Year-End Tax Planning Prior to Passage of the Tax Cuts & Jobs Act
Dear Client:
The Senate and House have been busy re-shaping the manner in which we will be taxed for federal tax purposes. Although the House Bill is much more comprehensive than the Senate proposal, the two branches of government share several commonalities.
This letter is intended to address proposed changes common to both versions of the legislation and inform you what actions are possible to reduce your 2017 federal income taxes by deducting certain 2018 expenses in 2017 and pushing income into 2018 when the federal marginal rates are expected to be lower.
As for state conformity, California will not have sufficient time to react to the Tax Cuts and Jobs Act. Therefore, California will continue to follow the Internal Revenue Code as of January 1, 2015. Simply stated, if you are a California taxpayer the changes detailed herein will not apply to your 2018 California income tax return. Other states that religiously adopt the Internal Revenue Code without hesitation (Arizona, Hawaii and Oregon) will probably adopt the Tax Cuts and Jobs Act effective January 1, 2018.
Commonalities between the House and Senate Bills.
Income and Loss Related Changes.
A. Nonbusiness Casualty and Theft Losses. The deduction for a loss incurred as a result of fire, flood, or theft that is not covered by insurance is no longer deductible. Under the House bill a casualty incurred as a result of a hurricane remains deductible.
B. Sale of Residence Exclusion. Under current law, $ 250,000 ($ 500,000 joint taxpayers) of the gain on the sale of your personal residence is tax-free if you lived in the home for 2 of the last 5 years. Both bills seek to change the holding period to 5 of the last 8 years.
C. Moving Expenses. The deduction related to an employment-related move is repealed for 2018. The few of you that have recently sold your home and have not moved are encouraged to move the bulk of your household belongings before January 1, 2018 to preserve this deduction.
Standard Deduction.
A. Substantial Increase in Standard Deduction Amounts. The chart below details the proposed increase in the standard deduction from the 2017 levels.
2017 Standard Deduction 2018 Standard Deduction
Single $ 6,350 $ 12,000
Head of Household $ 9,350 $ 18,000
Married – Joint $ 12,700 $ 24,000
2017 Tax-Planning Tip. The increased levels in the standard deduction will eliminate the tax benefit of itemizing deductions for several of you. In an effort to preserve the deduction and lower your 2017 federal income tax liability consider the following:
Pay the following taxes prior to December 31, 2017:
1. Real Property Taxes, normally due April 10, 2018.
2. State Estimated Taxes, normally due January 15, 2018.
Other considerations:
1. Charitable Giving. Accelerate January tithings and non-cash donations into December.
2. Unreimbursed Employee Business Expenses. Purchase supplies and equipment before year-end.
Itemized Deductions.
A. Elimination of the State and Local Tax Deduction (SALT). Both pieces of legislation eliminate the deduction for state and local income taxes, and the alternative deduction of sales taxes paid.
Comments. The elimination of the deduction for state and local income taxes will not have the dramatic affect as communicated in the press. Currently, Alternative Minimum Tax reduces and often eliminates any and all benefits of the SALT deduction. It is more of a physiological deduction we personally use to justify the high state income taxes that we currently pay. Additionally, the elimination of SALT does not apply to taxes paid incident to any trade or business (rentals, self-employed persons, pass-throughs, etc.).
2017 Tax-Planning Tip. In an effort to preserve the deduction and lower your 2017 tax liability consider the following:
Pay the following taxes prior to December 31, 2017:
1. 4th Quarter State Estimated Taxes.
2. Planned large taxable purchases (vehicles, recreational vehicles, boats, etc.) should be made before year-end.
B. Personal Residence Mortgage Interest. There is a substantial amount of disagreement with respect to home mortgage interest deductibility between the House and Senate. The House proposal has an effective date of November 2, 2017 which means that purchase debt and/or refinance debt after November 2, 2017 would fall under the new law.
Comments. Under the current law all persons are allowed to deduct the interest attributable to the acquisition and improvement of your home plus $ 100,000 of equity debt (second trust deed). Because of the dramatic increase in property values, the government has attempted to monitor any increase in mortgage debt amounts by requiring lenders to report mortgage balances annually on Form 1098; conducting “tracing” audits and mortgage debt audits.
2018 Tax-Planning Tip. Consider waiting to refinance your home until this area has been clarified. I expect that “grandfathered debt” (pre-November 2, 2017 mortgages) provisions will be written into law.
C. Elimination of Tax Preparation Fees. The deduction for tax preparation not attributable to a trade or business (rentals, self-employment, pass-through, etc.) will be repealed for tax years beginning after 2017.
Comments. The majority of you operate a trade or business, where the bulk of this deduction is reflected therefore, the repeal will not affect you.
D. Miscellaneous Itemized Deductions. The deductions for “unreimbursed” employee business expenses, investment expenses, union dues and certain legal fees have been eliminated. The elimination of this deduction will have a substantial impact on healthcare workers, first-responders, outside salespersons, truckers and persons having multiple employers.
2017 Tax-Planning Tip. In an effort to preserve the deductions and lower your 2017 tax liability consider the following:
Pre-pay any recurring or anticipated unreimbursed employee business expenses prior to December 31, 2017:
1. Automobile Lease Payment (January only, applicable to outside salespersons and others who regularly use their car for business purposes).
2. Continuing Education.
3. Equipment (cellular and computer equipment).
4. Firehouse Dues (January only).
5. Liability Insurance (educators and healthcare workers).
6. Office-in-Home Expenses (January utility bills, repairs and furnishings).
7. Professional Licenses.
8. Professional Memberships.
9. Professional Subscriptions.
10. Supplies (toner, postage, paper, etc.).
E. Gambling Losses. The deduction for gambling losses to the extent of wagering income remains intact. The Senate bill expands the deduction to include the costs attributable to wagering (Daily Racing Form, Racing Digest, tournament fees, etc.).
F. Pease Limitation – Repealed. Under current federal and state law high income taxpayers are denied the ability to deduct a portion of their itemized deductions, both the House and Senate have repealed this phase-out for federal tax purposes.
Personal Exemptions - Repealed.
Explanation. Under current law each taxpayer is allowed to deduct $ 4,050 for each exemption (him or herself, spouse and dependents) listed on the return. Over the past few years this deduction has been the subject of increased audit attention (persons claiming questionable and/or non-verifiable dependency exemptions). Both the House and Senate Bills repeal this deduction for simplification purposes and replace the dependency exemption with an expansion of the Child Tax Credit and introduce a Family Tax Credit for persons older than 17 years of age. In order to take advantage of these credits all persons must have a valid Social Security Number, ITINs no longer qualify.
Marginal Tax Rates.
Reduction in Marginal Tax Rates. Although the House and Senate remain in disagreement, the marginal tax rates are expected to decline in 2018.
2017 Tax-Planning Tip. If possible, defer recognizing income in 2017 to 2018 to take advantage of the anticipated lower 2018 marginal tax rates.
Tax Credits - Expanded.
Child Tax Credit. Both the Senate and House versions contain provisions for an increase in the Child Tax Credit. Presently, the credit is phased-out when your adjusted gross income exceeds $ 110,000. Under the proposed law the credit will phase-out when a married couple’s adjusted gross income exceeds $ 500,000.
Tax Credits - Repealed.
Plug-in Vehicle. The government has provided a maximum credit of $ 7,500 for the purchase of a plug-in vehicle used for personal purposes. This credit is no longer available for 2018 income tax returns.
2017 Tax-Planning Tip. If you were considering purchasing a Tesla or other qualifying vehicle in 2018, you should consider purchasing the car before year-end.
Tips for a Smooth Tax Season
With tax season officially underway, here are tips to make filing your return as stress-free as possible:
- Gather your tax information for filing. Items you'll need include W-2s, 1099s, K-1s and other forms you receive from your business, employers, brokers, banks, and others. If you find any errors, contact the issuer immediately to request a corrected copy.
- Organize your records. Once you've started gathering your information, find a place to put all the documents as you receive them, or consider scanning documents to store on your computer. You can also take pictures of the documents with your phone as backup. Missing information is one of the biggest reasons filing a tax return is delayed.
- Create an April 15th reminder. This is the deadline for filing your 2023 individual income tax return, completing gift tax returns, making contributions to a Roth or traditional IRA for 2023, and for paying the first installment of 2024 individual estimated taxes. So create a reminder that works for you.
- Know the deadlines for business returns. If you are a member in a partnership or a shareholder in an S corporation, the deadline for filing these business returns is March 15th. Calendar-year C corporation tax returns are due by April 15th.
- Clean up your auto log. Create and review the necessary logs to support your qualified business miles, moving miles, medical miles and charitable miles driven by you. Gather the logs and make a quick review to ensure they are up to date and totaled.
- Review your child's income. Your child may be required to file a 2023 income tax return. A 2023 return is generally required if your child has earned more than $13,850, or has investment income such as dividends, interest, or capital gains that total more than $1,250.
- Contribute to your IRA and HSA. You can still make 2023 IRA and HSA contributions through either April 15th or when you file your tax return, whichever date is earlier. The maximum IRA contribution for 2023 is $6,500 ($7,500 if age 50 or older). The maximum HSA contribution is $3,850 for single taxpayers and $7,750 for families.
- Calculate your estimated tax if you need to extend. If you file an extension, you'll want to do a quick calculation to estimate your 2023 tax liability. If you owe Uncle Sam any money, you'll need to write a check by April 15th even if you do extend.
Ideas to Help Set Financial Goals
With the new year underway, it may be time to come up with a list of goals and that could make 2024 the most financially rewarding year for your entire family. Your motivation can be nearly anything, from saving for retirement or paying for college. Consider these resolutions that can also provide a financial boost:
- Declutter for cash. Go through every room of the house as a family and collect items that nobody uses or needs anymore. Sell these items through sales platforms, then use the cash to pay down debt or add to your emergency fund.
- Work together to reduce food waste. With inflation running high over the last few years and grocery prices on the rise, everyone in the family can to do their part to reduce food spending. This means creating meal plans and shopping for groceries based on those plans, but it also means eating leftovers and cooking more at home instead of dining out.
- Set up automatic savings. Setting up automatic savings is another great way to make progress toward financial goals. You can set up your bank account to automatically transfer money to a dedicated savings account on a certain day each month, or on each payday.
- Save for something fun. Set a family savings goal for something to work toward, whether that’s saving for a family vacation or the building cash to purchase a backyard playground. Having a goal can help family members part with items they don’t need but can sell, or to cut their spending to help reach a common goal.
- Develop investing basics. Set up online access for your own retirement accounts or taxable investment accounts so you can show your family the power of compound interest firsthand. You can even consider setting up investments for your kids. If they have earned income, for example, they can start investing with a Roth IRA.
Financial goals can be a family affair if everyone in your crew understands what you’re working toward and what’s at stake. By keeping communication open and getting your entire family on the same page, you can all work together toward the lifestyle you want.
The Problem with Fakes
Protect yourself from modern-day counterfeiters
Finding brand name products at a great price can leave you feeling like you won the lottery, but there are hidden dangers that come into play if the goods aren't what they seem.
Here are some commonly counterfeited items and what you need to know to protect yourself.
Commonly Counterfeited Items
- Currency. The U.S. Treasury estimates that there are nearly $9 million of counterfeit bills in circulation. While creating an excellent counterfeit $100 bill would seem difficult, criminals can trick you if you aren’t paying attention.
- Shoes & Clothing. Manufacturing a low-quality knock-off and slapping a brand name label on a shirt or a pair of shoes is a tale as old as time. It’s much harder to spot a fake through online pictures and videos than seeing and touching it in person.
- Collectibles. Watches, coins, jewelry and artwork are often faked and sold for far less than anyone should believe.
- Electronics. As technology continues to evolve, so does the ease of assembling electronics. Using cheap components and labor, companies can slap together their version of the real thing. This process cuts corners and sometimes skirts safety procedures that can lead to knock-off electronic products that can pose a hazard to your health.
- Replacement parts. Fake parts are common within the electronics and auto repair industries and are especially difficult to spot. Unfortunately, parts not produced by the original manufacturer often fail to meet their operational specifications.
How to Protect Yourself
Knowing that counterfeit items are out there is the first step to avoiding them altogether. These additional tips can help you avoid fakes and the damage they cause:
- Know the real thing. The best way to spot a fake is to know the real thing inside and out. In the case of currency, the new $100 bills have plenty of watermarks, different textures and a security ribbon that make it difficult to fake. For products, do your research to know the characteristics of the legitimate item before you buy. Clues often come from irregularities in logos, colors and packaging.
- Buy from authorized retailers. Shopping around for the lowest price is a wise practice. Automatically going with the cheapest option is not. If your purchase is important, stick to an authorized retailer or reputable vendor.
- Research, research, research. The more you know the product, the less likely you will be tricked. Look at products from local stores and read through reviews of online vendors. Conduct research on scams and common tricks used by counterfeiters. Be wary of reviews from the website you are thinking about making the purchase from. Instead, conduct a web search of both the product and the vendor to see what people have to say.
- Trust your gut. Remember that something that seems too good to be true probably is. If you believe an item is probably counterfeit based on the price of the item or the person/website selling it, you're probably right.
Every Business Needs Cash!
5 keys to better cash management
Focusing on sales and profits can create a surprise for your business when there is not enough cash to pay the bills. Here are five practices to help improve your cash management.
- Create a cash flow statement and analyze it monthly.The primary objective of a cash flow statement is to help you budget for future periods and identify potential financial problems before they get out of hand. This doesn't have to be a complicated procedure. Simply prepare a schedule that shows the cash balance at the beginning of the month and add cash you receive (from things like cash sales, collections on receivables, and asset dispositions). Then subtract cash you spend to calculate the ending cash balance. If your cash balance is decreasing month to month, you have negative cash flow and you may need to make adjustments to your operations. If it's climbing, your cash flow is positive.
Tip: Once you have a cash flow statement that works for you, try to automate the report in your accounting system. - Create a history of your cash flow. Build a cash flow history by using historical financial records over the course of the past couple of years. This will help you understand which months need more attention.
- Forecast your cash flow needs. Use your historic cash flow and project the next 12 to 24 months. This process will help identify how much excess cash is required in the good months to cover payroll costs and other expenses during the low-cash months. To smooth out cash flow, you might consider establishing a line of credit that can be paid back as cash becomes available.
- Implement ideas to improve cash flow. Now that you know your cash needs, consider ideas to help improve your cash position. Some ideas include:
- Reduce the lag time between shipping and invoicing.
- Re-examine credit and collection policies.
- Consider offering discounts for early payment.
- Charge interest on delinquent balances.
- Convert excess and unsold inventory back into cash.
- Manage your growth. Take care when expanding into new markets, developing new product lines, hiring employees, or ramping up your marketing budget. All require cash. Don't travel too far down that road before generating accurate cash forecasts. And always ask for help when needed.
Understanding your cash flow needs is one of the key success factors in all businesses. If your business is in need of tighter cash management practices, now is the perfect time to get your cash flow plan in order.