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The New Estate Tax – Time to Revisit Your Plan?

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Estate TaxesTongue-in-cheek conversations love to make jokes about death and taxes as being the two only certain things in life. Well ironically, on the surface anyway, the new, colloquially termed “death tax” flies in the face of this popular “accepted truism” – well, almost.

Stripping the latest Estate Tax Law (effective January 2018) down to its nuts and bolts, we see that any single taxpayer who calculates his or her assets to be under $11.2 million can cast all worries to the wind – at least for the next 8 years. Thinking a little wider, a married couple has a clear runway if their estate is valued under $22.4 million. After that, the terrain gets decidedly more uninviting, allowing the IRS to potentially grab a flat 40% of estate value above the restated threshold.

Let’s be clear, room under the newly raised tax barrier has been improved by some 100% versus where it was in 2017 (i.e. it was $5.4 million and $10.8 million for a single-payer and married couple, respectively), which in anyone’s language is no mean concession. It was a bumper move make no mistake, and possibly a first decisive step in the Trump Administration’s determination to eradicate death taxes altogether. However, this particular tax item has been around for donkey’s years and its stubborn reluctance to leave the stage forever, and in every way, is simply not happening.

Statistically speaking there is no doubt the case can be made for the new threshold (all but) killing death taxes. Last year, and for some time before that, 2 in every 100 tax-paying families (a reliable estimate) were caught up in the estate tax net. The 2018 proclamation whittles it down to 1 in every 1000.

When paradigm shifts like this hit the ranks of the rich, especially the uber-rich, there are invariably a number of curved balls being launched in different spots. One of these affects families now facing estate valuations between the new and old yardsticks. More often than not an irrevocable trust is somewhere in the mix from years back, and this means it has built-in inflexibility. The thing is, it becomes one big head-scratcher when one tries to re-introduce assets back into the estate (to take advantage of the higher limit) extracted from a structure that’s purposely designed to be rigid.

Another one takes aim at the time-aged estate plans that have combined themselves with generation-skipping transfers and gifting options. The chances are that the new laws have moved the goalposts to a place not all that appealing to either the surviving spouse or the children/grandchildren. This flows straight into the next bump in the road – spending money on revising an estate plan that looked good for so many years. No longer is this cost tax deductible, but considering what’s at the stake here the $2000 – $10,000 tax accountant’s fee may be the best money you spend in 2018.

Some tax authorities are slamming the new Estate Tax as ill-planned and lacking foresight. The big fly in the ointment is the sunset clause, which taxpayers close to the new or old estate value tax limits should pay attention to. Things are touch-and-go when you consider that that there’s probably a huge assessed tax difference (in the multi-millions) between the surviving spouse dying in 2026 or just one year later. Throw in the intermingling of the estate tax with gift tax and generational skipping and it puts all these items on the proverbial chopping block. Some estate plan moderation at the very least is on the cards, and perhaps a complete renovation in cases.

If ever there was a time to make an appointment with your tax team to look at estate planning, it’s now. The variables that are pushing and shoving the comfort zone back and forth have to be addressed in the most emphatic way. Our professional experts are geared and ready to get into your corner and make any needed transition as painless as possible.

Learn more about BGMF CPAs trust and estate tax services and how we can assist you through this complex process.

Home Office Deduction

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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

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Home mortgage interest deductionWe 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.

 

Is a Sole Proprietor the Best Option

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sole proprietorSole Proprietor versus Other Entity Structures…

Are you thinking of starting a business or currently operating as a sole proprietor? We want you to consider this may not be a viable option for your business moving forward.

Below are a few reasons why being a sole proprietor is a poor choice for operating your business and we want to explain why and help you understand how to solve this problem.

One major reason is you’ll be personally liable if an accident were to occur. Let us tell you a story of how this would work in real life…

Consider you have recently opened a small boutique in your town that you’ve dreamed of your entire life.  You’ve saved, planned and now the dream is finally coming to fruition.  You’ve waited for the day you could quit your job and do something you were passionate about knowing you could add more value to others.

Start-up capital is tight due to initial expenses during the opening. You decide to go against advice and not form an entity (even a simple LLC) to save money and figure you would do this once you had revenue. It’s your grand opening and you are excited to finally throw open your doors with a big smile and welcome the public into what you’ve put your blood, sweat and money into over the previous months.

Not a half hour into your opening someone slips and falls hurting themselves in your shop. You feel horrible for this person and do what you can to help them get immediate assistance. You go out of your way to ensure they’re alright. Unfortunately, a few days later you are served with a lawsuit because of this incident and before you know you are nearly out of business before it truly began.

Listen, you may be saying that’s not my type of business. We appreciate that thought, but there are additional reasons why operating this type of entity is a poor choice.

Let’s discuss those reasons now…

  1. You put everything you own at risk if a lawsuit or judgement arises against the business.
  2. You will pay self-employment tax at 15.3% on the taxable income from the business.
  3. By operating in this manner, you aren’t building credit for the business.
  4. You are more likely to be audited compared to other entity structures, especially if you are running at a loss (thereby risking hobby loss rules).
  5. Based on the new 20% qualified business deduction, you are subject to phaseouts if your taxable income is above $315K.

Forming an LLC is one great option to pursue, but you will be taxed (if it is just one member) the same as a sole proprietor. This will give you asset protection, but you’ll have to deal with the other four issues.

Please note, this isn’t always the worst way to operate and we analyze that when we sit down with you to discuss your business that allow you to make decisions based on facts and figures.

If you would like to discuss starting a business, review your current operations or get help setting up the proper entity, please contact our of business advisors today!

How to Choose the Right Business Entity

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business structureCritical Choices: How the Business Entity You Select Impacts Your Taxes and Business Decisions

Entrepreneurs have a long list of special opportunities to save on taxes. However, your eligibility for some tax breaks depends on the decisions you make as you are planning and launching your business. One of the most critical choices is which business entity you will operate under.

The Amazon Best Selling book, The Great Tax Escape, walks you through each of your options, spelling out the benefits and drawbacks of the most common business structures. Although you can determine this on your own, you may want to consult an advisor to discuss the pros and cons of each type of entity.

Business Entity Basics

It’s no surprise that you must pay taxes on any income your business generates, but you might not realize that the same income can be taxed differently depending on how your business is organized. While some types of businesses are considered separate taxpayers from their owners, others require that you include your business income on your personal tax returns.

Your tax rates aren’t the only thing impacted by your choice of business entity. The structure you select affects whether you are personally responsible for business debts and whether you can be held personally liable if the business is sued.

When your business exists as a separate entity, the business itself can apply for credit, and these types businesses can continue to operate when you decide to move on or retire.  During this process there is more to consider than just taxes so you don’t want to take this lightly.

These are a few of the most common options:

Sole Proprietorships and Partnerships

When you are starting out and working alone, it is easy to operate as a sole proprietorship. Essentially, you and your business are one and the same for tax and legal purposes. Simply register your business name with the state, and you are ready to launch. You can still have employees as a sole proprietor, but you own the entire company.

The simplicity of this structure makes it quite popular, but it isn’t always the best choice for entrepreneurs. Business income is treated the same way as other personal income for tax purposes, and you assume full liability for all business debts and legal issues. That puts your personal assets at risk.

Though there is slightly more paperwork involved, a partnership is quite similar to a sole proprietorship. Taxes and legal liability are the responsibility of all partners, and partners can be sued individually or collectively for the actions of one business owner.

Operating out of these types of structures could cost you thousands in unwanted taxes each year. This is why we recommend doing your research so you aren’t giving your hard-earned money away.

Limited Liability Companies (LLC)

It is common to see the initials LLC after many small and medium-sized business names, and there is a good reason for that. LLCs offer business owners many of the protections that larger corporations enjoy, without the complexity and cost associated with incorporation.

With LLCs, business owners are considered separate from the business itself for the purpose of taxation and legal liability. This can lead to significant tax savings, and it protects personal assets from business-related debts and lawsuits.

Of course, setting up an LLC is more complicated than operating as a sole proprietor, so some entrepreneurs choose to hold off on this step until the business begins to be profitable. Your choice of business entity can dramatically impact your bottom line tax bill, and it will affect your long-term level of risk as the organization grows.

Depending on your situation there are more decisions when operating as an LLC that can be considered to save in taxes. This is something our firm analyzes for each company.

In Summary

This is a very high level overview of how to choose an entity. We haven’t even covered incorporating or electing to be an S Corporation. With the new tax laws in place the review of entity selection has been an important part of discussions and planning.

Whether you own a start-up or a company that has been around, this topic has become critical to review and analyze.

If you are starting a company, want to consider the differences in each type of entity as it relates to your business or analyze your current company to determine if you need to consider a switch to a different entity, please contact us today!

2018 Tax Changes: FAQ’s

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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.