Year-End Tax Planning Moves for Individuals

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 2019 takes place against the backdrop of recent major changes in the rules for individuals and businesses. For individuals, these changes include lower income tax rates, a boosted standard deduction, severely limited itemized deductions, no personal exemptions, an increased child tax credit, and a watered-down alternative minimum tax (AMT).

We have compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them.

... 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 ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). 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, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

... The 0.9% additional Medicare tax also may require higher-income earners to take year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of a threshold amount. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax.

... 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., $78,750 for a married couple). If the 0% rate applies to long-term capital gains you took earlier this year, for example you are a joint filer who made a profit of $5,000 on the sale of stock bought in 2009, and other taxable income for 2019 is $70,000, then before year end try not to sell assets yielding a capital loss because the first $5,000 of such losses won't yield a benefit this year. 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 2020 and accelerate deductions into 2019 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2019 that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2019. For example, that may be the case where a person will have a more favorable filing status this year than next, or expects to be in a higher tax bracket next year.

…If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA in 2019 if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2019, and possibly reduce tax breaks geared to AGI (or modified AGI).

... It may be advantageous to try to arrange with your employer to defer, until early 2020, a bonus that may be coming your way. This could cut as well as defer your tax.

... Many taxpayers won't be able to itemize because of the high basic standard deduction amounts that apply for 2019 ($24,400 for joint filers, $12,200 for singles and for marrieds filing separately, $18,350 for heads of household), and because many itemized deductions have been reduced or abolished. Some taxpayers may be able to work around these deduction restrictions 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. If you are not sure if this will affect you, contact us for help in determining how these changes will impact you.

...

... Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2019 deductions even if you don't pay your credit card bill until after the end of the year.

... 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 70½.  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 70½ or older by the end of 2019, have traditional IRAs, and particularly if you can't itemize your deductions, consider making 2019 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, Form 1040. But the amount of the qualified charitable distribution reduces the amount of your required minimum distribution, which can result 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 2019 to make health savings account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for 2019.

... Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $15,000 made in 2019 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

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.

 

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

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 2019 takes place against the backdrop of recent major changes in the rules for individuals and businesses.  For businesses, the corporate tax rate has been reduced to 21%, there is no corporate AMT, there are limits on business interest deductions, and there are very generous expensing and depreciation rules. And non-corporate taxpayers with qualified business income from pass-through entities may be entitled to a special deduction.

We have compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you will likely benefit from many of them.

... Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2019, if taxable income exceeds $321,400 for a married couple filing jointly, $160,700 for singles and heads of household, and $160,725 for marrieds filing separately, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property held by the trade or business. The limitations are phased in; for example, the phase-in applies to joint filers with taxable income between $321,400 and $421,400 and to single taxpayers with taxable income between $160,700 and $210,700.

Taxpayers may be able to achieve significant savings with respect to this deduction by deferring income or accelerating deductions so as to come under the dollar thresholds for 2019. 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 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. For 2019, the gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts don't exceed $26 million (the dollar amount was $25 million for 2018, and for earlier years it was $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. For tax years beginning in 2019, the expensing limit is $1,020,000, and the investment ceiling limit is $2,550,000. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for qualified improvement property, roofs, HVAC, fire protection, alarm, and security systems. The generous dollar ceilings that apply this year mean that 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. This can be a potent tool for year-end tax planning. Property acquired and placed in service in the last days of 2019, rather than at the beginning of 2020, can result in a full expensing deduction for 2019.

... 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 2019.

... 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. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (e.g. a certified audited financial statement) or $2,500 if there is no applicable financial statement. Where the UNICAP rules aren't an issue, consider purchasing such qualifying items before the end of 2019.

…To reduce 2019 taxable income, consider deferring a debt cancellation event until 2020.

... To reduce 2019 taxable income, consider disposing of a passive activity in 2019 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.

Self-employed individual's deduction for health insurance costs

There are tax benefits available to self-employed individuals who pay health insurance costs. Self-employed taxpayers can deduct 100% of their health insurance costs in computing their income taxes. This tax savings can reduce your after-tax cost of health coverage.

A brief review of the tax rules on health insurance premiums may be useful. Health insurance premiums paid by non-self-employed taxpayers are deductible as itemized medical expense deductions, but, for 2019 and later, only to the extent your total medical expenses exceed 10% of your adjusted gross income (AGI).

Because of the "floor" that applies to the medical expense deduction, if total medical expenses don't exceed 10% of AGI, no itemized deduction is available.

However, a self-employed taxpayer can deduct - as an "above the line" deduction, reducing AGI - 100% of the health insurance costs for the taxpayer, spouse, and dependents, and for any child of the self-employed taxpayer who is under age 27 as of the end of the tax year.

Example. M, who is self-employed, pays $3,000 in health insurance premiums and has no other medical expenses. M's AGI is $50,000. For 2019, since 10% of $50,000 equals $5,000, M could not claim an itemized medical expense deduction for the health insurance premiums. But, since M is self-employed, M can deduct the entire $3,000 above the line.

The health insurance deduction for self-employed taxpayers only applies for any calendar month in which you aren't otherwise eligible to participate in any subsidized health plan maintained by any employer of yours or of your spouse, or any plan maintained by any employer of your dependent or your under-age-27 child.

Also, the deduction can't exceed your earned income from the trade or business for which the health insurance plan was established.

These rules also apply to partners in partnerships and more-than-2% shareholders of S corporations where the partnership or corporation pays for health insurance coverage for its partners or shareholders.

The tax benefits of a self-employed individual's health insurance costs can effectively reduce your cost of health insurance. You may wish to consider stepping up your coverage in light of these savings. Please contact us if you wish to discuss how these rules apply to your particular situation or if you have any questions.

 

 

Tax treatment of scholarships

Receiving a scholarship is exciting and can be beneficial in paying for education costs, but the tax effects of such scholarships can be confusing.

Scholarships (and fellowships) are generally tax-free, whether for elementary or high school students, for college or graduate students, or for students at accredited vocational schools. It makes no difference whether the scholarship takes the form of a direct payment to the individual or a tuition reduction.

However, for the scholarship to be tax-free, certain conditions must be satisfied. The most important are that the award must be used for tuition and related expenses (and not for room and board) and that it must not be compensation for services.

Tuition and related expenses. A scholarship is tax-free only to the extent it is used to pay for (1) tuition and fees required to attend the school or (2) fees, books, supplies, and equipment required of all students in a particular course. For example, if a computer is recommended but not required, buying one wouldn't qualify. Other expenses that don't qualify include the cost of room and board, travel, research, and clerical help.

To the extent a scholarship award isn't used for qualifying items, it is taxable. The recipient is responsible for establishing how much of the award was used for qualified tuition and related expenses so as to be tax-free. You should maintain records (e.g., copies of bills, receipts, cancelled checks) that reflect the use of the scholarship money.

Scholarship award can't be payment for services. Subject to limited exceptions, a scholarship isn't tax-free if the payments are linked to services that your child performs as a condition for receiving the award, even if those services are required of all degree candidates. Thus, a stipend your child receives for required teaching, research, or other services is taxable, even if the child uses the money for tuition or related expenses.

Returns and records. If the scholarship is tax-free and your child has no other income, the award doesn't have to be reported on a return. However, any portion of the award that is taxable as payment for services is treated as wages, and the payor should withhold accordingly. Estimated tax payments may have to be made if the payor doesn't withhold enough tax. Your child should receive a Form W-2 showing the amount of these "wages" and the amount of tax withheld, but any portion of the award that is taxable must be reported, even if no Form W-2 is received.

Your child's award can have the following impact on these related tax issues:

(1) The dependency exemption (suspended for 2018-2025) that you claim for your child shouldn't be threatened by the scholarship. To claim an individual as your dependent, you must meet a support test. Although education is a support item, a special rule provides that educational costs covered by a scholarship (or fellowship) for a dependent who is a child of the taxpayer (but not for other dependents) aren't included in the calculation of total support.

(2) Any scholarship amounts that are taxable to the student will also increase your child's standard deduction. As noted above, to the extent scholarship funds are spent on room, board, or other nonqualifying expenses, the award is taxable. But the portion that's taxable to the student can be absorbed by a higher standard deduction. Because that taxable portion is treated as "earned income" (for purposes of the calculation of the standard deduction amount for dependents, see below), the student will qualify for a higher standard deduction.

The standard deduction allowed to dependents for 2019 is the greater of: (a) $1,100 or (b) $350 plus the dependent's earned income. But the standard deduction can't be more than the regular standard deduction ($12,200 for 2019 for single taxpayers). Thus, even though part of a scholarship is taxable, it may be "covered" by the standard deduction.

Example. T is a dependent of his parents. T's only income is $3,000 T received as part of a scholarship, which is taxable because it was applied to cover T's costs of room and board. Since the $3,000 is treated as earned income, T is entitled to a $3,350 standard deduction, which reduces his taxable income to zero.

(3) The tax-free scholarship may limit other higher education tax benefits to which you or your child may be entitled. Neither you nor your child may claim a credit, deduction, or exclusion for expenses paid with tax-free scholarship funds.

Thus, if your child receives a tax-free scholarship and his or her higher education expenses also qualify for any of the following credits, deductions, and exclusions, the expenses taken into account in computing any of these other benefits must first be reduced by the tax-free amounts used to pay the expenses:

        American Opportunity tax credit and Lifetime Learning credit.

        Deduction for interest on student loans.

        Coverdell ESA distribution exclusion.

        Qualified tuition (529) plan distribution exclusion.

        Savings bond interest exclusion.

         

Please contact us if you wish to discuss these or related matters further.

 

Taxation of social security benefits

How are Social Security benefits taxed? That depends on your other income. In the worst case scenario, 85% of your benefits would be taxed. (This doesn't mean you pay 85% of your benefits back to the government in taxes-merely that you would include 85% of them in your income subject to your regular tax rates.)

 

To determine how much of your benefits are taxed, you must first determine your other income, including certain items otherwise excluded for tax purposes (for example, tax-exempt interest). Add to that the income of your spouse, if you file jointly. To this add half of the Social Security benefits you and your spouse received during the year. The figure you come up with is your total income plus half of your benefits. Now apply the following rules:

1. If your income plus half your benefits is not above $32,000 ($25,000 for single taxpayers), none of your benefits are taxed.

2. If your income plus half your benefits exceeds $32,000 but is not more than $44,000 (exceeds $25,000 but is not more than $34,000 for single taxpayers), you will be taxed on (1) one half of the excess over $32,000 ($25,000 for single taxpayers), or (2) one half of the benefits, whichever is lower.

Example (1): S and D have $20,000 in taxable dividends, $2,400 of tax-exempt interest, and combined Social Security benefits of $21,000. So, their income plus half their benefits is $32,900 ($20,000 plus $2,400 plus 1/2 of $21,000). They must include $450 of the benefits in gross income (1/2 ($32,900 − $32,000)).

Example (2):  If S and D’s combined Social Security benefits were $5,000, and their income plus half their benefits were $40,000, they would include $2,500 of the benefits in income: 1/2 ($40,000 − $32,000) equals $4,000, but 1/2 the $5,000 of benefits ($2,500) is lower, and the lower figure is used.

3. If your income plus half your benefits exceeds $44,000 ($34,000 for single taxpayers), the computation in many cases grows far more complex. Generally, however, 85% of your Social Security benefits will be taxed if you fall into this category.

Caution: If you aren't paying tax on your Social Security benefits now because your income is below the above floor, or are paying tax on only 50% of those benefits, an unplanned increase in your income can have a triple tax cost. You'll have to pay tax (of course) on the additional income, you'll also have to pay tax on (or on more of) your Social Security benefits (since the higher your income the more of your Social Security benefits that are taxed), and you may get pushed into a higher marginal tax bracket. This situation might arise, for example, when you receive a large distribution from a retirement plan (such as an IRA) during the year or have large capital gains. Careful planning might be able to avoid this stiff tax result. For example, it may be possible to spread the additional income over more than one year, or liquidate assets other than an IRA account, such as stock showing only a small gain or stock whose gain can be offset by a capital loss on other shares. If you should need a large amount of cash for a specific purpose, we would be happy to help you determine what your additional tax cost will be before you liquidate any assets.

If you know your social security benefits will be taxed, you can voluntarily arrange to have the tax withheld from the payments by filing a Form W-4V. Otherwise, you may have to make estimated tax payments.

If you would like us to run some specific numbers for you, or if you would like to discuss this matter further, please contact us.

Mid-year Review of Estimated Taxes

It's not a major disaster if you owed some money when you filed your return – after all, you'd rather have the use of the funds for as long as possible. But what you want to avoid is having to pay the IRS a penalty for underpaying your taxes during the year. If you owe the estimated tax underpayment penalty, which is nondeductible, you're in effect paying the IRS interest for part of the money you should have prepaid during the year for taxes, but didn't. On the other hand, if you got a big refund on last year's return, you made an interest-free loan to the government – something you may want to avoid this year. If that happened, you should consider reducing the amount of withholding taken from your salary and/or the amount of estimated tax payments you make. 

Here are some pointers to keep you on even keel when it comes to estimated taxes.

Basic rules. There is no estimated tax underpayment penalty for the 2019 tax year if the total tax on your return reduced by withholding (but not by estimated tax payments) is less than $1,000. If the amount owed on an individual income tax return comes to $1,000 or more after subtracting withheld tax, the estimated tax underpayment penalty generally won't apply if your "required annual payment" – i.e., the amount that must be prepaid during the year in the form of withheld tax and estimated tax payments – equals at least the smaller of two amounts:

        (1) 90% of your tax bill for 2019, or

        (2) 100% of your tax bill for 2018.

For example, let's suppose your tax bill for 2018 was $12,000, and your tax bill for 2019 will come to $15,000 (90% of which is $13,500). In this case, you must prepay at least $12,000 of your tax bill during 2018 to avoid the underpayment penalty. On the other hand, if the tax you will owe for 2019 will only be $10,000, you will have to make timely estimated tax payment of only $9,000 for 2018 to avoid the penalty.

A tougher rule applies if your adjusted gross income for 2018 exceeded $150,000 ($75,000 for married persons filing a separate return). During 2019, to avoid the underpayment penalty, you must prepay the smaller of (1) 90% of the tax for 2019, or (2) 110% of the tax for 2018.

Note that the IRS can waive an underpayment penalty if you didn't make the payment because of a casualty, disaster, or other unusual circumstance, and it would be inequitable to impose the penalty. The penalty also can be waived for reasonable cause during the first two years after you retire (after reaching age 62) or become disabled.

It's a pay-as-you-go system. In general, one-quarter of your required annual payment must be paid by April 15, 2019, June 17, 2019, September 16, 2019, and January 15, 2020. Keep in mind that tax withheld from your salary is treated as an estimated tax payment, and that an equal part of withheld tax generally is treated as paid on each installment date.

You may be able to make smaller payments under the annualized income method, which is useful to people whose income flow is not uniform over the year, perhaps because of a seasonal business. You may also want to use the annualized income method if a significant portion of your income comes from capital gains on the sale of securities which you sell at various times during the year.

Time for a checkup. Although you now know what your 2018 tax bill came to, you probably don't know what your 2019 tax will be. While it can't be predicted with absolute certainty, we can project what your 2019 tax will be based on your financial picture thus far, as well as on events you anticipate will occur and transactions you anticipate finalizing in the balance of this year. It would be a good idea for us to get together well in advance of the next estimated tax installment to see how your payments are tracking and make any necessary adjustments to your wage withholding and/or estimated tax payments. Keep in mind that our review of your situation may discover that you're withholding too much rather than too little.

Please contact us to help you project your tax owed for 2019.

Charitable Donations of Appreciated Stock

If you are planning to make a relatively substantial contribution to a charity, college, etc., you should consider donating appreciated stock from your investment portfolio instead of cash. Your tax benefits from the donation can be increased and the organization will be just as happy to receive the stock.

This tax planning tool is derived from the general rule that the deduction for a donation of property to charity is equal to the fair market value of the donated property. Where the donated property is "gain" property, the donor does not have to recognize the gain on the donated property. These rules allow for the "doubling up," so to speak, of tax benefits: a charitable deduction, plus avoiding tax on the appreciation in value of the donated property.    

Example: Tim and Tina are twins, each of whom attended Yalvard University. Each plans to donate $10,000 to the school. Each also owns $10,000 worth of stock in ABC, Inc. which he or she bought for just $2,000 several years ago.   

Tim sells his stock and donates the $10,000 cash. He gets a $10,000 charitable deduction, but must report his $8,000 capital gain on the stock.

Tina donates the stock directly to the school. She gets the same $10,000 charitable deduction and avoids any tax on the capital gain. The school is just as happy to receive the stock, which it can immediately sell for its $10,000 value in any case.

Caution: While this plan works for Tina in the above example, it will not work if the stock has not been held for more than a year. It would be treated as "ordinary income property" for these purposes and the charitable deduction would be limited to the stock's $2,000 cost.

If the property is other ordinary income property, e.g., inventory, similar limitations apply. Limitations may also apply to donations of long-term capital gain property that is tangible (not stock), and personal (not realty).

Finally, depending on the amounts involved and the rest of your tax picture for the year, taking advantage of these tax benefits may trigger alternative minimum tax concerns.

If you'd like to discuss this method of charitable giving more fully, including the limitations and potential problem areas, please contact us.

Distributions from Traditional IRAs

Although advance planning is needed to help accumulate the biggest possible nest egg in your traditional IRAs, it is even more critical that you get help in planning for distributions from these tax-deferred retirement planning vehicles. There are three areas where knowing the ins and outs of the IRA distribution rules can make a big difference in how much you and your family will keep after taxes:

        (1) Early distributions. If you need to take money out of a traditional IRA before age 59-1/2 (e.g., for education expenses for children, to help make a down payment on a new home, or to meet necessary living expenses if you retire early), any distribution to you will be fully taxable (unless nondeductible contributions were made, in which case part of each payout will be tax-free). In addition, distributions before age 59-1/2 may be subject to a 10% penalty tax. However, there are several ways that the penalty tax (but not the regular income tax) can be avoided, including a method that is tailor-made for individuals who retire early and need to draw cash from their traditional IRAs to supplement other income.

        (2) Naming beneficiaries. The decision concerning who you wish to designate as beneficiary of your traditional IRA is critically important. This decision affects the minimum amounts you must withdraw from the IRA when you reach age 70-1/2, who will get what remains in the account at your death, and how that IRA balance can be paid out. What's more, a periodic review of whom you've named as IRA beneficiaries is vital to assure that your overall estate planning objectives will be achieved in light of changes in the performance of your IRAs, and in your personal, financial and family situation.

        (3) Required distributions. Once you attain age 70-1/2, distributions from your traditional IRAs must begin. If you don't withdraw the minimum amount each year, you may have to pay a 50% penalty tax on what should have been paid out, but wasn't. In planning for these required distributions, your income needs must be weighed against the desirable goal of keeping the tax shelter of the IRA going for as long as possible for both yourself and your beneficiaries.

If you think it seems easier to put money into a traditional IRA than to take it out, you're absolutely right. This is one area where expert guidance is essential.

If you would like assistance in reviewing your traditional IRAs or analyzing other aspects of your retirement planning, please contact us.

Election to Deduct/Amortize Start-Up and Organization Expenses

If you've recently started a business, or if you're in the process of starting one now, you should be aware that the way you treat some of your initial expenses for tax purposes can make a big difference in your tax bill.

Generally, expenses incurred before a business begins don't generate any deductions or other current tax benefits.

However, taxpayers, whether they are individuals, corporations or partnerships, are permitted to elect to write off $5,000 of "start-up expenses" in the year business begins, and the rest can be deducted over a period of 180 months that begins with the month business starts. The $5,000 figure is reduced by the excess of total start-up costs over $50,000.

You will be deemed to have made the election unless you opt out.

Start-up expenses include, with a few exceptions, all expenses incurred to investigate the creation or acquisition of a business, to actually create the business, or to engage in a for-profit activity in anticipation of that activity becoming an active business. To be eligible for the election, an expense also must be one that would be deductible if it were incurred after the business actually began. An example of a start-up expense is the cost of analyzing the potential market for a new product.

A similar $5,000/180-month/over-$50,000-phase-out election is available to corporations and partnerships for their "organization expenses." To qualify as an organization expense, the expense must be incident to the creation of the corporation or partnership, be an expense that, in the absence of the election, would be capitalized, and be an expense that, if it had been incurred in connection with a corporation or partnership that had a limited life, would have been eligible to have been written off over that limited life. Examples of organization expenses are legal and accounting fees for services related to organizing the new entity (such as fees for drafting the corporate charter or partnership agreement) and filing fees (such as fees paid to the state of incorporation).

As you can see, it's important to keep a record of these start-up and organization expenses, and to make the appropriate decision regarding the write-off election. As mentioned above, if you opt out of the election, there is no current tax benefit derived from the eligible expenses covered by the election. Also, you should be aware that an election either to deduct or to amortize start-up expenditures, once made, is irrevocable.

Please contact us to work with you in making any of the elections discussed above and in all other aspects of starting a business.

ABLE Accounts for the Disabled or Blind

There is a tax-advantaged way for taxpayers to save for the needs of family members with disabilities, without losing eligibility for other government benefits to which those individuals are entitled. This can be done though an ABLE account, which is a tax-free account that can be used to save for disability-related expenses. Here are the key features of ABLE accounts:

•       ABLE accounts can be created by eligible individuals to support themselves, by families to support their dependents, or by guardians for the benefit of their wards.

•       Eligible individuals must be blind or disabled - and must have become so before turning 26 - and must be entitled to benefits under the Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) programs. Alternatively, an individual can become eligible if a disability certificate for the individual is filed with IRS.

•       ABLE accounts are established under state ABLE programs. An account may be opened under any state's program (where that state allows out-of-state participants), not just the program of the state where the eligible individual lives. A majority of states have passed legislation to sponsor ABLE programs. Some states that haven't established their own programs allow tax benefits for contributions to a program in another state.

•       Any person may contribute to an ABLE account. While contributions aren't tax-deductible, the funds in the account are invested and grow free of tax. The account's investment directions can be changed up to twice a year.

•       Distributions from an ABLE account are tax free if used to pay for expenses that maintain or improve the designated beneficiary's health, independence, or quality of life. These expenses include education; housing; transportation; employment support; health, prevention, and wellness costs; assistive technology and personal support services; and other IRS-approved expenses.

•       If distributions are used for nonqualified expenses, the portion of the distribution that represents earnings on the account is subject to income tax plus a 10% penalty tax.

•       An eligible individual can have only one ABLE account. The total annual contributions by all persons to that account can't exceed the gift tax exclusion amount ($15,000 for 2018, adjusted annually for inflation). But for tax years beginning after Dec. 22, 2017, for contributions made before 2026, the designated beneficiary can make additional contributions, in excess of this limit, up to the lesser of the federal one-person poverty line or the beneficiary's compensation. To be eligible to make these contributions, the designated beneficiary must be employed or self-employed and must not be covered by an employer's retirement saving plan.

•       There is also a limit on the total balance in the account. This limit, which varies from state to state, is equal to the limit imposed by that state on qualified tuition plans (Section 529 college savings accounts).

•       ABLE accounts can generally be rolled over only into another ABLE account for the same individual or into an ABLE account for a sibling who is also an eligible individual. But for distributions after Dec. 22, 2017, for transfers made before 2026, amounts from qualified tuition programs (529 accounts) are allowed to be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that 529 account, or a member of that designated beneficiary's family. These rolled-over amounts are counted towards the overall limitation on amounts that can be contributed to an ABLE account within a tax year, and any amount rolled over in excess of this limitation is includible in the gross income of the distributee.

•       ABLE accounts have no impact on an individual's Medicaid eligibility. However, ABLE account balances in excess of $100,000 are counted toward the SSI program's $2,000 individual resource limit. Thus, an individual's SSI benefits are suspended, but not terminated, when his or her ABLE account balance exceeds $102,000 (assuming the individual has no other assets). In addition, distributions from an ABLE account to pay housing expenses count toward the SSI income limit.

•       If an eligible individual dies, any amount remaining in the account after Medicaid reimbursements goes to the deceased's estate or to a beneficiary and will be subject to income tax on investment earnings, but not to a penalty.

•       For tax years beginning after Dec. 22, 2017, for contributions made before 2026, the designated beneficiary of an ABLE account can claim the saver's credit for contributions made to his or her ABLE account.

We hope this information is helpful. If you'd like more details about establishing an ABLE account, please don't hesitate to contact us.