2019 Tax Provisions:
INDIVIDUAL TAXPAYERS: RECAP FOR 2019
As we close out another year and get ready for tax season, here’s what individuals and families need to know about tax provisions for tax year 2019.
Personal Exemptions
Personal exemptions are eliminated for tax years 2018 through 2025.
Standard Deductions
The standard deduction for married couples filing a joint return in 2019 is $24,400. For singles and married individuals filing separately, it is $12,200, and for heads of household, the deduction is $18,350.
The additional standard deduction for blind people and senior citizens in 2019 is $1,300 for married individuals and $1,650 for singles and heads of household.
Income Tax Rates
In 2019 the top tax rate of 37 percent affects individuals whose income exceeds $510,300 ($612,350 for married taxpayers filing a joint return). Marginal tax rates for 2019 are as follows: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. As a reminder, while the tax rate structure remained similar to prior years under tax reform (i.e., with seven tax brackets), the tax-bracket thresholds increased significantly for each filing status.
Estate and Gift Taxes
In 2019 there is an exemption of $11.40 million per individual for estate, gift, and generation-skipping taxes, with a top tax rate of 40 percent. The annual exclusion for gifts is $15,000.
Alternative Minimum Tax (AMT)
For 2019, exemption amounts increased to $71,700 for single and head of household filers, $111,700 for married people filing jointly and for qualifying widows or widowers, and $55,850 for married taxpayers filing separately.
Pease and PEP (Personal Exemption Phaseout)
Both Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) have been eliminated under TCJA.
Flexible Spending Account (FSA)
A Flexible Spending Account (FSA) is limited to $2,700 per year in 2019 (up from $2,650 in 2018) and applies only to salary reduction contributions under a health FSA. The term “taxable year” as it applies to FSAs refers to the plan year of the cafeteria plan, which is typically the period during which salary reduction elections are made.
Long-Term Capital Gains
In 2019 tax rates on capital gains and dividends remain the same as 2018 rates (0%, 15%, and a top rate of 20%); however, taxpayers should be reminded that threshold amounts don’t correspond to the tax bracket rate structure as they have in the past. For example, taxpayers whose income is below $39,375 for single filers and $78,750 for married filing jointly pay 0% capital gains tax. For individuals whose income is at or above $434,550 ($488,850 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent.
Miscellaneous Deductions
Miscellaneous deductions that exceed 2 percent of AGI (adjusted gross income) are eliminated for tax years 2018 through 2025. As such, you can no longer deduct on Schedule A expenses related to tax preparation, moving (except for members of the Armed Forces on active duty who move because of a military order), job hunting, or unreimbursed employee expenses such as tools, supplies, required uniforms, travel, and mileage. Business owners are not affected and can still deduct business-related expenses on Schedule C.
INDIVIDUALS – TAX CREDITS
Adoption Credit
In 2019 a nonrefundable (i.e., only those with tax liability will benefit) credit of up to $14,080 is available for qualified adoption expenses for each eligible child.
Child and Dependent Care Credit
The Child and Dependent Care Tax Credit was permanently extended for taxable years starting in 2013 and remained under tax reform. As such, if you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.
For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher-income earners, the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.
Child Tax Credit and Credit for Other Dependents
For tax years 2018 through 2025, the Child Tax Credit increases to $2,000 per child. The refundable portion of the credit increases from $1,000 to $1,400 – 15 percent of earned income above $2,500, up to a maximum of $1,400 – so that even if taxpayers do not owe any tax, they can still claim the credit. Please note, however, that the refundable portion of the credit (also known as the additional child tax credit) applies higher-income when the taxpayer isn’t able to fully use the $2,000 nonrefundable credit to offset their tax liability.
Under TCJA, a new tax credit – Credit for Other Dependents – is also available for dependents who do not qualify for the Child Tax Credit. The $500 credit is nonrefundable and covers children older than age 17 as well as parents or other qualifying relatives supported by a taxpayer.
Earned Income Tax Credit (EITC)
For tax year 2019, the maximum earned income tax credit (EITC) for low and moderate-income workers and working families increased to $6,557 (up from $6,431 in 2018). The maximum income limit for the EITC increased to $55,952 (up from $54,884 in 2018) for married filing jointly. The credit varies by family size, filing status, and other factors, with the maximum credit going to joint filers with three or more qualifying children.
INDIVIDUALS – EDUCATION EXPENSES
Coverdell Education Savings Account
You can contribute up to $2,000 a year to Coverdell savings accounts in 2019. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.
American Opportunity Tax Credit
For 2019, the maximum American Opportunity Tax Credit that can be used to offset certain higher education expenses is $2,500 per student, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.
Lifetime Learning Credit
A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2019, the modified adjusted gross income (MAGI) threshold at which the Lifetime Learning Credit begins to phase out is $114,000 for joint filers and $57,000 for singles and heads of household. The credit cannot be claimed if your MAGI is $67,000 or more ($134,000 for joint returns)
Employer-Provided Educational Assistance
As an employee in 2019, you can exclude up to $5,250 of qualifying postsecondary and graduate education expenses that are reimbursed by your employer.
Student Loan Interest
In 2019, you can deduct up to $2,500 in student-loan interest as long as your modified adjusted gross income is less than $65,000 (single) or $135,000 (married filing jointly). The deduction is phased out at higher income levels.
INDIVIDUALS – RETIREMENT
Contribution Limits
For 2019, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $19,000 ($18,500 in 2018). For persons age 50 or older in 2019, the limit is $25,000 ($6,000 catch-up contribution).
Retirement Savings Contributions Credit (Saver’s Credit)
In 2019, the adjusted gross income limit for the saver’s credit for low and moderate-income workers is $64,000 for married couples filing jointly, $48,000 for heads of household, and $32,000 for married individuals filing separately and for singles. The maximum credit amount is $2,000 ($4,000 if married filing jointly). Also of note is that starting in 2018, the Saver’s Credit can be taken for your contributions to an ABLE (Achieving a Better Life Experience) account if you’re the designated beneficiary. However, keep in mind that your eligible contributions may be reduced by any recent distributions you received from your ABLE account.
If you have any questions about these and other tax provisions that could affect your tax situation, don’t hesitate to call.
Year End Tax Planning Strategies for Tax Year 2017
Once again, tax planning for the year ahead presents a number of challenges, first and foremost being what tax reform measures (if any) will actually become legislation–and when they take effect (e.g. retroactive to January 1, 2017, or a future date). Furthermore, a number of tax extenders expired at the end of 2016, which may or may not be reauthorized by Congress and made retroactive to the beginning of the year. And then, of course, there are the normal variations in individual tax circumstances such as the sale of a home that could bump up income into another tax bracket.
With this in mind, let’s take a look at some of the tax strategies you can use given the current uncertainties.
General Tax Planning
General tax planning strategies for individuals this year include postponing income and accelerating deductions, as well as careful consideration of timing related investments, charitable gifts, and retirement planning. For example, taxpayers might consider using one or more of the following:
- Selling any investments on which you have a gain or loss this year. For more on this, see Investment Gains and Losses, below.
- If you anticipate an increase in taxable income this year (2017) and are expecting a bonus at year-end, try to get it before December 31. Keep in mind, however, that contractual bonuses are different, in that they are typically not paid out until the first quarter of the following year. Therefore, any taxes owed on a contractual bonus would not be due until you file your 2018 tax return in 2019. Don’t hesitate to call the office if you have any questions about this.
- Prepaying deductible expenses such as charitable contributions and medical expenses this year using a credit card. This strategy works because deductions may be taken based on when the expense was charged on the credit card, not when the bill was paid.
For example, if you charge a medical expense in December but pay the bill in January, assuming it’s an eligible medical expense, it can be taken as a deduction on your 2017 tax return.
- If your company grants stock options, you may want to exercise the option or sell stock acquired by exercise of an option this year if you think your tax bracket will be higher in 2018. Exercising this option is often but not always a taxable event; sale of the stock is almost always a taxable event.
- If you’re self-employed, send invoices or bills to clients or customers this year to be paid in full by the end of December.
Caution: Keep an eye on the estimated tax requirements.
Accelerating Income and Deductions
Accelerating income into 2017 is an especially good idea for taxpayers who anticipate being in a higher tax bracket next year or whose earnings are close to threshold amounts ($200,000 for single filers and $250,000 for married filing jointly) that make them liable for additional Medicare Tax or Net Investment Income Tax (see below).
In cases where tax benefits are phased out over a certain adjusted gross income (AGI) amount, a strategy of accelerating income and deductions might allow you to claim larger deductions, credits, and other tax breaks for 2017, depending on your situation.
The latter benefits include Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child tax credits, higher education tax credits and deductions for student loan interest.
Caution: Taxpayers close to threshold amounts for the Net Investment Income Tax (3.8 percent of net investment income) should pay close attention to “one-time” income spikes such as those associated with Roth conversions, sale of a home or other large assets that may be subject to tax.
Tip: If you know you have a set amount of income coming in this year that is not covered by withholding taxes, increasing your withholding before year-end can avoid or reduce any estimated tax penalty that might otherwise be due.
Tip: On the other hand, the penalty could be avoided by covering the extra tax in your final estimated tax payment and computing the penalty using the annualized income method.
Here are several examples of what a taxpayer might do to accelerate deductions:
- Pay a state estimated tax installment in December instead of at the January due date. However, make sure the payment is based on a reasonable estimate of your state tax.
- Pay your entire property tax bill, including installments due in year 2018, by year-end. This does not apply to mortgage escrow accounts.
- It may be beneficial to pay 2018 tuition in 2017 to take full advantage of the American Opportunity Tax Credit, an above-the-line deduction worth up to $2,500 per student to cover the cost of tuition, fees and course materials paid during the taxable year. Forty percent of the credit (up to $1,000) is refundable, which means you can get it even if you owe no tax.
- Try to bunch “threshold” expenses, such as medical expenses and miscellaneous itemized deductions. For example, you might pay medical bills and dues and subscriptions in whichever year they would do you the most tax good.
Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income (AGI). For example, to deduct medical and dental expenses these amounts must exceed 10 percent of AGI. By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction.
Note: The temporary exemption of 7.5 percent for individuals age 65 and older and their spouses expired on December 31, 2016 and is no longer available.
Health Care Law
If you haven’t signed up for health insurance this year, do so now and avoid or reduce any penalty you might be subject to. Depending on your income, you may be able to claim the premium tax credit that reduces your premium payment or reduces your tax obligations, as long as you meet certain requirements. You can choose to get the credit immediately or receive it as a refund when you file your taxes next spring. Please contact the office if you need assistance with this.
Additional Medicare Tax
Taxpayers whose income exceeds certain threshold amounts ($200,000 single filers and $250,000 married filing jointly) are liable for an additional Medicare tax of 0.9 percent on their tax returns, but may request that their employers withhold additional income tax from their pay to be applied against their tax liability when filing their 2017 tax return next April.
High net worth individuals should consider contributing to Roth IRAs and 401(k) because distributions are not subject to the Medicare Tax.
If you’re a taxpayer close to the threshold for the Medicare Tax, it might make sense to switch Roth retirement contributions to a traditional IRA plan, thereby avoiding the 3.8 percent Net Investment Income Tax (NIIT) as well (more about the NIIT below).
Alternate Minimum Tax
The Alternative Minimum Tax (AMT) exemption “patch,” which was made permanent by the American Taxpayer Relief Act (ATRA) of 2012, is indexed for inflation and it’s important not to overlook the effect of any year-end planning moves on the AMT for 2017 and 2018.
Items that may affect AMT include deductions for state property taxes and state income taxes, miscellaneous itemized deductions, and personal exemptions. Please call if you’re not sure whether AMT applies to you.
Note: AMT exemption amounts for 2017 are as follows:
- $54,300 for single and head of household filers,
- $84,500 for married people filing jointly and for qualifying widows or widowers,
- $42,250 for married people filing separately.
Charitable Contributions
Property, as well as money, can be donated to a charity. You can generally take a deduction for the fair market value of the property; however, for certain property, the deduction is limited to your cost basis. While you can also donate your services to charity, you may not deduct the value of these services. You may also be able to deduct charity-related travel expenses and some out-of-pocket expenses, however.
Keep in mind that a written record of your charitable contributions–including travel expenses such as mileage–is required in order to qualify for a deduction. A donor may not claim a deduction for any contribution of cash, a check or other monetary gift unless the donor maintains a record of the contribution in the form of either a bank record (such as a cancelled check) or written communication from the charity (such as a receipt or a letter) showing the name of the charity, the date of the contribution, and the amount of the contribution. For more information about this topic, see Charitable Contributions of Property below.
Tip: Contributions of appreciated property (i.e. stock) provide an additional benefit because you avoid paying capital gains on any profit.
Investment Gains and Losses
This year, and in the coming years, investment decisions are likely to be more about managing capital gains than about minimizing taxes per se. For example, taxpayers below threshold amounts in 2017 might want to take gains; whereas taxpayers above threshold amounts might want to take losses.
Caution: In recent years, extreme fluctuations in the stock market have been commonplace. Don’t assume that a down market means investment losses. Your cost basis may be low if you’ve held the stock for a long time.
If your tax bracket is either 10 or 15 percent (married couples making less than $75,900 or single filers making less than $37,950), then you might want to take advantage of the zero percent tax rate on qualified dividends and long-term capital gains. If you fall into the highest tax bracket (39.6 percent), the maximum tax rate on long-term capital gains is capped at 20 percent for tax years starting in 2013.
Minimize taxes on investments by judicious matching of gains and losses. Where appropriate, try to avoid short-term capital gains, which are usually taxed at a much higher tax rate than long-term gains–up to 39.6 percent in 2017 for high-income earners ($418,400 single filers, $470,700 married filing jointly).
Where feasible, reduce all capital gains and generate short-term capital losses up to $3,000. As a general rule, if you have a large capital gain this year, consider selling an investment on which you have an accumulated loss. Capital losses up to the amount of your capital gains plus $3,000 per year ($1,500 if married filing separately) can be claimed as a deduction against income.
Wash Sale Rule. After selling a securities investment to generate a capital loss, you can repurchase it after 30 days. This is known as the “Wash Rule Sale.” If you buy it back within 30 days, the loss will be disallowed. Or you can immediately repurchase a similar (but not the same) investment, e.g., and ETF or another mutual fund with the same objectives as the one you sold.
Tip: If you have losses, you might consider selling securities at a gain and then immediately repurchasing them, since the 30-day rule does not apply to gains. That way, your gain will be tax-free; your original investment is restored, and you have a higher cost basis for your new investment (i.e., any future gain will be lower).
Net Investment Income Tax (NIIT)
The Net Investment Income Tax, which went into effect in 2013, is a 3.8 percent tax that is applied to investment income such as long-term capital gains for earners above certain threshold amounts ($200,000 for single filers and $250,000 for married taxpayers filing jointly). Short-term capital gains are subject to ordinary income tax rates as well as the 3.8 percent NIIT. This information is something to think about as you plan your long-term investments. Business income is not considered subject to the NIIT provided the individual business owner materially participates in the business.
Please call if you need assistance with any of your long term tax planning goals.
Mutual Fund Investments
Before investing in a mutual fund, ask whether a dividend is paid at the end of the year or whether a dividend will be paid early in the next year but be deemed paid this year. The year-end dividend could make a substantial difference in the tax you pay.
Example: You invest $20,000 in a mutual fund in 2017. You opt for automatic reinvestment of dividends, and in late December of 2017, the fund pays a $1,000 dividend on the shares you bought. The $1,000 is automatically reinvested.
Result: You must pay tax on the $1,000 dividend. You will have to take funds from another source to pay that tax because of the automatic reinvestment feature. The mutual fund’s long-term capital gains pass through to you as capital gains dividends taxed at long-term rates, however long or short your holding period.
The mutual fund’s distributions to you of dividends it receives generally qualify for the same tax relief as long-term capital gains. If the mutual fund passes through its short-term capital gains, these will be reported to you as “ordinary dividends” that don’t qualify for relief.
Depending on your financial circumstances, it may or may not be a good idea to buy shares right before the fund goes ex-dividend. For instance, the distribution could be relatively small, with only minor tax consequences. Or the market could be moving up, with share prices expected to be higher after the ex-dividend date. To find out a fund’s ex-dividend date, call the fund directly.
Please call if you’d like more information on how dividends paid out by mutual funds affect your taxes this year and next.
Year-End Giving To Reduce Your Potential Estate Tax
The federal gift and estate tax exemption, which is currently set at $5.49 million, is set to increase to $5.60 million in 2018. ATRA set the maximum estate tax rate set at 40 percent.
Gift Tax. For many, sound estate planning begins with lifetime gifts to family members. In other words, gifts that reduce the donor’s assets subject to future estate tax. Such gifts are often made at year-end, during the holiday season, in ways that qualify for exemption from federal gift tax.
Gifts to a donee are exempt from the gift tax for amounts up to $14,000 a year per donee in 2017. Next year, in 2018, the gift tax exclusion increases to $15,000, however.
Caution: An unused annual exemption doesn’t carry over to later years. To make use of the exemption for 2017, you must make your gift by December 31.
Husband-wife joint gifts to any third person are exempt from gift tax for amounts up to $28,000 ($14,000 each). Though what’s given may come from either you or your spouse or both of you, both of you must consent to such “split gifts.”
Gifts of “future interests,” assets that the donee can only enjoy at some future time such as certain gifts in trust, generally don’t qualify for exemption; however, gifts for the benefit of a minor child can be made to qualify.
Tip: If you’re considering adopting a plan of lifetime giving to reduce future estate tax, don’t hesitate to call the office for assistance.
Cash or publicly traded securities raise the fewest problems. You may choose to give property you expect to increase substantially in value later. Shifting future appreciation to your heirs keeps that value out of your estate. But this can trigger IRS questions about the gift’s true value when given.
You may choose to give property that has already appreciated. The idea here is that the donee, not you, will realize and pay income tax on future earnings and built-in gain on sale.
Gift tax returns for 2017 are due the same date as your income tax return. Returns are required for gifts over $14,000 (including husband-wife split gifts totaling more than $14,000) and gifts of future interests. Though you are not required to file if your gifts do not exceed $14,000, you might consider filing anyway as a tactical move to block a future IRS challenge about gifts not “adequately disclosed.” Please call the office if you’re considering making a gift of property whose value isn’t unquestionably less than $14,000.
Income earned on investments you give to children or other family members are generally taxed to them, not to you. In the case of dividends paid on stock given to your children, they may qualify for the reduced child tax rate, generally 10 percent, where the first $1,050 in investment income is exempt from tax and the next $1,050 is subject to a child’s tax rate of 10 percent (0 percent tax rate on long-term capital gains and qualified dividends).
Caution: In 2017, investment income for a child (under age 18 at the end of the tax year or a full-time student under age 24) that is in excess of $2,100 is taxed at the parent’s tax rate.
Other Year-End Moves
Retirement Plan Contributions. Maximize your retirement plan contributions. If you own an incorporated or unincorporated business, consider setting up a retirement plan if you don’t already have one. It doesn’t actually need to be funded until you pay your taxes, but allowable contributions will be deductible on this year’s return.
If you are an employee and your employer has a 401(k), contribute the maximum amount ($18,000 for 2017), plus an additional catch-up contribution of $6,000 if age 50 or over, assuming the plan allows this and income restrictions don’t apply.
If you are employed or self-employed with no retirement plan, you can make a deductible contribution of up to $5,500 a year to a traditional IRA (deduction is sometimes allowed even if you have a plan). Further, there is also an additional catch-up contribution of $1,000 if age 50 or over.
Health Savings Accounts. Consider setting up a health savings account (HSA). You can deduct contributions to the account, investment earnings are tax-deferred until withdrawn, and amounts you withdraw are tax-free when used to pay medical bills.
In effect, medical expenses paid from the account are deductible from the first dollar (unlike the usual rule limiting such deductions to the amount of excess over 10 percent of AGI). For amounts withdrawn at age 65 or later that are not used for medical bills, the HSA functions much like an IRA.
To be eligible, you must have a high-deductible health plan (HDHP), and only such insurance, subject to numerous exceptions, and must not be enrolled in Medicare. For 2017, to qualify for the HSA, your minimum deductible in your HDHP must be at least $1,300 for single coverage or $2,600 for a family.
Summary
These are just a few of the steps you might take. Please contact our office for assistance with implementing these and other year-end planning strategies that might be suitable to your particular situation.
Year End Tax Planning Strategies
Tax planning strategies for individuals this year include postponing income and accelerating deductions, as well as careful consideration of timing related investments, charitable gifts, and retirement planning.
General tax planning strategies that taxpayers might consider include the following:
- Sell any investments on which you have a gain or loss this year. For more on this, see Investment Gains and Losses, below.
- If you anticipate an increase in taxable income in 2016 and are expecting a bonus at year-end, try to get it before December 31. Keep in mind, however, that contractual bonuses are different, in that they are typically not paid out until the first quarter of the following year. Therefore, any taxes owed on a contractual bonus would not be due until you file a tax return for tax year 2017.
- Prepay deductible expenses such as charitable contributions and medical expenses this year using a credit card. This strategy works because deductions may be taken based on when the expense was charged on the credit card, not when the bill was paid.
For example, if you charge a medical expense in December but pay the bill in January, assuming it’s an eligible medical expense, it can be taken as a deduction on your 2016 tax return.
- If your company grants stock options, you may want to exercise the option or sell stock acquired by exercise of an option this year if you think your tax bracket will be higher in 2017. Exercising this option is often but not always a taxable event; sale of the stock is almost always a taxable event.
Caution: Keep an eye on the estimated tax requirements.
Accelerating Income and Deductions
Accelerating income into 2016 is an especially good idea for taxpayers who anticipate being in a higher tax bracket next year or whose earnings are close to threshold amounts ($200,000 for single filers and $250,000 for married filing jointly) that make them liable for additional Medicare Tax or Net Investment Income Tax (see below).
In cases where tax benefits are phased out over a certain adjusted gross income (AGI) amount, a strategy of accelerating income and deductions might allow you to claim larger deductions, credits, and other tax breaks for 2016, depending on your situation.
The latter benefits include Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher education tax credits and deductions for student loan interest.
Caution: Taxpayers close to threshold amounts for the Net Investment Income Tax (3.8 percent of net investment income) should pay close attention to “one-time” income spikes such as those associated with Roth conversions, sale of a home or other large assets that may be subject to tax.
Tip: If you know you have a set amount of income coming in this year that is not covered by withholding taxes, increasing your withholding before year-end can avoid or reduce any estimated tax penalty that might otherwise be due.
Tip: On the other hand, the penalty could be avoided by covering the extra tax in your final estimated tax payment and computing the penalty using the annualized income method.
Here are several examples of what a taxpayer might do to accelerate deductions:
- Pay a state estimated tax installment in December instead of at the January due date. However, make sure the payment is based on a reasonable estimate of your state tax.
- Pay your entire property tax bill, including installments due in year 2017, by year-end. This does not apply to mortgage escrow accounts.
- It may be beneficial to pay 2017 tuition in 2016 to take full advantage of the American Opportunity Tax Credit, an above-the-line deduction worth up to $2,500 per student to cover the cost of tuition, fees and course materials paid during the taxable year. Forty percent of the credit (up to $1,000) is refundable, which means you can get it even if you owe no tax.
- Try to bunch “threshold” expenses, such as medical and dental expenses–10 percent of AGI (adjusted gross income)–and miscellaneous itemized deductions. For example, you might pay medical bills and dues and subscriptions in whichever year they would do you the most tax good.
Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income (AGI). By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction.
Health Care Law
If you haven’t signed up for health insurance this year, do so now and avoid or reduce any penalty you might be subject to. Depending on your income, you may be able to claim the premium tax credit that reduces your premium payment or reduces your tax obligations, as long as you meet certain requirements. You can choose to get the credit immediately or receive it as a refund when you file your taxes next spring. Please contact the office if you need assistance with this.
Additional Medicare Tax
Taxpayers whose income exceeds certain threshold amounts ($200,000 single filers and $250,000 married filing jointly) are liable for an additional Medicare tax of 0.9 percent on their tax returns, but may request that their employers withhold additional income tax from their pay to be applied against their tax liability when filing their 2016 tax return next April.
High net worth individuals should consider contributing to Roth IRAs and 401(k) because distributions are not subject to the Medicare Tax.
If you’re a taxpayer close to the threshold for the Medicare Tax, it might make sense to switch Roth retirement contributions to a traditional IRA plan, thereby avoiding the 3.8 percent Net Investment Income Tax as well (more about the NIIT below).
Alternate Minimum Tax
The Alternative Minimum Tax (AMT) exemption “patch,” which was made permanent by the American Taxpayer Relief Act (ATRA) of 2012, is indexed for inflation and it’s important not to overlook the effect of any year-end planning moves on the AMT for 2016 and 2017.
Items that may affect AMT include deductions for state property taxes and state income taxes, miscellaneous itemized deductions, and personal exemptions. Please call if you’re not sure whether AMT applies to you.
Note: AMT exemption amounts for 2016 are as follows:
- $53,900 for single and head of household filers,
- $83,800 for married people filing jointly and for qualifying widows or widowers,
- $41,900 for married people filing separately.
Charitable Contributions
Property, as well as money, can be donated to a charity. You can generally take a deduction for the fair market value of the property; however, for certain property, the deduction is limited to your cost basis. While you can also donate your services to charity, you may not deduct the value of these services. You may also be able to deduct charity-related travel expenses and some out-of-pocket expenses, however.
Keep in mind that a written record of your charitable contributions–including travel expenses such as mileage–is required in order to qualify for a deduction. A donor may not claim a deduction for any contribution of cash, a check or other monetary gift unless the donor maintains a record of the contribution in the form of either a bank record (such as a cancelled check) or written communication from the charity (such as a receipt or a letter) showing the name of the charity, the date of the contribution, and the amount of the contribution.
Tip: Contributions of appreciated property (i.e. stock) provide an additional benefit because you avoid paying capital gains on any profit.
Investment Gains and Losses
This year, and in the coming years, investment decisions are likely to be more about managing capital gains than about minimizing taxes per se. For example, taxpayers below threshold amounts in 2016 might want to take gains; whereas taxpayers above threshold amounts might want to take losses.
Caution: In recent years, extreme fluctuations in the stock market have been commonplace. Don’t assume that a down market means investment losses. Your cost basis may be low if you’ve held the stock for a long time.
If your tax bracket is either 10 or 15 percent (married couples making less than $75,300 or single filers making less than $37,650), then you might want to take advantage of the zero percent tax rate on qualified dividends and long-term capital gains. If you fall into the highest tax bracket (39.6 percent), the maximum tax rate on long-term capital gains is capped at 20 percent for tax years 2013 and beyond.
Minimize taxes on investments by judicious matching of gains and losses. Where appropriate, try to avoid short-term capital gains, which are usually taxed at a much higher tax rate than long-term gains–up to 39.6 percent in 2016 for high-income earners ($415,050 single filers, $466,950 married filing jointly).
Where feasible, reduce all capital gains and generate short-term capital losses up to $3,000.
Tip: As a general rule, if you have a large capital gain this year, consider selling an investment on which you have an accumulated loss. Capital losses up to the amount of your capital gains plus $3,000 per year ($1,500 if married filing separately) can be claimed as a deduction against income.
Tip: After selling a securities investment to generate a capital loss, you can repurchase it after 30 days. This is known as the “Wash Rule Sale.” If you buy it back within 30 days, the loss will be disallowed. Or you can immediately repurchase a similar (but not the same) investment, e.g., and ETF or another mutual fund with the same objectives as the one you sold.
Tip: If you have losses, you might consider selling securities at a gain and then immediately repurchasing them, since the 30-day rule does not apply to gains. That way, your gain will be tax-free; your original investment is restored, and you have a higher cost basis for your new investment (i.e., any future gain will be lower).
Net Investment Income Tax (NIIT)
The Net Investment Income Tax, which went into effect in 2013, is a 3.8 percent tax that is applied to investment income such as long-term capital gains for earners above certain threshold amounts ($200,000 for single filers and $250,000 for married taxpayers filing jointly). Short-term capital gains are subject to ordinary income tax rates as well as the 3.8 percent NIIT. This information is something to think about as you plan your long-term investments. Business income is not considered subject to the NIIT provided the individual business owner materially participates in the business.
Please call if you need assistance with any of your long term tax planning goals.
Mutual Fund Investments
Before investing in a mutual fund, ask whether a dividend is paid at the end of the year or whether a dividend will be paid early in the next year but be deemed paid this year. The year-end dividend could make a substantial difference in the tax you pay.
Example: You invest $20,000 in a mutual fund at the end of 2016. You opt for automatic reinvestment of dividends, and in late December of 2016, the fund pays a $1,000 dividend on the shares you bought. The $1,000 is automatically reinvested.
Result: You must pay tax on the $1,000 dividend. You will have to take funds from another source to pay that tax because of the automatic reinvestment feature. The mutual fund’s long-term capital gains pass through to you as capital gains dividends taxed at long-term rates, however long or short your holding period.
The mutual fund’s distributions to you of dividends it receives generally qualify for the same tax relief as long-term capital gains. If the mutual fund passes through its short-term capital gains, these will be reported to you as “ordinary dividends” that don’t qualify for relief.
Depending on your financial circumstances, it may or may not be a good idea to buy shares right before the fund goes ex-dividend. For instance, the distribution could be relatively small, with only minor tax consequences. Or the market could be moving up, with share prices expected to be higher after the ex-dividend date.
Tip: To find out a fund’s ex-dividend date, call the fund directly.
Please call if you’d like more information on how dividends paid out by mutual funds affect your taxes this year and next.
Summary
These are just a few of the steps you might take. Please contact the office for assistance with implementing these and other year-end planning strategies that might be suitable to your particular situation.
2015 Tax Provisions for Individuals
With the announcement that the tax filing season for 2015 will begin on January 19, America’s Tax & Accounting Service would like to update you on what individuals and families need to know about tax provisions for 2015.
2015 Filing Season
From tax credits and educational expenses to the AMT, many of the tax changes affecting individuals for 2015 were related to the signing of the American Taxpayer Relief Act (ATRA) in 2012–tax provisions that were modified, made permanent, or extended. With that in mind, here’s what individuals and families need to know about tax provisions for 2015.
Personal Exemptions
The personal and dependent exemption for tax year 2015 is $4,000.
Standard Deductions
The standard deduction for married couples filing a joint return in 2015 is $12,600. For singles and married individuals filing separately, it is $6,300, and for heads of household the deduction is $9,250.
The additional standard deduction for blind people and senior citizens in 2015 is $1,250 for married individuals and $1,550 for singles and heads of household.
Income Tax Rates
In 2015 the top tax rate of 39.6 percent affects individuals whose income exceeds $413,201 ($464,851 for married taxpayers filing a joint return). Marginal tax rates for 2015–10, 15, 25, 28, 33 and 35 percent–remain the same as in prior years.
Due to inflation, tax-bracket thresholds increased for every filing status. For example, the taxable-income threshold separating the 15 percent bracket from the 25 percent bracket is $74,900 for a married couple filing a joint return.
Estate and Gift Taxes
In 2015 there is an exemption of $5.43 million per individual for estate, gift and generation-skipping taxes, with a top tax rate of 40 percent. The annual exclusion for gifts is $14,000.
Alternative Minimum Tax (AMT)
AMT exemption amounts were made permanent and indexed for inflation retroactive to 2012. In addition, non-refundable personal credits can now be used against the AMT.
For 2015, exemption amounts are $53,600 for single and head of household filers, $83,400 for married people filing jointly and for qualifying widows or widowers, and $41,700 for married people filing separately.
Marriage Penalty Relief
The basic standard deduction for a married couple filing jointly in 2015 is $12,600.
Pease and PEP (Personal Exemption Phaseout)
Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) limitations were made permanent by ATRA (indexed for inflation) and affect taxpayers with income at or above $258,250 (single filers) and $309,900 for married filing jointly in tax year 2015.
Flexible Spending Accounts (FSA)
Flexible Spending Accounts are limited to $2,550 per year in 2015 and apply only to salary reduction contributions under a health FSA. The term “taxable year” as it applies to FSAs refers to the plan year of the cafeteria plan, which is typically the period during which salary reduction elections are made.
Specifically, in the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year.
Further, employers may allow people to carry over into the next calendar year up to $500 in their accounts, but aren’t required to do so.
Long Term Capital Gains
In 2015 taxpayers in the lower tax brackets (10 and 15 percent) pay zero percent on long-term capital gains. For taxpayers in the middle four tax brackets the rate is 15 percent and for taxpayers whose income is at or above $413,201 ($464,851 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent.
Individuals – Tax Credits
Adoption Credit
In 2015 a nonrefundable (i.e. only those with a lax liability will benefit) credit of up to $13,400 is available for qualified adoption expenses for each eligible child.
Child and Dependent Care Credit
The child and dependent care tax credit was permanently extended for taxable years starting in 2013. If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.
For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.
Child Tax Credit
For tax year 2015, the child tax credit is $1,000. A portion of the credit may be refundable, which means that you can claim the amount you are owed, even if you have no tax liability for the year. The credit is phased out for those with higher incomes.
Earned Income Tax Credit (EITC)
For tax year 2015, the maximum earned income tax credit (EITC) for low and moderate income workers and working families increased to $6,242 (up from $6,143 in 2014). The maximum income limit for the EITC increased to $53,267 (up from $52, 427 in 2014) for married filing jointly. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.
Individuals – Education Expenses
Coverdell Education Savings Account
You can contribute up to $2,000 a year to Coverdell savings accounts in 2015. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.
American Opportunity Tax Credit
For 2015, the maximum American Opportunity Tax Credit that can be used to offset certain higher education expenses is $2,500 per student, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.
Employer-Provided Educational Assistance
In 2015, as an employee, you can exclude up to $5,250 of qualifying post-secondary and graduate education expenses that are reimbursed by your employer.
Lifetime Learning Credit
A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2015, the modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $108,000 for joint filers and $54,000 for singles and heads of household.
Student Loan Interest
In 2015 you can deduct up to $2,500 in student-loan interest as long as your modified adjusted gross income is less than $65,000 (single) or $130,000 (married filing jointly). The deduction is phased out at higher income levels. In addition, the deduction is claimed as an adjustment to income so you do not need to itemize your deductions.
Individuals – Retirement
Contribution Limits
For 2015, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $18,000. For persons age 50 or older in 2015, the limit is $24,000 ($6,000 catch-up contribution). Contribution limits for SIMPLE plans remain at $12,500 for persons under age 50 and $15,500 for persons age 50 or older in 2015. The maximum compensation used to determine contributions increased to $265,000.
Saver’s Credit
In 2015, the AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and-moderate-income workers is $61,000 for married couples filing jointly, $45,750 for heads of household, and $30,500 for married individuals filing separately and for singles.
We hope that this information was beneficial. Please feel free to contact us if you have any questions or need any tax advice. We can be reached at our Tampa office: 813.983.0235 or our Lakeland location: 863.644.9756 or by email: [email protected]
2014 Income Tax Changes
As tax laws change every year, America’s Tax & Accounting Service has identified the most significant changes for the tax year of 2014 that might affect our clients:
1) The Patient Protection and Affordable Care Act could well be the biggest change to taxes in 2014. Employers with more than 50 full-time equivalent employees will be facing a tax penalty if they fail to provide affordable essential health coverage to their employees.
Individuals who fail to purchase coverage might also be subject to a penalty. Adults could be facing a fine of $95, while the penalty for uninsured children will be $47.50. This fine will increase annually and, by 2016, will be $695 per adult or 2.5 percent of the total household’s taxable income, whichever is greater.
2) Higher Employer Plan Contribution Limits
Taxpayers will be able to contribute up to $18,000 to their 401(k), 403(b) and most 457 plans and the federal government’s Thrift Savings Plan in 2015. The catch up contribution limit will also increase to $6,000 in 2015 for a total contribution limit of $24,000 for employees age 50 and older.
3) Higher Income Limits for IRA Contributions
Income limits for deductible contributions to IRAs vary based on whether the taxpayer and/or his or her spouse are eligible to participate in an employer-sponsored retirement plan. The tax deduction for making a traditional IRA contribution is phased out for investors who have a workplace retirement plan and a modified adjusted gross income of more than $61,000 but less than $71,000 for individuals, and more than $98,000 but less than $118,000 for couples in 2015.
For individuals who don’t have a workplace retirement plan but are married to someone who does, the tax deduction for an IRA contribution is phased out if the couple’s income is more than $183,000 but less than $193,000 in 2015.
The maximum contribution for an IRA has not changed for 2015 and remains at $5,500 for people under 50, with an additional catch-up of $1,000 for those 50 and older for a total of $6,500.
Family Related Tax Items:
For 2015, the maximum EITC amount available is $3,359 for taxpayers filing jointly with one child; $5,548 for two children; $6,242 for three or more children (up from $6,143 in 2014) and $503 for no children. Phaseouts are based on filing status and number of children and begin at $8,240 for single taxpayers with no children and $18,110 for single taxpayers with one or more children.
For 2015, the value used to determine the amount of credit that may be refundable is $3,000 (the credit amount has not changed). Keep in mind that this is the value of the expenses used to determine the credit and not the actual amount of the credit.
We hope that you’ve found this information helpful. As always, we are available year round to help with your tax questions. We can be reached at: 813.983.0235 or 863.644.9756 or by email: [email protected]
New Lakeland Office
America’s Tax & Accounting Service is proud to announce our new office, located at 5410 South Florida Avenue, Suite 13, Lakeland, FL 33813.
We will be open from January 15 – April 15, 9am – ? pm, and Saturdays from 10 am – 2 pm. If you would like to schedule an appointment outside of normal business hours, please call us at: 863.644.9756 and we will be happy to make an appointment with you.
We would like to welcome all of Pat’s Tax & Accounting clients and we will strive to ensure that you experience the same great service that you have received from Pat.
We look forward to earning your loyalty and support.
2013 Income Tax Changes
2013 Income Tax Changes
As a service to our tax clients, we at America’s Tax & Accounting Service are constantly researching any changes to tax laws that may affect our clients.
Contact America’s Tax & Accounting Service for your 2013 tax planning
While there were very few major changes for 2012 tax returns, there are several changes that are scheduled to take effect this year, which may affect your 2013 tax return. We’ve listed the most significant changes that may affect 2013 tax return below:
- The standard mileage rate for 2013 is now $0.565 p/mile for business miles, which is a slight increase over the 2012 mileage rate
- For high income earners earning over $400,000 for a single person ($450,000 for married couples), the maximum tax rate will now be 39.6% instead of the previous 35%.
- The capital gains tax rate for high income earners (thresholds noted above) will also be increased to 20% (compared to 15% last year).
- For high income earners in the above two categories, there is also an additional 0.9% hospital insurance tax, which will be deducted through their normal payroll tax deductions. Also, for families making $250,000 or more annually, there will be a 3.8% surtax on investment income
- For those clients that itemize, the floor for itemizing medical expenses has been increased from 7.5% of Adjusted Gross Income (AGI) to 10% in 2013, meaning the taxpayer must spend an additional 2.5% more of their income before they can get a deduction for medical expenses.
- The maximum amount you can contribute to a 401(k) plan have been raised to $17,500. The catch-up contribution limit for taxpayers over 50 has been increased to $5,500.
- The maximum amount you can contribute to an Individual Retirement Account (IRA) has been increased to $5,500. The catch-up contribution is unchanged from last year and remains at $1,000.
The below tax deductions will still be in place for the 2013 income tax season:
- Filers going through a foreclosure or short sale will still be able to exclude most (if not all) of the debt from taxable income through the principal residence exclusion.
- Child tax credits, Earned Income Credits, and the American Opportunity Credit have all been extended through 2017.
- Mortgage insurance premiums can continue to be deducted as mortgage interest.
America’s Tax & Accounting Service is already studying 2013 tax changes so that you don’t have to!
We hope that you’ve found the above information helpful. Please feel free to contact America’s Tax & Accounting Service for any help in tax planning or any accounting needs. We can be reached year round at (813) 983-0235.
Unusual (but legit) Income Tax Deductions
As the 2012 income tax filing season draws to a close, America’s Tax & Accounting Service did some research on some of the more unusual (but legitimate) income tax deductions that have been qualified by the IRS. Since the tax season may have been an unpleasant one for some taxpayers, this posts attempt at humor will hopefully bring a smile to the reader’s face…..
Deductible??
1) Is pet food deductible? The normal answer from most tax experts would be a resounding “No”, but in certain cases pet food is an allowed deduction. If you are a business owner and use a pet to protect your business – the expense of feeding the pet can be allowed. A specific example allowed by the IRS involved a junkyard owner who bought cat food to feed his cat, who in turn, protected his business against some nuisance rodents. In this case, the pet performed a relatively important task in the maintenance and upkeep of the business.
2) Is a swimming pool deductible? Your swimming pool might qualify as a medical deductible expense if it improves a medical condition. In one case, an arthritis patient was allowed to deduct the cost of his swimming pool, since he was prescribed to exercise in a swimming pool by his primary physician to treat his arthritic condition.
3) Is Beer deductible? There is precedent set by the IRS in a case in which a business owner was allowed to deduct the cost of beer, as it was used to attract customers and promote his business.
Deductible??
4) Can music lessons be deductible? The short answer is no, but there is a case in IRS history, where clarinet lessons were allowed to be deducted as the lessons were intended to cure a child’s overbite.
5) Body Oil – A tax court has ruled that bodybuilders can deduct the cost of body oil as a business expense as it is used to make muscles glisten under hot stage lights. Vitamin supplements, however, were not allowed to be deducted.
While these are humorous examples of some of the stranger income tax deductions that have been allowed, there are hundreds of less outrageous deductions that can be taken, yet many people that prepare their own taxes (or even many paid tax preparers) are not aware of them. If you have questions on what is an allowable deduction, please feel free to contact America’s Tax & Accounting Service and we will be happy to help.
America’s Tax & Accounting Service has been providing the Tampa Bay area with income tax and bookkeeping services for over 15 years.