Latest News

Sunday, 07 October 2018 00:00

CPA CLIENT BULLETIN SELECT Oct 2018

What’s inside

Supreme Court decision in Wayfair affects online sellers
Buy-write strategies for a flat market
Bond ladders may hedge interest rate hikes
Tax calendar


Factoid: Money from homes

U.S. household net worth topped $100 trillion for the first time in early 2018 as home values rose $500 billion, offsetting a decline in stock market values.


Did you know?

In a recent survey of U.S. consumers, 26% of respondents reported owning a digital assistant such as Google Home, Amazon's Echo/Dot (Alexa), and Microsoft's Cortana. They are primarily used for questions and answers, music, and entertainment. Financial institutions are starting to tap into the ability of intelligent personal assistants to access accounts to verify balances and make transfers.

Source: Total System Services

 

Article: Supreme Court decision in Wayfair affects online sellers

If your company makes sales to out-of-state buyers, do you need to collect state sales tax? Until recently, Supreme Court decisions from the 20th century declared that would not necessarily be the case.

Example 1: ABC Corp., based in Alabama, sends a catalogue to customers and prospects. A consumer who lives in Wyoming places a $100 order.

Assume that ABC has neither employees nor property in Wyoming. ABC would not be required to collect Wyoming sales tax on the $100 purchase price and remit to Wyoming under those Supreme Court decisions because ABC had no “physical presence” in that state. (Wyoming, like most states, requires consumers to pay a use tax instead of a sales tax, but states have found it difficult to enforce compliance with their use taxes.)

Because they must collect sales tax, in-state retailers have been at a significant disadvantage versus out-of-state sellers who don’t collect sales tax.

South Dakota v. Wayfair

The 20th century reasoning of the physical presence requirement did not recognize the realities of the 21st century, a divided (5-4) Supreme Court found earlier this year. In South Dakota v. Wayfair, Inc., 6/21/18, the Court held that the physical presence requirement no longer applied, paving the way for enforcement of a South Dakota law that requires many “remote” sellers to collect applicable sales tax on purchases by South Dakota residents.


The majority in the Wayfair decision pointed to some favorable aspects of the South Dakota law. For one, it applies only to remote sellers with at least 200 transactions or $100,000 in revenue from South Dakota buyers in a calendar year. Therefore, a company that occasionally ships a few moderately priced items across state lines needn’t master all the sales tax rules pertaining to South Dakota buyers and collect the tax and remit it to the state.

In addition, South Dakota is a party to the Streamlined Sales and Use Tax Agreement, which reportedly has 24 member states. This agreement, designed to standardize taxes in order to reduce administrative and compliance costs, provides sellers access to sales tax administration software.

Going forward

After this Supreme Court decision, many (perhaps most) states will consider new legislation that requires out-of-state vendors to collect and forward sales tax, even without a physical presence in the buyer’s state. However, Congress might pass a federal law addressing the issue of interstate sales tax collection.
If no federal law is passed, the focus will remain on states’ actions. Assuming that states follow the format of the South Dakota law, companies that do a minimum amount of online retailing may not be greatly affected.
Conversely, small businesses that do a great deal of selling online, or plan to do so, might have to make extensive efforts to collect and forward sales tax to multiple states. Our office can help such companies comply with any requirements that arise.

Article: Buy-write strategies for a flat market

Up one month, down the next. The stock market this year has offered lots of excitement. As of this writing, broad market indexes have provided little sustenance for bulls or bears, with results not far from early 2018.
One strategy that may be appealing in a relatively flat stock market is to use covered calls. Even if the actual stock you own goes nowhere, trading in options may deliver meaningful investment income. The downside of this approach is that any gains in a strong upturn may be limited.

Selling the upside

A covered call strategy can begin with the purchase of a stock that seems appealing.
Example: In October, Carl Wagner buys 200 shares of XYZ Corp., trading at $50, for $10,000. He instructs his adviser to sell (or “write,” in option lingo) two call options on XYZ stock at a $55 exercise price, expiring in January, which is three months away. Each call gives the option owner the right to buy 100 shares of XYZ for $55 apiece until a given date in January.

In this hypothetical example, Carl receives 90 cents per share from his sale of the call option. For his 200 shares, that’s $180. From that point on, several things can happen.

Flat market

Say that XYZ shares bounce around $50 for three months. They never top $55, so it never pays for the owner of the option to buy Carl’s shares. The call option expires unexercised.
Here, Carl’s $180 income from selling the call would be 1.8% of his $10,000 investment in XYZ. He’d also collect the quarterly dividend, which might be, say, 0.5%, if XYZ pays a 2% annualized dividend. That’s a 2.3% total return in a quarter of a year, or 9.2% annualized, while XYZ shares went nowhere. Going forward, with the option not exercised, Carl can write another call on the shares of XYZ he still owns.
This is a simplified, hypothetical example. Trading costs aren’t included, for one thing. Nevertheless, a “buy-write” strategy might produce desirable results if stocks are in a trading range.

 

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Wednesday, 15 August 2018 00:00

CPA CLIENT BULLETIN SELECT Aug 2018

What’s inside

What’s inside

How the new tax law affects 529 plans
Now the G.I. Bill is forever
Education as a small-business fringe benefit
Tax calendar


Factoid : Higher education

Measured by market share, total accounts, and assets under management (over $66 billion), Virginia529 is the largest 529 plan in the nation.


Did you know ?

The Servicemen’s Readjustment Act of 1944 (G.I. Bill) paid almost $4 billion to nearly 9 million veterans from 1944–1949 in unemployment compensation. The education and training provisions existed until 1956, and the Veterans’ Administration offered insured loans until 1962. The Readjustment Benefits Act of 1966 extended these benefits to all veterans of the armed forces, including those who served during peacetime.

Source: History.com


Article : How the new tax law affects 529 plans

For many years, 529 college savings plans have offered a tax-favored way to save for higher education. These plans, officially qualified tuition programs, are named for the IRC section that provides their advantages.
In brief, 529 plans are funded with after-tax dollars. In college savings plans, account owners choose from a menu of investments, and any earnings are untaxed. Distributions are also tax-free if they do not exceed the qualifying educational expenses of the account beneficiary: payments of tuition, fees, supplies, and certain housing expenses for the account beneficiary’s study at an eligible educational institution. Before 2018, eligible educational institutions included only post-secondary institutions.

Youth movement

Under the new tax law, the benefits mentioned previously (tax-free investment earnings, potentially tax-free distributions) remain as they were. The difference is that for tax years beginning after December 31, 2017, 529 plans are no longer limited to higher


Factoid : Higher education

Measured by market share, total accounts, and assets under management (over $66 billion), Virginia529 is the largest 529 plan in the nation.


Did you know ?

The Servicemen’s Readjustment Act of 1944 (G.I. Bill) paid almost $4 billion to nearly 9 million veterans from 1944–1949 in unemployment compensation. The education and training provisions existed until 1956, and the Veterans’ Administration offered insured loans until 1962. The Readjustment Benefits Act of 1966 extended these benefits to all veterans of the armed forces, including those who served during peacetime.

Source: History.com


Article : How the new tax law affects 529 plans

For many years, 529 college savings plans have offered a tax-favored way to save for higher education. These plans, officially qualified tuition programs, are named for the IRC section that provides their advantages.
In brief, 529 plans are funded with after-tax dollars. In college savings plans, account owners choose from a menu of investments, and any earnings are untaxed. Distributions are also tax-free if they do not exceed the qualifying educational expenses of the account beneficiary: payments of tuition, fees, supplies, and certain housing expenses for the account beneficiary’s study at an eligible educational institution. Before 2018, eligible educational institutions included only post-secondary institutions.

Youth movement

Under the new tax law, the benefits mentioned previously (tax-free investment earnings, potentially tax-free distributions) remain as they were. The difference is that for tax years beginning after December 31, 2017, 529 plans are no longer limited to higher education at a post-secondary institution. Now they can be used for elementary and secondary education, as well. That includes learning in public, private, and religious schools.

There is one key caveat: Tax-free distributions for elementary and secondary education are capped at $10,000 per student per year. As before, there is no annual limit on qualified distributions from 529 plans for higher education.

Example 1: Bill and Claire Dawson open a 529 account for their newborn son Noah. Over the years, they invest thousands of dollars there. When Noah is age 10, in the fifth grade, he goes to a private school where the tuition is $15,000. The Dawsons take $10,000 from Noah’s 529 account to pay part of his tuition with a tax-free distribution. A larger distribution could lead to an income tax obligation and possibly an additional 10% tax on the amount of the taxable distribution.

 

Sooner than later

For families like the Dawsons, using 529 money for pre-college costs might not be an ideal strategy. The earlier money is withdrawn, the less time there will be for compounding earnings. Extending untaxed investment buildup, which eventually may come out as a tax-free distribution, is a prime benefit of 529 plans.

Even so, the new law can prove beneficial in some situations. When cash is short and private school costs are high, a $10,000 tax-free distribution from a 529 plan may be welcome. If students are now attending an expensive high school but are expected to attend an inexpensive college, it may make sense to use the $10,000 529 distribution each year.

Moreover, even though the new 529 provision applies to federal tax, substantial benefits might come from state taxes. Nearly every state offers a 529 plan, and most of them provide state income tax credits or state tax deductions to residents who invest in the home state’s plan. (Some states have tax benefits for investing in any 529 plan.)

So far, states have differed on how they’ll treat 529 plan distributions for K-12 distributions. Assuming your state goes along with the new federal law, using $10,000 a year for pre-college costs may become especially attractive.

Example 2: Suppose Ted and Sarah Raymond live in a state that offers a 10% tax credit for 529 contributions. They invest $10,000 in their state’s plan this year, getting a $1,000 credit against state tax. Then, they use that $10,000 to pay part of their daughter Gina’s private high school tuition. With the $1,000 state tax saving, the Raymonds effectively reduce Gina’s school cost by $1,000 by streaming their cash through their state’s 529 plan.

Our office can inform you of your state’s tax treatment of 529 contributions and how the state is dealing with the new rules on 529 distributions.

 

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Wednesday, 15 August 2018 00:00

Construction Dollars and Sense

Tax and Financial Reporting
News and Tools August 2018

 

The Tax Cuts and Jobs Act (TCJA) generally effective stating in 2018, raised the threshold for the requirement to use the percentage-ofcompletion method (PCM) from $10million average annual gross receipts (AAGR) to $25million for contracts starting in 2018.

 

Contractors who were previously required to switch from a deferral method, such as the completed contract method (CCM), because their AAGR exceeded $10million, or the cash or an accrual method, will be able to go back to that former method in 2018 if their AAGR is less than $25million. The required steps are in an IRS issued Revenue Procedure dated August 3, 2018.

Contractors using, or going back to, an accrual method, can elect to exclude retainage receivable from revenue as late as the date for filing the tax return. This election requires that retainage payable also be deferred until it is actually payable, but since the receivables generally are more than the payables, the net difference is a great deferral to a subsequent year. A huge benefit is available for contractors using the PCM in certain common situations. This is not a provision of the TCJA, but a calculation that the IRS has only recently been approving for the last few months. This change in accounting method requires the prior consent of the IRS.

 

A huge benefit is available for contractors using the PCM in certain common situations. This is not a provision of the TCJA, but a calculation that the IRS has only recently been approving for the last few months. This change in accounting method requires the prior consent of the IRS.

 

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Friday, 29 June 2018 00:00

CPA CLIENT BULLETIN SELECT July 2018

What’s Inside

More give in the gift tax
Don’t neglect estate planning
Moving your business to a low-tax state
Tax calendar


Factoid : Bountiful bequests

The IRS has clarified that the 2018 indexed federal estate tax exemption amount is $11.18 million, not the original estimate of $11.2 million.

 

Did you know?

Recognizing tax burdens, the U.S. areas with the highest cost of living are Manhattan, San Francisco, Silicon Valley, and Brooklyn, in that order. Among 253 locations studied, total taxes as a percentage of gross income range from 25% (Casper, WY) to 45% (Manhattan, NY). In lower cost areas such as Memphis, Oklahoma City, and Cincinnati, gross income under $75,000 could provide a standard of living requiring over $300,000 in Manhattan and more than $200,000 in San Francisco.

Source: Wahrheit Ventures

 

Article : More give in the gift tax

The Tax Cuts and Jobs Act of 2017 increased the federal estate tax exemption to $11.18 million for 2018. That’s per person, so the combined exemption for a married couple can be as much as $22,360,000 worth of assets this year.


The same ceilings apply to the federal gift tax, which offsets the estate tax.


Example 1: Mona McAfee plans to give $20,000 to her son Luke this year. Does that mean that Mona’s estate tax exemption would be reduced to $11,160,000?
Probably not. In addition to the lifetime exemption numbers now in effect, there is also an annual gift tax exclusion. Due to an ongoing process of inflation adjustment, that exemption increased to $15,000 in 2018. Therefore, in 2018, each person can give up to $15,000 to any number of recipients without incurring gift tax consequences. That’s up from an annual $14,000 exclusion, which was in effect the previous five years.
Here, Mona’s $20,000 would be partially covered by the $15,000 exclusion, so only $5,000 will have gift tax consequences. Mona would have to report a $5,000 taxable gift on IRS Form 709. That $5,000 taxable gift will reduce her current federal estate and gift tax exemption amount to $11,175,000, assuming no other taxable gifts have been made.
As the recipient of the gift, Luke will pay no taxes.

 

Real world relevance

Most people won’t have estates close to $11 million, so this exercise might seem academic. Still, the $15,000 annual gift tax exclusion can have practical effects in many situations. It’s also worth noting that paying someone else’s medical or education bills directly won’t be included in the $15,000 allowance.

Example 2: Rhonda Cole wants to provide financial support for her son Mark’s two children, Ken and Julie. To do so, Rhonda pays tuition bills for Ken and Julie directly to their colleges. The total is $50,000. In addition, Rhonda gives them each $15,000 in 2018 and no other gifts.
Rhonda also decides to give Mark $15,000 this year and pays $5,000 worth of bills from Mark’s medical procedures directly to the health care providers. In total, Rhonda has given $100,000 to her loved ones, reducing her taxable estate by that amount. However, she hasn’t gone over the $15,000 exclusion for any recipient in 2018, so Rhonda hasn’t made any taxable gifts and will not have to file a gift tax return.

Note that the $15,000 limit presents a handy ceiling for making family gifts each year without the bother and expense of filing a gift tax return. This strategy won’t work as well if Rhonda gives Mark $50,000 so Mark can pay his children’s college bills. Then, Rhonda will have made a taxable gift of this amount and will be required to file Form 709.

Paired planning

Other possibilities exist if a married couple holds assets jointly, perhaps in a bank or brokerage account. A gift from such an account, or a gift of other property, by one spouse can be considered to be divided equally between the two spouses, so the annual gift tax allowance effectively increases to $30,000. There are two ways to do this. The easy way would be for each spouse to write a separate check for $15,000. If this is not practical, the spouses can get the benefit of a $30,000 annual exclusion by electing "gift splitting" on Form 709.

 

Gift tax notes

• The gift tax lifetime exemption ceiling of $11.18 million for 2018 will increase with inflation, but much lower limits are scheduled after 2025. There is some uncertainty about how this reduction, if it takes effect as scheduled, will affect large taxable gifts.

• Any future reduction in the lifetime gift tax exemption is unlikely to affect gifts that conform to annual gift tax exclusion rules.

 

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Thursday, 28 June 2018 00:00

CPA CLIENT BULLETIN SELECT June 2018

What’s inside

IRS okays home equity deductions
Buck market volatility with a retirement bucket plan
Coping with summer vacations at your small business
Tax calendar


Factoid : Winning streak

The median U.S. house price reached $241,700 in early 2018, marking 72 consecutive months of year-on-year price gains.

Did you know?

In 2017, total U.S. household consumer debt reached $13 trillion. Non-mortgage debt (car loans, student loans, credit cards, and so on) was reported by 71% of American workers. Only 31% of workers with non-mortgage debt were saving outside the workplace for retirement, compared with 69% of workers without non-mortgage debt.

Source: LIMRA Secure Retirement Institute.

 

Article : IRS okays home equity deductions

As previously reported in the April 2018 edition of the CPA Client Bulletin, the Tax Cuts and Jobs Act of 2017 affected the tax deduction for interest paid on home equity debt as of 2018. Under prior law, you could deduct interest on up to $100,000 of home equity debt, no matter how you used the money. The old rule is scheduled to return in 2026.


The bad news is that you now cannot deduct interest on home equity loans or home equity lines of credit if you use the money for college bills, medical expenses, paying down credit card debt, and so on. The good news is that the IRS has announced “Interest on Home Equity Loans Often Still Deductible Under New Law.” The details are in IR 2018-32, a news release from the IRS.

 

The book, not the cover

According to the IRS, even if a loan is labeled “home equity,” the interest may be deductible on your tax return. The key is how the borrowed money is used. In addition, the $100,000 ceiling doesn’t apply.


For home loan interest to be tax deductible, the taxpayer that secures the loan must use the money to buy, build, or substantially improve his or her home. Beginning in 2018, taxpayers may only deduct interest on $750,000 of such “qualified residence loans,” or $375,000 for a married taxpayer filing separately.


Those numbers apply to the total of a taxpayer’s home loans, but older loans up to $1 million and $500,000, respectively, may have fully deductible interest. As before, home loan interest on debt that exceeds the cost of the home won’t be eligible for an interest deduction, among other requirements.

 

Fine points

For home loans obtained in 2018 and future years, some tax rules are clear, but some are more complex.

Example 1: Eve Harper gets a $500,000 loan from Main Street Bank to buy a home in July 2018. In November 2018, Eve gets a $50,000 “home equity” loan from Broad Street Bank, which she uses to buy a car. The interest on the second loan is not tax deductible.

Example 2: Same as example 1, except that Eve uses the Broad Street Bank loan to install central air conditioning, add a powder room, and upgrade plumbing throughout her new home. The interest on both of these loans will be deductible.

The tax treatment of these examples may seem straightforward, but that’s not always true.


Example 3: Same as example 1, except that the Broad Street Bank loan is used to make a down payment on a mountain cabin, where Eve plans to go for vacations. Interest on this $50,000 loan is deductible because the total of both loans does not exceed $750,000, and the $50,000 loan is secured by the cabin. Indeed, Eve could get a loan up to $250,000 (for a $750,000 total of home loans) to buy the cabin and still deduct the interest, as long as this loan is secured by the cabin.

Example 4: Same as example 3, except that the Broad Street Bank loan is secured by Eve’s main home, not by the cabin she’s buying. Now, the Broad Street Bank loan would be considered home equity debt no matter how much was borrowed, and no interest on that loan could be deducted.

 

Over the limit

 

What would happen if Eve gets a $500,000 loan in June to buy her main house and another $500,000 loan in November to buy a vacation home? She would be over the $750,000 debt limit for deducting interest on 2018 home loans, so only a percentage of the interest paid would be tax deductible.

The bottom line is that if you intend to use a home equity loan to buy, build, or substantially improve a home, you should be careful about how the debt is secured. Be prepared to show that the money really was used for qualified purposes.

Moreover, qualified home loans obtained on or before December 15, 2017, are grandfathered, with tax deductions allowed for interest up to $1 million or $500,000, as explained. Some questions remain, though, about how refinancing those grandfathered loans will affect the tax treatment. If you are considering refinancing a home loan that’s now
grandfathered, our office can provide the latest guidance on how your taxes might be affected.

 

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Over the limit

 

What would happen if Eve gets a $500,000 loan in June to buy her main house and another $500,000 loan in November to buy a vacation home? She would be over the $750,000 debt limit for deducting interest on 2018 home loans, so only a percentage of the interest paid would be tax deductible.

            The bottom line is that if you intend to use a home equity loan to buy, build, or substantially improve a home, you should be careful about how the debt is secured. Be prepared to show that the money really was used for qualified purposes.

            Moreover, qualified home loans obtained on or before December 15, 2017, are grandfathered, with tax deductions allowed for interest up to $1 million or $500,000, as explained. Some questions remain, though, about how refinancing those grandfathered loans will affect the tax treatment. If you are considering refinancing a home loan that’s now grandfathered, our office can provide the latest guidance on how your taxes might be affected.

Wednesday, 27 June 2018 00:00

CPA CLIENT BULLETIN SELECT May 2018

What’s inside

The new tax law will change divorce tactics
Stretching for yield...carefully
No tax deductions for business entertaining
Tax calendar

 

Factoid : Global expansion

The broadest global expansion in seven years occurred during 2017, with economic growth in 120 countries that accounted for three-fourths of world economic output.

 

Did you know ?

Among Baby Boomers (age 52 and older), 46% considered delaying retirement beyond the original target date in 2017. In 2015, the percentage was 47%. By comparison, 41% of Millennials (age 18–35) considered such a delayed retirement in 2017, up from 30% in 2015.

Source: T. Rowe Price

 

Article : The new tax law will change divorce tactics

When couples divorce, financial negotiations often involve alimony. The tax rules regarding alimony were dramatically changed by the Tax Cuts and Jobs Act (TCJA) of 2017, but existing agreements have been grandfathered. In addition, the old rules remain in effect for divorce and separation agreements executed during 2018. Next year, the rules will change, and the roles will be reversed.

Under divorce or separation agreements executed in 2018, and for many years in the past, alimony payments have been tax deductible. Moreover, these deductions reduce adjusted gross income, so they may have benefits elsewhere on a tax return. While the spouse or former spouse paying the alimony gets a tax deduction, the recipient reports alimony as taxable income.

 

Shifting into reverse

Beginning with agreements executed in 2019, there will be no tax deduction for alimony. As an offset, alimony recipients won’t include the payments in income.

Example 1: Joe and Kim Alexander get divorced in 2018. Joe expects to be in a 35% tax bracket in the future, whereas Kim anticipates being in a 22% bracket. Suppose that the proposed agreement has Joe paying $3,500 a month ($42,000 a year) in alimony.

Joe will save $14,700 in tax (35% times $42,000), but Kim will owe $9,240 (22% times $42,000). Net, the couple will save over $5,000 per year in taxes. This type of calculation will affect the negotiations, as it has in the past. Assuming the relevant rules are followed, it may make sense to tip the agreement toward Joe paying alimony to Kim, perhaps in return for other considerations.

Example 2: Assume that the Alexanders’ neighbors, Len and Marie Baker, have identical finances. They divorce in 2019. If Len pays $42,000 a year in alimony, he will get no deduction and won’t get the $14,700 in annual tax savings that Joe did in example 1. Marie, on the other hand, will pocket $42,000, tax-free, without the $9,240 tax bill faced by Kim in example 1.

 

Moving things along

Just as people shouldn’t “let the tax tail wag the investment dog,” so taxes shouldn’t dominate divorce or separation proceedings. However, it’s also true that taxes shouldn’t be ignored. If you are in such a situation, our office can help explain to both parties the possible savings available from executing an agreement during 2018, rather than in a future year.

The new rules will be in effect beginning in 2019. With no alimony deduction and a tax exemption for alimony income, it may be desirable to consider after-tax, rather than pre-tax, income when making decisions. Speaking very generally, there may be less cash for the couple to use after-tax.

Keep in mind that, as of 2019, not all states will have alimony tax laws that conform to the new federal rule. Your state may still offer tax deductions for alimony payments and impose income tax on alimony received. That’s all the more reason to look at after-tax results when calculating a divorce or separation agreement.

 

Getting personal

The impact of the new TCJA on spousal negotiations may go beyond the taxation of alimony. Among other provisions to consider, the TCJA abolishes personal exemptions. As a tradeoff, the standard deduction was almost doubled (see CPA Client Bulletin, April 2018).

In some past instances, divorcing spouses would agree that the high bracket party would claim the children’s personal exemptions, which effectively were tax deductions, in return for some other consideration. Now those exemptions don’t exist, so they shouldn’t be part of divorce negotiations. If you previously entered into an agreement that included the treatment of children’s personal exemptions, you may want to consult with counsel to see about possible revisions.

 

Trusted advice

Defining alimony

Payments to a spouse or former spouse must meet several requirements to be treated as alimony for tax purposes. The following are some key tests:

• The payments are made under a divorce or separation agreement.

• There is no liability to continue the payments after the recipient’s death.

• The payments aren’t treated as child support or a property settlement.

• The payments are made in cash (including checks or money orders).

 

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Thursday, 29 March 2018 00:00

CPA CLIENT BULLETIN SELECT April 2018

What’s inside

Special report on tax planning under the Tax Cut and Jobs Act of 2017

Patience is prudent
Know your true tax rate
Rethinking retirement contributions
Regard Roth conversions carefully
Are state and local taxes reasons for relocation?
Positive prognosis for medical deductions
Home equity hassle
New tax deduction for pass-through entities
Tax calendar

 

Factoid : Up to standard

IRS data for 2015 returns show that 69.2% of taxpayers took the standard deduction, 29.5% took itemized deductions, and the others had income too low for any deductions.

Did you know ?

In 1913, when the 16th Amendment instituted the federal income tax, the form and directions fit on four pages. The top tax rate was 7%. Since then, the peak rate has been as high as 94% in 1944 and as low as 28% from 1988–1990.

Source: Bradford Tax Institute


Article: Patience is prudent

The Tax Cuts and Jobs Act (TCJA) of 2017, passed at year end, has been called the most extensive tax legislation in more than 30 years. It’s certainly far reaching, covering individual income taxes, business income taxes, and estate taxes. The new law has many tax saving opportunities as well as possible pitfalls.

Trying to grasp everything in the TCJA can be overwhelming. Therefore, it’s best not to panic; don’t rush into tax motivated actions just because of gossip or opinions you hear. There’s no need to act rashly this early in the year.

That said, it is important to understand what’s in the TCJA and what it might mean to you. Consider this issue of CPA Client Bulletin as a place to start. You’ll find explanations of some key portions of the law as well as tax planning ideas.

One issue is not sufficient to cover the new law, so we’ll keep you posted throughout the year as uncertainties are addressed and new strategies emerge. Of course, if you have questions about the TCJA and possible planning tactics, please call our office for a personalized response.

Article: Know your true tax rate

It has been widely reported that the TCJA lowers federal income tax rates for many people. The highest tax rate, for example, has fallen from 39.6% to 37%. Many people who are in lower brackets also stand to benefit.

Example 1: Alice Young had $100,000 of taxable income in 2017. As a single filer, Alice was in the 28% tax bracket. If Alice has that same $100,000 in taxable income in 2018, she will be in a 24% bracket. Indeed, Alice could add as much as $57,500 in taxable income this year and maintain her lower 24% tax rate.

Not for everyone

However, there are some quirks in the new tax rates. Some people actually face higher rates.

Example 2: Brad Walker had $220,000 of taxable income in 2017, which put him in a 33% tax bracket. With the same income in 2018, Brad will face a 35% tax rate.

In addition, the federal tax rates such as 24% or 35% are just one factor in determining the true rate you’ll pay by adding taxable income, or the true amount you’ll save with a tax deduction. Many people owe state or even local income tax, which might be fully or partially deductible on a federal tax return or not deductible at all. Various other provisions of the tax code will also impact your marginal tax rate—the percent you’ll owe or save by adding or reducing taxable income.

Knowing your true tax rate can help you make knowledgeable financial decisions, some of which are explained elsewhere in this issue. By starting with your 2017 tax return and incorporating your expectations as well as your plans for 2018, our office can help you determine the value of tax related actions.


Article: Rethinking retirement contributions

The TCJA generally lowered federal income tax rates, with some exceptions. Among the ways in which lower rates impact tax planning, they make unmatched contributions to traditional employer retirement plans less attractive.

Example 1: Chet Taylor has around $100,000 in taxable income a year. Chet contributed $12,000 to his company’s traditional 401(k) in 2017, reducing his taxable income. He was in the 28% tax bracket last year, so his federal tax savings were $3,360 (28% of $12,000). An identical contribution this year will save Chet only $2,880, because the same income would put him in a lower 24% bracket.

Not everyone will be in this situation.

Example 2: Denise Sawyer has around $200,000 taxable income a year. Denise contributed $12,000 to her company’s traditional 401(k) in 2017, reducing her taxable income. She was in the 33% tax bracket last year, so her federal tax savings were $3,960 (33% of $12,000). An identical contribution this year will save her $4,200 because the same income would put her in a higher 35% bracket.

 

Planning pointers

Considering the changes in tax rates, participants in employer sponsored retirement plans should review their contribution plans. If your company offers a match, be sure to contribute at least enough to get the full amount. Otherwise, you’re giving up a portion of your compensation package.

Beyond that level, decide whether you wish to make unmatched tax-deferred contributions to your traditional 401(k) or similar plans. The value here is tax deferral and the ability to compound potential investment earnings without paying current income tax. Deferring tax at, say, 12%, 22%, or 24% in 2018 will be less desirable than similar deferrals were last year, when tax rates were 15%, 25%, or 28%.

 

Link to Full Article

 

Tuesday, 27 February 2018 00:00

CPA Client Bulletin Select January 2018

What’s Inside

Investing In 2018: Dividend Stocks
Investing In 2018: Defensive Funds
Small Companies Need Plans for Natural Disasters
Tax Calendar


Factoid: Slippery Slope

From late 2007 to late 2017, oil prices fell from over $100 a barrel to under $50 a barrel.

 

Did You Know ?

 

In 2017, the national median cost of home health aide services was $21.50 an hour. Annualized, based on 44 hours of care per week for 52 weeks, that’s nearly $50,000 a year. Costs are highest in North Dakota (around $64,000 a year) and lowest in Louisiana ($35,000).

Source: Genworth 2017 Annual Cost of Care Survey


Article: Investing In 2018: Dividend Stocks

As of this writing, it appears that 2018 may be a difficult year for investors. Yields on bonds, bank accounts, money market funds, and other savings vehicles are extremely low, with questionable prospects for substantial increases. Stock market indexes, on the other hand, are at or near record levels.
In essence, relatively low-risk places to put your money this year appear to offer scant returns. Equity markets have been rising since early 2009, so the chance of a pullback may be just as great as the possibility of solid gains.
Given this environment, where might investors go for opportunities for respectable returns with some protection against a steep decline? One possibility is in the stock market.

Paying dividends

Equity markets are notoriously difficult to predict. Nevertheless, dividend paying stocks might tilt the risk-reward odds in your favor. During recent bear markets, dividend payers generally fared better than those that didn’t pay dividends.
This seems reasonable because dividend paying companies may be enterprises that generate ample cash flow—enough to distribute some profits to investors. Companies in strong financial condition could be favored by investors in stormy economic weather, and the prospect of ongoing dividend payouts might stem panicked selling.

Floor and ceiling

Whereas dividend paying stocks may offer some protection during down markets, they also might deliver solid returns. The yield on the benchmark Standard & Poor’s 500 Index currently is nearly 2%. That’s the yield for the broad index, so some of the large companies included in the index have dividend yields of 3% or more. When an investment starts with such a payout, it’s less likely to fall into negative territory and is already on the way to possible robust returns.

Dividends can grow, too. Indeed, many public companies have long histories of raising their payouts.

Example: Nancy King is a widow who depends on investment income for her lifestyle. She invests $50,000 in shares of GHI Corp., currently paying a 4% dividend, or $2,000 a year. If GHI raises its annual dividend to $2,500 over the next few years, Nancy will collect a 5% return on her initial investment.

In addition, qualified dividends (see Trusted Advice box) receive favorable tax treatment. Nancy, in a low tax bracket in our example, could owe 0% on qualified dividends. Other taxpayers owe 15% or, for those in the highest ordinary tax bracket, 20%. These rates are lower than ordinary income tax rates. The Trump Administration’s tax reform framework, released in the fall of 2017, does not mention the possibility of ending this tax break.

 

Go with a pro

 

It’s true that dividend paying stocks can offer many advantages. However, investing in equities carries risks; even the most established company, with excellent management, can see its share price tumble in a broad selloff. Selecting individual dividend paying stocks can require thorough research and portfolio monitoring.

 

Therefore, many investors prefer to invest in mutual funds or ETFs that focus on dividend stocks. There are dozens of such funds available, with portfolio managers who are responsible for stock selection. Other funds track a custom index of dividend paying stocks. Dividend stock funds tend to fall into two broad categories:

 

High payout. Some funds are designed to pay higher yields than the S&P 500, perhaps 3% or 4%. They may use “dividend capture” strategies, buying funds just before a dividend payout. High dividends may be appealing, but a robust payout can indicate a relatively low share price due to concerns about the company’s growth prospects.

Dividend growth. These funds may have yields similar to the S&P 500 or lower. However, the stocks they hold are chosen because the companies have enjoyed growing earnings along with rising dividends and are considered likely to continue such profitability. 

 

Quality counts

 

Dividend oriented investors may hold individual stocks, specialized funds, or a combination. They aim to own successful, profitable companies that will provide a steady stream of cash flow, bull market or bad. There’s no magic about dividend paying stocks and there have been instances in which a dividend cut has been followed by a plunging stock price. Still, buying successful companies that pay appealing dividends is one way to approach equity investing this year, with current prices at lofty levels.

 

Download Full Article

 

 

 

 

What’s Inside

 

Investing In 2018: Dividend Stocks

Investing In 2018: Defensive Funds

Small Companies Need Plans for Natural Disasters

Tax Calendar

 

 

Factoid: Slippery Slope[Office1] 

 

From late 2007 to late 2017, oil prices fell from over $100 a barrel to under $50 a barrel.

 

Did You Know[Office2] ?

 

In 2017, the national median cost of home health aide services was $21.50 an hour. Annualized, based on 44 hours of care per week for 52 weeks, that’s nearly $50,000 a year. Costs are highest in North Dakota (around $64,000 a year) and lowest in Louisiana ($35,000).

 

Source: Genworth 2017 Annual Cost of Care Survey

 

 

Article: Investing In 2018: Dividend Stocks[Office3] 

 

As of this writing, it appears that 2018 may be a difficult year for investors. Yields on bonds, bank accounts, money market funds, and other savings vehicles are extremely low, with questionable prospects for substantial increases. Stock market indexes, on the other hand, are at or near record levels.

            In essence, relatively low-risk places to put your money this year appear to offer scant returns. Equity markets have been rising since early 2009, so the chance of a pullback may be just as great as the possibility of solid gains.

            Given this environment, where might investors go for opportunities for respectable returns with some protection against a steep decline? One possibility is in the stock market.

 

Paying dividends

 

Equity markets are notoriously difficult to predict. Nevertheless, dividend paying stocks might tilt the risk-reward odds in your favor. During recent bear markets, dividend payers generally fared better than those that didn’t pay dividends.

            This seems reasonable because dividend paying companies may be enterprises that generate ample cash flow—enough to distribute some profits to investors. Companies in strong financial condition could be favored by investors in stormy economic weather, and the prospect of ongoing dividend payouts might stem panicked selling.

 

Floor and ceiling

 

Whereas dividend paying stocks may offer some protection during down markets, they also might deliver solid returns. The yield on the benchmark Standard & Poor’s 500 Index currently is nearly 2%. That’s the yield for the broad index, so some of the large companies included in the index have dividend yields of 3% or more. When an investment starts with such a payout, it’s less likely to fall into negative territory and is already on the way to possible robust returns.

            Dividends can grow, too. Indeed, many public companies have long histories of raising their payouts.

            Example: Nancy King is a widow who depends on investment income for her lifestyle. She invests $50,000 in shares of GHI Corp., currently paying a 4% dividend, or $2,000 a year. If GHI raises its annual dividend to $2,500 over the next few years, Nancy will collect a 5% return on her initial investment.

            In addition, qualified dividends (see Trusted Advice box) receive favorable tax treatment. Nancy, in a low tax bracket in our example, could owe 0% on qualified dividends. Other taxpayers owe 15% or, for those in the highest ordinary tax bracket, 20%. These rates are lower than ordinary income tax rates. The Trump Administration’s tax reform framework, released in the fall of 2017, does not mention the possibility of ending this tax break.


 [Office1]Email

Include a Factoid section in your next client email, then copy and paste this item.

 

Image tip: Include a photo of a declining arrow or barrels that are full and half full.

 

Twitter

#Factoid: Over the past 10 years, the price of oil has fallen nearly 50% per barrel. [link to newsletter] #Trivia

 

Facebook/LinkedIn/GooglePlus

Factoid:  From late 2007 to late 2017, oil prices fell from over $100 a barrel to under $50 a barrel. That’s a reduction of 50 percent! [link to newsletter] #Factoid #Trivia

 [Office2]Email

Include a “Did You Know” section in your monthly email and include this tip.

 

Image tip: Health care worker

 

Twitter

Trivia: The national, median cost of home health aide services is nearly $50,000 annually. Can you guess which states have the highest and lowest costs? [link to newsletter] #DidYouKnow #HealthCare

 

Facebook/LinkedIn/GooglePlus

How costly are home health aide services?

According to the Genworth 2017 Annual Cost of Care Survey, the national, median cost of annual home health aide services is $50,000. Can you guess which states have the highest and lowest costs? Find out >> [link to newsletter] #DidYouKnow #HealthCare

 [Office3]Email Tip: Include a portion of this story in an email to your clients, then link to the newsletter or your blog page created from this content.

 

Consider the headline, “2018 May Be a Difficult Year for Investors.” Include a snippet from the article, then link to the full story as a “Read more…” [link to newsletter story]

 

Twitter/Instagram

2018 May Be a Difficult Year for Investors
Where to go in case of a steep decline? Here are some ideas. [newsletter link] #Money #Investing [include a popular hashtag for your city/geography]

 

Facebook/Google Plus/LinkedIn

2018 May Be a Difficult Year for Investors

Where might investors go for opportunities for respectable returns with some protection against a steep decline? Here are some ideas. [newsletter link] #Money #Investing [include a popular hashtag for your city/geography]

Tuesday, 27 February 2018 00:00

CPA Client Bulletin Select February 2018

What’s Inside

Solving the Annuity Puzzle
Deducting Employee Business Expenses
Insuring Key People at Small Companies
Tax Calendar

 

Factoid: Annuity Sales

Annuity sales in the first half of 2017 topped $100 billion.


Did You Know ?

Campus Costs

The average total cost at private, nonprofit four-year institutions reached $46,950 in the 2017–2018 school year, up from $45,370 a year ago. Those are the published charges for tuition, fees, room, and board. For in-state students living on campus at public universities, comparable average costs this year are $20,770.

Source: The College Board

 

Article: Solving the Annuity Puzzle

Americans hold billions of dollars in annuities, yet they are widely misunderstood. Used properly, an annuity can serve valuable purposes in personal financial planning. On the other hand, some types of annuities are widely criticized, even scorned, by some financial advisers.

Lifelong income

 

What might be considered the purest type of annuity is a contract with an issuer, often an insurance company, for a stream of cash flow. Such contracts have been called immediate annuities, although they now may be labeled income annuities or payout annuities because those labels may be more appealing to consumers.


Example 1: Marie Jenkins pays $100,000 to an insurer for an income annuity. Every month thereafter the company sends Marie a check. annuities guarantee certain withdrawal amounts. Annuity withdrawals may be fully taxable, and a 10% penalty also may apply before age 59½.

 

Critics charge that some annuities, especially deferred annuities, can be complex, illiquid, and burdened with high fees. Read the fine print of any annuity before making a commitment.

 

Trusted Advice

 

Taxation of Annuity Payouts

 

Periodic annuity payments are amounts paid at regular intervals—weekly, monthly, or yearly—for a period of time greater than one year.

Between the simplified and general methods of computing income tax on such payments, you must use the general method if your annuity is paid under a nonqualified plan, rather than under a qualified plan such as a 401(k) or an IRA.

With the general method, you determine the tax-free part of each annuity payment based on the ratio of the cost of the contract to the total expected return. 

The expected return is the total amount you and other eligible recipients can expect to receive under the contract, as per life expectancy tables from the IRS.

Our office can help you make the required calculation.

 

Article: Deducting Employee Business Expenses 

 

If you work for a business, you might incur certain expenses that are related to your job. In some cases, those expenses can be substantial. As of this writing, in late 2017, Congress is considering legislation that would eliminate miscellaneous itemized deductions, but it appears that they will be available on 2017 returns. That said, you may be able to deduct such expenses incurred last year when you file your 2017 federal income tax return.

 

The process of claiming this deduction for employee business expenses might not be simple. You must go through several steps, and you’ll need relevant records to substantiate the deduction if you’re challenged by the IRS.

 

The broad look

 

In general terms, here is an explanation of how to arrive at an employee business expense deduction. First, you need to see how much you have spent on items that are ordinary and necessary for your role at work. These must be outlays that were not reimbursed in some manner. Therefore, the amounts you hope to deduct must be your actual out-of-pocket costs.

 

Once you calculate this number, it is incorporated as a miscellaneous itemized deduction on Schedule A of your tax return. If you take the standard deduction instead of itemizing on Schedule A, you can’t deduct your employee business expenses.

 

Other costs also go into the category of miscellaneous deductions. They might include tax preparation and investment fees. Once you have a total of miscellaneous items, that amount is deductible on Schedule A to the extent it exceeds 2% of adjusted gross income (AGI).

 

Example: Al and Bonnie Carson are both employees at different companies. Al has no unreimbursed employee expenses, but Bonnie had $2,500 of such costs in 2017. Together, the Carsons’ miscellaneous items total $4,100 for last year.

 

On their 2017 joint tax return, the Carsons report AGI of $110,500. In this example, 2% of AGI is $2,210. Subtracting $2,210 from $4,100 leaves $1,890, the amount of miscellaneous deductions they can claim on Schedule A. 

 

Download Full Article

 

 

 

 

 

 

 

annuities guarantee certain withdrawal amounts. Annuity withdrawals may be fully taxable, and a 10% penalty also may apply before age 59½.

Critics charge that some annuities, especially deferred annuities, can be complex, illiquid, and burdened with high fees. Read the fine print of any annuity before making a commitment.

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