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.

Importance of Income Tax Planning as Part of your Estate Plan

As a result of the large estate tax exemption amount that was set in 2011 at $5 million (increased to $10 million for estates of decedent's dying in 2018 through 2025), which increases annually for inflation (the amount is $11,180,000 in 2018), many modest estates no longer need to be concerned with federal estate tax. Before 2011, the smaller estate tax exemption amount resulted in estate plans that attempted to avoid the estate tax, but were not concerned with minimizing income tax. Now, because many estates will not be subject to estate tax (thanks to that large exemption amount), planning for such estates can be devoted almost exclusively to saving income taxes. While saving both income and transfer taxes has always been a goal of estate planning, it was more difficult to succeed at both when the estate and gift tax exemption level was much lower. Below are some tax planning strategies you may want to revisit in light of the large exemption amount and other recent changes in the law.

Gifts that use the annual gift tax exclusion. One of the benefits of using the gift tax annual exclusion to make transfers during life is to save estate tax. This is because both the transferred assets and any post-transfer appreciation generated by those assets are removed from the donor's estate. However, because the estate tax exemption amount is so large, estate tax savings may no longer be an issue. Further, making an annual exclusion transfer of appreciated property carries a potential income tax cost because the donee receives the donor's basis upon transfer. Thus, the donee could face an income tax cost, via a capital gains tax liability, on the possible sale of the gifted property in the future. If there is no concern that an estate will be subject to estate tax, even if the gifted property grows in value, then the decision to make a gift should be based on factors other than estate tax savings. For example, gifts may be made to help a family member with making a purchase or starting a business. But a donor should not gift appreciated property because of the capital gain that could be realized on a future sale of the property by the donee. If the appreciated property is held until the donor's death, the heir will get a step-up in basis that will wipe out the capital gain tax on any pre-death appreciation in the value of the property.

Planning that equalizes spouses' estates. In the past, spouses often undertook complicated strategies to equalize their estates so that each could take advantage of the estate tax exemption amount. Generally, a two-trust (a credit shelter trust and marital trust) plan was established to minimize estate tax. "Portability," or the ability to apply the decedent's unused exclusion amount to the surviving spouse's transfers during life and at death, became effective for estates of decedents dying after 2010. As long as the election is made, portability allows the surviving spouse to apply the unused portion of a decedent's applicable exclusion amount (the deceased spousal unused exclusion (DSUE) amount) as calculated in the year of the decedent's death. So, if a spouse dies in 2017, when the estate tax exclusion amount is $5,490,000, without having used any exclusion amount over the course of the deceased spouse's life, the surviving spouse would be able to apply the DSUE amount of $5,490,000 to any taxable transfers made. If the surviving spouse were to die later in 2017, then the surviving spouse will be able to use an exclusion amount of $10,980,000 (both the DSUE and the surviving spouse's exclusion amount). In this example, if the surviving spouse dies in a later year, the DSUE amount remains fixed at $5,490,000, but the surviving spouse's basic estate exclusion amount will increase annually. The portability election gives married couples more flexibility in deciding how to use their exclusion amounts.

Estate exclusion or valuation discounts that do not preserve the step-up in basis. Some strategies to avoid inclusion of property in the estate may no longer be worth pursuing. It may be better to have the property be included in the estate or not qualify for valuation discounts so that the property receives a step-up in basis. For example, the special use valuation - the valuation of qualified real property used for farming purposes or in a trade or business on the basis of the property's actual use, rather than on its highest and best use - may not save enough, or any, estate tax to justify giving up the step-up in basis that would otherwise occur for the property if the special use valuation is not applied. Also, estates where property was transferred to avoid estate inclusion by limiting the transferor's power or control over the property may now welcome that inclusion because that inclusion would mean a step-up in basis, saving potential future capital gain tax. The gap between the transfer tax rate and the capital gains tax rate has narrowed, making strategies that do not preserve the step-up in basis less desirable.

Keep in mind that the increase in the estate tax exemption is only temporary as of right now, effective for 2018-2025. There are many factors to consider when determining what steps to take when estate planning.

If you would like to discuss these strategies, and see how they may relate to your estate plan, please contact us.

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.

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.

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.

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.

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.