Taxation

Capital Gains Rates Before and After the New Tax Law 04-23-2018

The tax brackets for long-term capital gains and qualified dividends are changing under the new tax law. For 2018 through 2025, these brackets aren't linked to the ordinary-income tax brackets for individuals. Here are the new cutoffs, along with 1) how the brackets have changed for trusts, estates and dependents subject to the kiddie tax, 2) what's happened to the 3.8% net investment income tax, and 3) how short-term capital gains are taxed. Continue reading


Are Roth IRAs Still Beneficial under the New Tax Law? 03-12-2018

Roth IRAs can be a smart way for you to save for retirement. And temporary tax rate cuts for 2018 through 2025 under the new tax law could persuade some people to convert traditional IRAs into Roth IRAs sooner rather than later. But the new law also contains a potential pitfall if an account's value unexpectedly falls after it's converted. Here's what you need to know before jumping headfirst into a Roth IRA or a Roth conversion. Continue reading


New Law Revamps the Kiddie Tax 01-22-2018

The so-called "kiddie tax" was designed to discourage high-income taxpayers from shifting income to children in lower tax brackets to reduce the family's overall tax bill. The kiddie tax can cause a portion of a dependent child's net unearned income to be taxed at higher rates than the regular rates for single taxpayers. The Tax Cuts and Jobs Act changes the kiddie tax rate structure for 2018 through 2025. Here's how. Continue reading


Landmark Tax Reform Bill Passes 12-25-2017

The Tax Cuts and Jobs Act is the biggest tax reform package in over 30 years. With tax filing season right around the corner, business and individual taxpayers, with the help of their tax advisors, are scrambling to understand how the changes will affect them. Here are some key elements of the new law. Continue reading


How Might the New Tax Reform Law Affect You? 12-25-2017

The new tax law has finally passed and the changes generally kick in in 2018. President Trump and Republican members of Congress say it will bring $3.2 trillion in tax cuts. But some individual taxpayers are skeptical. Everyone's situation is unique and not everyone will come out ahead. This article provides an example of how it might affect your taxes in 2018, if you're still eligible to itemize deductions. Continue reading


Retirement Account Catch-Up Contributions Can Add Up 11-16-2017

Are you age 50 or older? If so, you can currently make extra “catch-up” contributions to certain types of tax-favored retirement accounts. Over time, these contributions can make a significant difference in your retirement-age wealth.

What about tax reform? After President Trump and other lawmakers stated that they wouldn’t tinker with retirement plan contribution tax breaks, the U.S. Senate has proposed limits to catch-up contributions. These are just proposals. For now, the rules in this article are current law.

Unfortunately, many people are unaware of this retirement savings bonus. Here’s what you need to know to reap the benefits.

The Basics

Eligible taxpayers can make catch-up contributions to a traditional IRA or a Roth IRA. In addition, some employer-sponsored retirement plans allow participants to make catch-up contributions.

IRA catch-up contributions. Once you reach age 50, you can make extra catch-up contributions of up to $1,000 annually to your traditional IRA or Roth IRA. If you’ll be 50 or older as of December 31, 2017, you can still make a catch-up contribution for the 2017 tax year. You have until April 16, 2018, to make your contribution.

Tax-deductible contributions to traditional IRAs create tax savings, but your income may be too high to qualify. Contributions to Roth IRAs don’t generate any upfront tax savings, but you can take federal-income-tax-free withdrawals after age 59 1/2 (assuming you’ve had at least one Roth account open for over five years).

There are income restrictions on Roth contributions, too. Worst case, you can make extra nondeductible traditional IRA contributions and benefit from the account’s tax-deferred earnings advantage.

Catch-up contributions to employer-sponsored plans. If your employer’s retirement plan allows extra salary reduction contributions and you’ll be age 50 or older at the end of next year, you can contribute up to $6,000 in added savings for 2018 to your 401(k), 403(b) or 457 account.

Salary reduction contributions are subtracted from your taxable wages, so you effectively get a federal income tax deduction. If your state has a personal income tax, you’ll generally get a state income tax deduction, too.

You can use the resulting tax savings to help pay for part of your catch-up contributions. Or you can set the tax savings aside in a taxable retirement savings account to further increase your retirement-age wealth.

Having trouble deciding which tax-favored account to make extra contributions to? In a nutshell, making deductible catch-up contributions to a traditional IRA or to an employer-sponsored retirement plan will lower your tax bills. Contributing extra to a Roth IRA won’t lower your taxes, but you can take more tax-free withdrawals later in life.

Retirement Savings Bonus

How much extra could you accumulate just by making catch-up contributions? The extra savings quickly add up, because maximum catch-up contributions are considerably larger than they once were.

For example, the maximum catch-up contribution to a 401(k) account was only $1,000 in 2002 vs. $6,000 for 2018. The maximum catch-up contribution to an IRA was only $500 in 2002 vs. $1,000 for 2017 and 2018.

To illustrate how much catch-up contributions can add to a retirement nest egg, suppose Beth, who’s currently 50, decides to contribute an extra $1,000 to her IRA in 2017. She contributes an extra $1,000 each year through 2032. By age 65, Beth will have accumulated roughly $30,000 more in savings (assuming an 8% annual return).

Alternatively, let’s suppose that Beth decides to contribute an extra $6,000 to her 401(k) plan each year through age 65, starting in 2018. In that case, by age 65, she’ll accumulate roughly $182,000 in additional savings (assuming an 8% annual return).

To maximize your savings, you can make catch-up contributions to both your IRAs and employer-provided retirement plans in the same year. In the hypothetical example, Beth’s combined savings could add up to $212,000 by age 65 (assuming an 8% annual return), if she contributed to $1,000 extra to her IRA annually (starting in 2017) and $6,000 to her 401(k) annually (starting in 2018).

Deadlines

There’s still plenty of time to make an extra catch-up contribution of up to $1,000 to your IRA for the 2017 tax year. The 2017 IRA contribution deadline is April 16, 2018. Then you can make another IRA catch-up contribution for your 2018 tax year anytime between January 1, 2018, and April 15, 2019.

If you are an employee and your employer-sponsored qualified retirement plan allows catch-up contributions, you can sign up to make them for 2018 year during this year’s open enrollment period that is probably already underway at your job. Or your employer may allow you to modify your contributions any time during the year, which means you might still be able to do it for this year. Check with your benefits department to see what your options are.

Contact your tax advisor if you have questions or want more information about retirement account catch-up contributions.

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Give Back and Save Taxes with Charitable Contributions 10-31-2017

As year-end approaches, you may be thinking about making some charitable donations. Here’s a rundown of the potential tax breaks for your generosity.

Donating Clothing and Household Items

When it comes to your old clothes, furniture, linens, electronics, appliances, and the like, the general rule is that you can claim deductions only for items in “good condition or better.” However, you can deduct the fair market value of an item that’s not in good condition or better if you attach a written qualified appraisal that values the item at more than $500. For example, this rule might apply to a Persian rug that’s valuable despite being in only “fair” condition.

Itemized Deductions

You can claim write-offs for contributions of cash and other items donated to charitable organizations, such as United Way and Goodwill. What you might not realize is that not all contributions to charities qualify for tax breaks.

First, you receive tax savings from charitable donations only if you itemize deductions on your personal tax return. For 2017, the standard deduction amounts are:

    • $6,350 for singles,

 

    • $9,350 for heads of households, and

 

  • $12,700 for married joint-filers.

Unless your total itemized deductions, including any charitable donations, exceed the applicable standard deduction, you won’t get any tax savings for your generosity. In general, most people who don’t own homes don’t itemize.

Also, be aware that some not-for-profit organizations aren’t qualified charities for federal income tax purposes. You can search for IRS-approved charities on the IRS website or ask your tax advisor for help. And of course, you can’t deduct money or property you give to an individual.

In addition, there are limits on the amount of itemized charitable donations that you can deduct in any one year. For most types of donations, the limit is 50% of adjusted gross income (AGI). However, lower limits apply to certain types of donations.

Any amount of charitable contribution that’s disallowed under the applicable percent-of-AGI limitation is carried forward to the following five tax years. If you can’t use up the carryover amount during the five-year period, the remainder can’t be deducted.

Supporting Documentation

The tax rules also require proper documentation for charitable contribution deductions. The type of documentation depends on the size and nature of the donation.

Cash contribution under $250. These donations require a written receipt from the organization showing its name, the date and place of the contribution, and the amount. Alternatively, you can save canceled checks or credit card statements.

Cash contribution of $250 or moreThe IRS won’t accept canceled checks or other evidence supplied by you for these donations. Instead, you must obtain a written acknowledgment from the charity by the time you file your federal tax return. If you don’t get a written acknowledgment and you do get audited, the IRS will reject your deduction, even if there’s no doubt that your donations were legitimate.

Noncash donation under $250. Here, you’ll need to obtain a receipt from the charity by the time you file your return. Keep it with your tax records for the year, but don’t file it with your return.

Noncash donation worth between $250 and $5,000These donations require a contemporaneous written acknowledgment from the charity (more detailed than a receipt) that meets IRS guidelines. Keep it with your tax records, but don’t file it with your return.

A qualified acknowledgment must include the following information:

    • A description (but not the value) of the noncash item,

 

    • Whether the charity provided you with any goods or services in exchange for the donation (other than intangible religious benefits), and

 

  • A description and good-faith estimate of the value of any goods or services provided by the charity in exchange for your donation.

An acknowledgment meets the contemporaneous requirement if you obtain it on or before the earlier of 1) the date you file your Form 1040 for the year you made the donation, or 2) the due date (including any extension) for filing that return. If you don’t have a qualified acknowledgment in hand by the relevant date, you can’t claim a charitable deduction.

Noncash donation worth between $501 and $5,000. In addition to the aforementioned contemporaneous written acknowledgment from the charity, you’ll need to provide written evidence that supports the item’s acquisition date, fair market value and cost.

The written evidence — which may be as simple as your own handwritten notes — will be used to complete IRS Form 8283, “Noncash Charitable Contributions.” Keep the evidence with your tax records, but don’t file it with your return.

Noncash donation worth more than $5,000. In addition to a contemporaneous written acknowledgment and written evidence, these donations require a written qualified appraisal. Specific appraisal requirements apply to certain types of donated property and donations valued above certain amounts. However, no appraisal is required for donations of publicly traded securities.

Special restrictions apply to donations of vehicles, planes and boats. As a general rule, your charitable write-off will usually be limited to the amount the charity receives when it sells the vehicle, plane or boat (as opposed to the item’s fair market value).

Save Taxes by Donating

You can reap tax savings by making charitable donations, but the rules are complicated. Your tax advisor can help devise a plan that delivers the maximum tax savings for your generosity. Just don’t wait too long to get started: Year-end will be here before you know it.

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Last-Minute Reminders: Mortgage Interest & FBAR 04-14-2017

Update on Home Mortgage Interest Deductions

For 2016, the IRS Form 1098 – “Mortgage Interest Statement” – you received from your lender with information used to claim an itemized deduction for qualified residence interest should include additional information this year.

A qualified residence includes your principal residence and up to one additional personal residence. Qualified residence interest is defined as interest on up to $1 million of “acquisition debt” plus interest on up to $100,000 of “home equity debt.”

Acquisition debt is debt that is:

  • Incurred to acquire, construct, or substantially improve a qualified residence, and
  • Secured by a qualified residence

Home equity debt is debt (other than acquisition debt) that is:

  • secured by a qualified residence
  • used for any purpose
  • deductible under the alternative minimum tax (AMT) rules only to the extent the debt proceeds are used to acquire, construct or substantially improve a qualified residence

Important note: If you’re married and file separately from your spouse, you can deduct half of the eligible mortgage interest paid on your separate returns.

Additional information is required to be included in Form 1098 this year to allow the IRS to more easily identify taxpayers who attempt to deduct interest on loan balances above the combined $1.1 million limit for acquisition debt and home equity debt, as well as those taxpayers who attempt to claim mortgage interest deductions for more than two residences. That information is:

  • Mortgage origination date
  • Outstanding principal balance as of the beginning of the calendar year for which the Form 1098 is provided
  • Address of the property that secures the mortgage (or a description if the property doesn’t have an address)

Note: You also may raise a red flag if the amount of your qualified residence interest deduction differs from the combined mortgage interest reported on your Form(s) 1098. This sometimes legitimately happens if, for example, you have more than $1.1 million of combined acquisition debt or own more than two homes.

New FBAR Filing Deadline

If you have an interest in — or authority over — a foreign financial account, the IRS wants you to provide information about the account by filing a form called the “Report of Foreign Bank and Financial Accounts” (FBAR).

The annual deadline for filing FBARs has been changed. It now coincides with the tax filing deadlines for individuals, under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. So, for accounts held in 2016, you must generally file FBARs by April 18, 2017. (Formerly, the deadline was June 30, excluding weekends and holidays.)

Important note: If you fail to meet the annual FBAR due date, the Financial Crimes Enforcement Network (FinCEN) will grant an automatic extension to October 15. Accordingly, specific requests for this extension aren’t required.

Reporting Requirements
FBARs are not filed with federal tax returns. Each year, citizens and resident aliens of the United States, as well as domestic partnerships, corporations, estates and trusts, must generally file an FBAR form electronically with the FinCEN if:

  1. They have a direct or indirect financial interest in — or signature authority over — one or more accounts in a foreign country. This includes bank accounts, brokerage accounts, mutual funds, trusts or other types of foreign financial accounts, and
  2. The total value of the foreign accounts exceeds $10,000 at any time during the calendar year.

Taxpayers also may be subject to FBAR compliance if they file an information return related to certain foreign corporations, foreign partnerships, foreign disregarded entities, or transactions with foreign trusts and receipt of certain foreign gifts.

Exceptions to the Rules
FBAR filing exceptions are available for the following U.S. taxpayers or foreign financial accounts:

  • Certain foreign financial accounts jointly owned by spouses
  • United States persons included in a consolidated FBAR
  • Correspondent/nostro accounts
  • Foreign financial accounts owned by a governmental entity
  • Foreign financial accounts owned by an international financial institution
  • IRA owners and beneficiaries
  • Participants in and beneficiaries of tax-qualified retirement plans
  • Certain individuals with signature authority over — but no financial interest in — a foreign financial account
  • Trust beneficiaries (but only if a U.S. person reports the account on an FBAR filed on behalf of the trust)
  • Foreign financial accounts maintained on a United States military banking facility
  • Important note: Filers living abroad may coordinate FBAR filing with their tax return deadline (June 15, 2017)

Penalties for Noncompliance
Take the FBAR requirement seriously. Failing to file an FBAR can result in the following penalties if assessed after August 1, 2016, and associated violations occurred after November 2, 2015:

  • An inflation-adjusted civil penalty of as much as $12,459 per violation, if the failure wasn’t willful. This penalty may be waived if income from the account was properly reported on the income tax return and there was reasonable cause for not reporting it.
  • A civil penalty equal to the greater of: 1) 50% of the account, or 2) $124,588 per violation, if the failure to report was willful.
  • Criminal penalties and time in prison.

For Assistance

Consult with a tax professional if you have questions about any of this. Your tax advisor can ensure you meet the requirements for reporting mortgage interest and foreign accounts and help avoid penalties for noncompliance.

 

Feel free to contact us for more information rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com.

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4 Big Questions to Answer Before Claiming Higher Education Tax Credits 04-06-2017

The Internal Revenue Code offers two federal income tax credits for post-secondary education expenses: the American Opportunity tax credit, and the Lifetime Learning credit.  While these credits aren’t new, there are several recent developments that might affect your 2016 federal income tax return. Here are four questions you need to answer to help preserve and maximize your credits.

1. Did the School Require You to Purchase That Computer?

The U.S. Tax Court recently decided that the cost of a computer isn’t eligible for the American Opportunity credit unless the school specifically requires the student to have one. In this case, the taxpayer bought a computer for his college English class to prepare a paper while he was traveling. According to the Tax Court, the cost of the computer wasn’t a qualifying expenditure for the American Opportunity credit, because having a computer wasn’t a condition of the student’s enrollment. (Djamal Mameri v. Commissioner, T.C. Summary Opinion 2016-47)

2. When Did You Actually Pay Your Tuition?

In another recent Tax Court decision, the taxpayer was a student at Arizona State University. In December 2011, the taxpayer prepaid his tuition for the spring semester of 2012. The tuition bill wasn’t actually due until January 2012. The taxpayer then claimed a $2,500 American Opportunity credit on his 2012 federal income tax return, based on the tuition for the 2012 spring semester. (Lucas McCarville v. Commissioner, T.C. Summary Opinion 2016-14)

The IRS disallowed the taxpayer’s credit for 2012, citing tax code provisions that stipulate that tuition payments made in the current year (2011 in this case) for educational sessions that begin in the first three months of the following year (2012 in this case) are eligible for the American Opportunity credit only in the current year (the year of payment, which was 2011 in this case).

The taxpayer had already claimed the maximum $2,500 American Opportunity credit on his 2011 return. So he was attempting to include the payment for the spring 2012 semester tuition (paid in 2011) on his 2012 return in order to claim a $2,500 American Opportunity credit for that year. The Tax Court agreed with the IRS, requiring credits to be claimed in the year in which a bill is paid, regardless of when it’s due.

3. Did You Check Your Math?

Tax law requires post-secondary educational institutions to supply annual Form 1098-T, Tuition Statement, to taxpayers and the IRS. Taxpayers are supposed to use the amount of qualified tuition and related fees reported on these forms to calculate their allowable education credits. In turn, the IRS can use the same information to see if taxpayers got it right. But this common-sense provision won’t work the way it is supposed to anytime soon. As a result, there will be ongoing confusion about tuition and fee information reported on Form 1098-T.

For pre-2016 years, Form 1098-T issued by educational institutions could report either:

  • Payments received by the institution during the year for qualified tuition and related fees, or
  • Amounts billed by the institution during the year for qualified tuition and related fees.

Many institutions chose to report amounts billed, because that information was more easily retrieved from their accounting systems. However, the amount billed during the year isn’t what a taxpayer needs to know to calculate the allowable credit for that year. Instead, taxpayers need to know the amount paid during the year. Therefore, the information reported on Form 1098-T can be misleading to both taxpayers who claim education credits and to the IRS when reviewing the credits.

Congress attempted to correct this situation, but the IRS gave institutions the option to continue reporting amounts billed during the year on Form 1098-T issued for both 2016 and 2017.

Therefore, Form 1098-T issued for both 2016 and 2017 can report either:

  • The total amount billed by the institution during the year for qualified tuition and related fees, or
  • The total amount paid to the institution during the year.

Taxpayers must base their education credit calculations on amounts paid during the year, but Form 1098-T for 2016 and 2017 may not supply that information. As a result, reconciling credit amounts claimed on tax returns with tuition and fee amounts reported on Form 1098-T will continue to be problematic for many taxpayers.

4. Do You Have ID Numbers?

Fraudulent claims for higher education tax credits have become common, so Congress enacted two anti-fraud controls that apply to 2016 returns:

  1. You can’t claim the American Opportunity credit for a student who doesn’t have a federal tax identity number (TIN) issued on or before the due date of the return for that year. For a U.S. citizen, the TIN is his or her Social Security number (SSN). Non Citizens can obtain TINs that aren’t SSNs.
  2. When you file your tax return, you must include the educational institution’s employer identification number (EIN) on Form 8863, Education Credits, for each student for whom you claim the American Opportunity or Lifetime Learning credit.

Need Help?

College is expensive. Why not let Uncle Sam help make it more affordable via higher education tax credits? Contact us about navigating the rules to ensure you maximize the credits that are currently available under the tax law.

 

Feel free to contact us for more information rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com.

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2017 Q2 tax calendar: Key deadlines for businesses and other employers 04-02-2017

Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

April 18

  • If a calendar-year C corporation, file a 2016 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.
  • If a calendar-year C corporation, pay the first installment of 2017 estimated income taxes.

May 1

  • Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), and pay any tax due. (See exception below.)

May 10

  • Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.

June 15

  • If a calendar-year C corporation, pay the second installment of 2017 estimated income taxes.

© 2017

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