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Changes in Individual Tax Deductions 2019

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New tax law changes2019 tax filing season is well under way and BGMF CPAs have been planning and working diligently to prep for the incoming tax documents and ensuring we’re well educated on the new tax laws for your benefit.

For individuals we wanted to provide a refresher of the changes related to the new tax laws to help you prepare accordingly not only for tax filing, but for 2020 tax planning.

The recently enacted tax reform law made some significant changes to the system of income tax deductions used by consumers. Here are highlights of the changes.

The standard deduction is increased.

The standard deduction has grown. Because of the significant increases, many taxpayers who formerly itemized their deductions may now benefit from the standard deduction instead.

 

Changes in Standard Deductions
Filing Status Old Law New Law
Single $6,500 $12,000
Married filing jointly $13,000 $24,000
Head of Household $9,550 $18,000
Married filing separately $6,500 $12,000

The deduction for state and local taxes is reduced.

For those who itemize their deductions, the maximum amount permitted for all state and local taxes (SALT) combined is $10,000 per year ($5,000 for married individuals filing separately). How the new limit affects you will depend on your specific situation. If you live in a high-tax state, you may see much of your SALT deduction reduced, and that could mean that itemizing deductions is no longer the better option.

The mortgage interest deduction has a lower cap.

For mortgage debt incurred after December 15, 2017, you may only deduct interest on debt value up to $750,000 ($375,000 for married individuals filing separately). Previously, the limit was $1 million. For home equity debt, the deduction for interest is suspended through 2025, unless the proceeds are used to buy, build, or substantially improve the home that secures the loan.

Casualty and theft losses are not now generally deductible.

Beginning this year, only losses that occur as the result of a federally-declared disaster may be deducted. Formerly, casualty and theft losses had generally been deductible to the extent they exceeded 10% of adjusted gross income (AGI).

Miscellaneous itemized deductions are suspended.

Various miscellaneous expenses, such as unreimbursed employee business expenses and tax preparation expenses, were formerly deductible as an itemized deduction to the extent they totaled more than 2% of the taxpayer’s AGI. The new law suspends the deduction for these expenses.

Charitable contributions are still deductible if you itemize.

Cash contributions will now be allowed up to 60% of the taxpayer’s “contribution base,” up from 50%. A taxpayer’s contribution base is generally equal to AGI exclusive of any net operating loss carryback for the year. This change will affect only those taxpayers who contribute a significant proportion of their income to charity.

Medical expense rules become more generous.

Taxpayers with substantial medical expenses who also itemize can now deduct unreimbursed medical expenses in excess of 7.5% of their AGI, down from the deductibility threshold of 10% previously.

Moving expenses lose their tax advantage.

The deduction for qualified moving expenses, which can be claimed even if a taxpayer doesn’t itemize, has been suspended, except for members of the Armed Forces on active duty (provided certain conditions are met).

The alimony deduction for payers is eliminated.

The tax treatment of alimony payments will change significantly under the new law. Such payments will no longer deductible by the payer (and the recipient will no longer be required to include the alimony in income). The change applies to alimony paid under any divorce or separation agreement executed after December 31, 2018.

Note that some of these provisions are scheduled to sunset in 2019 or 2026 unless Congress acts to extend them. Talk to one of our tax advisors to see how the law may ultimately impact your situation.

Now is a great time to consider buying rental real estate or starting or buying a business to take advantage of other aspects of the new tax laws. Contact us today to set up a time to discuss these strategies.

BGMF in the News 2020

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BGMF CPAs team of Bill Groeber, Christiann Arimany and Joe Collinsworth recently sat down with the Springfield News-Sun to share with the community that Bill is entering his 50th tax season.

He was kind enough to share some of his insights over the years, changes he’s witnessed and we provided some tips on how to keep your personal information safe and what to do with regards to IRS scams.

Click here to view the Springfield News-Sun Article with BGMF

Below are some additional insights related to fraud and scams:

  1. Phone scams. The IRS will not start with a call nor threaten/demand payment.
  2. Phishing scams. Typically these come in the form of emails wanting you to click a link to provide information. The IRS won’t email.
  3. Phony letters. The IRS tends to begin correspondence with a letter and now scammers are utilizing fake letters to taxpayers.
  4. False tax returns & promises. Scammers will file false tax returns under your social security number to get the refund.
  5. False tax preparers. They will promise large refunds by inflating deductions/credits and charge large fees.
  6. False charities. You may receive a phone call or email requesting donations.

Tips to Avoid Potential Scams or Fraud:

  1. Never give out social security number, bank information or other personal information.
  2. Don’t engage on the phone or respond to emails (do not click on the links).
  3. Utilize reputable preparers and verify organizations you donate to.
  4. If you receive a potential scam call, email, or letter talk with your advisor immediately.
  5. Consider credit monitoring if concerned about identity theft.
  6. Contact the IRS and authorities.
  7. Protect your personal information both at home and when in public.
  8. Change your passwords often and use strong, unique passwords.

This is not an exhaustive list and protecting your identity is becoming more important.  Contact our firm today for tax preparation services or if you have concerns related to scams or fraud so we can assist you in dealing with these matters.

Do You Need to File Information Returns?

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Do you need to file information returns or are you expecting to receive these forms to file your taxes? Every January we receive a series of questions related to the requirement to file information returns and what qualifies.

Below is an overview of whether you should prepare and remit information returns or if you should plan to receive one prior to filing.

If you made or received a payment in a calendar year as a small business or self-employed individual, you most likely are required to file an information return to the IRS.  BGMF CPAs assists clients in preparing the necessary forms to ensure compliance with the IRS.  Contact us if you need help in January with form filings or have questions.

If you engaged in certain financial transactions during the calendar year as a small business or self-employed (individual), you are most likely required to file an information return to the IRS.

Below are some of the transactions that you have to report.

  • Services performed by independent contractors — those not employed by your business.
  • Prizes and awards, as well as certain other payments — termed other income.
  • Rent.
  • Royalties.
  • Backup withholding or federal income tax withheld.
  • Payments to physicians, physicians’ corporation or other suppliers of health and medical services.
  • Substitute dividends or tax-exempt interest payments, and you are a broker.
  • Crop insurance proceeds.
  • Gross proceeds of $600 or more paid to an attorney.
  • Interest on a business debt to someone (excluding interest on an obligation issued by an individual.
  • Dividends and other distributions to a company shareholder.
  • Distribution from a retirement or profit plan, or from an IRA or insurance contract.
  • Payments to merchants or other entities in settlement of reportable payable transactions — any payment card or third-party network transaction.

Review the IRS guide to information returns.

Being in receipt of a payment may also require you to file an information return. Some examples include:

  • Payment of mortgage interest (including points) or reimbursements of overpaid interest from individuals.
  • Sale or exchange of real estate.
  • You are a broker and you sold a covered security belonging to your customer.
  • You are an issuer of a security taking a specified corporate action that affects the cost basis of the securities held by others.
  • You released someone from paying a debt secured by property, or someone abandoned property that was subject to the debt or otherwise forgave their debt to you (1099-C).
  • You made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than in a permanent retail establishment.

Keep in mind that information is for businesses and not all types of business entities are required to receive various information returns. You will not have to file an information return if you are not engaged in a trade or business. You also will not have to file an information return if you are engaged in a trade or business and 1) the payment was made to another business that’s incorporated, but wasn’t for medical or legal services or 2) the sum of all payments made to the person or unincorporated business was less than $600 in one tax year.

In addition, a question that arises often is what if I don’t receive a 1099 for income earned because it was less than the thresholds?  The answer is you are still required to report the income on your tax return whether you receive an information form (i.e. 1099-Misc) or not.

Finally, if your company does business in a foreign country, has a bank account or assets outside the United States, there may be additional informational filing requirements that must be completed. The new tax laws brought many changes to foreign filing requirements.

This is just an introduction to a complicated topic, and the mechanics of filing such a return are filled with essential details. If you’re running a business, even a small one, be sure to discuss the details with one of our qualified professionals today!

Tax Planning and Strategies to Pay Less Tax

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tax saving strategiesYear-end is upon us again! Time to celebrate the holidays with family and friends, set those new year resolutions and of course do some tax planning!

Is tax planning a must? That is an excellent question and depends on your strategy to expand and grow your business and wealth.  BGMF CPAs always recommends tax planning in your strategy.

Waiting to plan when you file your taxes is not a good course of action. There isn’t much to do at that point to ensure you don’t overpay. It’s your money, not the governments and the tax law is written primarily to reduce your taxes.

Taxes are stealing your money (sometimes up to 50% or more), time and future so now is the time to stop the bleeding. Ever wonder where your money goes? We’ve seen a lot of changes in tax laws the last decade and we find that many tend to ignore the realities. This is due to a variety of factors, such as not understanding the tax code and how to make it work for them or trying to plan alone.

I’ll have you consider that the tax law is a map to vast amounts of wealth. If you follow the law carefully, you will be shocked to uncover secrets within the code which can allow you to amass huge amounts of cash flow and wealth.  The reason for this relates back to the government wanting the economy to grow through investment and spending in various sectors.

What you make is important, but even more so is what you keep. That is where your advisors come into play. A high-quality advisor will help you navigate the tax code to keep more of your hard-earned money and make better investment decisions.

Taxes Are a Major Expense & What You Can Do to Save

Consider that taxes are one of your biggest expenses and too many people ignore taxes in their strategy. When you meet with our tax planning team, we’ll look at a variety of factors, but we’ve boiled tax savings into a few different categories; type of taxpayer, changing the year, type of income, changing the deductions.

As a business owner or investor, we’ll review entity structure and if changing the taxpayer makes sense (i.e. switch to a C Corporation). We’ll also consider the year in which income and expenses occur to plan accordingly for deductions and credits. In addition, we’ll review type of income and deductions that are either being taken or not utilized.  For example, are you truly taking advantage of all expenses that could be considered legitimate business deductions (i.e. travel, home office)?

As an individual, we’ll review your overall situation to determine where you can save in taxes. In addition, we’ll review any major changes in your life such as getting married, having children, buying a home, college planning, divorce, retirement or other.  We’ll also discuss potential opportunities that may not be as apparent such as areas to invest, starting a business or taking advantage of deductions and credits that you may be missing.

We also work with your other advisors so everyone on your team is working in unison to keep money in your pocket.

How to Hire a Tax Advisor

When hiring an advisor to review tax planning with you, beware of those who promise to lower your taxes and cross the line to cheating.  There are plenty of legal ways to reduce taxes with the right plan.

Tax advisors and CPAs come with a variety of skill sets and beware of advisors who aren’t willing to understand the code to utilize the tax saving strategies available. Ask a lot of questions and ensure you’re comfortable and confident with the team you’re working with.

In summary, we’ll leave you to consider this – taxes are unique to each individual and based on your specific facts and circumstances. Change those and you will change your tax!

In other posts, we’ll provide specific tax saving strategies, but this overview of why tax planning is important will help you take the right steps prior to year end to ensure you have the opportunity to save in taxes now!

Call us at 937-325-0623 x5 or

Schedule a consult with one of our advisors today

Taxes Need Year Round Attention

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tax planningGiving your taxes your full attention just once a year isn’t the best business or individual strategy.

Experts suggest that a year-round approach is better for your finances, unless of course you like paying more in taxes than you must!

Numerous tax experts agree that addressing your tax liability effectively requires planning throughout the year. Those business owners who reap the most benefits consider their taxes year-round, rather than waiting to focus on tax payments just a few weeks before the filing date.

With proper tax planning as part of your wealth strategy, you and your CPA will devise a plan to help you not only make money, but keep it as well. The IRS code is partially written on how to file and pay taxes, yet the majority is written on how to legally reduce taxes. This allows you to make better investment decisions.

A typical small business qualifies for roughly a dozen tax deductions. For example, you may be able to claim deductions on the following:

  • Cars operated for business purposes
  • Business-related travel and entertainment expenses
  • Purchases of office supplies, furniture, equipment, and software programs
  • Telephone expenses
  • Contributions toward insurance policies, retirement plans, and pension funds
  • Home office
  • Hiring children
  • Cost segregation

It’s surprising how many small businesses never take advantage of these (and other non-listed) deductions, mainly because they suffer from the “tax-planning-happens-but-once-a-year” syndrome. To fully benefit from these deductions, it’s important to maintain your expense records throughout the year.

It’s also important to meet with your CPA on a regular basis to discuss planning and set up proper strategies for your situation. There are advanced tax strategies that can be uncovered when you and your accountant can sit down and review all details.

Your goal should be to reduce your tax liabilities by retaining records of your purchases and determining the proportion of business costs in combined expenses. By monitoring your expenses closely all year, you can analyze each expense for its tax impact as it’s made. Additionally, smart business owners should contemplate three key steps to tax planning:

1. Invest in the most effective tax and accounting record tools for your business. Whether it’s spending a few dollars on journals or tax books with a set of refill sheets to do manual tracking (or utilize excel) or investing in the latest online software applications, you will benefit from more rigorous and accurate recordkeeping.

Sure, the initial investment could be significant, but regular monitoring should facilitate tracking expenses and making advance payments, which will save you money in the long run. This tips goes for both individuals tracking their personal finances and businesses needing an accounting software and remember businesses can deduct these expenses as they are necessary.

2. Determine when you need professional tax tips and planning advice. At times you will be able to justify paying for professional tax services, particularly if you need advice on unclear requirements in tax laws that could be in your favor.

To prevent unnecessary complications and aggravations, you must avoid violating tax laws that may be applicable to your small business. If you are unsure of these laws, using the tools at your disposal, such as current software and online recordkeeping, and complementing those capabilities with professional advice when needed, can help you keep your taxes under control.

You will know when you need help. Our CPA’s and tax preparers are trained to also know when you may require additional planning. When going through your tax information for preparation it’s not a bad idea to ask questions to understand where opportunities lie to save in taxes.

3. Establish year-round tax planning goals. A good tax-planning strategy will help you accomplish some of these goals:

  • Reduce the amount of taxable income
  • Claim any available tax credits
  • Lower your tax rate
  • Control the time when taxes must be paid
  • Avoid the most common tax-planning mistakes

Plus, a year-end review at the end of your fiscal year or “busy season” can be most effective if you’ve maintained clear records and an understanding of your financial position throughout the year.

When you meet with BGMF CPAs we may recommend monthly, quarterly or annual tax planning sessions to ensure you are taking advantage of every tax saving opportunity available. We set this based on your unique situation and whether you or your business needs planning more often rather than once per year.  Waiting until tax filing season may be too late to take advantage of the various tax savings strategies.

Click here to schedule a consultation to learn the best ways to evaluate the impact of taxes throughout the year.

Tax Planning for College

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college tax planningIt is never too early to prepare and go through the process of tax planning for college.

It’s no secret that a college education is expensive. Average annual charges for tuition, fees, and room and board at four-year public colleges and universities stood at $20,770 for in-state students and $36,420 for out-of-state students (this was averages for the 2017-2018 school year.)

Average charges were $46,950 at four-year private colleges and universities.1 Based on historical trends, these costs are likely to increase in the future.

Parents who are intimidated by these figures should realize that the expenses at most colleges and universities are generally less than the quoted prices. There are scholarships, grants, and work-study programs available that can soften the financial impact of a college education.

Parents should take the time to look into the various tax benefits that can help reduce the costs of sending a child to college. Getting an early start on tax planning for college expenses can help reduce some of the anxiety surrounding the whole issue of trying to figure out how to pay for college. Here are some areas worth further investigation.

Savings Programs

Parents have several education savings opportunities that come with built-in tax benefits. Section 529 plans have grown in popularity over the years, but Coverdell education savings accounts also offer valuable tax benefits.

Section 529 Savings Plans

Section 529 college savings plans* are specifically designed for educational saving. You can invest a little at a time or contribute a larger lump sum, whatever approach works best for you. You choose how you want your contributions invested; your plan investments are then professionally managed. These plans offer several features that parents may find appealing:

  • Investment earnings accumulate tax deferred and won’t be subject to federal income taxes when withdrawn for your child’s qualifying educational expenses. (Excess withdrawals are subject to tax and a potential 10% penalty.)
  • Some states offer their residents tax incentives for investing in an in-state plan. For example, Ohio gives up to a $4,000 deduction for each child’s 529 plan contributed to during the year.
  • As a parent, you retain control of the money in the account even after the child turns 18.
  • If your child does not attend college or deplete the fund, you can change the account beneficiary to another qualifying family member without losing tax benefits.

Coverdell Education Savings Accounts

Annual contributions to these accounts are limited to $2,000 per child. This maximum phases out (is gradually reduced to zero) for taxpayers with modified adjusted gross income (AGI) between $95,000 and $110,000 (between $190,000 and $220,000 for joint filers).

Your contributions accumulate tax deferred at the federal level and earnings are tax-free when used for qualified educational expenses such as tuition, room and board, and books. If you make withdrawals from the account for non-educational expenses, the earnings portion of the withdrawal may be subject to federal income tax and an additional 10% penalty.

IRAs

Another college planning option may be to discuss if opening a Roth IRA would make the most sense. Roth IRA contributions are post tax and offers special withdrawal rules for higher education.

Similar to other college savings plans, the earnings will grow tax-free and with a Roth you will have more flexibility on how the money is utilized (for example, if your child doesn’t need the money for college you can continue to invest in the Roth for the future).

Roth IRAs do not get tax benefits similar to other college savings plans and you will want to understand how financial aid views a Roth IRA for planning purposes.  Roth IRA contributions have income limitations as well that you should know.

It’s best to sit down with your advisors to determine which vehicle makes the most sense for your situation.

Scholarships

Young adults who demonstrate high academic promise or who possess certain desirable skills may receive scholarships that can defray a percentage of the cost of attending college. Scholarships are generally exempt from income tax if the scholarship is not compensation for services and is used for tuition, fees, books, supplies, and similar items (and not for room and board).

Tuition Tax Credits

A tax credit gives you a dollar-for-dollar reduction against the taxes you owe the IRS. The following two education tax credits can help eligible parents alleviate the costs of educating a child.

American Opportunity Tax Credit (AOTC)

This credit is worth up to $2,500 per year for each eligible student in your family. It’s for the payment of tuition, required enrollment fees, and course materials for the first four years of post-secondary education. The credit is allowed for 100% of the first $2,000 of qualifying expenses, plus 25% of the next $2,000. Were the credit to exceed the amount of tax you owe, you may be eligible for a refund of up to 40% of the credit. The available credit is phased out for single taxpayers with modified AGI between $80,000 and $90,000, and for married couples with modified AGI between $160,000 and $180,000.

Lifetime Learning Credit (LLC)

This credit can be as much as $2,000 a year (per tax return) for the payment of tuition and required enrollment fees at an eligible educational institution. It is calculated as 20% of the first $10,000 of expenses. You cannot claim the credit for a student if you are claiming the AOTC for the student that year. Unlike the AOTC, qualified expenses for the LLC do not include academic supplies and no portion of the credit is refundable. The LLC is phased out (in 2018) for single taxpayers with modified AGI between $57,000 and $67,000, and for married couples with modified AGI between $114,000 and $134,000.

Student Loan Interest Deduction

A tax deduction lowers your tax liability by reducing the amount of income on which you pay tax. You can deduct interest on qualified loans you take out to pay for your child’s post-secondary education. The maximum deduction is $2,500 per year, but it phases out for taxpayers who are married filing jointly with AGI between $135,000 and $165,000 (between $65,000 and $80,000 for single filers). The deduction is available even if you don’t itemize deductions on your return.

*Certain 529 plan benefits may not be available unless specific requirements (e.g., residency) are met. There also may be restrictions on the timing of distributions and how they may be used. Before investing, consider the investment objectives, risks, and charges and expenses associated with municipal fund securities. The issuer’s official statement contains more information about municipal fund securities, and you should read it carefully before investing.

College Funds Held in Each Account

529 Plans 30%
General Savings Accounts 22%
Investment Accounts 14%
Checking Accounts 8%
Prepaid State Plan 8%
Certificate of Deposit 5%
Other 13%

Don’t put this off until it’s too late. Set up a time to talk with one of our advisors to get started on the right path for tax planning and college.

Source/Disclaimer:

1 Trends in College Pricing 2017, The College Board, 2017