.
  • The reduction or cancellation of debt generally results in taxable income to the debtor. So if you are planning to make a deal with creditors involving debt reduction, consider postponing action until January to defer any debt cancellation income into 2018.

Disappearing or reduced deductions, larger standard deduction.

Beginning next year, the Tax Cuts and Jobs Act suspends or reduces many popular tax deductions in exchange for a larger standard deduction. Here’s what you can do about this right now:

  • Individuals (as opposed to businesses) will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes. To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date. But don’t prepay in 2017 a state income tax bill that will be imposed next year – Congress says such a prepayment won’t be deductible in 2017. However, Congress only forbade prepayments for state income taxes, not property taxes, so a prepayment on or before Dec. 31, 2017, of a 2018 property tax installment is apparently OK.
  • The itemized deduction for charitable contributions won’t be chopped. But because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won’t be able to itemize deductions. If you think you will fall in this category, consider accelerating some charitable giving into 2017.
  • The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017 it was 7.5% of AGI for age-65-or-older taxpayers. But keep in mind that next year many individuals will have to claim the standard deduction because, for post-2017 years, many itemized deductions will be eliminated and the standard deduction will be increased. If you won’t be able to itemize deductions after this year, but will be able to do so this year, consider accelerating “discretionary” medical expenses into this year. For example, before the end of the year, get new glasses or contacts, or see if you can squeeze in expensive dental work such as an implant.

Other year-end strategies.

Here are some other last minute moves that can save tax dollars in view of the new tax law:

  • The new law substantially increases the alternative minimum tax (AMT) exemption amount, beginning next year. There may be steps you can take now to take advantage of that increase. For example, the exercise of an incentive stock option (ISO) can result in AMT complications. So, if you hold any ISOs, it may be wise to postpone exercising them until next year. And, for various deductions, e.g., depreciation and the investment interest expense deduction, the deduction will be curtailed if you are subject to the AMT. If the higher 2018 AMT exemption means you won’t be subject to the 2018 AMT, it may be worthwhile, via tax elections or postponed transactions, to push such deductions into 2018.
  • Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but after Dec. 31, 2017, such swaps will be possible only if they involve real estate that isn’t held primarily for sale. So if you are considering a like-kind swap of other types of property, do so before year-end. The new law says the old, far more liberal like-kind exchange rules will continue apply to exchanges of personal property if you either dispose of the relinquished property or acquire the replacement property on or before Dec. 31, 2017.
  • For decades, businesses have been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business. For example, if you take a client to a nightclub after a business meeting, you can deduct 50% of the cost if strict substantiation requirements are met. But under the new law, for amounts paid or incurred after Dec. 31, 2017, there’s no deduction for such expenses. So if you’ve been thinking of entertaining clients and business associates, do so before year-end.
  • The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and also suspends the tax-free reimbursement of employment-related moving expenses. So if you’re in the midst of a job-related move, try to incur your deductible moving expenses before year-end, or if the move is connected with a new job and you’re getting reimbursed by your new employer, press for a reimbursement to be made to you before year-end.
  • Under current law, various employee business expenses, e.g., employee home office expenses, are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. So, we should determine whether paying additional employee business expenses in 2017, that you would otherwise pay in 2018, would provide you with an additional 2017 tax benefit. Also, now would be a good time to talk to your employer about changing your compensation arrangement-for example, your employer reimbursing you for the types of employee business expenses that you have been paying yourself up to now, and lowering your salary by an amount that approximates those expenses. In most cases, such reimbursements would not be subject to tax.

Please keep in mind that these are only some of the year-end moves that should be considered in light of the new tax law. If you would like more details about any aspect of how the new law may affect you, please do not hesitate to call us.



Watch out – More charity scams

The IRS recently reported an increase in charity scams since the rise in natural disasters over the last few months. Scammers use authentic-looking emails to direct people to fraudulent websites that ask for financial and personal information. The IRS website has a list of exempt organizations you can use to find qualified charities if you plan on making a donation.



2018 Social Security changes announced

The Social Security Administration stated there will be a 2 percent cost-of-living adjustment (COLA) to monthly Social Security and Supplemental Security Income benefits for 2018. This is the largest increase since 2012. Up to $128,700 in wages will be subject to Social Security taxes (up $1,500 from 2017).



Renew your ITIN by Dec. 31

Individual Taxpayer Identification Numbers (ITINs) that have not been used when filing a tax return at least once in the past three years will automatically expire on Dec. 31, 2017. There’s also a rolling expiration date affecting certain ITINs. The key number to look for is in this position: 9xx-XX-xxxx. If your ITIN has the middle digits of 70, 71, 72 or 80, you’ll need to renew it before the new year.



Donating to a charity? Do this

If you plan on donating to a charity, take steps to ensure it’s tax-deductible. First, check to see if the organization you’d like to donate to is qualified and registered with the IRS. You can do this by visiting the IRS website, or calling (877) 829-5500.

You’ll also need to collect receipts to file with your tax return, and get an independent appraisal for noncash donations greater than $5,000. Remember, contributions are deductible in the year they are made. Donations must be made by Dec. 31 to be deductible in 2017.



Want to give this year? Here’s what you need to know

Giving on a yearly basis could trim both your estate and income taxes. First, there’s the annual exclusion for gifts. Currently, you can give $14,000 annually to any number of recipients without paying federal gift tax. Married couples can double this amount by gift-splitting – a gift of $28,000 from one spouse is treated as if it came half from each.

Why giving is a two-way street

Gifts do more than help out children who need the money. They also reduce your estate so your estate will pay less estate tax upon your death. Apart from annual gift giving, you can currently transfer (during your lifetime or through your estate) a total of $5.49 million with no estate or gift tax liability. On amounts above this threshold, you or your estate will be faced with taxes at the current top rate of 40 percent. So a consistent program of annual gift giving might create substantial tax savings.

Note that gifts to individuals do not entitle you to an income tax deduction. A gift isn’t a charitable contribution. Conversely, a gift doesn’t constitute taxable income to the recipient. Gifts of income-producing property may, however, reduce your taxable income. Once you’ve given the property away, the recipient (not you) receives the income it produces and pays any income tax due on it.

Giving can be easy

One advantage to annual gift giving is that it is relatively simple to do, especially if you’re giving away cash. Another advantage is flexibility. You’re not locked into anything; you can see how much you can afford to give away each year. You can give away anything – cash, stock, art, real estate, etc. Valuation is the fair market value on the date of the gift. Subsequent appreciation, if any, belongs to the recipient’s estate (not yours).

Before you give away assets, be sure you will not need them yourself to provide income in later years. Consider the impact inflation will have on your resources.

Proper planning is essential in this area; get professional assistance before you do any gift giving. Contact our office if we can help.



2018 IRS identity theft protection

In an ongoing effort to fight identity theft, the IRS announced it will incorporate a new verification code box on all official Forms W-2 in 2018. Taxpayers preparing their own returns and tax professionals will be asked to include a 16-digit code. This extra authentication step is just one of many new protections the IRS has created for the upcoming filing season.



Tax reform: what is proposed?

There is now a ton of media chatter about the recently introduced federal tax reform package being passed around in Washington, D.C. While it’s still early in the process, here are some of the key elements of the current proposal.

For individuals:

  • Individual tax rate brackets trimmed to three rates of 12, 25 and 35 percent, down from the current seven brackets.
  • Nearly doubling the standard deduction, to $12,000 for individuals and $24,000 for joint filers.
  • Eliminating all but two itemized deductions: home mortgage interest and charitable deductions.
  • Eliminating personal exemptions for dependents, but increasing the Child Tax Credit.
  • Repealing the estate tax.
  • Repealing the Alternative Minimum Tax (AMT).

For businesses:

  • Cutting the top corporate tax rate to 20 percent from 38 percent.
  • Capping at 25 percent the tax rate for pass-through corporations including sole proprietorships, partnerships and S corporations (down from the current 39.6 percent max).
  • Shifting international taxation to a territorial system, encouraging U.S. corporations to repatriate earnings from foreign subsidiaries.
  • Allowing full expensing of business investments, rather than the standard depreciation model.

It’s not official yet

Please recall that much needs to occur before any tax reform proposal makes its way into law. There is sure to be much discussion over a few points, including:

  • The current proposal does not account for how any federal revenue shortfall created by this reform will be addressed, nor how it will impact government spending.
  • Many constituents will battle to retain their deductions. For example, being able to deduct state and local taxes on a federal return is very important for residents of high-tax states such as New York and California.
  • With the elimination of so many deductions and the increase in the standard deduction, fewer taxpayers may decide to use itemized deductions if this reform is passed. This could impact the value of the home mortgage interest and charitable contribution deductions.
  • Taxpayers in the lowest income bracket see their rate rise to 12 percent from 10 percent. The proposal authors say this will be offset by the higher standard deduction.

Action required?

Given the Republicans’ slim margin of seats in both the House and the Senate, any defection within their ranks could derail this legislation. This was the fate of the health care reform bill earlier this year. Because of this, the best course of action is to wait and see. Whatever ends up happening in Washington, rest assured that you’ll be informed of what you need to know, and help will be available to review any of the changes as they impact your situation.