Personal Tax

The 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.

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

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.

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.

Although there are only a few weeks left in the year, it’s not too late to implement some planning moves to reduce this year’s taxes.

Save Bunches by Bunching

Beginning in 2018, many taxpayers who used to itemize in prior years will no longer do so because of the substantial increase in the standard deduction.

Example: In 2017, Fred and Wilma have charitable contributions of $5,000, mortgage interest of $12,000, property and property taxes of $6,000 for total itemized deductions of $23,000.  Since their total itemized deductions of $23,000 exceed their $12,700 standard deduction, they will itemize.

In 2018, the standard deduction for a married couple is increased to $24,000.  If they have the same itemized deductions in 2018, they will claim the standard deduction of $24,000 since this exceeds their itemized deductions of $23,000. 

The bunching strategy involves incurring itemized deductions every other year rather than annually.  The benefit of this strategy is more easily explained with an example:

In 2018, Fred and Wilma double their normal charitable contribution of $5,000 and make a $10,000 charitable contribution.  They will not make a charitable contribution in 2019 (they are bunching two years of charitable donations in 2018).  Their itemized deductions are:  $10,000 of charity, $12,000 of mortgage interest, and $6,000 of property taxes for total itemized deductions of $28,000.  Since this exceeds the $24,000 standard deduction, they will itemize.  In 2019, they will take the $24,000 standard deduction.  The total deductions over the two years is $52,000 ($28,000 itemized deduction in 2018 plus $24,000 standard deduction in 2019).  If they continued to make $5,000 charitable contributions per year, then their itemized deductions would always be less than their standard deduction of $24,000 per year. 

The benefit of this strategy is that they deduct $52,000 over two years with the bunching strategy rather than claiming the standard deduction of $24,000 per year (i.e., deducting $48,000 over two years).  The additional $4,000 deducted over two years is roughly a $1,000 reduction in tax.  They will once again bunch their charitable donations in 2020 and skip the donation in 2021.

Combine Bunching with Qualified Charitable Distributions

Taxpayers who have reached age 70½ who own IRAs and are thinking of making a charitable gift should consider making the donation through a qualified charitable IRA distribution—this is a DIRECT transfer from the IRA trustee to the charity.  Such a transfer (not to exceed $100,000 per year) will neither be included in taxable income nor allowed as a deduction.

The benefits of this strategy are:

• AGI is not increased for purposes of the phaseout of any deduction, exclusion, or tax credit
• The distribution qualifies as a required minimum distribution
• It is not subject to the AGI phaseout of charitable contributions
• the taxpayer does not need to itemize to claim the charitable deduction (which is now more difficult due to the increased standard deduction)

To qualify, the distribution must be a direct transfer from the IRA trustee to the charity.  If a taxpayer first takes an IRA distribution and then contributes it to a charity, the donation will not qualify as a qualified charitable distribution.  It is also important that the taxpayer NOT receive anything in exchange for the contribution from the charity as this could also disqualify qualified charitable distribution treatment.

Make HSA Contributions

If you have a high deductible health insurance policy, you may qualify for deductible contributions to a Health Savings Account.  A deductible above-the-line deduction of $3,450 for individual coverage and $6,900 for family coverage can be made as late as the original due date (generally April 15) of the tax year.  For example, you can deduct an HSA contribution on April 15, 2019 on your 2018 tax return.  If you are age 55 or above, you can contribute an additional $1,000 per year.

Nail Down Investment Losses

If you have paper losses on stocks it may make sense to sell the investments before year end to generate a deductible capital loss.  The same investment can then be re-purchased at least 31 days later.  This way, the taxpayer can realize her investment loss for tax purposes but still retain the same, or approximately the same, investment position.  It is critical to wait at least 31 days before re-purchasing the stock to avoid the wash sale rules.  These rules disallow losses on investments if the same or substantially similar investment is purchased within 30 days of the loss sale.

Capital losses reduce capital gains and can offset up to $3,000 of ordinary income per year.  Excess capital losses are carried forward to future tax years.

Source/Disclaimer:

This communication is not intended to be tax advice and should not be treated as such. You should contact your tax professional to discuss your specific situation.

Curcuru & Associates, CPA PLC, offers a variety of tax planning services to both businesses and individuals. Proactive tax planning now can save you money and make tax time a breeze. Call us at 248-538-5331 and request a free initial consultation to learn more.

The tax deduction available for making a charitable donation of property may be no more than the fair market value of the property on the date of the gift. Fair market value is the price that a willing buyer and seller would agree to when neither is required to act and both have reasonable knowledge of the relevant facts.

The IRS lists several factors that may be considered in determining fair market value.*

Cost or selling price can be an accurate measure of fair market value when the transaction and the donation dates are close and there has been no change that would affect the item’s value.

Sales of comparable properties may be useful for determining value where the properties sold and the property donated are similar and the sales occurred reasonably close in time to the date of the donation.

Replacement cost may be a good indicator of value in some situations, provided that depreciation is subtracted from the cost to reflect the property’s physical condition and obsolescence.

Expert opinion is relevant to the extent the expert has the appropriate education and experience and has thoroughly analyzed the transaction.

* IRS Publication 561, Determining the Value of Donated Property

Who Qualifies as an Appraiser?

Generally, where a charitable deduction of more than $5,000 is claimed for donated property, the IRS requires a qualified appraisal by a qualified appraiser. A qualified appraiser is someone who:

• Has earned an appraisal designation from a recognized professional organization or has met certain education and experience requirements

• Regularly prepares appraisals for a fee

• Is not an “excluded individual,” such as the donor, the donee, or a party to the transaction in which the donor acquired the property being appraised (Other exclusions apply.)

The qualified appraisal must be signed and dated and can be made no earlier than 60 days before the valued property is donated.

To learn more about tax rules and regulations for donations, give us a call today. Our knowledgeable and trained staff is here to help.

Everyone makes mistakes, but making a mistake on your income-tax return can cost you. It could delay your refund, boost your tax bill, require an amended return or even trigger an audit. Before you submit your return electronically or put it in the mail, double-check to make sure you haven’t made any errors.

Simple slip ups

Many tax-return mistakes are simple ones. Ensure that you’ve entered the correct name, address and Social Security number for every person listed on your return. Another frequent error is to enter the right information on the wrong line. So it pays to go through your return line by line.

Clear up confusion

It’s important that you use the right filing status. If you’re not sure which filing status is right for you, use the interactive tool “What is My Filing Status?” on www.irs.gov. You can also check the IRS website to figure out who you can claim as a dependent. Once you determine who qualifies as your dependent(s), verify that you have checked the appropriate exemption boxes for your personal, spousal and dependency exemptions.

Correctly calculate credits and deductions

If you’re claiming any credits, such as the dependent care credit, you need to follow the instructions carefully. And check that you have completed the necessary forms or schedules. If you’re taking the standard deduction, verify that you are claiming the correct one. You can use the chart in the Form 1040 Instructions or use the interactive tool “How Much is My Standard Deduction?” on www.irs.gov.

Check your math

It’s very easy and common to make simple math errors while preparing your tax return. It’s a good idea to double-check that you’ve added and subtracted all numbers correctly and that you haven’t transposed any numbers. Ensure that you used the right column on the tax table when figuring out your tax.

Final details matter

Don’t be in such a rush to finish your return that you forget a few final, simple steps. If you’re filing a paper return, verify that you (and your spouse if it’s a joint return) have signed and dated the return. Attach Copy B of each Form W-2 that you received from your employers. Attach each Form 1099-R that shows federal tax withholding. And attach all other necessary schedules and forms in sequence number order. Make a copy of the return and all attachments for your own records. Use the correct mailing address from your tax form instructions, and include a check or money order if you owe tax. And, finally, check that you put sufficient postage on your envelope.

Connect with our team today for all the latest and most current tax rules and regulations.

Any deductible expense is useful because it reduces the amount of income subject to tax. But for individual taxpayers, deductions that can be claimed in arriving at adjusted gross income (AGI) — referred to as “above-the-line” deductions — are especially significant. By lowering AGI, above-the-line deductions increase your chances of qualifying for various other deductions and credits.

Alimony. Generally, payments are deductible if they were made in cash pursuant to a divorce or separation instrument. Other requirements may apply.  As part of the Tax Cuts & Jobs Act, the taxation of alimony will change for divorce or separation agreements entered into after 2018.  For these agreements, alimony will no longer be deductible by the payer and will be tax-free to the recipient.

Traditional IRA contributions. Contributions of up to $5,500 ($6,500 for individuals age 50 or older) to a traditional individual retirement account (IRA) are potentially deductible on your 2017 return. AGI-based limitations apply if you (or your spouse) are an active participant in an employer-sponsored retirement plan.

Rental property/trade or business expenses. Expenses associated with property held for the production of rents are deductible above the line on Schedule E, whereas sole proprietors deduct their trade or business expenses above the line on Schedule C.

Student loan interest. Taxpayers may deduct up to $2,500 of interest expense on qualified higher education loans, though phaseouts apply to those at higher levels of modified AGI.

Moving expenses. Subject to certain requirements, a taxpayer who moves as a result of a change in his or her principal place of work may deduct certain costs of moving and traveling to the new residence.  2017 is the last year this deduction will be allowed–it was eliminated as part of the Tax Cuts & Jobs Act.

Health savings account contributions. The 2017 deduction limits are $3,400 for those with self-only coverage under an eligible high-deductible health plan and $6,750 for those with family coverage. An additional $1,000 deduction is available to those 55 and older who are not enrolled in Medicare.

Self-employed taxpayers. The self-employed also may be able to deduct retirement plan contributions, qualified health insurance premiums, and a portion of their self-employment taxes.

For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.