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 The deduction related to an employment-related move is repealed for 2018.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.
Common Missing Tax Return Items
Want your tax return filed quickly and without error? Then double-check this list of items that are often overlooked. These missing items often cause delays in getting your tax return filed:
- Forms W-2 and 1099. Using last year's tax return as a checklist, make sure all your W-2s and 1099s are received and applied to your tax return. Missing items will be caught by the IRS mismatch program. All these forms are required to be in the mail to you on or before Jan. 31. If you are missing a form, contact the company responsible for issuing them.
- Dependent information. If you added a new dependent in 2023, provide the name, Social Security number and birth date to have them added to your tax return. If you have a dependent that shares custody with someone else, discuss the plan for who is going to claim them. Your tax return cannot be filed if there is conflict in this area.
- Cost basis information. If you sold any assets (typically investments or real estate), you need to know the cost basis amount to calculate your taxable capital gain. Check your investment statements to ensure that your broker includes the required information. Sometimes it's difficult to find this information on the Form 1099-B summary, but it might be listed later in the statement details.
- Schedule K-1s. As an owner of a partnership or S-corporation, you will need to receive a Form K-1 that reports your share of the profit or loss from the business activity. When you receive your K-1, pay special attention to box 17 (code V) for S corporations and box 20 (code Z) for partnerships. This is where information is included for the Qualified Business Income Deduction.
- Digital asset transactions. If you are buying or selling cryptocurrency or other digital assets, you will need to provide details to support the cost basis and sales price of each transaction.
- Forms or documents with no explanation. If you receive a tax form, but have no explanation for the form, questions will arise. For instance, if you receive a retirement account distribution form, it may be deemed income. If it is part of a qualified rollover, no tax is due. An explanation is required to file your information correctly.
- Missing signatures. Both you and your spouse need to review and sign the e-file approval forms before the tax return can be filed. The sooner you review and approve your tax return, the sooner it can be filed.
By knowing these commonly missed pieces of information, hopefully your tax filing experience will be a smooth one.
Building an Emergency Fund When Cash is Scarce
The traditional rule-of-thumb for emergency funds is to have enough cash stashed away to cover 3 to 6 months worth of expenses. For many people, though, this sounds better in theory than in practice.
When you're starting from scratch and don't have a lot — or any — extra cash at the end of the month, consider these ideas to help grow your emergency fund.
Cutting Expenses
- Review recent statements to find opportunities to save. Look over your bank statements and credit card bills from the last few months to see where all your income is going. Spend some time tallying up expenses in categories you have some control over, such as entertainment, dining out, clothing and online shopping.
- Cut down on lifestyle expenses. Identify areas to cut your spending and create new spending goals in categories that were problematic in previous months. Some of the easiest places to cut include online shopping, subscription services, clothing, movies and music. Once you reach your emergency fund goal, you can consider adding some of these spending areas back into your budget.
- Spend less on food. One of the biggest budget busters for many families is their spending on food — both at the grocery store and at restaurants. Control food spending by making a meal plan and cooking most of your meals at home, shopping sales at the supermarket, and making meals with ingredients you already have.
Increasing Income
- Squirrel away windfalls. Consider adding windfalls such as tax refunds, work bonuses, or annual gifts you may receive from a family member to your emergency savings as soon as you receive it.
- Sell stuff you don't need. Look around your home for items you rarely use and then sell unwanted stuff using an online marketplace. Used items that can fetch a good sales price include workout equipment, brand name clothing and accessories, small furniture and antiques.
- Add a part-time job or side hustle. Boost your income by picking up more shifts at work, asking for overtime, or getting a second job or side gig to fill your spare time. This step can help you bring more money home so you can add to your emergency fund.
Once you start looking for ways to spend less and earn more, there's one final step that can help you grow your emergency fund. Make sure the money you find on both ends of the spectrum makes its way to your savings, either through manual or automatic transfers.
The best way to do this is by having a dedicated emergency fund in an account that's separate from your regular checking and savings accounts. By moving your extra money into this account, you can grow your emergency fund with less temptation to spend it.
Your Brain on Social Media
How to make online interaction better for your health
More than half the world now uses social media sites such as Facebook, X, and Instagram every day. The average user spends about 2 hours and 23 minutes on these platforms clicking, liking, and replying to content sent from around the world.
Research has demonstrated, however, that too much social media can have negative effects on mental health. This appears to be especially true for children and young adults. Here are some ideas to help ensure social media use does not become a problem, especially for your children.
- Limit time. At least two separate studies have shown a correlation between more than two hours of daily social media use and negative mental health symptoms. Consider limiting your family's use to less than two hours a day. Many in the tech community say no to their children using these social media platforms all together. Others require phones and electronic devices to be checked in when at home and restrict their use during the school week.
- Set bedtime limits. Stop all social media use for at least one hour before bedtime. Then turn off all electronics and place them outside of bedrooms to avoid disruptions. Neither brightly lit electronic screens nor upsetting online content right before bed tend to promote restful sleep.
- Discourage mobile use. If excessive social media use is common in your family, consider deleting the apps from your phones and only allow social media use from a home desktop computer. This will help you control the amount of use and avoid the distraction throughout the day.
- No private social media. Ensure you have access to all social media accounts of your children and review them periodically.
- Use real names. Having you and your kids use your real names and identities when using social media may seem risky, but experts at the youth social media advocacy group SmartSocial.com say it actually promotes positive use and avoids negative interactions and communities. It also helps teach kids to be responsible users who are conscious of the risks and consequences of online activity. But beware of the downsides as well. This includes targeted bullying and potential stalking.
- Find real communities. Use social media to join communities devoted to your favorite hobbies and interests. Talk to your kids about the communities they've joined and the interactions they're involved with to make sure they are using social media for positive experiences.
Important Moves to Consider When Interest Rates Change
A domino effect occurs each time the Federal Reserve changes interest rates. An increase leads to higher rates for consumers when they borrow, while paving the way to better returns for savings accounts. A decrease results in paying less interest when borrowing money, but also causes a drop in how much your savings can earn.
While waiting to see what the Fed does in 2024, consider having a plan in place for both these scenarios — a hike in interest rates as well as a cut. Here are some ideas for formulating your own financial plan for each scenario.
When Interest Rates Increase
- Shop around for new savings accounts. Rate increases are good for long-term savers and families who are stashing away money for short-term goals like buying a home. When interest rates are on an uptick like they are right now, it’s a great time to shop around for a high-yield savings account or to lock in a great rate for a portion of your savings with a certificate of deposit.
- Focus on paying down high interest debt. Rate increases can create disastrous results for people who have debt with variable interest rates. For example, data from the Fed shows the average credit card interest rate increased from 14.22% in 2018 to 21.19% in the second half of 2023. If high-interest debt is dragging you down financially, rate increases give you more incentive to pay it off.
- Avoid borrowing when possible. Surging interest rates make borrowing money more expensive, so try and avoid borrowing for personal and business reasons. If you must borrow, attempt to exhaust every other source of cash before taking on new debt.
When Interest Rates Drop
- Refinance existing debts. Look into consolidating or refinancing all your existing debts, including your mortgage, personal loans, and credit cards. Lower rates can help you save money on interest, secure a lower monthly payment, and help you pay off a debt's balance more quickly.
- Look for ways to put additional funds to good use. Lower interest rates make it less appealing to stash money away in savings account products, money market accounts, and certificates of deposit. Instead of savings accounts that feature little or no interest, look for ways to invest for the future or put your money to use for things you need.
- Apply for funding. Rate drops also make borrowing money more attractive. Consider applying for a personal or small business loan, but only if you have a plan for it.