TIMING IS EVERYTHING

 
To repeat - timing is everything.  Here are my thoughts on tax-related timing.
 
* Make your current year contributions to a traditional or ROTH IRA, Coverdell Education IRA, Section 529 College Savings Account, of Health Savings Account on the first business day of the year – usually January 2^nd.  Thanks to the “magic” of tax-free compounding, by making your contributions on the first available day of the year you will have substantially more in the accounts when you are ready to retire or when you need money for education or medical costs.
 
* Take your RMDs (Required Minimum Distributions) from retirement accounts as late as possible in December.  Again, to maximize tax-free accrual.
 
* If you know you will be getting married during the year, change your withholding status with your employer(s) to increase federal and state income tax withholding as soon as possible.  You may not be getting married until the fall, but your tax status as married will be effective for the entire year.  If you know in 2023 you will be getting married in 2024, no matter when in the year, change your withholding now to be effective January 1, 2024. (Some related advice - if you change your last name due to marriage immediately report the change to the Social Security Administration).
 
* If you experience a “major life event” – any of the events listed below – contact your tax professional as soon as possible to discuss the tax implications and plan accordingly.  Do not wait until you meet with your preparer in February or March of the following year – it may be too late to avoid penalty and interest.
 
• you got married, divorced, or become widowed
• you had or adopted a child
• you changed jobs
• your spouse started working
• you have a substantial increase or decrease in income
• you have a substantial gain from the sale of stocks or bonds
• you bought or sold a home or rental real estate
• you started, acquired, or sold a business
• you retired
• you started to receive Social Security benefits
• you made unplanned withdrawals from an IRA or pension plan
• you received an inheritance
• you received correspondence from the IRS or a state tax agency
 
Actually, you should consult your, or a, tax professional BEFORE many of these events begin.  For example, if you are beginning the process of divorce, you should consult a tax professional for guidance in negotiating the divorce agreement, any custody agreement, and the distribution of assets.
 
TTFN

TEN FACTS ABOUT THE NEW TAX LAW

“The Tax Cuts and Jobs Act” – officially titled “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” – has drastically changed the United State Tax Code. 

For tax years 2018 through 2025, when the individual provisions of the Act are scheduled to expire, this new law will affect every single income tax return filed.

Here are ten important things you need to know about the new law.

(1) Tax rates are reduced.

The new tax rates for 2018 are - 

Rate	Single	Head of Household	Married Filing Joint	Married Filing Separately
10%	Up to $9,525	Up to $13,600	Up to $19,050	Up to $9,525
12%	$9,526 to $38,700	$13,601 to $51,800	$19,051 to $77,400	$9,526 to $38,700
22%	$38,701 to $82,500	$51,801 to $82,500	$77,401 to $165,000	$38,701 to $82,500
24%	$82,501 to $157,500	$82,501 to $157,500	$165,001 to $315,000	$82,501 to $157,500
32%	$157,501 to $200,000	$157,501 to $200,000	$315,001 to $400,000	$157,501 to $200,000
35%	$200,001 to $500,000	$200,001 to $500,000	$400,001 to $600,000	$200,001 to $300,000
37%	$500,001  or more	$500,001  or more	$600,001  or more	$300,001 or more

(2) The deduction for personal exemptions is gone. 

You can no longer claim a tax deduction for yourself, your spouse or any of your dependents.  For 2017 this was $4,050 per person.  This substantially reduces the tax benefit of the highly publicized almost doubling of the Standard Deduction amounts.  There is a new $500 tax credit for “non-qualified” children and other dependents – not for the taxpayer and spouse – but this does not fully make up for the loss of the deduction.

(3) The Child Tax Credit is doubled and available to many more taxpayers.

The previously $1,000 credit for each qualified dependent child under age 17 is now $2,000.  And the Adjusted Gross Income (AGI) levels at which the credit begins to be phased out have been substantially increased – to $400,000 for married couples filing a joint return and $200,000 for all other taxpayers.  This more than makes up for the loss of the personal exemption deduction for these dependents.  The credit allowed for dependent children age 17 and older is the $500 mentioned above.   

(4) The lower tax rates for qualified dividends and capital gains remain unchanged.

The new tax law keeps intact the current lower tax rates of 0%, 15% and 20% for qualified dividends, capital gain distributions and long-term capital gains.  But these rates are not tied into the new tax rates and income brackets created by the Act.  The lower tax rates continue to apply to the previous tax rate brackets.  So, for 2018 through 2025 there are two separate sets of tax rates and income brackets – one for “regular” taxable income and one for qualified dividends and capital gains.

The Qualified Dividends and Capital Gains tax rates for 2018, based on net taxable income, are -  

Rate	Single	Head of Household	Married Filing Joint		Married Filing Separate
0%	Up to $38,600	Up to $51,700	Up to $77,200		Up to $38,600
15%	$38,600 to $425,800	$51,700 to $452,400	$77,200 t0 $479,000		$38,600 to $239,500
20%	Over $425,800	Over $452,400	Over $479,000		Over $239,500

(5) The deduction for taxes is limited to $10,000.

The itemized deduction for taxes - state and local income taxes or state and local sales taxes, personal property taxes and real estate taxes – is limited to $10,000, or $5,000 for a married couple filing separately.  A married couple can deduct up to $10,000 in taxes on their Form 1040, but two unmarried taxpayers living together can each deduct $10,000 on their individual returns, for a total of $20,000.  Foreign real estate taxes are no longer deductible on Schedule A.

(6) The deduction for interest on home equity borrowing is gone.

You can no longer deduct interest on home equity debt if you itemize on Schedule A.  Only “acquisition debt” - borrowing secured by a residence that is used to “buy, build or substantially improve” the residence - is deductible.  There is no “grandfathering” of existing home equity debt.  As a result, you can no longer rely on the Form 1098 issued by your mortgage lender to provide the amount you can deduct for mortgage interest. 

Homeowners must keep separate track of their acquisition debt and home equity debt going back to the original purchase mortgage for a residence and including all subsequent refinancing and additional borrowing.

The characterization of debt as “home equity” is based on the use of the money borrowed and not what the loan is called by the lender.  What may be identified as a “home equity loan” or “home equity line of credit” by a bank will be considered “acquisition debt” if the money is used to substantially improve the residence that is secured by the loan.

(7) The deduction for employee business expenses is gone.

Employees can no longer deduct unreimbursed job-related expenses as a Miscellaneous itemized deduction on Schedule A.  This includes union or professional dues, the cost and maintenance of uniforms and work clothes, business travel and entertainment, job-related continuing education, and job-seeking expenses.

(8) The deduction for job-related moving expenses is gone (with one exception).

The cost of moving your household due to accepting a new job or a new job location is no longer deductible as an “adjustment to income”.  Only members of the Armed Forces on active duty who move because of a military order are allowed to deduct their moving expenses.

Similarly, all employer reimbursements for employee moving and relocation expenses (except for qualified military moves) are considered taxable income to the employee.  These reimbursements must now be included in full in taxable federal wages reported on Form W-2.

(9) The deduction for theft losses is gone and the deduction for casualty losses is restricted.

Losses resulting from a theft – defined by the IRS as “the unlawful taking of money or property with the intent to deprive you of it” – are no longer deductible as an itemized deduction on Schedule A.

Only personal casualty losses that occur in a Presidentially-declared disaster area – a disaster declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act - are deductible on Schedule A, still subject to the $100-per-casualty and 10%-of-AGI limitations.  

(10) The Alternative Minimum Tax (AMT) is effectively gone.

Upper-middle class taxpayers in highly taxed states no longer have to worry about becoming victims of the AMT. 

Items that had triggered the AMT in the past included the deduction for personal exemptions and the itemized deductions for excessive medical expenses, taxes, home equity debt interest, and Miscellaneous expenses subject to the 2% of AGI exclusion.  These items were not deductible in calculating the AMT.  With the exception of the itemized deduction for taxes these items no longer apply under the new tax law, and the deduction for taxes is limited to $10,000. 

The AMT exemptions have been raised, and they do not begin to phase out until Alternative Minimum Taxable Income (AMTI) exceeds $1 Million for a married couple filing a joint return and $500,000 for all other taxpayers, a huge increase from the previous thresholds.

The Tax Cuts and Jobs Act has made many other changes to the individual income tax return, as well as a multitude of changes to the taxation of business entities.  To find out just how the changes will affect you I recommend you consult your, or a, tax professional.

By the way, the fee you pay to a tax professional to prepare your return or provide tax advice is also no longer deductible as an itemized deduction.

I discuss the Tax Cuts and Jobs Act in more detail, with tax planning advice, in MY book “The GOP Tax Act and the New 1040”.

TTFN   

TAX PLANNING FOR THE GOP TAX ACT

I am almost ready to “go to press” with my new book THE GOP TAX ACT ANDTHE NEW 1040: ADVICE AND INFORMATION FOR DEALING WITH THE NEW TAX LAWS.  I am currently at the proof-reading stage – and should have it ready to go in a couple of weeks.

“The Tax Cuts and Jobs Act”, aka the GOP Tax Act, has drastically changed the United State Tax Code.  For 2018 through 2025, or until new tax legislation is enacted, the Act will affect every income tax return filed.   This book explains how the Act affects wage-earning1040 (and 1040A) filers and provides advice and strategies to help make sure you pay the absolute least amount of federal income tax possible under the new laws.  It is a “must-read” for everyone who files a Form 1040.

It answers these questions in detail –

* So, what does the GOP Tax Act do?

* How has the GOP Tax Act changed Schedule A?  

* What can you do to deal with the tax law changes? 

* What Can You Deduct on Schedule A for 2018 and Beyond?

* To be or not to be an independent contractor?

A copy of this book in pdf format, sent as an email attachment, will be only $6.95.  A print version, sent via postal mail, will also be available for $8.95.  As a special “pre-publication” offer for TWTP readers I am offering a 25% discount for the first 50 orders I get that are postmarked by June 15^th.  So, the pdf version will be $5.20 and the print version will be $6.70.

To order your copy of this valuable book send your check or money order, payable to TAXES AND ACCOUNTING, INC, and your email address or postal address to –

TAXES AND ACCOUNTING, INC

GOP TAX ACT BOOK

POST OFFICE BOX A

HAWLEY PA 18428

An e-book version for reading on Kindle will also be available from AMAZON.COM.  When it is I will provide the link here at TWTP.

TTFN

SIMPLIFICATION AND COMPLEXITY FOR TAXPAYERS

While the GOP Tax Act adds much unnecessary complexity to the Tax Code, it does make some things simpler.

By eliminating the miscellaneous deductions subject to the 2% of AGI limitation, taxpayer recordkeeping is simplified.  Employees who are not reimbursed for their job-related expenses under an accountable plan will no longer need to keep track of business mileage, business meals and entertaining, and other employee business expenses.  And there is no longer the need to keep track of job-seeking expenses, including travel to interviews, or educational expenses to maintain or improve skills required in your current trade or business.  Investment and tax preparation costs are no longer deductible, so no longer a need to keep track of these expenses.  Of course, this simplification comes at a cost – the loss of a potentially large tax deduction.

The Act changes tax planning considerations, and makes year-end planning simpler.

To begin, with the increased Standard Deduction, unfortunately made much less attractive for taxpayers without dependents due to the loss of the personal exemption deduction, there will be less taxpayers who will benefit from itemizing.

For those who could be able to benefit from itemizing –

* It will still be possible to “bunch” medical expenses and charitable contributions – that is claim additional deductions in a year when you may be able to itemize, so that you itemize every other year.  The use of a charitable donor-advised fund account and contributions of appreciated stock at year-end will still apply.  And during the year, the Qualified Charitable Distribution (click here) is an even more attractive strategy for those age 70½ and over.

* With the limitation of the itemized deduction for combined property and state and local income or sales taxes to $10,000, there is little that can be done here, other than to attempt to maximize the deduction.  If the $10,000 maximum will not be already met, it is still a good idea to make any 4^th quarter state estimated tax payment in December instead of January of the next year.  And pre-payment, if possible, of property taxes can be used to bunch deductions. 

* One can still make a 13^th mortgage payment to bunch the interest deduction.

* The total elimination of job related, investment, and tax preparation expenses, and other miscellaneous deductions subject to the 2% of AGI exclusion, makes these deductions no longer an issue, so there is nothing more than can be done.

* And the changes to the dreaded Alternative Minimum Tax (AMT) will create less victims, so AMT considerations will no longer apply for most.

While the new limitations on the mortgage interest deduction simplifies the Tax Code, it greatly complicates recordkeeping for taxpayers and potentially for tax professionals.  Under the GOP Tax Act interest on home equity debt, regardless of the amount of the debt principal, is no longer deductible.  Period.  There is grandfathering of existing acquisition debt interest rules – but there is NO grandfathering of existing home equity debt.  Taxpayers will need to separately track acquisition and home equity debt going forward, and going back to day one on all current mortgage debt! 

I do believe in the original House version of the bill all existing mortgage debt was “grandfathered” – including home equity debt.  While I can understand, and agree with, the philosophy of limiting deductible mortgage interest to acquisition debt, for practicality sake I wish that existing home equity debt had been included in the grandfathering.

Taxpayers have always been required to keep separate track of acquisition and home equity debt, but few actually did due to the allowance of a deduction for interest on up to $100,000 of home equity debt.  This is now something that MUST be done, especially for taxpayers with existing mortgages.

Even if a homeowner never incurred any separate home equity debt – never took out a separate home equity loan or opened a home equity line of credit – if an original acquisition mortgage was ever refinanced they may have home equity debt.  The additional closing costs of each refinance that were added to the principal of the refinanced mortgage loan is home equity debt.  The only way you would avoid home equity debt in such a situation is if you literally refinanced only the principal from each old mortgage and paid all closing costs in cash.

For example - you purchased a home in 2011.  You have had only one mortgage, from the original purchase, and no home equity debt.  You refinanced the original mortgage in 2015 to get a better rate.  The principal balance on the original mortgage was $197,374.  The principal balance of the refinanced mortgage was $200,000.  You did not take any money “out”, and paid a little over $1,000 at the closing.  The difference is the closing costs for title insurance, inspections, fees, etc. etc.  You have have acquisition debt of $197,374 and home equity debt of $2,626.   

I will be rewriting my Mortgage Interest Guide, which includes worksheets for keeping track of mortgage debt and a detailed example of how to use them, to reflect the new rules for 2018 and beyond.  It is only $2.00, delivered as a pdf email attachment.  I will let you know here when it is available.

So, as you can see, not only has the Tax Code been drastically changed by the new GOP Tax Act, but also the year-round recordkeeping requirements of taxpayers.

TTFN

STARTING THE NEW YEAR OFF RIGHT

I am in the process of proofing the January 2018 issue of ROBERT D FLACH’S 1040 INSIGHTS and getting ready to “go to press”.

This issue discusses –

* “year-beginning” tax moves to make,

* information returns that will begin to appear in the mail in January,

* the changes to the 1040 that will affect most taxpayers that are in the new Tax Cuts and Jobs Act,

* using a “box” or online service to prepare their tax returns, and

* the Social Security changes for 2018.  

You can order a copy of this issue for only $2.00 – a special discounted price for this issue.  It will be sent to you as a pdf email attachment. 

Send your check or money order for $2.00, payable to Taxes and Accounting, Inc, and your email address to –

TAXES AND ACCOUNTING, INC

FOBERT D FLACH’S 1040 INSIGHTS

POST OFFICE BOX A

HAWLEY PA 18428

For information on subscribing to this newsletter click here.

TTFN

A TALE OF THE TAIL

One of the most important pieces of advice I have seen, and have given, over the years is “Don’t let the tax tail wag the investment dog”.

Do not make investment or financial decisions based solely on tax considerations. For years now I have been saying that the first criteria for evaluating any transaction, strategy, or technique you are considering should always be financial.  Taxes are second. 

Obviously you should be aware of, and take into consideration, the tax consequences of any planned transaction, and try to structure the transaction so that it results in the minimum federal and state tax cost.   

But remember - taxes are only pennies on the dollar.   

When discussing this issue I always tell the following story –

Many decades ago, when I was still an "apprentice" tax preparer, one of my mentor’s clients came in and proudly announced that his employer had offered to reimburse him for job-related mileage, but he turned it down because then he would not be able to deduct business travel on his Form 1040 (back then employee business expenses were deductible in full "above-the-line" as an Adjustment to Income). 

My mentor avoided the temptation to tell the client that he was a complete idiot, and attempted to explain, with great patience and tact, that it is much "more better" for someone to give you $1.00 tax free than it is to be able to save 30 cents by claiming a tax deduction. 

Similarly, there is no benefit in spending $1.00 needlessly to save 30 cents in taxes.  You have not saved 30 cents – you have actually lost 70 cents!  It doesn’t make sense to incur an expense solely because it is deductible.

TTFN

 

 

 

 

 

 

 

 

 

 

YEAR-END TAX PLANNING

It’s that time of the year again – time to talk about year-end tax planning.

 

As I have been saying every year at this time for decades - Once the ball drops on One Time Square on New Year’s Eve and 2017 is rung in there is very little that you can do to reduce your 2016 tax liability.  But there is much that can be done during the last two months of the year to make sure that you pay the absolute least amount of federal and state income tax possible.

 

I have created a 2016 YEAR-END TAX PLANNING GUIDE.  This guide discusses in detail what you can do between October 1 and December 31 to make sure that you pay the absolute least possible amount of federal and state income tax for 2016.

 

I talk about –

 

·         THE MOST IMPORTANT NUMBER ON YOUR TAX RETURN

 

·         THE TRADITIONAL YEAR-END STRATEGY

 

·         TIMING OF DEDUCTIONS

 

·         CAPITAL GAINS AND LOSSES

 

·         MUTUAL FUNDS

 

·         COLLEGE COSTS

 

·         PEP, PEASE, NIIT, AND THE MEDICARE SURCHARGE

 

·         EXPIRING TAX BENEFITS

 

·         and the dreaded ALTERNATIVE MINIMUM TAX

 

I also provide compilations of the Inflation and Cost-of-Living Adjustments for credits, deductions, exclusions, and phase-outs for 2016 and 2017, and include helpful worksheets.  The “What’s New for 2017” compilation will be sent separately when the information becomes available

 

The cost of this report, sent to you as a “pdf” email attachment, is only $3.00!  A print copy send via postal mail is $4.00.      

 

Send your check or money order for $3.00 or $4.00 payable to TAXES AND ACCOUNTING, INC, and your email, or postal, address to –

 

YEAR-END TAX PLANNING GUIDE

TAXES AND ACCOUNTING, INC

POST OFFICE BOX A

HAWLEY PA 18428

 

TTFN