Tax Cuts and Jobs Act Update

The Tax Cuts and Jobs Act (TCJA) was passed by Congress in a hurry late last year, and the IRS has been working to implement the changes for 2018. Here are the latest answers to some of the most common questions about the tax overhaul:

·        Is home equity interest still deductible?

The short answer is: Not unless you've used the money to buy, build or substantially improve your home.  

Before the TCJA, homeowners were able to take out a home equity loan and spend it on things other than their residence, such as to pay off credit card debt or to finance large consumer purchases. Under the old tax code, they could deduct interest on up to $100,000 of such home equity debt.  The TCJA effectively writes the concept of home equity indebtedness out of the tax code. Now you can only deduct interest on "acquisition indebtedness," meaning a loan used to buy, build or substantially improve a residence. If you took out a home equity loan pre-2018 and used it for any other purpose, interest on it is no longer deductible.

·        I'm a small business owner. How do I use the new 20 percent qualified business expense deduction?  

Short answer: It's complicated.

Certain small businesses structured as sole proprietors, S corporations and partnerships can deduct up to 20 percent of their qualified business income. But that percentage can be reduced after your taxable income reaches $157,500 (or $315,000 as a married couple filing jointly).  The amount of the reduction depends partly on the amount of wages paid and property acquired by your business during the year. Another complicating factor is that certain service industries including health, law, consulting, athletics, financial services and accounting are treated differently.  The IRS is expected to issue more clarification on how these rules are applied, such as when your business is a mix of one of those service industries and some other kind of business.

·        What are the new rules about dependents and caregiving?

There are a few things that have changed regarding dependents and caregiving:

• Deductions. Standard deductions are nearly doubled to $12,000 for single filers and $24,000 for married joint filers. The code still says dependents can claim a standard deduction limited to the greater of $1,050 or earned income plus $350.
• Kiddie Tax. Unearned income of children under age 19 (or 24 for full-time students) above a threshold of $2,100 is now taxed at a special rate for estates and trusts, rather than the parents' top tax rate.
• Family credit. If you have dependents who aren't children under age 17 (and thus eligible for the Child Tax Credit), you can now claim $500 for each dependent member of your household for whom you provide more than half of their financial support.
• Medical expenses. You can deduct medical expenses higher than 7.5 percent of your adjusted gross income as an itemized deduction. You can claim this for medical expenses you pay for a relative even if they aren't a dependent (i.e. they live outside your household) as long as you provide more than half of their financial support.

Stay tuned for more guidance from the IRS on the new tax laws, and reach out if you'd like to set up a tax planning consultation for your 2018 tax year.  If you have questions, call us at (219) 769-3616 or email them to tlynch@swartz-retson.com.

Answers to Commonly Asked Tax Questions

With all of the headlines about the changes to tax law, you probably have lots of questions. Here are answers to some of the most common questions taxpayers have this year.

Q. I’m hearing about a lot of changes to 2018 taxes. What should I do?

A. You’re right, there are a lot of changes in 2018 due to the passage of the Tax Cuts and Jobs Act (TCJA), including to the income tax brackets. The simple answer to the question “What should I do?” is to not make any major changes until you finish filing your 2017 taxes. Once you understand your 2017 tax obligation, you are in a better position to plan for 2018.

However, there are a few things you can start thinking about now. Depending on where you fall in the new income tax brackets, you may want to consider ways to lower your taxable income. This could include increasing your contributions to 401(k) retirement accounts or health savings accounts (HSAs). You’ll also want to make sure your employer has adjusted your federal tax withholding so that you don’t have to wait to receive a large refund (or tax bill) next year. You can review the IRS withholding calculator using your latest pay stub data to make sure the changes are accurate.

Q. What is the penalty amount if I didn’t have health insurance in 2017?

A. The penalty per adult is calculated as the greater of either $695 or 2.5 percent of your yearly household income, up to a maximum of $3,264 for individuals or $16,320 for a family of five or more. Note that the penalty is still in place for tax years 2017 and 2018. The TCJA eliminates the penalty for 2019 through 2025.

Q. Is Social Security taxed?

A. It depends. You won’t pay tax on more than 85 percent of your Social Security income, but how much gets taxed depends on your income bracket. If your combined income is less than $25,000 for the year, you won’t pay tax on Social Security income.

Q. When is the last day to do my taxes?

A. Technically, Tuesday, April 17. But don’t wait until the last minute. Ask for help to get started now, or to file an extension so you have time to complete your tax return later. The sooner you file, the sooner you can get your refund. It usually takes about three weeks to arrive from the date you file. Also, remember you need to keep most tax related documents for at least three years, so don’t toss your paperwork after you file.

Q. The IRS contacted me, what should I do?

A. Ask for help. There are numerous scammers who impersonate the IRS during tax season. The real IRS will never contact you via social media, email or text message. In addition, an IRS agent will not contact you over the phone unless you first receive official correspondence in the mail. If you have received a notice in the mail, immediately ask for help to determine how to proceed.

These are just a few of the questions people have during tax season. If you have more, call us at (219) 769-3616 or email them to tlynch@swartz-retson.com.

Expired Home and Education Tax Breaks Revived

Congress passed a federal budget bill in early February that revived dozens of expired tax breaks for the 2017 tax year. They include a deduction for education expenses as well as several tax breaks for homeowners.

If you have not yet filed your 2017 tax return, please be aware these late changes are retroactive to the beginning of 2017. Check out this list of the most useful tax breaks to see if they apply to your situation:

Tuition and fees deduction. If you paid qualified tuition and related higher education expenses, you may be able to deduct as much as $4,000 of those costs. This can be done on a regular return (without itemizing). The deduction is capped at $4,000 for single filers with adjusted gross income (AGI) of $65,000 or less ($130,000 joint) and at $2,000 for single filers with AGI of $80,000 or less ($160,000 joint).

Mortgage insurance deduction. If you paid mortgage insurance premiums, you may now be able to deduct those amounts as an itemized deduction. This deduction begins to phase out for taxpayers with AGI of $100,000 or more.

Mortgage debt forgiveness exclusion. If qualifying mortgage debt on your primary residence was discharged or forgiven, you can exclude that amount from your income.

Energy-efficient home improvement credit. Energy-efficient home improvements (such as upgrades to windows, or heating and cooling systems), may be eligible for a tax credit equal to 10 percent of the amount paid, up to $500.

If you think any of these apply to you, bring all the related documentation to your tax filing appointment. If you have already filed, you may need to file an amended tax return to capture these very late law changes.

Call us at (219) 769-3616 with your questions, or email them to tlynch@swartz-retson.com.

Entertainment Expenses

In an effort to offset revenue lost under the new Tax Cuts and Jobs Act (TCJA), several popular business expenses are now subject to deductibility limits or were eliminated entirely.  One such benefit that was eliminated was the deduction for entertainment expenses. 

Under pre-TCJA law, a 50% tax deduction was allowed for entertainment, amusement, or recreation expenses that were directly related to the active conduct of a trade or business, so long as the business had proper documentation and could prove the expense was ordinary and necessary.  The Tax Cuts and Jobs Act has repealed this rule and disallowed the deduction, regardless if the expenses are directly related to or associated with an active trade or business.  

Historically, entertainment expenses were recorded on a business’s books under the expense account of ‘Meals and Entertainment,’ since both of these expenses were limited to a 50% deductibility for tax purposes.  While entertainment expenses have been repealed, the new law maintains the deduction for business related meal expenses.  Therefore, beginning in 2018, businesses should begin recording these expenses into two separate expense accounts.  This will allow for easier distinction between business related meals, which are still 50% deductible, and entertainment expenses, which are non-deductible.  This simple accounting change will allow business owners to better budget for these expenses, as well as improve upon year-end accounting and tax return preparation processing.

Call us at (219) 769-3616 with your questions, or email them to tlynch@swartz-retson.com.

2018’s IRS “Dirty Dozen” Tax Scams

Every year the IRS releases its "Dirty Dozen" list of the year's most prevalent tax scams. They include ploys to steal personal information, talk people out of money, or engage in questionable tax activity. Here are some of the top scams:

• Phishing. Fake emails or websites claiming to represent the IRS, for the purpose of stealing personal information. The IRS will never try to contact you via email about a bill or refund.
  
  
• Phone scams. Scammers impersonating IRS agents over the phone. These impersonators may threaten you with arrest if you don't make immediate payment for fake tax bills. Don't fall for it – the real IRS makes contact via a letter, and never threatens or demands immediate payment.
  
  
• Identity theft. Using a stolen Social Security number to file a fraudulent return and claim a refund. The IRS said it is making great progress on reducing this scam as identity theft reports are down 40 percent from a year ago.
  
  
• Fake charities. Some fraudsters use the mask of charitable activity to get you to donate funds to fake organizations. Only donate to legitimate charities, which are listed in the IRS database.
  
  
• Inflated refund claims. Many taxpayers are wooed by tax-refund services offering payouts that seem too good to be true. Cheap tax-preparation services that promise unrealistic refunds are illegal and often get taxpayers in trouble.
  
  
• Padded deductions. The IRS is focusing on identifying tax returns that try to reduce tax by overstating deductions such as charitable deductions or business expenses.
  
  
• Falsifying income to claim credits. Improper use of the Earned Income Tax Credit (EITC), meant for eligible low-income taxpayers. The IRS has been cracking down on EITC fraud in recent years.
  
  
• Abusive tax shelters. Some fraudsters peddle complex tax avoidance schemes known as tax shelters that they portray as legal tax strategies. Make sure you get an independent opinion on any complex tax schemes.
  
  
• Frivolous tax arguments. Frivolous arguments to avoid paying taxes (for example, arguing a personal vacation is a business expense) can be penalized by up to $5,000 per tax return.
  
  
• Offshore tax avoidance. Using offshore bank accounts and complex international tax structures to avoid paying taxes is still a common scam on the radar of IRS auditors.

If you have questions, call us at (219) 769-3616 or email them to tlynch@swartz-retson.com.

Reap the Benefit of Hiring Your Child for the Summer

Hiring your children to work in your business can be a win-win situation for everyone. Your kids will earn money, gain real-life experience in the workplace, and learn what you do every day. And, you will reap a few tax benefits in the process. Before you decide if hiring your child is the right thing for your business, learn if it can work for you.

Generally, if your child is doing a legitimate job and the pay is reasonable for the work, his or her salary can be a tax-deductible business expense. Your child’s income can be tax-free to them up to the standard deduction amount for a single taxpayer ($12,000 in 2018). Wages earned in excess of this amount are typically taxed at your child’s rate, which is likely lower than your rate. The following guidelines will help you determine if the arrangement will work in your situation:

·       Make sure your child works a real job that he or she can reasonably handle, no matter how basic or simple. Consider tasks like office filing, packing orders, or customer service.

·       Treat your child like any other employee. Expect regular hours and appropriate behavior. If you are lenient with your child, you risk upsetting regular employees.

·       To avoid questions from the IRS, make sure the pay is reasonable for the duties performed. It’s not a bad idea to prepare a written job description for your files. Include a W-2 at year-end.

·       Record hours worked just as you would for any employee. Pay your child using the normal payroll system and procedures your other employees use.

If you have questions, give us a call. Together we can determine if hiring your child is the right course of action for your business and your family.

If you have questions, call us at (219) 769-3616 or email them to tlynch@swartz-retson.com

Stay Prepared to Sell Your Business

If you enjoy running your own business, selling it may be the furthest thing from your mind. But the reality is that eventually an opportunity to sell will come, whether due to your own life changes or a perfect buyer walking in the door. Planning, often years in advance of the sale date, is necessary to get the most value for the love, sweat and tears you've invested. Here are some tips to stay prepared:

• Assemble a great team. Selling a business is a complex process, especially as you grow larger. You're likely to need three kinds of professionals to help: an accountant, to help review and produce clean and easy-to-understand financial statements; a lawyer, to create the necessary legal documents and help you negotiate terms; and a trusted business broker, to evaluate the worth of your business and find buyers.
  
  
• Develop your exit strategy. With the help of your advisory team, create a clear picture of what selling your business might look like. Outline the risks and opportunities that could affect the valuation of your business. Planning out an ideal scenario as well as a plan B will help you avoid getting backed into a corner and selling at a discount.
  
  
• Clean up your financials. As you get closer to selling, go over your business financial statements as well as your tax returns from the last three years. A broker will like to present a clear and compelling financial picture to a client, and that will include a year-to-date financial report.
  
  
• Have a plan to improve sales. The worst time to sell is when sales are declining, even if it's just a temporary or seasonal dip. Part of your planning should include some tactics to boost your sales and cash flow, such as increasing marketing and promotion, liquidating bloated inventories or collecting on accounts receivables.
  
  
• Be prepared to evaluate buyers. Be prepared to take a calm approach to any offers you get. You don't want to jump at the first offer, and many offers that seem too good to be true often are. Lack of solid financing is often an issue, so work with your business broker to find buyers who have been prequalified by a lender.
  
  
• Have your after-sale plan down. Often a buyer will want to include a clause that the previous owner stay on awhile as an advisor. Make sure that the advisory period lined out in the contract isn't longer than is comfortable for you. Finally, work with your accountant on a tax-efficient plan for the proceeds of your sale.

If you have questions, call us at (219) 769-3616 or email them to gward@swartz-retson.com.