Header Right

Tax

Time to Check Your Withholding

by

check tax withholdingIn light of the tax law changes made by the Tax Cuts and Jobs Act of 2017, it may be an appropriate time for taxpayers to review their withholding.

Changes to the tax rates and brackets, the removal of personal exemptions and certain other deductions, the new limit on the deduction for state and local taxes, and various other modifications may have a significant impact on personal income tax liabilities.

BGMF CPAs offers tax planning services to clients to properly strategize and save in taxes.  Like many taxpayers found out during tax filing season, their withholding was lower than expected, resulting in lower refunds or a tax bill. At a minimum we recommend reviewing your withholding to ensure you’re not surprised next tax filing season.

The IRS offers workers the opportunity to perform a quick “paycheck checkup” to make sure they have the right amount of tax withheld from their paychecks. The IRS Withholding Calculator can be found at http://irs.gov/individuals/irs-withholding-calculator.

Getting it right is important since you could face an unexpected tax bill or penalty at tax time next year if you have too little tax withheld. Or, if you have too much tax withheld, you may be eligible for a tax refund. Many people see a large tax refund as a plus — but in reality a large tax refund is effectively an interest-free loan of taxpayer money to the IRS. A better approach may be to have less tax withheld up front and receive more in your paycheck. That way, the extra money would be available to save or invest, pay down debt, or spend as you see fit.

The withholding calculator can help you figure out if you need to give your employer a new Form W-4, Employee’s Withholding Allowance Certificate. Your results from the calculator can be used to help you fill out the form and adjust your income tax withholding.  If you prefer not to calculate this yourself we’re glad to help. Please contact us today to start that conversation.

Steps to Take

The key is to plan ahead. Before you access the calculator and start entering data, the IRS suggests that you:

  • Have your most recent pay stubs within reach.
  • Have a copy of your most recent income tax return available. A copy of your completed Form 1040 can assist you in estimating your 2019 income and identifying other items that may affect your tax.

The IRS cautions that the calculator’s results will only be as accurate as the information you enter. If there is a change to your circumstances during the year, you will have to use the calculator again to ensure that your withholding is still correct.

Moreover, the IRS withholding calculator may not work for those with more complex tax situations. Taxpayers who owe self-employment tax, alternative minimum tax, the tax on unearned income of dependents, or certain other taxes, and those with long-term capital gain or qualified dividends should use the instructions in Publication 505, Tax Withholding and Estimated Tax.

If you have questions about your withholding or would like assistance with analyzing your tax situation, consult with your tax advisor.  We’re available all year around to answer your questions.

Tax Deductions When Traveling for Business and Pleasure

by

business travel and taxBusiness owners who travel out of town on business sometimes like to extend their trips and take a little time to relax and see the sights. When a trip is partly for business and partly for pleasure, various expenses may still be deductible.

Domestic Travel

A self-employed individual whose trip is primarily for business may deduct the full cost of the travel itself (such as airfare or train fare) even though some of the trip is devoted to personal activities.1 Additionally, various other expenses allocable to business, such as lodging and 50% of meal costs incurred on the business days, are deductible.

There needs to be a legitimate business purpose for each person taking the trip for there to be a write-off.  For example, if your spouse or kids travel with you, the cost of their travel may not be deductible if they are not involved in the business.

In addition, you may have to allocate a portion of the trip when both business and personal activities are intertwined.How do you maximize your deductions when traveling? Easy! Turn more days into business days. Consider getting your spouse and kids involved and find ways to conduct business-related matters.  Ultimately, you’ll have to demonstrate how the activities performed helped your business.

If a trip is primarily for personal reasons, the entire cost of the travel is a nondeductible personal expense. However, expenses incurred while at the destination that are directly related to the taxpayer’s business may be deducted.

For example, if you travel to Disney with your family and set up a couple of lunch meetings with clients in the area, the cost of the meals could be deductible as a business expense. The trip to Disney would be non-deductible.

Foreign Travel

The deductibility rules for combined business/pleasure trips outside of the U.S. are a little more complicated in some respects. Even if the primary purpose of the trip is business, the cost of the travel itself generally has to be allocated, and only the business portion is deductible. However, no allocation has to be made — and the full travel cost is deductible — if:

  • The trip lasts for no more than seven consecutive days (excluding the day of departure but including the day of return); or
  • Personal days total less than 25% of the total days spent on the trip (including both the day of departure and the day of return); or
  • The taxpayer can establish that the opportunity to take a personal vacation was not a major consideration for the trip.
  • For these purposes, business days include days when business is conducted for only part of the day, days spent traveling to and from a business destination, and weekend days or holidays that fall between two business days.

As this brief overview suggests, with smart planning, self-employed business owners can maximize their write-offs for combined business/pleasure travel.

Contact us today to discuss how we can help you maximize your deductions and limit your tax liability with proper planning.

Source/Disclaimer:

1Under The Tax Cuts and Jobs Act of 2017, employees may no longer deduct unreimbursed employee business expenses as a miscellaneous deduction, effective with the 2018 tax year.

Tax Strategies for Retirees

by

retirement tax strategies

Now that the 2018 tax filing season is partially behind us, our Springfield, OH CPA firm is starting to review tax strategies for a variety of groups, including retirees at varying stages of their retirement.

As the dust settles, we continue to dive deeper into how the new tax laws are impacting individuals.

Nothing in life is certain except death and taxes. — Benjamin Franklin

That saying still rings true roughly 300 years after the former statesman coined it. Yet, by formulating a tax-efficient investment and distribution strategy, retirees may keep more of their hard-earned assets for themselves and their heirs. Here are a few suggestions for effective money management during your later years.

Less Taxing Investments

Municipal bonds, or “munis,” have long been appreciated by retirees seeking a haven from taxes and stock market volatility. In general, the interest paid on municipal bonds is exempt from federal taxes and sometimes state and local taxes as well (see table).1 The higher your tax bracket, the more you may benefit from investing in munis.

Also, consider investing in tax-managed mutual funds. Managers of these funds pursue tax efficiency by employing a number of strategies. For instance, they might limit the number of times they trade investments within a fund or sell securities at a loss to offset portfolio gains. Equity index funds may also be more tax efficient than actively managed stock funds due to a potentially lower investment turnover rate.

It’s also important to review which types of securities are held in taxable versus tax-deferred accounts. Why? Because the maximum federal tax rate on some dividend-producing investments and long-term capital gains is 20%.3 In light of this, many financial experts recommend keeping real estate investment trusts (REITs), high-yield bonds, and high-turnover stock mutual funds in tax-deferred accounts. Low-turnover stock funds, municipal bonds, and growth or value stocks may be more appropriate for taxable accounts.

The Tax-exempt Advantage: When Less May Yield More
Would a tax-free bond be a better investment for you than a taxable bond? Compare the yields to see. For instance, if you were in the 25% federal tax bracket, a taxable bond would need to earn a yield of 6.67% to equal a 5% tax-exempt municipal bond yield.
Federal Tax Rate 12% 22% 24% 32% 35% 37%
Tax-exempt Rate Taxable-equivalent Yield
4% 4.55% 5.13% 5.26% 5.88% 6.15% 6.35%
5% 5.68% 6.41% 6.58% 7.35% 7.69% 7.94%
6% 6.82% 7.69% 7.89% 8.82% 9.23% 9.52%
7% 7.95% 8.97% 9.21% 10.29% 10.77% 11.11%
8% 9.09% 10.26% 10.53% 11.76% 12.31% 12.70%
The yields shown above are for illustrative purposes only and are not intended to reflect the actual yields of any investment.

Which Securities to Tap First?

Another major decision facing retirees is when to liquidate various types of assets. The advantage of holding on to tax-deferred investments is that they compound on a before-tax basis and therefore have greater earning potential than their taxable counterparts.

On the other hand, you’ll need to consider that qualified withdrawals from tax-deferred investments are taxed at ordinary federal income tax rates of up to 37%, while distributions — in the form of capital gains or dividends — from investments in taxable accounts are taxed at a maximum 20%.* (Capital gains on investments held for less than a year are taxed at regular income tax rates.)

For this reason, it’s beneficial to hold securities in taxable accounts long enough to qualify for the favorable long-term rate. And, when choosing between tapping capital gains versus dividends, long-term capital gains are more attractive from an estate planning perspective because you get a step-up in basis on appreciated assets at death.

It also makes sense to take a long view with regard to tapping tax-deferred accounts. Keep in mind, however, the deadline for taking annual required minimum distributions (RMDs).

The Ins and Outs of RMDs

The IRS mandates that you begin taking an annual RMD from traditional individual retirement accounts (IRAs) and employer-sponsored retirement plans after you reach age 70½. The premise behind the RMD rule is simple — the longer you are expected to live, the less the IRS requires you to withdraw (and pay taxes on) each year.

RMDs are now based on a uniform table, which takes into consideration the participant’s and beneficiary’s lifetimes, based on the participant’s age. Failure to take the RMD can result in a tax penalty equal to 50% of the required amount. Tip: If you’ll be pushed into a higher tax bracket at age 70½ due to the RMD rule, it may pay to begin taking withdrawals during your sixties.

Unlike traditional IRAs, Roth IRAs do not require you to begin taking distributions by age 70½.2 In fact, you’re never required to take distributions from your Roth IRA, and qualified withdrawals are tax free.2 For this reason, you may wish to liquidate investments in a Roth IRA after you’ve exhausted other sources of income. Be aware, however, that your beneficiaries will be required to take RMDs after your death.

Estate Planning and Gifting

There are various ways to make the tax payments on your assets easier for heirs to handle. Careful selection of beneficiaries of your accounts is one example. If you do not name a beneficiary, your assets could end up in probate, and your beneficiaries could be taking distributions faster than they expected. In most cases, spousal beneficiaries are ideal because they have several options that aren’t available to other beneficiaries, including the marital deduction for the federal estate tax.

Also, consider transferring assets into an irrevocable trust if you’re close to the threshold for owing estate taxes. In 2018, the federal estate tax applies to all estate assets over $11.2 million. Assets in an irrevocable trust are passed on free of estate taxes, saving heirs thousands of dollars. Tip: If you plan on moving assets from tax-deferred accounts, do so before you reach age 70½, when RMDs must begin.

Finally, if you have a taxable estate, you can give up to $15,000 per individual ($30,000 per married couple) each year to anyone tax free. Also, consider making gifts to children over age 14, as dividends may be taxed — or gains tapped — at much lower tax rates than those that apply to adults. Tip: Some people choose to transfer appreciated securities to custodial accounts (UTMAs and UGMAs) to help save for a grandchild’s higher education expenses.

Strategies for making the most of your money and reducing taxes are complex. Your best recourse? Plan ahead and consider meeting with a competent tax advisor, an estate attorney, and a financial professional to help you sort through your options.

BGMF CPAs can provide the resources you’ll need to plan properly moving forward.  Contact our team today!

Source/Disclaimer:

1Capital gains from municipal bonds are taxable, and interest income may be subject to the alternative minimum tax.

2Withdrawals prior to age 59½ are generally subject to a 10% additional tax.

3Income from investment assets may be subject to an additional 3.8% Medicare tax, applicable to single-filer taxpayers with modified adjusted gross income of over $200,000 and $250,000 for joint filers.

Home Office Deduction

by

Home office deductionDo you take advantage of the home office deduction?

Under the new tax laws, with the increased standard deduction where many taxpayers won’t obtain deductions for their mortgage interest and real estate taxes, they can potentially take advantage of a portion of those deductions against their business income.

If you haven’t considered this deduction due to being informed this was a red flag with the IRS or other factors, you should re-consider your position.

Working from home can potentially deliver some attractive tax advantages. If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home.

Direct expenses are costs that apply only to your home office. The cost of painting your home office is an example of a direct expense. Indirect expenses are costs that benefit your entire home, such as rent, deductible mortgage interest, real estate taxes, and homeowner’s insurance. You can deduct only the business portion of your indirect expenses.

What Space Can Qualify?

Your home office could be a room in your home, a portion of a room in your home, or a separate building next to your home that you use to conduct business activities. To qualify for the deduction, that part of your home must be one of the following:

Your principal place of business. This requires you to show that you use part of your home exclusively and regularly as the principal place of business for your trade or business.

A place where you meet clients, customers, or patients. Your home office may qualify if you use it exclusively and regularly to meet with clients, customers, or patients in the normal course of your trade or business.

A separate, unattached structure used in connection with your trade or business. A shed or unattached garage might qualify for the home office deduction if it is a place that you use regularly and exclusively in connection with your trade or business.

A place where you store inventory or product samples. You must use the space on a regular basis (but not necessarily exclusively) for the storage of inventory or product samples used in your trade or business of selling products at retail or wholesale.

Note: If you set aside a room in your home as your home office and you also use the room as a guest bedroom or den, then you won’t meet the “exclusive use” test.

Simplified Option

If you prefer not to keep track of your expenses, there’s a simplified method that allows qualifying taxpayers to deduct $5 for each square foot of office space, up to a maximum of 300 square feet.

The home office deduction can help reduce your tax liability as long as you follow the regulations. In today’s marketplace many individuals are running businesses from home. This reason and the new tax laws make this potential deduction more viable in your tax strategy.

Contact our firm today to review if you’re taking advantage of all deductions available to you!

Home Equity Loan Interest Deduction

by

Home mortgage interestWe have received a lot of questions asking if home equity interest is still deductible. This article should help you answer that question…

Most of us will agree that our biggest investment is in our home. So, it shouldn’t surprise you that your house or condo is your first port-of-call whenever there’s a need to borrow money. And the easiest way to draw funds against the security of real estate is by arranging a Home Equity Loan.

Home Equity funding helps us in important ways:

  • Number one, the interest rates payable on this type of loan are arguably the lowest available.
  • Secondly, you can get the cash working for you quickly with the least bother, paperwork and tedious protocol.
  • Then there’s the third big reason: help from Uncle Sam.

Up to now all interest payments on a Home Equity Loan were tax-deductible (barring the prior tax law thresholds). It made borrowing almost a no-brainer! Who wouldn’t opt for already-low interest rates to be pulled even lower? Benefits like this are rare in our modern world where it seems like everything, including financing fees, are only going up.

Well, it’s time for a retake on the “Uncle Sam thing”: the new taxation laws as per the Tax Cuts and Jobs Act of 2017, enacted in December of the same year, have removed some delectable treats from the traditional “Home Equity feast”.

Is it likely to change your borrowing behavior anytime soon? No, but it should give you pause. There’s a certain logic to it that really can’t be argued with. Here are the new Home Equity items to keep in mind:

  • The amount you can borrow is tied to the value of the residence, be it a primary or secondary home. The I.R.S. has decided that your total loan value cannot be more than the assessed value of the asset as a start.
  • And in combination with all other mortgages cannot exceed $750,000 (down from prior law). So Home Equity lending is not the bottomless well some may believe it to be.
  • Tax breaks haven’t disappeared but at the same time, they simply are not what they used to be. Any Home Equity draws you make from now on have to be used to build, renovate or essentially improve your residence to qualify the interest payable on them for a tax deduction.

So on this last point, for example: if you use your new funds to pay off student loans, reduce your credit card debt or splurge it on a vacation, nobody is going to stop you. What they are going to stop is anyone claiming tax relief for this type of expenditure for the foreseeable future.

TD Bank in a survey points out that 32% of Home Equity Lending fits the new definition for deductibility. Looking at it from the other side, 68% of the tax deductions we took for granted for so long now fall away. That said, we all know that there’s no substitute for smart thinking to make the most of new terms and conditions.

In addition, a high percentage of taxpayers who are used to itemizing their deductions (where you would deduct the interest), will potentially not itemize going forward due to the increased standard deduction.

Finally, the limitations do not relate to rental properties. Interest on loans are still fully deductible against rental income.

So don’t hesitate to consult with our professional tax team when it comes to making your Home Equity decisions, or to clarify your thinking on any tax matter. We often see benefits buried under the “strict letter of the law” – we could make a difference.

 

Filed Under: Tax

2018 Tax Changes: FAQ’s

by

2018 tax changesThe Tax Cuts and Jobs Act (TCJA) raises many questions for taxpayers looking to plan for the coming year.

Below are answers to some of them to consider as we close out 2018.

Do I need to adjust my withholding allowances, given that tax brackets have changed?

You may notice a change in your net paycheck as a result of the tax law, which alters tax rates, brackets, and other items that affect how much tax is withheld from your pay. The IRS has already issued new withholding tables, and your employer should adjust its withholding without requiring any action on your part. But you may want to take the opportunity to make sure you are claiming the appropriate number of withholding allowances by filling out IRS Form W-4. This form is used to determine your withholding based on your filing status and other information. The IRS suggests that you consider completing a new Form W-4 each year and when your personal or financial situation changes.

Can I take advantage of the new deduction for pass-through business income?

The new rules for owners of pass-through entities — partnerships, limited liability companies, S corporations, and sole proprietorships — allow them to deduct 20% of their business pass-through income. The 20% deduction is available to owners of almost any type of trade or business whose taxable income does not exceed $315,000 (joint return) or $157,500 (other returns). Above those amounts, the deduction is subject to certain limitations based on business assets and wages. Different deduction restrictions apply to individuals in specified service businesses (e.g., law, medicine, and accounting).

Can I still deduct mortgage interest and real estate taxes paid on a second home?

Yes, but the new rules limit these deductions. The deduction for total mortgage interest is limited to the amount paid on underlying debt of up to $750,000 ($375,000 for married individuals filing separately). Previously, the limit was $1 million. Note that the new restriction will not apply to taxpayers with home acquisition debt incurred on or before December 15, 2017. Additionally, the deduction for interest on home equity loans (new and existing) is suspended and will not be available for tax years 2018-2025.

Note that the law also establishes a $10,000 limit on the combined total deduction for state and local income (or sales) taxes, real estate taxes, and personal property taxes. As a result, your ability to deduct real estate taxes may be limited.

Are there any changes to capital gains rates and rules that I should know about?

The rules concerning how capital gains are determined and taxed remain essentially unchanged. But since short-term gains (for assets held one year or less) are taxed as ordinary income, they will be taxed at the new ordinary income rates and brackets. Net long-term gains will still be taxed at rates of 0%, 15%, or 20%, depending on your taxable income. And the 3.8% net investment income tax that applies to certain high earners will still apply for both types of capital gains.

2018 Long-Term Capital Gains Breakpoints

Rate Single Filers Joint Filers Head of Household Married Filing Separately
0% Below $38,600 Below $77,200 Below $51,700 Below $38,600
15% $38,600-$425,799 $77,200-$478,999 $51,700-$452,399 $38,600-$239,499
20% $425,800 and above $479,000 and above $452,400 and above $239,500 and above

Can I still deduct my student loan interest?

Yes. Although some earlier versions of the tax bill disallowed the deduction, the final law left it intact. That means that student loan borrowers will still be able to deduct up to $2,500 of the interest they paid during the year on a qualified student loan. The deduction is gradually reduced and eventually eliminated when modified adjusted gross income reaches $80,000 for those whose filing status is single or head of household, and over $165,000 for those filing a joint return.

I have a large family and formerly got to take an exemption for each member. Is there anything in the new law that compensates for the loss of these exemptions?

The new law suspends exemptions for you, your spouse, and dependents. In 2017, each full exemption translated into a $4,050 deduction from taxable income which, for large families, added up. Compensating for this loss, the new law almost doubles the standard deduction to $12,000 for single filers and $24,000 for joint filers. Additionally, the child tax credit is doubled to $2,000 per child, and the income levels at which the credit phases out are significantly increased. Depending on your situation, these new provisions could potentially offset the suspension of personal exemptions.

I have been gifting friends and relatives $14,000 per year to reduce my taxable estate. Can I still do this?

Yes, you may still make an annual gift of up to $15,000 in 2018 (increased from $14,000 in 2017) to as many people as you want without triggering gift tax reporting or using any of your federal estate and gift tax exemption. But TCJA also doubles the exemption to an estimated $11.2 million ($22.4 million for married couples) in 2018. So anyone who anticipates having a taxable estate lower than these thresholds may be able to gift above the annual $15,000 per-recipient limit and ultimately not incur any federal estate or gift tax. Note, however, that the higher exemption amount and many of TCJA’s other changes to personal taxes are scheduled to expire after 2025, unless Congress acts to extend them.

There were a lot of changes that will create tax planning opportunities for the current year and future years. If you want to discuss your particular situation in depth to understand how you will be impacted and what you can do to minimize your tax liability, contact us today.

This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax circumstances are different. You should contact your tax professional to discuss your personal situation.

Filed Under: Tax