Year End Tax Planning 2017

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When December and the holiday season rolls around it’s very easy to get caught up in all the holiday preparation.  The last thing you want to think about is year-end tax planning but it might save you big money come April if you can sit down and review your 2017 tax situation and look ahead a little to 2018.  This year might be a little more complex to do tax planning as the tax laws will likely be changing but we don’t know for sure what they will look like in 2018.

A few tax planning strategies that never seem to change:

  • Review your investments and balance capital gains by potentially selling investments at a loss
  • Review your wage withholdings–to high, too low?
  • Consider contributing the max to your retirement fund (SEP, traditional, & IRA contributions for 2017 can be made up until filing deadline 2018)
  • Spend money in flexible spending accounts that don’t rollover
  • Make those last minute charitable donations (cash or non-cash) and save receipts!

In light of the tax law changing, the biggest thing that will impact many of my tax clients is the doubling of the standard deduction.  If you don’t think you will hit the $24,000 (ish) itemized deduction floor in 2018, accelerating some deductions before December 31,2017 may give you the best of both world.  Look at your cash flow and consider accelerating the following:

  • Charitable contributions–if you normally give monthly make the January payment in December
  • Mortgage Interest–pay your January mortgage bill in December
  • State taxes–if you pay quarterly estimated taxes, don’t wait until January 15 to pay the state portion.  Send the check by December 31 to take the deduction in 2017 as this itemized deduction is slated to be chopped entirely in 2018.
  • Have a lot of unreimbursed employee expenses or other miscellaneous itemized deductions?  Bunch them before year end

Happy Holidays and Happy Tax Planning!

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The Equifax Data Breach & Taxes

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The Equifax data breach is said to impact nearly half the US population.  Sensitive information such as social security numbers, birthdates, addresses, and drivers license numbers have been compromised.  Financial advisors recommend credit freezes, credit monitoring, and other avenues to watch out for identity theft due to the breach. This breach might also impact the 2018 tax filing season for tax year 2017 as the sensitive information obtained is exactly what is needed to file a fraudulent return for a fraudulent refund causing you a major headache when filing your actual return.  Here are a few ways to mitigate this potential fraudulent use of sensitive tax information:

  • File Early: The first to e-file (quickest mode) or paper file a return makes it an automatic reject for anyone else trying to e-file a return with your social security number. Don’t rush to file with incomplete or inaccurate information but gather and organize as many documents as you can during 2017 and look for online options to receive the rest.
  • Change Withholdings: If you are one that expects a windfall tax return in February or March, if another return is filed in your name it may be up to 8 months before you will see the return.  Changing withholdings to more exemptions on your paycheck means you will see the money now.  It may be a good idea to talk about a tax estimate with your tax advisor to make you the proper exemptions are taken on the form W4 so you don’t end up owing come tax time or the amount is very minimal.
  • Consider a PIN: Those who have been a victim of tax identity theft have been issued a PIN number to use on future tax returns.  A few states (Florida, Georgia, Washington DC) offer an option to apply for a PIN before tax identity theft has occurred so if you live in those areas, it may be an option.
  • Monitor fraud: Don’t throw out any tax notices, especially CP2000 ones showing unreported income from employers you never worked for.

Unfortunately, none of the above measures are fail safe against a fraudulent return being returned using your information but can potentially help mitigate the situation.

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Loaning Money to Family

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To loan money to family members or not, that is the question.  Some say any money “lent” should be considered a gift since things get sticky when you combine money and family and the likelihood of ever seeing the money again is slim.  If you are going to legitimately loan money to family members, keep the following in mind.

  1. Figure out what you can truly afford.  Before saying yes to a loan, figure out if you can afford to lose the money that is meant for a loan. Don’t put your own financial security in jeopardy.
  2. Make sure your spouse/significant other is on board. This should go without saying that if you are married or share accounts with another person, both should be on board to make the loan.  This will help save your finances and marriage/relationship.
  3. Charge interest. If you don’t want the loan to be potentially re-categorized as a gift, the IRS will want to see interest charged, at least at the applicable federal rate.  As of August 2017 this rate is set at 1.29% short-term loans (up to 3 years), 1.95% mid-term loans (3-9 years), 2.85% (over 9 years)long-term loans.  If you end up forgiving the loan with principal and accrued interest in excess of the gift tax exclusion of $14,000/$28,000 (joint gift) you may be liable for gift taxes.
  4. Put the Loan in Writing. Drawing up an official loan document will be extra assurance to the IRS that you are loaning money and not just making a gift.  This also helps everyone involved in the transaction understand expectations. Sample promissory notes are available online if you don’t want to involve a lawyer.  If you are making a loan to family for a home mortgage, make sure the loan/promissory note is written up correctly so your interests are secure.  Draw up a mortgage or deed of trust to put the home up as collateral on the loan.  Make an amortization schedule that shows the breakdown of principal and interest over the life of the loan.
  5. Provide assistance in another way. Besides making a loan to a family member, other ways you can help financially are: give a small gift of money or goods (remember the $14,000 gift tax exclusion/$28,000 joint gift), co-sign on a bank loan, create a budget and help them get finances in order, provide employment, help them find financial assistance and local resources.


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Summer, Teen Jobs, & Taxes

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Remember back at the start of summer when you told your teen to get a job and they actually did?  Did you know the tax ramifications of a summer job for your teen?  Don’t worry, it’s not that complicated so here’s the run down.

Summer Job – Employee

Chances are your teen got a job as an employee lifeguarding, making sandwiches at a restaurant, working as a counselor at daycamp, or other summer opportunities. As an employee, the employer  asked them to fill out a W-4 which basically tells what level federal & state taxes to take out of the paycheck.  If you still consider your teen a dependent (you’re still paying for the roof over their head and most expenses because teens are expensive!) if they don’t plan to make over $6,350 they can put exempt on the W-4 and not have any taxes withheld.  This $6,350 amount is the standard deduction limit for 2017 meaning no federal taxes are assessed up to that amount of earned income, or wages.  If your teen’s total earned income is under $6,350 for the whole year and no income tax was withheld, no tax return needs to be filed (win-win!).  If your teen had taxes withheld or earned over $6,350 they will have to file an income tax return come January 2018 to get any potential refund back or pay any taxes owed. Usually a 1040-EZ is all they need and there are many free online software programs you can use.

Summer Job – Independent Contractor

If your teen went out on their own for work, created a business, or was classified as an independent contractor by the person they worked for, chances are they will need to file a tax return and owe taxes.  Instead of filling out a W-4, they should have been asked to fill out a W-9.  In January instead of being issued a W-2 like a traditional employee, they will receive a 1099-MISC from the business that paid them money for their services.   All income and expenses associated with that income (mileage, supplies, equipment, etc) are put on a Schedule C.  Self-employment tax  on net income (income – expenses) is assessed at 15.3%.  A return is required to be filed on self-employment income over $400.  As an employee, you don’t really notice employment taxes as half of the full amount–7.65%–is automatically withdrawn (employee portion) and the employer pays the other half separately from the paycheck.  Even if your teen earned less than $6,350 and has no federal income tax assessed, self-employment tax is still assessed.

Summer Job – Family Business

Have a family business that you or your spouse owns and want to give your teen the opportunity to work with you?  If that business is a sole proprietorship or partnership, no FICA taxes are required to be withheld for child employees under 18.  Under 21, no FUTA taxes are required.

Dependency Exemption

As mentioned above, if you provide over half the financial support for your teen and they live with you at least half the year (or are students at college aged 19-23), you can claim the dependency exemption for them on your tax return.  The dependency exemption for 2017 is $4,050 and can mean tax savings estimated at $1,000 for you (depending on your marginal tax rate).  If you claim your teen as a dependent, make sure that if they are required to file a tax return they don’t accidentally claim the exemption also.

Enjoy the rest of summer and I hope your teen made some money at their summer job!

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Tax Considerations Changing Jobs

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New job?  Congratulations! Here are a few things relating to Uncle Sam & taxes to keep in mind:

W-2s: When it comes time to prepare your taxes, don’t forget to include income from all employers you received wages from.  If you have moved, the W-2 may or may be forwarded to you but it is your responsibility to keep addresses current with previous employers or request another copy of the W-2 from them.

Severance/Separation Pay: Any severance or separation pay is taxable in the year it is paid out. The same also goes for any accrued vacation pay paid out at departure.  Any unemployment money received between jobs is also considered taxable income taxed at your ordinary tax rates.

W-4 Withholdings: If your income changed significantly from your previous job, it’s a good idea to re-evaluate how much is withheld for taxes.  Got a big raise?  Great, just double check if that puts you in a higher tax bracket or makes you ineligible for tax credits like the child tax credit or the student loan interest deduction to make sure enough is being withheld throughout the year.

Retirement Funds: You may be tempted to cash out and keep the funds from your old employer’s retirement account but for most people, this will bring an extra 10% penalty plus taxes at your normal tax rate (it adds up, believe me!).  Instead of withdrawing, you can keep the funds with your old employer or transfer the funds directly to a traditional IRA (or Roth IRA if that makes more sense tax-wise-it will be taxable income in the year converted from 401(k)) at the investment establishment of your choosing.  Also, make sure your contributions between your old job and new one for the year to a 401(k) do not go above $18,000 ($24,000 if over age 50).  If the amount combined goes over, you might be subject to a penalty or have to withdraw excess funds.

Healthcare: If you have an HSA with both employers, make sure your contributions don’t go over a combined about of $3,400 single policy or $6,750 for a family policy or else excess funds are either subject to an extra tax or need to be withdrawn by due date of the return.  Also, under current ACA law, if you do not have healthcare coverage for over 90 days, there may be an extra tax imposed.  Check with your old and new employer for coverage dates to stay within this 90 short gap exemption or if over, look into Cobra or an individual health plan through your state’s exchange.

Job Change Expenses: There are a few job change related expenses that may be taken as deductions on your tax return.  If you moved more than 50 miles away from your old job/residence, any out of pocket moving expenses may qualify for the moving expense deduction.  Reimbursements by your new employer can be handled in many different ways so please consult a tax adviser about your specific situation.  If you incurred signification job search expenses (unreimbursed travel, etc) you may qualify for the job search deduction which gets combined with other miscellaneous itemized deductions and has to get over 2% of your income to take.

Excess Social Security Taxes: If your combined taxable wages for the year exceed $127,200 in the year you changed jobs, there is a good chance you overpaid social security taxes.  Any excess amount from your W-2s (combined if over $7,886.40 withheld on line 4 for an individual) will be put on Form 1040 line 71 and added to other tax payments made to go against any tax liability.

Enjoy your new job and if you have any tax questions related to the change, please consult a tax professional.

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Student Loans & Tax Filing Status

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For many, leaving college means starting to pay student loan debt which can often equal a house payment. Some student loan lenders offer an Income Based Repayment (IBR) or Pay as You Earn Repayment (PAYE) based on the adjusted gross income of your tax return.  If you are married and your spouse has a high income, this pushes your AGI up and probably doesn’t give you much benefit in lowering student loans.  One potential way around this is to file married filing separate (MFS) instead of married filing joint (MFJ).  I say potential as MFS generally means higher taxes are paid as a couple.

Here are some tax implications to keep in mind with the MFS filing status:

  • Dependent Care Credit not allowed
  • Earned Income Tax Credit not allowed
  • Student Loan interest deduction not allowed
  • Lifetime Learning Education Credit not allowed
  • Tax rates higher than MFJ

Another thing to keep in mind down the line is the taxability of future loan forgiveness with an IBR or PAYE.  As the tax law stands right now student loan debt forgiveness is considered taxable income (except under the Public Service Loan forgiveness program).  This means you could have a large tax bill in the year the debt is forgiven.

So the question is, should you file MFS and reduce your student loan payment?  It all comes down to the math running an MFS v MFJ tax return comparisons along with calculating loan repayment schedules based on the AGIs produced in both tax returns and seeing which one nets the most benefit while potentially looking at future taxability of any loan forgiveness.  Whoever said this was easy?  Online tax programs or a tax professional can help with these calculations.

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Selling Your Personal Home & Taxes

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I have had a lot of inquiries lately about taxes due on the sale of a personal home as many homeowners still think old tax laws are in effect.  Things have gotten a lot easier in excluding any gain on the sale of a personal home but let’s start with what the old law was.

OLD Tax law: If you sold your personal home at a gain, to escape tax on capital gains the proceeds of the sale had to be rolled over into the purchase of another home.  Individuals over 55 were allowed a once-in-a-lifetime exclusion of $125,000 from capital gains on the sale of their home.

NEW Tax law (as of 5/6/97 yes that’s 1997): If you lived  in the home as your primary residence and owned it 2 out of the last 5 years,  you are eligible for a $250,000 (single/MFS/HoH) or $500,000 (MFJ) exclusion from capital gains tax.  If you lived in the home less than 2 years, some exceptions to the rule might apply to allow a pro-rated exclusion: move due to change of job, health, or unforeseen circumstances such as divorce.  If you depreciated the home due to renting it out or claimed depreciation in the home office deduction, that amount will need to be “recaptured” and taxed at rates up to 25% (this is technically a section 1250 gain, not capital).  Another caveat is you cannot claim the exclusion more than once every two years.

That’s it in a nutshell for selling your house without having to cough up money on the gain to the government.  As with any tax law, if your situation is a little more complex than described above, please contact a tax professional.

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2017 Tax Filing Season Calendar

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Happy 2017!  As tax documents start flowing into your mailbox and email inbox, please keep in mind the following dates for the 2017 tax filing season for 2016 tax returns.
January 17, 2017: Due date 4th Quarter estimated tax payments

January 23:  IRS begins processing returns for 2016 tax year

January 31: Deadline for employers to mail out W-2s and most 1099-MISC

February 15: Deadline for financial institutions to mail out 1099-B (interest, dividends, capital gains)

February 15: All 2016 tax returns claiming the Earned Income Credit (EIC) and/or Additional Child Tax Credit held by IRS until this date

March 15: Partnership (1065) & S-Corp (1120S) tax deadline.  Please note the new tax deadline for partnership returns is now March 15 instead of April 15 (or 18 depending on the year).

April 18: Individual and C-Corp (1120) tax deadline or request for extension.  Yes that’s right, you get an extra few days to prepare your return!

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2016 Year End Tax Planning

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Is it really possible that 2016 is almost over?  Looking back over previous articles, last year’s tax planning one came to mind and I’ll put it out there again with a few more additions.  Here are things to consider before midnight on December 31 rolls around:

  • Adjust Withholdings:  If you had a significant increase (decrease) in income, change in marital status or dependency exemptions, it’s very important to adjust withholdings for these changes especially if a big year end bonus is coming your way.  Not paying enough during the year can trigger an underpayment penalty.  Paying too much is an interest free loan to the government.
  • Bunch Miscellaneous Itemized Deductions:  If you itemize deductions and have large amounts of unreimbursed employee expenses, lawyer fees attributed to alimony or other taxable income related items, or tax preparation fees it’s a good idea to check if you will make it over that 2% income threshold to take the deduction.  If your close, expenses can be bunched for the 2016 tax year by paying for them with cash or CC by Dec. 31.  If you are subject to AMT, this deduction may not be beneficial to you.
  • Open and Fund Retirement Accounts: If you earn money from self-employment, you are eligible for additional tax-advantaged retirement savings beyond your IRA. The deadline to open a SIMPLE IRA was Oct. 1, but you can still open an individual 401(k), Roth or traditional, until Dec. 31. The contribution deadline varies by type of entity. The deadline to contribute to other retirement accounts is usually April 15, or whenever you file your taxes, but there is some variation among types of accounts. If your 401(k) or 403(b) is through your employer, your deadline for contributions is Dec. 31. If you earn money from self-employment, you are eligible for additional tax-advantaged retirement savings beyond your IRA.
  • Organize Your Materials:  I can’t stress enough how important it is to have your tax receipts and statements organized whether digitally or by paper before you sit down to prepare your tax return.  Here is a post about it.
  • Decide who will Take Dependents: If parents are divorced, decide now who will take the dependency exemption as only one can.
  • Spend Your Flex Spending Account Money: In most FSAs, only $500 of unused funds may be rolled over to the next calendar year and a use-it-or-lose-it rule is in place for anything above that amount.
  • Give to Charity: Now is a good time to donate to your favorite charity (ies) not only for the benefit of helping others but also for the potential tax savings.  If you itemize your deductions, donating to a charitable organization-501(c) may lower your tax liability.
  • Accelerate Deductions or Delay Income: Make your mortgage payment early, pay property taxes, tuition, medical bills or other deductible expenses now to increase this year’s deductions – unless you’d be better off financially deducting those items next year. You might also be able to delay bonuses or other income until next year if that’s a better move.
  • Balance Capital Gains with Losses: If you have capital gains from stock or other asset sales, look at your portfolio to see if it makes sense to sell an asset that has a loss to offset your capital.
  • Give Gifts from Your Future Estate: If you want to reduce the estate tax liability for your heirs, look to give them a gift now.  Gifts to an individual in a calendar year up to $14,000 ($28,000 for a married couple) are tax free for both the giver and receiver.  Gifts made directly to educational institutions for higher learning and medical bills paid directly on behalf of someone else are also tax free.
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Gifts & Taxes

Image result for gift taxNow that Halloween is over, retailers will be setting up their holiday displays in force.  The holiday season makes us think of giving gifts a little more than at other times in the year.  Just in case you have a rich parent, aunt, or grandparent that wants to be very generous in their giving (or you are one), here are some things to keep in mind about gifts & potential gift taxes.

  • Any gift taxes levied on gifts are paid by the giver (donor), not the one receiving the gift.
  • The definition of gift for IRS purposes is “any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.”
  • Gifts can be cash, goods (cars, etc), stocks/investments, really anything with value.
  • If you give a gift in 2016 or 2017 with a value of $14,000 or less to an individual, no need to worry about gift taxes.  A husband and wife can combine this amount to give $28,000 to an individual tax free.
  • Gifts made directly to educational institutions for tuition/educational expenses or medical facilities for medical expenses on behalf of someone do not count as taxable gifts.  Just make sure the money goes directly to the institution and not to the individual to pay the institution.
  • If your gift is greater than the $14,000/$28,000 gift tax exclusion, please consult a tax professional about the potential tax liability.

Have fun gift-giving (receiving)!

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