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 The deduction related to an employment-related move is repealed for 2018.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.
Yes! You Owe Tax on That
6 Surprising Taxable Items
If something of value changes hands, you can bet the IRS considers a way to tax it. Here are six taxable items that might surprise you:
- Surprise #1: Hidden treasure. In 1964, a married couple discovered $4,467 in a used piano they purchased seven years prior for $15. After reporting this hidden treasure on their 1964 tax return, the couple filed an amended return that removed the $4,467 from their gross income and requested a refund. The couple filed a lawsuit against the IRS when the refund claim was denied. The Tax Court ruled that the hidden treasure should be reported as gross income on the couple's 1964 tax return, the year when the hidden treasure was found.
Tip: The IRS considers many things like hidden treasure to be taxable, even though they are not explicitly identified in the tax code. - Surprise #2: Some scholarships and financial aid. Scholarships and financial aid are top priorities for parents of college-bound children, but be careful — if part of the award your child receives goes toward anything except tuition, it might be taxable. This could include room, board, books, or aid received in exchange for work (e.g., tutoring or research).
Tip: When receiving an award, review the details to determine if any part of it is taxable. Don’t forget to review state rules as well. While most scholarships and aid are tax-free, no one needs a tax surprise. - Surprise 3: Gambling winnings. Hooray! You hit the trifecta for the Kentucky Derby. But guess what? Technically, all gambling winnings are taxable, including casino games, lottery tickets and sports betting. Thankfully, the IRS allows you to deduct your gambling losses (to the extent of winnings) as an itemized deduction, so keep good records.
Tip: Know the winning threshold for when a casino or other payer must issue you a Form W-2G. But beware, the gambling facility and state requirements may lower the limit. - Surprise 4: Unemployment compensation. The IRS confused many by making this compensation tax-free during the COVID-19 pandemic. Unemployment compensation income has since gone back to being taxable.
Tip: If you are collecting unemployment, either have taxes withheld or make estimated payments to cover the tax liability. - Surprise 5: Crowdfunding. A popular method to raise money is crowdfunding through websites. Whether or not the funds are taxable depends on two things: your intent for the funds and what the giver receives in return. Generally, funds used for a business purpose are taxable and funds raised to cover a life event are a gift and not taxable to the recipient.
Tip: Prior to using these tools, review the terms and conditions and ask for a tax review of what you are doing. - Surprise 6: Cryptocurrency transactions. Cryptocurrencies like Bitcoin are considered property by the IRS. So if you use cryptocurrency, you must keep track of the original cost of the coin and its value when you use it. This information is needed so the tax on your gain or loss can be properly calculated.
Tip: Using cryptocurrency for everyday financial transactions is not for the faint of heart because of how much recordkeeping is involved.
When in doubt, it’s a good idea to keep accurate records so your tax liability can be correctly calculated and you don’t get stuck paying more than what’s required. Please call if you have any questions regarding your unique situation.
Moves to Improve Your Credit Score
While your credit score is a three-digit number that's automatically assigned to you, this is one area of your financial life where you have quite a bit of control. The moves you make or don't make with your credit can help determine where this score falls at any time, and the impact can be dramatic.
Where good credit, a score of 670 or higher, can mean having access to financing with the best rates and terms, a low credit score can mean paying higher interest rates and more loan fees — or even being denied financing altogether. Bad credit can also mean having trouble getting an apartment or a job if your employer asks to see your credit report for hiring purposes.
The following steps can help you improve your credit this year and beyond:
- Set up bills for automatic payments. Because your payment history is the most important factor used to determine credit scores, make every effort to pay bills on time. Set up your bills for automatic payments so they're paid no matter what, and you can avoid unnecessary credit score damage.
- Pay down existing debt. How much you owe in relation to your credit limits is the second most important factor used for credit scores. This means avoiding carrying a balance on your credit cards and never using more than 25% of your credit line or your credit score could be impacted.
- Look over your credit reports for errors. Check your credit reports from all three credit bureaus — Experian, Equifax and TransUnion. You can do this once a year for free at AnnualCreditReport.com. If you find any errors or information you don't recognize, take steps to dispute this information with the credit bureaus.
- Build credit with new financial products. If you need to build credit from scratch or repair credit after mistakes made in the past, look for new credit products that are easy to obtain. Your best options are secured credit cards that require a cash deposit as collateral and credit-builder loans.
- Use a free app to build credit. You can use a free app like Experian Boost to get credit for payments you're already making like utility bills, subscription services and even your rent. All you have to do is connect your accounts to this app to have your payments reported to the credit bureaus.
You don’t have to live with a low credit score for another year, especially since so many things can help you improve it. By never missing a payment, paying down debt, checking over your credit reports and getting creative when it comes to building new credit, you can end 2024 in much better shape.
Avoid a Penalty and Tax Surprise when Withdrawing from Retirement Accounts
Retirement accounts that provide tax breaks have very specific rules that must be followed if you want to enjoy the financial rewards of those tax breaks.
One of these rules defines WHEN you're allowed to pull money from your retirement accounts. If you pull money too soon, you're at risk of being levied with a penalty by the IRS. There are several exceptions to this rule, such as paying for qualified higher education expenses or paying for expenses if you become permanently disabled. In general, though, if you withdraw retirement funds before you reach age 59½, you'll be hit with a 10% penalty in addition to regular income taxes. In the April 2023 court case Magdy A. Ghaly and Laila Ryad v. Commissioner, the taxpayers learned this rule the hard way.
The Facts
In 2018, Mr. Ghaly took two distributions from his retirement account.
Distribution #1: Withdrawal
Mr. Ghaly was laid off from his job, and in 2018, he withdrew money from his retirement account to provide for his family. He requested and received a withdrawal of $71,147 from his retirement account. His retirement company provided him with a Form 1099-R indicating the withdrawal was taxable.
Distribution #2: Deemed Distribution
In 2015, Mr. Ghaly took a loan from his retirement account. Because the loan followed certain IRS-approved guidelines, it was not considered a taxable distribution from his account that year. However, when Mr. Ghaly failed to repay that loan when it came due in 2018, it became a taxable distribution. His retirement company provided him with a 1099-R tax form for the deemed distribution.
Mr. Ghaly had not yet reached age 59½ before either amount was distributed.
The Findings
In an attempt to restore those distributions to his account to avoid both the tax on the distributions and the early withdrawal penalty, he opened two retirement accounts in 2020 and made the maximum contributions allowed for each account.
The Tax Court ruled against the taxpayers, stating that the contributions Mr. Ghaly made in 2020 were irrelevant when determining if his 2018 distributions were taxable. Mr. Ghaly was required to pay income taxes on the amounts withdrawn (to the extent those distributions were taxable) and was assessed an additional 10% early withdrawal penalty.
The Lesson
If you are planning an early withdrawal from a retirement account, understand before making the withdrawal whether the 10% penalty applies to you. In Mr. Ghaly's case, he could have explored the substantially equal periodic payment exception or withdrawn money penalty free if used as hardship to pay for his health insurance while unemployed. The lesson: please call if you have questions about an early withdrawal you may be planning before you make it!
Give Your Personal Brand a Boost
The idea of building a personal brand might seem intimidating, but the benefits can be career altering. Not only does your brand promote you to the entire market, it solidifies your standing within your network where most new career opportunities come from. Here are some steps to consider for building a brand that promotes your strengths and showcases your value.
- Do a personal evaluation. Start by reflecting on your personal and career experiences. Write down a list of traits and accomplishments that are good portrayals of the value you bring to people and organizations. Ask yourself questions such as, “How would others describe me?” or “In what situations would people look to me for help?” Also take an inventory of your social network presence. You can even try googling yourself to see what comes up. Understanding the current state of your brand, both online and offline, is imperative before taking the next step.
- Be authentic. As you do your self-evaluation, the shape of your persona will start to emerge. Maybe you’re a go-to person for complex problems, or someone people confide in for advice, or a trusted leader that isn’t afraid of making the big decision. Odds are you’re a combination of a lot of different things, but try to nail down the main ideas so you can narrow your focus. The key here is to be authentic and genuine. There’s no sense building a brand based on something that you’re not — this only causes problems for you and everyone around you.
- Build your online profile. More than ever, people and businesses are looking to learn about you by researching online. You should try to match your online profile to your in-person qualities. This comes more naturally to some than others, but even some simple steps can enhance your online persona. Start by choosing a profile picture that displays who you are in the best possible light. On LinkedIn, for example, your career industry will dictate the style you choose. This photo will be your first impression, so make sure it conveys the look you are going for.
- Engage and network. Networking is extremely important to your brand. A LinkedIn study shows that 85% of professionals believe networking is important for finding your next role, while 70% of job changes happen because of a connection at the new company. To increase your online presence, consider posting on a consistent basis. You can start simple by sharing an article you thought was interesting. Then take it a step further by sharing a story that taught you something. The more you do it, the more comfortable you’ll be, and the more that your authentic personality will start to show.
- Tell your story. Don’t be afraid to share things about your personality and experiences that helped shape who you are as a person. This will draw people to you and start to build trust. And you don’t have to get deeply personal...even the smallest little details about something unique about your day or an experience can make you more interesting.
Building a brand is a lifelong process, so keep at it and don’t be afraid to evolve as you go and learn. And who knows, you might even learn something about yourself in the process.