Category Archives: Kevin’s Korner

Kevin’s monthly updates for Shaw & Associates

The Shaw Atlas – November 2018 Article

Year End Tax Planning Strategies

With another year coming to a close it’s time to evaluate and implement year-end tax planning strategies. Due to the changes brought about by the Tax Cuts and Jobs Act (TCJA) there will be some new wrinkles to consider as well as the tried and true strategies. With the standard deduction rate nearly doubling and with some itemized deductions such as state and local taxes, being limited, itemizing your deductions this year may not be as likely. We are going to identify a couple of new and old year-end tax strategies to consider that could potentially ease your tax burden and give you a better understanding of how the new laws will affect your tax situation.   

Long-Term Capital Gains

This is a very simple yet effective strategy that can generate significant tax savings. Long-term capital gains, which are primarily securities such as stocks, bonds, and real estate that are held for more than a year, are federally taxed at 0% if you are in the 12% marginal tax bracket or below. A married couple filing jointly with taxable income below $77,400 can generate long-term capital gains federally tax free until they eclipse the 12% marginal tax bracket. For example, a couple filing jointly who are projecting taxable income of $50,000 for the year can generate $27,400 of long-term capital gains federally tax free. Of course, as soon as taxable income exceeds the $77,400 threshold, any additional long-term capital gains will be taxed at 15%.

Convert or Invest in Roth IRAs

When calculating your taxable income for year end, you may find that you are going to be in a lower tax bracket than usual. If so, consider converting some of your retirement savings to Roth IRAs to take advantage of these lower rates so that more of your future retirement distributions will be tax free. Unlike traditional IRAs where your contributions are tax deductible for that year, Roth IRAs are not currently deductible when making the contribution. The advantages of a Roth IRA are that earnings the fund creates while your money matures is earned tax free and qualified distributions are never taxed. For more information on Roth vs. Traditional IRA, read our September 2018 Newsletter.

Take Advantage of Charitable Donation Deductions

With the standard deduction nearly doubling for most there will be a significant decrease in those who will itemize their deductions. If you are now going to use the standard deduction, the tax value for your charitable contributions will disappear. While it may not be feasible financially for many of you to increase the amount you already donate, there are a couple simple strategies surrounding charitable deductions you can implement to further decrease your taxable income. The first is bunching; instead of donating $5,000 to your favorite charity every year, consider bunching and donating $10,000 every other year. This way you can have $10,000 worth of charitable deductions for a single tax year, making it more likely that some of your charitable contributions will be tax deductible. A second, similar strategy is to set up a donor-advised fund. Donor-advised funds are set up for your charitable contributions to be made over time. For instance, you can put $20,000 into the fund and set it up so every year $5,000 is automatically withdrawn and donated to your favorite charity or charities. The advantage of the donor-advised fund is that the $20,000 contribution to the fund is immediately deductible for that tax year, even though the funds haven’t been donated yet. Both these strategies are extremely effective as they make more of your charitable contribution tax deductible. For more information about these strategies and additional strategies for those paying income taxes in the state of Colorado, read our July 2018 Newsletter.    

Medical Deductions

In the past, medical deductions were only tax deductible if medical expenses exceeded 10% of your Adjusted Gross Income (AGI). Don’t forget that medical expenses also include dental, eye doctor, chiropractor, pediatrician, etc. Luckily, under the new tax laws the limit has been lowered to 7.5% of your AGI for 2018. For those whose expenses are not set to exceed the 7.5% AGI limit for 2018, consider bunching your medical expenses. This can easily be done by accelerating medical procedures and appointments into 2018 or deferring to 2019. For instance, if you have doctor and dental appointments planned for early 2019, see if you can get them in a little earlier before year end. This way your expenses can potentially exceed 7.5% of your AGI and you could see a deduction for the year. However, be sure you will actually be itemizing in 2018, otherwise the bunching will not be effective.

Qualified Business Income Deductions (For Business Owners Only)

One of the most impactful new tax laws enacted under the TCJA was a special 20% deduction allowed for certain flow-through entities such as S-Corporations, LLCs and partnerships, as well as sole proprietors and single member LLCs. Individuals with pass-through or Schedule C income and taxable income less than $315,000 automatically qualify to receive this deduction on the LESSER of their qualified business income (QBI) or taxable income. However, if your taxable income is above $315,000 you don’t automatically qualify. Don’t panic, you may still qualify but it is far more complicated with many nuances and is about as clear as mud. Due the extremely complex nature, we highly recommend meeting with our team or another CPA to determine how to make the most of this deduction under the new laws. For more detailed information on this topic, please read our March 2018 Newsletter.

These are just a few tax planning areas we discuss with our clients to get their taxes ready for the end of the year. Obviously everyone’s tax situation is very unique, so for more in-depth planning we highly advise setting up a tax planning meeting with your tax advisor. We are open for appointments and are currently taking new clients. If you would like to set up a meeting with us, visit our website or call our office at (970) 223-0792 to schedule.

 

The Shaw Atlas – September 2018 Article

Tax Planning Strategies In Low-Income Years

Though it typically isn’t ideal to have a low-income year, it can actually provide beneficial opportunities that could potentially save you significant amounts of money on your taxes and help you plan for future success. This month, we will be discussing a few strategies to take advantage of IRAs and capital gain rates to help you achieve this growth and security for your future, even in low-income years. 

How to Use IRAs to Your Advantage in a Low-Income Year

Low-income years are a great time to evaluate your IRAs. First, let’s look at a summary of the differences between traditional and Roth IRAs.

The tax advantage of a traditional IRA is all current contributions are tax deductible. If you’re making $50,000 a year and you contribute $5,000 to a traditional IRA, your taxable income will be $45,000 (excluding any other deductions you may have). The catch is when withdrawing from your traditional IRA upon retirement, the amount you withdraw becomes taxable income in that year. An additional catch is any earnings you’ve generated in the IRA are also taxable upon withdrawal. Thus, what your projected future marginal tax bracket is when withdrawing funds will have a bearing on your strategy.

Roth IRAs are taxed exactly the opposite from traditional IRAs. Contributions to your Roth are not tax deductible when you make the contribution. Therefore, if you’re making $50,000 in income and contributing $5,000 to a Roth IRA, you will still be taxed on your full $50,000 of income (again, excluding any other deductions). The biggest advantage is when the time comes to withdraw your funds. Your contributions, plus earnings the fund has generated, will be tax-free.     

Consider Contributing or Converting to Roth IRAs

If you are in a low-income year at lower marginal tax brackets, your benefits from making a traditional IRA contribution (and getting a tax deduction) are reduced. Roth IRAs, on the other hand, can be perfect for this situation, especially if you plan to withdraw your funds while residing in a higher marginal income tax bracket. When you withdraw Roth funds in a higher-income year the earnings won’t be subject to tax the same way they would with a traditional IRA.

You should also consider converting funds, up to the point of reaching the next marginal tax bracket, from your existing traditional IRA to a Roth IRA. As long as you convert the funds in a 60 day window, there is no 10% early withdrawal fee. The amount you convert will become taxable income for that year — the same way as if you had made a contribution directly to a Roth — which is why this can be such an effective strategy during low-income years.  

If You Plan to Be in a Lower Tax Bracket In or Around Retirement

If in retirement, or whenever you begin withdrawing from your IRA’s, you plan on being in a lower income tax bracket, a traditional IRA may potentially be the more financially beneficial strategy. This will depend on the spread between the marginal tax brackets during your contribution years vs. your marginal tax bracket in retirement. It also is predicated on what you do with your tax savings generated by the tax benefit you receive from your annual traditional IRA contributions. If you reinvest the savings it is possible that the traditional IRA could be more beneficial, but if you spend the savings a Roth IRA would most likely be the better alternative.

Finding a Balance Investing in IRAs

When it comes time to decide what type of IRA to invest in, it can generally be beneficial to strike a good balance between Roth and traditional IRAs. For instance, if you plan on being in a lower income bracket in retirement but you have invested solely in traditional IRAs, you can unintentionally force yourself into a higher tax bracket when you withdraw. Large withdrawals from your traditional IRA in addition to other forms of income in retirement, like Social Security Benefits, can leave you in a higher tax bracket than you may have planned. Thus, it is important to mix in some Roth IRAs to your portfolio as the money has already been taxed and will not increase your taxable income whenever you choose to withdraw.

How to Use Low-Income Years to Avoid Large Capital Gains Tax

Capital gains for individuals are primarily profit gained from the sale of capital assets such as stocks, bonds, and real estate. Profits made from the sale of these items will be subject to a lower capital gains tax rate as long as you hold the asset for at least one year. It’s important to understand how to avoid getting taxed too heavily, or not taxed at all, on profits from these capital assets.

A Potentially Great Time to Unload Long-Term Capital Gains

Long-term capital gains are stock, bonds, or real taxable property you’ve held for more than one year. If you’re filing jointly and are reporting taxable income of less than $77,400 — or $38,700 for singles — your capital gains are actually tax-free (for federal purposes) up to the point the capital gains move you to the next tax bracket. So, if you’re reporting income in those brackets, it’s a great opportunity to sell some investments tax-free. This strategy can be potentially great for those nearing retirement or having a low-income year and are in need of cash. For example, let’s say you’re filing jointly and reporting $40,000 of taxable income and you want to sell stock with $50,000 of capital gains that you have held for more than one year. Since the income limit (for those filing jointly) to not have to pay any capital gains tax is $77,400, $37,400 of the sale of your stock would be federally tax-free. But since the rest of the sale will put you into the next highest income tax bracket, you’ll pay a 15% capital gains tax on the remaining $12,600 of the sale. This means you have to be mindful of how the capital assets you sell may affect how much you are taxed on capital gains.

How to Make the Most on the Sale of Your Home

The IRS allows you to exclude a significant amount of capital gains on the sale of your home if you meet the requirements stated below. You are tax exempt up to $250,000 of your capital gain if you’re single or $500,000 if you file jointly. If you’re a married couple, however, and you’re lucky enough that the house you bought for $200,000 is now worth over $700,000, surpassing the exemption amount, it could be beneficial to wait until a lower-income year to sell your house. This way you can avoid being taxed too heavily on your excess capital gains from the sale. If you’re nearing or in retirement, are reporting lower income, and don’t necessarily need all the space, this could be a great time to sell your home for maximum profit.

You CAN’T qualify for the real estate exclusions if any of these factors apply to you:

  • The house wasn’t your principal residence.
  • You owned the property for less than two years in the five-year period before you sold it.
  • You didn’t live in the house for at least two years in the five-year period before you sold it. (People who are disabled, and people in the military, Foreign Service or intelligence community can get a break on this.)
  • You already claimed the $250,000 or $500,000 exclusion on another home in the two-year period before the sale of this home.
  • You bought the house through a like-kind exchange (esentially swapping one investment property for another) in the past five years.
  • You are subject to expatriate tax.

Navigating low-income years can be difficult but also extremely financially beneficial. Hopefully some of these simple yet effective strategies offer you better insight into finding financial peace of mind in these times. We know that much of this material can often be confusing, so we would be more than happy to discuss any further questions with you. We will all we can to make sure you leave feeling confident and comfortable in your financial future. Call us today to set up an appointment. 

The Shaw Atlas – August 2018 Article

Optimizing Your Social Security Retirement Benefits

Social Security continues to be a confusing topic for many trying to plan their retirement. This month we hope to clear up the cluster of information in order to help you work towards making the most of your Social Security retirement benefits — or Primary Insurance Amount (PIA). We aim to provide you a little more financial peace of mind ahead of retirement.

To use as a reference as you read, we have included the following definitions:

  • Primary Insurance Amount (PIA) — The amount a person will receive when he/she collects Social Security retirement benefits.
  • Average Indexed Monthly Earnings (AIME) — The formula the Social Security Administration uses to determine the size of a person’s PIA.
  • Full Retirement Age (FRA) — The age in which a person can receive 100% of your PIA. Age of full retirement is based on your date of birth.

The Basics

When it comes to collecting social security for retirement, you essentially have three options: early retirement, full retirement, or delayed retirement. In order to qualify for retirement benefits, you’ll need at least 10 years of work experience or 40 credits. The amount needed for one credit in 2016 was $1,260 — and it is only possible to earn four credits per year. The amount you will receive from the Social Security Administration is based on AIME, which is primarily based on 35 years of your highest income as well as factors like inflation. It’s important to know that your zero income years are included if you have not worked at least 35 years. How exactly the government calculates your AIME is extremely complex, so we recommend using the calculator provided at the Social Security Administration’s website to get an accurate estimate.

Early Retirement

You can begin receiving retirement benefits as early as 62, but is not often advised because you won’t be eligible for your entire PIA. For example, an individual whose FRA is 66 and starts collecting at age 62 will see a 25% reduction in their benefits — also called PIA. Still, around 40% of eligible individuals begin claiming their benefits as soon as they become available. Here are a couple examples why early retirement might be right for you:

Longevity

While this is not the most joyous topic to consider, it is still very important. If you have questionable longevity past your retirement age it is not viable to wait for the extra money. Instead, you may want to claim your benefits early. However, something to take into consideration when choosing this option is whether or not your spouse will claim your benefits in the future. It’s critical to determine if they will be financially secure with your reduced amount. We will further discuss functionality of spousal benefits later in the article.

It’s Just Time

If you are reaching a point where going to work is barely manageable and you feel you have put your time in, there’s no shame in claiming early retirement benefits. You should calculate whether the reduced benefits package is still a financially sustainable option to retire the way you’ve planned. If it all checks out, then why not?

Full Retirement Age (FRA)

Your FRA age depends solely on your date of birth. FRA was originally 65 when social security was created but has been steadily increasing. Those born before 1938 have a FRA of 65, but those born in 1960 or after have a FRA of 67 — and still increasing. FRA is a very viable option because the benefits are higher and you won’t be subject to a reduction on your hard-earned PIA if you decide to stay employed.

Delayed Retirement

This option is the most financially beneficial but you must weigh a series of options before heading down this path. For example, if you were born after 1943 and you delay your retirement, you will see an 8% annual increase in your PIA benefits — or two-thirds of 1% each month. This means if you can wait until you’re 70, you will have grown your PIA to 132%. Waiting may seem like a daunting idea for many reaching the end of their careers, but you aren’t required to be employed if you wish to delay claiming your PIA. If you can financially sustain yourself without the PIA benefits, you should delay claiming in order to accrue more value until it’s imperative to access your retirement income. You may consider putting away more savings and setting yourself up for the extra benefits of delayed retirement, but first consider how beneficial they may — or may not be — to your end goal.

Other Considerations

Your Spouse’s Benefits

If your spouse has a significantly higher income than you, you are entitled to 50% of their PIA. Keep in mind, if you begin taking your spouse’s benefits before you have reached your FRA, your spouse’s PIA will be permanently reduced — even if they retire at or past their FRA. Additionally, if you are no longer married and your ex-spouse is living, you can still receive 50% of the benefits if:

  • Your marriage lasted 10 years or longer
  • You’re unmarried
  • You’re age 62 or older
  • The benefit you’re entitled to receive based on your own work record is less than the benefits you’d receive based on your spouse’s work record

Finally, although not ideal, if you outlive your spouse in retirement you are entitled to 100% of your spouse’s benefits if their PIA was larger than yours.

Claiming Early Retirement While Still Employed

If you begin claiming your Social Security benefits before your FRA and you’re still employed, your benefits may be subjected to adjustments and you may need to repay some — or all — of your benefits back. If your earnings exceed $17,040, which is the yearly limit for 2018, your benefits would be further reduced $1 for every $2 you make over the limit in addition to your already reduced PIA. However, once you reach your FRA, there is no limit on your income and no potential repayment.

Taxes After Reaching FRA

Once you reach FRA, your benefits are no longer subject to a reduction if your earned income surpasses the earnings limit, but your benefits package may still be subjected to taxation as any other income would. Those filing as individuals will see their benefits start being taxed if other sources of annual income surpass $25,000. Married couples who file a joint return will start at $32,000. If this income threshold is passed, 85% your benefits can eventually be taxed. With this information, it’s important for those who still have a substantial income in their later years to consider waiting as long as possible to claim their PIA. This way, they can avoid heavy taxation while continuing to grow their PIA in late retirement.      

 

We hope this article has given you some clarity on the many nuances associated with claiming your social security retirement benefits. While it can be incredibly complex to navigate retirement, there’s a financially sustainable path for everyone. Here at Shaw & Associates, we are here to help put you on a path toward making the most of your retirement. If you have any additional questions or concerns, please give us a call and schedule an appointment.

The Shaw Atlas – July 2018 Article

Don’t Give Up On Your Charitable Donations: They Survive and Thrive Under The New Tax Cuts and Jobs Act

Unfortunately, under the new Tax Cuts and Jobs Act (TCJA), as predicted by Howard Gleckman of Forbes, “The share of middle-income households claiming the charitable deduction will fall by two-thirds, from about 17 percent to just 5.5 percent.” This is attributed mainly to new restrictions on Schedule A deductions. Coupled with the nearly doubled standard deduction rate, this has pushed many Americans away from itemizing their deductions and, in turn, from claiming charitable deductions.

For this month’s article, we’re here to tell you that claiming charitable deductions can still be very viable. There are a few strategies that can get you above the newly increased standard deduction rate, all the while keeping your annual charitable donations to your community viable for your finances.

TCJA Boosts for Charitable Donations

As aforementioned, the TCJA did greatly restrict the number of deductions you can claim under Schedule A. This has pushed many middle-income Americans away from itemizing their deductions because the higher standard deduction rate is harder to surpass by itemizing deductions.

For example, the TCJA has capped the amount of state and local taxes (SALT) that are deductible to $10,000, which causes problems for high-wealth taxpayers and taxpayers in high-tax states such as California and New York. On top of this, the deductibility of mortgage interest rates has been capped to only the first $750,000 of debt for all mortgages taken out after December 14th, 2017. For instance, with median home values in Boulder now at $720,500 — up 6.1% last year and expected to rise another 4% next year — a new generation of homeowners could fall victim to this code change.

On a positive note, the the TCJA has boosted deductions for charitable contributions by raising the limit that can be contributed in one year. The limit has risen from 50% of adjusted gross income (AGI) to 60% of AGI. Boosting charitable donations is now an excellent option for the taxpayer that loses valuable Schedule A deductions, such as SALT and mortgage interest, to, once again, surpass standard deduction rate and continue itemizing. All the while, maintaining charitable donations to their community.

How To Make The Most of Your Charitable Contributions Under the TCJA

For many middle-income families, while the idea of boosting their charitable donations may sound ideal, it may not be entirely financially feasible. There are a couple of tax-strategic avenues that allow the taxpayer to maintain similar monetary contributions to charities while still increasing deductions.

Bunching

Bunching is a very simple but extremely effective solution to increase deductions. For instance, if you make a $1,000 donation to the Boys & Girls Club every year, but that still doesn’t put you over the standard deduction rate, you can skip a year and instead donate $2,000 the next year. You can also schedule to have this bunching year align with other payments, like property taxes, pushing your deductions past the standard limit and ultimately saving on your taxes.

Pros: If donations are aligned with other large payments (property tax, mortgage) you can make the most of your itemized deduction that year.

Cons: Charities could suffer from inconsistent donations

Donor-Advised Funds

Donor-Advised Funds work similarly to bunching, but can relinquish the guilt of only donating to your favorite charity bi-yearly. If you donate $1,000 to your church every year and don’t want to stop annual donations, you can put a large sum of future donations in a Donor-Advised Fund. For example, you can place $5,000 into the fund and schedule your annual $1,000 donation to be given straight to your church from the fund every year. Putting $5,000 in the donor-advised fund, even though it hasn’t yet been received by the charity, allows the $5,000 donation to be immediately deductible. Even better, you maintain full privileges of determining your grant to qualified charities and your assets can grow while in the fund.

Most large financial services companies like Fidelity and Charles Schwab will have options to set up donor-advised funds. There are, however, some fees associated with using these services. For instance, if you put $10,000 into Fidelity Charitable, Fidelity’s donor fund, the annual fees would be roughly $127. If you’re willing to absorb those fees the Donor-Advised route may be the most flexible solution, not only to donate your money, but also to gain the best deduction possible.

Pros: Money in fund is instantly deductible, assets in fund can grow, you maintain full privileges over charitable contributions, you can continue normal annual donations

Cons: Funds often come with annual fees  

Colorado Charitable Deduction

Even if you’re not going to itemize your deductions federally doesn’t mean you should give up on charitable contributions. In Colorado, even if you’re not itemizing federally for the tax year, you can still get a deduction from the state if your charitable contributions are greater than $500. So, on years you’re not bunching donations or claiming a donor-advised fund deduction, you can still capitalize on state level charitable deductions.

Colorado Child Care Contribution Tax Credit

For Colorado residents considering raising their charitable contribution, they should also consider the Colorado Child Care Contribution Tax Credit (CCCCTC) to get even more value out of your donation. The CCCCTC offers a tax credit of 50% for a qualifying monetary contribution to promote child care in Colorado up to $100,000. This means a contribution of $5,000 to a non-profit organization in Colorado that promotes child care, such as the Boys & Girls Clubs of Larimer County, will be offset by a $2,500 tax credit against your Colorado income taxes. Your contribution is also eligible to be claimed in full as a charitable deduction on your Schedule A federal tax returns in addition to the state returns for Colorado. Depending on your federal marginal tax bracket, as well as the impact of your itemized deduction situation, the amount of positive tax impact could be as high as 90% of the contribution. This means your theoretical $5,000 contribution would be offset with $4,500, by the federal government and Colorado state, in tax credit and deductions.  

Taxpayers Eligible for the Credit

  • Colorado Residents
  • Nonresident individuals that file Colorado tax returns
  • Estates
  • Trusts
  • C corporations

Examples of Eligible Organizations

  • Boys & Girls Club of Larimer County (or any Boys & Girls Club in Colorado)
  • Realities For Children
  • Teaching Tree
  • Mile High United Way

For more information about CCCCTC qualifying contributions and a list of other qualified charities visit the Colorado Department of Revenue website.

Pros: You can donate more than you would normally because your getting at least 50% of your contribution back and you don’t have to itemize federally to claim Colorado state charitable deductions and tax credit

Cons: Your favorite charity may not qualify for the credit

These options we’ve discussed above are great solutions to not only continue contributing to your favorite charities and community, but also to benefit under the new Tax Cuts and Jobs Act. With the deductible amount of charitable donations raised from 50% of adjusted gross income to 60% its more lucrative to donate then every before. Using donor-advised funds or bunching, in tandem with the Colorado Child Care Contribution Tax Credit, present incredibly viable opportunities to take make the most of your contributions. Some of these strategies might suit your needs better than others so it’s best to thoroughly review your options. If you have any additional questions, please call us to schedule a meeting and we’ll be happy to discuss how these changes may impact you or your organization.

The Shaw Atlas – April 2018 Article

Tax Cuts and Jobs Act: Important Changes to Deductions

In the third and final section of our three-part Tax Cuts and Jobs Act article series, we are going to discuss changes to marginal tax brackets, the standard deduction and personal exemptions, and make note of some suspended or modified deductions beginning in 2018.

Changes to Marginal Tax Rates

To start, marginal tax rates based on your taxable income have changed in 2018. The new rates are based on how you plan to file: individual, married filing jointly, married filing separately, head of household, or estates and trusts.

For taxpayers currently in the 28% or lower marginal tax brackets, the new rates will create a positive taxable impact. Additionally, the amount of income taxed in these brackets has increased. These taxpayers will need to pay less taxes on a higher amount of income. Score!

Those in tax brackets above 28% may experience an increase or decrease depending on their level of income.

In order to envision the marginal tax bracket process, imagine each bracket to be like a bucket to fill; each bucket can only hold a certain amount of money and is taxed at a higher percent as income rises.

For example, let’s say your taxable income is $42,000 and you’re filing as a single individual. The changes in your marginal tax brackets between 2017 and 2018 would look like this:

The first bucket (which you must pay a 10% tax rate on) fills up to $9,525 of your income. The second bucket can hold up to $38,700 of your income, and since you have already paid taxes on $9,525 at 10%, the remaining amount for the second bucket becomes $29,175. This second amount is taxed at 12%. The third bucket can hold up to $82,500, but since your taxable income is only $42,000 in this example, this bucket will not be full. The remaining amount of your income that has yet to be taxed is $3,300, which will be taxed at 22% in the third bucket. In total, you will pay a sum of each bucket’s taxed value.

Here is a break-down of the math:

Taxable Income = $42,000

  1. $9,525 x 10% = $952.50
  2. $29,175 x 12% = $3,501
  3. $3,300 x 22% = $726

Total amount paid (marginal tax sum) = $5,179.50

If your income is higher, you will fill more buckets and pay a higher percent of taxes as that number increases (and vice versa with lower income). The bracket percentages have also changed for those married filing jointly, married filing separately, head of households, and estates and trusts.

Changes to Standard Deduction

In 2018, taxpayers will only be able to deduct from their Adjusted Gross Income (AGI) the greater of the standard deduction or sum of itemized deductions. This will determine taxable income. (Previously, you would deduct any personal exemptions from this total as well. See the section below on changes to the personal exemption rule).

In 2017, the standard deduction for single individuals and married couples filing separately was $6,350, and for married couples filing jointly was $12,700. In 2018, the standard deduction has increased to $12,000 for individuals and married couples filing separately and is now $24,000 for married couples filing jointly.

At first glance this seems like a win for taxpayers because you are able to subtract a much higher amount from your AGI and significantly lower your taxable income, especially if you did not itemize or your itemized deductions were below $24,000. However, each taxpayer’s situation will be different due to changes in allowed personal exemptions, which we discuss below.

Changes to Personal Exemptions

Prior to the Tax Cuts and Jobs Act, taxpayers were allowed to subtract personal exemptions from their AGI, which was a set amount for each individual on the tax return (i.e., taxpayer, spouse, and any dependents). In 2017, the personal exemption was $4,050 each. If you had a five-family household, for example, you’d be allowed to deduct $20,250.

Post-TCJA, personal exemptions have been eliminated, meaning the new exemption amount is zero. No personal exemptions can be deducted for anyone on the tax return. For some taxpayers this may significantly impact them negatively.

For example, a married couple filing jointly in 2017 with no dependents would have received a $12,600 standard deduction as well as a personal exemption of $8,100 ($4,050 per person). This gives them $20,700 in total deductions. In 2018, this same couple can now receive a standard deduction of $24,000, but cannot deduct any personal exemptions. In this instance, the couple benefits from the new law and receives $3,300 more in total deductions.

On the contrary, a family with four children in 2017 would have been able to receive a $12,600 standard deduction (married filing jointly) and would also have been able to deduct $24,300 ($4,050 per person) in personal exemptions, which is a grand total of $36,900. Now, in 2018, they are allowed a $24,000 standard deduction, but are no longer allowed any personal exemptions and thus lose out on $12,900 worth of deductions.

Essentially, the more dependents you have, the more negatively this new law will impact your possible deductions. However, if this applies to you, there are also modifications to the child tax credit that can help (see below*).

Important Suspended or Modified Deductions Beginning 2018

Child Tax Credit

2017: Taxpayers could claim a child tax credit of up to $1,000 per child under 17 years of age. The credit was available up to an income level of $75,000 for single filers, $110,000 for married filers, and $55,000 for married individuals filing separately. For every $1,000 over that income level, the taxpayer loses $50 worth of credit per child until fully eliminated.

2018: Taxpayers can now claim up to $2,000 worth of child tax credit per child under 17 years of age. This credit is available up to a $400,000 income level for married couples filing jointly, and up to $200,000 for all other taxpayers. As in the old law, for every $1,000 over that income level, the taxpayer loses $50 worth of credit per child.

* This child tax credit modification can help families with many dependents who have seen significant losses in their deductions due to changes in personal exemptions.

Personal Casualty & Theft Losses

2017: Taxpayers could claim an itemized deduction for uncompensated personal casualty losses, such as that of a fire, storm, shipwreck or other casualty as well as theft.

2018: Personal casualty and theft losses have been suspended except for those declared in a Federally-declared disaster area.

State and Local Tax Deduction

2017: There was no monetary limitation on the amount of property, sales, and/or income taxes that could be deducted.

2018: All property, sales, and/or income taxes combined are limited to a $10,000 deduction if you itemize. This will impact high wealth taxpayers and those in states with high property, sales, and income taxes.

Mortgage and Home Equity Interest Deduction

2017: You could have a mortgage of up to $1 million and an equity credit line of $100,000, both of which allow you to deduct interest paid on the loan.

2018: All mortgages are limited to deductibility of interest only if used for acquisition or improvement purposes, and are only deductible up to the first $750,000 combined. Interest on mortgages taken out for any other reason cannot be deducted.

Exception: The new $750,000 lower limit and acquisition and improvement requirement do not apply to home equity debt obtained before Dec. 15, 2017.

Alimony Deduction by Payor/Inclusion by Payee

2017: Following a divorce, alimony payments were considered deductible by the payor spouse and includable as income by the recipient spouse.

2018: If a divorce was executed or modified in 2018, alimony payments are no longer deductible by the payor spouse and no longer included in the recipient spouse’s income. The income used for alimony is now taxed at the rates applicable to the payor spouse.

Moving Expenses Deduction

2017: Taxpayers could claim a deduction for moving expenses due to acquiring a new job. The new workplace was required to be at least 50 miles farther from the taxpayer’s former residence than their former workplace.

2018: This deduction for new job moving expenses is suspended, with the exception of Armed Forces on active duty who move following a military order.

Miscellaneous Itemized Deductions

2017: Taxpayers were allowed to deduct miscellaneous itemized deductions if they were greater than 2% of the taxpayer’s AGI.

2018: This deduction for miscellaneous itemized deductions is suspended.

What we have discussed above are what we consider to be the primary changes that will affect most taxpayers. However, there are other changes that may impact your tax situation. Keep in mind, all of these changes will revert back to the laws in place prior to the Tax Cuts and Jobs Act after Dec. 31, 2025.

If you have any unanswered questions regarding these changes and how they impact you, please call us to schedule an appointment.

The Shaw Atlas – March 2018 Article

Tax Cuts and Jobs Act: Pass-Through Deduction

This month’s article details a rather complicated section of the Tax Cuts and Jobs Act, and we would like to break it down to its simplest form so you can rest easy knowing exactly how it relates to your business. Let’s discuss Section 199A of the law which covers the new 20% deduction for pass-through income from S Corporations, LLCs, partnerships, and sole proprietorships.

Right off the bat, if you receive pass-through income and your taxable income is less than $315,000, you automatically qualify to receive a special 20% deduction on the LESSER OF your qualified business income (QBI) or taxable income.

If this applies to you, you have all the information you need. That was easy, right?

Things get a bit more complicated as taxable income rises over $315,000, but here is an essential overview of the key aspects.

The first question you must answer is whether or not you qualify as a “specified service business.” As currently defined, this includes…

  • Accounting
  • Law firms
  • Health care
  • Financial services
  • Consulting, and
  • Brokerage services

Additionally, if your business is dependent on the reputation of you or your employees to generate revenue, you also fall under the “specified service business” category. It is important to note as well that architectural and engineering firms are exempt from consideration as specified service businesses.

From here, let’s break down the businesses into two subsections: Specified Service Businesses and Non-Specified Service Businesses, and discuss how the credit rules apply within each category.

Specified Service Businesses

As noted above, if you receive pass-through income and your taxable income is less than $315,000, you qualify for a 20% deduction on the lesser of your QBI or taxable income.

If your taxable income is anywhere between $315,000 and $415,000, you receive a partial deduction based upon a prorated calculation.

If your taxable income is greater than $415,000 you do not qualify for this special deduction.

Non-Specified Service Businesses

On the other side of the scale, if your business does not fall under the “specified services” net, there may be additional calculations you must make.

Again, as stated above, if you receive pass-through income and your taxable income is less than $315,000, you automatically qualify for a 20% deduction on the lesser of your QBI or taxable income.

Under the “non-specified service business” net, if your taxable income is between $315,000 and $415,000, you qualify for a deduction that is determined using a prorated calculation factoring in W-2 wages and qualified business property as discussed below.

If your taxable income is greater than $415,000, you must meet an additional standard related to W-2 wages paid to your employees and/or your qualified business property. In this scenario, you may deduct the LESSER OF

  • 20% of your QBI or taxable income, or
  • The greater of 50% of W-2 wages paid to employees or 25% of W-2 wages plus 2.5% of qualified business property

You may be thinking, wait…what? We know how you feel. To clear things up, let’s look at it again using an example.

Assume that your company has a QBI of $500,000 per year, taxable income of $420,000, the total amount of W-2 wages paid to employees is $150,000, and your qualified business property is equal to $1,000,000. This would mean…

    • 20% of your QBI (20% x 500,000 = 100,000)
    • 20% of your taxable income (20% x 420,000 = 84,000)
    • 50% of W-2 wages paid to employees (50% x 150,000 = 75,000), and
    • 25% of W-2 wages plus 2.5% of qualified business property
    • (25% x 150,000 = 37,500)
    • (2.5% x 1,000,000 = 25,000)
      • Which, together, equals 62,500

The first step is to determine which is the lesser value between your anticipated QBI deduction and your taxable income deduction. In this case, it would be the taxable income deduction at $84,000.

Next, calculate which is the greater value between 50% of W-2 wages ($75,000) and 25% of W-2 wages plus 2.5% of qualified business property ($62,500). We can conclude here that the greater value is 50% of W-2 wages at $75,000.

Following so far?

Now that we know which two values to compare, the final step is to take the LESSER OF these two deduction values (taxable income of $84,000 and 50% of W-2 wages at $75,000). The smaller value here is $75,000, and therefore would be the final overall value your business could deduct.

Clear as mud, right? We understand that Section 199A is a complicated element of the new tax law and we would be delighted to discuss how it applies to you. We recommend contacting Shaw & Associates (or your own financial advisor if you use a different tax preparer) to determine the impact of this law on your business specifically and how to proceed. Please give us a call or schedule an appointment—following tax season please—and we will be happy to help!

The Shaw Atlas – February 2018 Article

Tax Cuts and Jobs Act: Meals & Entertainment

There has been a great deal of information circulating recently about the Tax Cuts and Jobs Act. We aim to provide you with access to knowledge that will ensure you feel confident about these changes and how they may affect you or your business.

As we indicated, this article will be the first of a three-part series addressing the new tax law. To begin, there have been some important shifts in business deductions for meals and entertainment.

2017 Meals & Entertainment

Prior to the new tax law, meals and entertainment charges related to business could typically be deducted by 50%. Deductible meal and entertainment expenses under this category included meals consumed while traveling for business, entertaining customers for business purposes, and attending a conference, business lunch or meeting.

There were also expenses that could be 100% deductible if the meals were provided to the employee as a means of convenience for the employer. This includes providing an on-site cafeteria to minimize lunch breaks or make up for a lack of dining options near the office. A meeting held on-site during lunch hours was also 100% deductible.

2018 Changes

Under the Tax Cuts and Jobs Act, signed into law on December 22, 2017, many of the expenses that were once 50% deductible have since been eliminated. However, there have been significant differences in interpretations of this new law by experts, Currently what we know to be true is that entertainment expenses intended for current or potential clients, such as sporting events or a round of golf, are no longer deductible. Still unclear is whether or not meal expenses for current or potential clients will fall under the same category as entertainment. We are waiting for more clarification from the IRS on this subject, which we expect to be issued in 2018.

Additionally, expenses for employee meals at work have been reduced to a 50% deduction. Any charges made for these purposes between January 1, 2018 and December 31, 2025 will continue to be 50% deductible. Following December 31, 2025 they will not be deductible.

How to Record Meals and Entertainment in Your Books

In order for us to make the proper judgement when preparing your taxes until more clarification is given, we ask that you create and use the following accounts in your books for meals and entertainment expenses as of January 1, 2018:

  • Entertainment: includes golfing, skiing, sporting events, etc. (non-deductible)
  • Meals-travel: Any meal for business travel outside of the 50-mile geographic area of your business (deductible at 50%)
  • Meals-employer convenience: Meals for employees located on business premises (deductible at 50%)
  • Meals-other: (waiting for IRS clarification on deductibility)
  • Holiday, summer parties: All costs for such parties for staff including meals, supplies, site charges, etc. (deductible at 100%)

If you have any unanswered questions regarding this plan and how it impacts you, please call us to schedule an appointment for after April 17.

KRFC Radio Tax Tips

I have partnered with KRFC 88.9 public radio to do a series of tax related episodes on Money Matters: Investing In Your Financial Future for the next few weeks. As the episodes air over the next few weeks, we will post them here for our clients and friends to listen to (in case you miss the airings on the radio). You can catch the episodes as they air every Tuesday until March 3, 2015 at 9:00 am on 88.9 KRFC.  

Episode 1 Tuesday Jan. 27, 2015: Benefits of Legal Entities for Small Business Owners 

Episode 2 Tuesday Feb. 3, 2015: How Small Business Owners Can Save on Taxes

Episode 3 Tuesday Feb. 10, 2015: Commonly Asked Questions About Deductions for Small Businesses

Thank You, and Don’t Keep Us A Secret

Now that tax season is behind us I want to take a moment to thank all of our clients for allowing us to continue to be their tax and financial advisor. We understand that it is very important that you have an advisor that you can trust and whose primary concern is for your financial well-being. We have an annual survey that we ask you to complete and are pleased to report that your responses have been very favorable. We hope that we are living up to your expectations and that you will let us know if we need to improve in any areas. There is a radio commercial currently airing that I find a bit corny, but which sums up my feelings as to our relationship with our clients. To paraphrase, if you like our services tell a friend as there is no higher compliment than your trust in referring us to that person. If you’re not happy, please call me so I can address any issues you may have.