Saturday, February 16, 2019

Deduction for Student Loan Interest

Can you deduct the interest you pay on your college loans? The answer is yes, subject to certain limits. The maximum amount of student loan interest you can deduct each year is $2,500. The deduction is phased out if your adjusted gross income (AGI) exceeds certain levels, as explained below.

The interest must be for a "qualified education loan," which means a debt incurred to pay tuition, room and board, and related expenses to attend a post-high school educational institution, including certain vocational schools. Certain post-graduate programs also qualify. Thus, an internship or residency program leading to a degree or certificate awarded by an institution of higher education, hospital, or health care facility offering post-graduate training can qualify.

It doesn't matter when the loan was taken out or whether interest payments made in earlier years on the loan were deductible or not.

For 2018, the deduction is phased out for taxpayers who are married filing jointly with AGI between $135,000 and $165,000 ($65,000 and $80,000 for single filers). The deduction is unavailable for taxpayers with AGI of $165,000 ($80,000 for single filers) or more.

Married taxpayers must file jointly to claim this deduction.

No deduction is allowed to a taxpayer who can be claimed as a dependent on another's return. For example, in the typical situation where a parent is paying for the college education of a child whom the parent is claiming as a dependent, the interest deduction is only available for interest the parent pays on a qualifying loan, not for any interest the child/student may pay on a loan the student may have taken out. The child will be able to deduct interest that is paid in a later year when he or she is no longer a dependent.

The deduction is taken "above the line." In other words, it's subtracted from gross income to determine AGI. Thus, it's available even to taxpayers who don't itemize deductions.

Other requirements. The interest must be on funds borrowed to cover qualified education costs of the taxpayer or his spouse or dependent. The student must be a degree candidate carrying at least half the normal full-time workload. Also, the education expenses must be paid or incurred within a reasonable time before or after the loan is taken out.

Taxpayers must keep records to verify qualifying expenditures. Documenting a tuition expense isn't likely to pose a problem. However, care should be taken to document other qualifying education-related expenditures such as for books, equipment, fees, and transportation.

Documenting room and board expenses should be straightforward for students living and dining on campus. Student who live off campus should maintain records of room and board expenses, especially when there are complicating factors such as roommates.

Please contact us if you would like assistance in determining whether you qualify for this deduction or if you have any questions about it.

Tuesday, January 22, 2019

Child Tax Credit Changes & New Dependent Credit due to the Tax Cuts and Jobs Act

Under pre-Act law, the child tax credit was $1,000 per qualifying child, but it was reduced for married couples filing jointly by $50 for every $1,000 (or part of a $1,000) by which their adjusted gross income (AGI) exceeded $110,000. (The threshold was $55,000 for married couples filing separately, and $75,000 for unmarried taxpayers.) To the extent the $1,000-per-child credit exceeded your tax liability, it resulted in a refund up to 15% of your earned income (e.g., wages, or net self-employment income) above $3,000. For taxpayers with three or more qualifying children, the excess of the taxpayer's social security taxes for the year over the taxpayer's earned income credit for the year was refundable. In all cases the refund was limited to $1,000 per qualifying child.

Starting in 2018, the Tax Cuts and Jobs Act, or TCJA, doubles the child tax credit to $2,000 per qualifying child under 17. It also allows a new $500 credit (per dependent) for any of your dependents who are not qualifying children under 17. There is no age limit for the $500 credit, but the tax tests for dependency must be met. Under the TCJA, the refundable portion of the credit is increased to a maximum of $1,400 per qualifying child. In addition, the earned income threshold is decreased to $2,500 (from $3,000 under pre-Act law), which has the potential to result in a larger refund. The $500 credit for dependents other than qualifying children is nonrefundable.

The TCJA also substantially increases the "phase-out" thresholds for the credit. Starting in 2018, the total credit amount allowed to a married couple filing jointly is reduced by $50 for every $1,000 (or part of a $1,000) by which their AGI exceeds $400,000 (up from the pre-Act threshold of $110,000). The threshold is $200,000 for all other taxpayers. So, if you were previously prohibited from taking the credit because your AGI was too high, you may now be eligible to claim the credit.

In order to claim the credit for a qualifying child, you must include that child's Social Security number (SSN) on your tax return. Under pre-Act law you could also use an individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN). If a qualifying child does not have an SSN, you will not be able to claim the $2,000 credit, but you can claim the $500 credit for that child using an ITIN or an ATIN. The SSN requirement does not apply for non-qualifying-child dependents, but you must provide an ITIN or ATIN for each dependent for whom you are claiming a $500 credit.

The changes made by the TCJA should make these credits more valuable and more widely available to many taxpayers. If you have children under 17, or other dependents, and would like to determine if these changes can benefit you, please contact us.

Wednesday, December 12, 2018

Year-End Tax Planning 2018

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Year-end planning for 2018 takes place against the backdrop of a new tax law - the Tax Cuts and Jobs Act - that make major changes in the tax rules for individuals and businesses.

We have compiled a checklist of actions based on current tax rules that may help you save tax dollars if you act before year-end.

Year-End Tax Planning Moves for Individuals

...Higher-income earners must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount. As year-end nears, a taxpayer's approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, while others should try to see if they can reduce MAGI other than NII.

...Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer's taxable income. The 0% rate generally applies to the excess of long-term capital gain over any short term capital loss to the extent that it, when added to regular taxable income, is not more than the "maximum zero rate amount" (e.g., $77,200 for a married couple). If the 0% rate applies to long-term capital gains you took earlier this year, try not to sell assets before year-end yielding a capital loss, because the losses that offset the gains won't yield a benefit. And if you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains sheltered by the 0% rate.

...Postpone income until 2019 and accelerate deductions into 2018 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2018 that are phased out over varying levels of adjusted gross income (AGI). Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.

...It may be advantageous to try to arrange with your employer to defer, until early 2019, a bonus that may be coming your way. This could cut as well as defer your tax.

...Beginning in 2018, many taxpayers who claimed itemized deductions year after year will no longer be able to do so. This is because the basic standard deduction has been increased and many itemized deductions have been cut back or abolished. If you are not sure if this will affect you, contact us for help in determining how these changes will impact you.

...Some taxpayers may be able to work around the new reality by applying a "bunching strategy" to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, if a taxpayer knows he or she will be able to itemize deductions this year but not next year, the taxpayer may be able to make two years' worth of charitable contributions this year, instead of spreading out donations over 2018 and 2019.

...If you expect to owe state and local income taxes when you file your return next year and you will be itemizing in 2018, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2018. But remember that state and local tax deductions are limited to $10,000 per year, so this strategy is not a good one to the extent it causes your 2018 state and local tax payments to exceed $10,000.

...Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-½. (That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire.) Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn.

...If you are age 70-½ or older by the end of 2018, have traditional IRAs, and particularly if you can't itemize your deductions, consider making 2018 charitable donations via qualified charitable distributions from your IRAs. Such distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A. But the amount of the qualified charitable distribution reduces the amount of your required minimum distribution, resulting in tax savings.

...Consider increasing the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year.

...If you become eligible in December of 2018 to make health savings account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for 2018.

...Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $15,000 made in 2018 to each of an unlimited number of individuals.


Year-End Tax-Planning Moves for Businesses & Business Owners

...For tax years beginning after 2017, taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2018, if taxable income exceeds $315,000 for a married couple filing jointly, or $157,500 for all other taxpayers, the deduction may be limited in certain situations.

…Taxpayers may be able to achieve significant savings by deferring income or accelerating deductions so as to come under the dollar thresholds for 2018. Depending on their business model, taxpayers also may be able increase the new deduction by increasing W-2 wages before year-end. The rules are quite complex, so don't make a move in this area without consulting your tax adviser.

...More "small businesses" are able to use the cash (as opposed to accrual) method of accounting in 2018 and later years than were allowed to do so in earlier years. To qualify as a "small business" a taxpayer must, among other things, satisfy a gross receipts test. Effective for tax years 2018 and later, the gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts don't exceed $25 million (previously $5 million). Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings until next year or by accelerating expenses by paying bills early or by making certain prepayments.

...Businesses should consider making expenditures that qualify for the liberalized business property expensing option (Section 179 deduction). For tax years beginning in 2018, the expensing limit is now $1,000,000, and the investment ceiling limit is $2,500,000. Expensing is generally available for most depreciable property (other than buildings), off-the-shelf computer software, qualified improvement property, roofs, HVAC, fire protection, alarm, and security systems. Many small and medium sized businesses that make timely purchases will be able to currently deduct most, if not all, of their outlays for machinery and equipment. The expensing deduction is not prorated for the time that the asset is in service during the year. Thus, property acquired and placed in service in the last days of 2018 can result in a full expensing deduction for 2018.

...Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment bought used (with some exceptions) or new, if purchased and placed in service this year. The 100% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2018.

...Businesses may be able to take advantage of the de minimis safe harbor election to expense the costs of lower-cost assets and materials and supplies, assuming the costs don't have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. Where the UNICAP rules aren't an issue, consider purchasing such qualifying items before the end of 2018.

...To reduce 2018 taxable income, consider disposing of a passive activity in 2018 if doing so will allow you to deduct suspended passive activity losses.

These are just some of the year-end steps that can be taken to save taxes. By contacting us, we can tailor a particular plan that will work best for you.

Thursday, December 6, 2018

Year-End Tax Planning for an Individual’s Capital Gains and Losses

Year-end is a good time to engage in planning to save taxes by carefully structuring your capital gains and losses.

Let's consider some possibilities if you have losses to date. For example, suppose you lose money in the stock market this year and have other investment assets that have appreciated in value. You should consider the extent to which you should sell, before the end of this year, appreciated assets (if you think their value has peaked) and thereby offset gains with pre-existing losses.

Long-term capital losses offset long-term capital gains before they offset short-term capital gains. Similarly, short-term capital losses offset short-term capital gains before they offset long-term capital gains. Remember you may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing your adjusted gross income or AGI.

Individuals are subject to tax at a rate as high as 37% on short-term capital gains and ordinary income. But long-term capital gains on most types of investment assets receive favorable treatment. They are taxed at rates ranging from zero to 23.8% depending on an individual's taxable income (inclusive of the gains).

All of this means that you should try to avoid having long-term capital losses offset long-term capital gains since those losses will be more valuable if they are used to offset short-term capital gains or up to $3,000 per year of ordinary income. This requires making sure that the long-term capital losses are not taken in the same year as the long-term capital gains are taken. However, this is not just a tax issue, you also need to consider investment factors. You wouldn't want to defer recognizing gain until the following year if there's too much risk that the property's value will decline before it can be sold. Similarly, you wouldn't want to risk increasing a loss on property that you expect will continue to decline in value by deferring its sale until the following year.

To the extent that taking long-term capital losses in a different year than long-term capital gains is consistent with good investment planning, you should take steps to prevent those losses from offsetting those gains.

If you have yet to realize net capital losses for this year, but expect to realize net capital losses next year well in excess of the $3,000 ceiling, you should consider shifting some of the excess losses into this year. That way the losses can offset current gains and up to $3,000 of any excess loss will become deductible against ordinary income this year.

For the reasons outlined above, paper losses or gains on stocks may be worth recognizing this year in some situations. But suppose the stock is also an attractive investment worth holding for the long term. There is no way to precisely preserve a stock investment position while at the same time gaining the benefit of the tax loss, because the "wash sale" rule precludes recognition of loss where substantially identical securities are bought and sold within a 61-day period (30 days before or 30 days after the date of sale). Thus, you can't sell stock to establish a tax loss and simply buy it back the next day. However, you can substantially preserve an investment position while realizing a tax loss by using one of these techniques:

·         Sell the original holding and then buy the same securities at least 31 days later. The risk is upward price movement.

·         Buy more of the same stocks or bonds, then sell the original holding at least 31 days later. The risk here is downward price movement.

·         Sell the original holding and buy similar securities in different companies in the same line of business. This approach trades on the prospects of the industry as a whole, rather than the particular stock held.

·         For mutual fund shares, sell the original holding and buy shares in another mutual fund that uses a similar investment strategy.

As we have shown, careful handling of your capital gains and losses can save you substantial amounts of tax. Please contact us so that we can help you to realize maximum tax savings from these and other year-end planning strategies.

Wednesday, November 21, 2018

New Paid Family & Medical Leave Credit from the Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act introduces a new component credit for paid family and medical leave, i.e. the paid family and medical leave credit, which is available to eligible employers for wages paid to qualifying employees on family and medical leave. The credit is available as long as the amount paid to employees on leave is at least 50% of their normal wages and the leave payments are made in employer tax years beginning in 2018 and 2019. That is, under the Act, the new credit is temporary and won't be available for employer tax years beginning in 2020 or later unless Congress extends it further.

For leave payments of 50% of normal wage payments, the credit amount is 12.5% of wages paid on leave. If the leave payment is more than 50% of normal wages, then the credit is raised by .25% for each 1% by which the rate is more than 50% of normal wages. So, if the leave payment rate is 100% of the normal rate, i.e. is equal to the normal rate, then the credit is raised to 25% wages paid on leave. The maximum leave allowed for any employee for any tax year is 12 weeks.

Eligible employers are those with a written policy in place allowing (1) qualifying full-time employees at least two weeks of paid family and medical leave a year, and (2) less than full-time employees a pro-rated amount of leave. Qualifying employees are those who have (1) been employed by the employer for one year or more, and (2) who, in the preceding year, had compensation not above 60% of the compensation threshold for highly compensated employees. Paid leave provided as vacation leave, personal leave, or other medical or sick leave is not considered family and medical leave.

If you wish to discuss any of these credits in more detail and the options you may have for your business, please contact us.

Wednesday, October 31, 2018

New Qualified Business Income Deduction from the Tax Cuts and Jobs Act

A significant new tax deduction taking effect in 2018 under the new tax law should provide a substantial tax benefit to individuals with "qualified business income" from a partnership, S corporation, LLC, or sole proprietorship. This income is sometimes referred to as "pass-through" income.

The deduction is 20% of your "qualified business income (QBI)" from a partnership, S corporation, or sole proprietorship, defined as the net amount of items of income, gain, deduction, and loss with respect to your trade or business. The business must be conducted within the U.S. to qualify, and specified investment-related items are not included, e.g., capital gains or losses, dividends, and interest income (unless the interest is properly allocable to the business). The trade or business of being an employee does not qualify. Also, QBI does not include reasonable compensation received from an S corporation, or a guaranteed payment received from a partnership for services provided to a partnership's business.

The deduction is taken "below the line," i.e., it reduces your taxable income but not your adjusted gross income. But it is available regardless of whether you itemize deductions or take the standard deduction. In general, the deduction cannot exceed 20% of the excess of your taxable income over net capital gain. If QBI is less than zero it is treated as a loss from a qualified business in the following year.

Rules are in place (discussed below) to deter high-income taxpayers from attempting to convert wages or other compensation for personal services into income eligible for the deduction.

For taxpayers with taxable income above $157,500 ($315,000 for joint filers), an exclusion from QBI of income from "specified service" trades or businesses is phased in. These are trades or businesses involving the performance of services in the fields of health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners.

Additionally, for taxpayers with taxable income more than the thresholds noted previously, a limitation on the amount of the deduction is phased in based either on wages paid or wages paid plus a capital element.

Other limitations may apply in certain circumstances, e.g., for taxpayers with qualified cooperative dividends, qualified real estate investment trust (REIT) dividends, or income from publicly traded partnerships.

The complexities surrounding this substantial new deduction can be formidable, especially if your taxable income exceeds the threshold discussed above. If you wish to work through the mechanics of the deduction, with particular attention to the impact it can have on your specific situation, please contact us.

Friday, October 19, 2018

Tax Aspects of a Parent Entering a Nursing Home

If you have a parent who may need to enter a nursing home in the near future, you may have questions about medical expenses, insurance, or other related issues. These matters and other tax aspects which you should consider in connection with your parent entering a nursing home are discussed below.

The costs of qualified long-term care, including nursing home care, are deductible as medical expenses to the extent they, along with other medical expenses, exceed 7.5% of adjusted gross income (AGI) for 2018.

Qualified long-term care services are necessary for diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance or personal-care services required by a chronically ill individual (as certified by a physician or other licensed health-care practitioner) provided under a plan of care presented by a licensed health-care practitioner.

Premiums paid for a qualified long-term care insurance contract are deductible as medical expenses (subject to an annual premium deduction limitation based on age, as explained below) to the extent they, along with other medical expenses, exceed the %-of-AGI threshold. A qualified long-term care insurance contract is insurance that covers only qualified long-term care services, doesn't pay costs that are covered by Medicare, is guaranteed renewable, and doesn't have a cash surrender value. A policy isn't disqualified merely because it pays benefits on a per diem or other periodic basis without regard to the expenses incurred.

Qualified long-term care premiums are includible as medical expenses up to the following dollar amounts: For individuals over 60 but not over 70 years old, the 2018 limit on deductible long-term care insurance premiums is $4,160, and for those over 70, the 2018 limit is $5,200.

Amounts paid to a nursing home are fully deductible as a medical expense if the person is staying at the nursing home principally for medical, rather than custodial, etc., care. If a person isn't in the nursing home principally to receive medical care, then only the portion of the fee that is allocable to actual medical care qualifies as a deductible medical expense.

If your parent qualifies as your dependent under the rules discussed below, you can include any medical expenses you incur for your parent along with your own when determining your medical deduction. If your parent doesn't qualify as your dependent only because of the gross income or joint return test ((b) and (c), below), you can still include these medical costs with your own.

You may be able to claim your parent as a dependent, even though your parent is confined to a nursing home. To qualify, (a) you must provide more than 50% of your parent's support costs, (b) your parent must not have gross income in excess of the exemption amount ($4,150 for 2018), (c) your parent must not file a joint return for the year, and (d) your parent must be a U.S. citizen or a resident of the U.S., Canada, or Mexico. Your parent can qualify as your dependent even if he or she doesn't live with you, provided the support and other tests are met.

Amounts you pay for qualified long-term care services required by your parent and eligible long-term care insurance premiums, as well as amounts you pay to the nursing home for your parent's medical care, are included in the total support you provide.

If you aren't married and you're entitled to claim your parent as a dependent, you may qualify for the head-of-household filing status, which has a higher standard deduction and lower tax rates than the single filing status. In order to qualify for head-of-household status, generally you must have paid more than half the cost of maintaining a home for yourself and a qualifying relative for more than half the year. In the case of a parent, however, you may be eligible to file as head of household if you pay more than half the cost of maintaining a home that was the principal home for your parent for the entire year. Thus, if your parent is confined to a nursing home, you're considered to be maintaining a principal home for your parent if you pay more than half the cost of keeping your parent in the nursing home.

If your parent sells his or her home, up to $250,000 of the gain from the sale may be tax-free. In most cases, the seller, in order to qualify for this $250,000 exclusion, must have (a) owned the home for at least two years out of the five years before the sale, and (b) used the home as his or her principal residence for at least two years out of the five years before the sale. However, there is an exception to the two-out-of-five-year use test under (b) if the seller becomes physically or mentally unable to care for him or herself at any time during the five-year period.

If your parent is terminally or chronically ill and is insured under a life insurance contract, he or she may be able to receive tax-free payments (accelerated death benefits) while living. Any lifetime payments received under a life insurance contract on the life of a person who is either terminally or chronically ill are excluded from gross income.

If you wish to discuss these situations further, please contact us.