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:

Check 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.

Tax Cuts and Jobs Act
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.
Check I’m a small business owner. How do I use the new 20 percent qualified business expense deduction?

Short answer: It’s complicated and you should get help.

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.

Check What are the new rules about dependents and caregiving?There are a few things that have changed regarding dependents and caregiving:

Check 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.
Check 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.
Check 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.
Check 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.

Handling Health Care Coverage Gaps

Health care coverage gaps happen. Whether because of job loss or an extended sabbatical between gigs, you may find yourself without health care for a period of time. Here are some tax consequences you should know about, as well as tips to fix a coverage gap.

Coverage gap tax issues

You will have to pay a penalty in 2018 if you don’t have health care coverage for three consecutive months or more. Last year the penalty for a full uncovered year was equal to 2.5 percent of your household income or $695 per adult (and $347.50 per child), whichever is higher. The 2018 amounts will be slightly higher to adjust for inflation.

Example: Susan lost her job-based health insurance on Dec. 31, 2016, and applied for a plan through her state’s insurance marketplace program that went into effect on April 1. Because she was without coverage for three months, she’ll owe a fourth of the penalty on her 2017 tax return (three of 12 months uncovered, or 1/4th of the year).

How to handle a gap in health care coverage

While the penalty is still in place for tax years 2018 and earlier, it is eliminated starting in the 2019 tax year by the Tax Cuts and Jobs Act.

Three ways to handle a gap

There are three main ways to handle a gap in health care coverage:

Check COBRA. If you’re in a coverage gap because you’ve left a job, you may be able to keep your previous employer’s health care coverage for up to 18 months through the federal COBRA program. One downside to this is that you’ll have to pay the full premium yourself.
Check Marketplace. You can buy an insurance marketplace health care plan through Healthcare.gov or your state’s online portal. Typically, you can only sign up for or change a Marketplace plan once a year. But you can qualify for a 60-day special enrollment period after a major life event, such as losing a job, moving to a new home or getting married.
Check Applying for an exemption. If you are without health care coverage for an extended period, you may still avoid the penalty by qualifying for an exemption. Valid exemptions include unaffordability (you must prove the cheapest health insurance plan costs more than 8.16 percent of your household income), income below the tax filing threshold (which was $10,400 for a single filer below age 65 for 2017), ability to demonstrate certain financial hardships, or membership in certain tribal groups or religious associations.

Protect Yourself From Port-Out Scams

Mobile phones not only contain our personal details and information about everyone we know; they are used to verify our identities and unlock access to our financial accounts.

Now scammers are using a process called a “port-out” to hack into our phones to change our passwords, steal our personal data and even empty our bank accounts.

Basics of the Port-Out Scam

A port-out scam starts by manipulating the legitimate process you can use to move your mobile phone number from one carrier to another. A scammer calls a carrier and impersonates you to request that your mobile phone number and SIM card data be transferred to a new carrier and device owned by the scammer.

Once the scammer successfully ports out your number in this way, they are often able to use it as leverage to gain access to your bank accounts. That’s because like other online accounts, banks will respond to requests to change your password by sending the new password or a PIN to your phone.

Protect yourself from Port-Out scams
Once the scammer uses a ported-out phone to change your passwords, not only are you locked out from accessing your accounts, but the scammer can now begin emptying them.

How to Protect Yourself

The key security vulnerability of the port-out scam is with the mobile phone carrier. When a customer calls to request changing their phone number to another carrier and device, the carrier will ask them to provide a PIN number. For some U.S. carriers including T-Mobile, the default PIN has been the last four digits of the customer’s Social Security number.

You may have heard that last year more than 143 million Americans had their data exposed in a hacking security breach at the credit reporting agency Equifax. The information exposed included names linked with phone numbers and Social Security numbers. In other words, everything a hacker would need to try a port-out scam.

Recently, T-Mobile sent text messages to customers warning them to change their PINs. It also set up a port-out protection page.

No matter what carrier you use, it’s worthwhile updating your security information and PIN. It can take only minutes and it may avoid the devastating consequences of this scam. Make sure that the new PIN you choose is different from your carrier account password.

Here are the pin protection links at the other three major U.S. carriers:

Check AT&T
Check Sprint
Check Verizon

Managing Money Tips for Couples

Couples consistently report finances as the leading cause of stress in their relationship. Here are a few tips to avoid conflict with your long-term partner or spouse:

Check Be transparent. Be honest with each other about your financial status. As you enter a committed relationship, each partner should learn about the status of the other person’s debts, income and assets. Any surprises down the road may feel like dishonesty and lead to conflict.
Check Discuss future plans often. The closer you are with your partner, the more you’ll want to know about the other person’s future plans. Kids, planned career changes, travel, hobbies, retirement expectations — all of these will depend upon money and shared resources. So, discuss these plans and create the financial roadmap to go with them. Remember that even people in a long-term marriage may be caught unaware if they fail to keep up communication and find out their spouse’s priorities have changed over time. Managing money tips for couples
Check Know your comfort levels. As you discuss your future plans, bring up hypotheticals: How much debt is too much? What level of spending versus savings is acceptable? How much would you spend on a car, home or vacation? You may be surprised to learn that your assumptions about these things fall outside your partner’s comfort zone.
Check Divide responsibilities; combine forces. Try to divide financial tasks such as paying certain bills, updating a budget, contributing to savings and making appointments with tax and financial advisors. Then periodically trade responsibilities over time. Even if one person tends to be better at numbers, it’s best to have both members participating. By having a hand in budgeting, planning and spending decisions, you will be constantly reminded how what you are doing financially contributes to the strength of your relationship.
Check Learn to love compromise. No two people have the same priorities or personalities, so differences of opinion are going to happen. One person is going to want to spend, while the other wants to save. Vacation may be on your spouse’s mind, while you want to put money aside for a new car. By acknowledging that these differences of opinion will happen, you’ll be less frustrated when they do. Treat any problems as opportunities to negotiate and compromise. Instead of looking at the outcome as “I didn’t get everything I wanted,” think of it as “We both made sacrifices out of love for each other.”
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Leveraging Your Children’s Lower Tax Rate One of the best places for parents to look for tax savings

If you’re a parent, your dependent children can be a source of tax savings. There are the well-known provisions in the tax code such as the Dependent Child Care Credit and the Child Tax Credit, but there’s also an opportunity to shift some taxable income to your children.

Shifting income to your children works because the tax rate increases as your income rises. This provides an incentive to shift income to your lower-earning dependent children. Here’s how to make it work:

Shifting income rules

In 2018, the first $1,050 of unearned income for each child is not taxed and the next $1,050 in unearned income is taxed at the lowest rate of 10 percent. Typical unearned income includes interest, dividends, royalties and investment gains.

Tip: Transfer enough income-producing assets to each child to approach the annual unearned income limits as closely as possible. Depending on your marginal tax rate you could be saving as much as 37 percent in federal income tax on the transferred amounts.

Tip: In addition to the unearned income, consider purchasing investments that will have long-term capital gain appreciation. This may help manage the timing and rate of capital gains tax when the investment is later sold.

Tip: Remember excess investment income could be subject to the additional 3.8 percent Medicare surtax. Any investment income that can be shifted to your children could also save you this additional tax bite as well.

Caution: The Tax Cuts and Jobs Act passed last year now uses the estates and trusts tax rates to calculate a “kiddie tax” on any unearned income over $2,100. Using that tax table, your child’s unearned income rate would scale up to 37 percent after it surpasses $12,500.

Leverage your children’s earned income

Income your children make from wages is considered earned income. If you own a small business, finding ways to employ your children can be a way to shift income from your higher tax rate to their lower rate. Care must be taken to be able to defend the work being done by your child and the amount they receive for their work. Some ideas include:

  • Use your child in an advertisement for your business.
  • Have your child clean your office a few times per week.
  • Put your child in charge of making local business deliveries.
  • Have your child help assemble items or help with mailings.

Tip: If you are a sole proprietor you may hire your dependent children under age 18 and won’t be required to pay Social Security and Medicare taxes.

Caution: Moving assets from you to your children could affect their ability to receive financial aid for college. Make sure to consider how your tax strategy affects college financing.

There are many opportunities to leverage the tax advantages of having children. Reach out if you’d like help creating a plan for your family.

Is a Section 529 plan the right college savings plan for you?

There are many ways to save for college, but one thing is certain: it is never too early to start. One way to save for college is with a “Section 529” plan. These plans offer a way to pay for college expenses with some nice tax advantages.

What are they?

Section 529 plans allow you to set up a tax-advantaged account to pay for your child’s college education. There are two types of Section 529 plans: prepaid tuition programs and college savings plans.

  • Prepaid tuition programs let you lock in today’s tuition costs by purchasing tuition credits or certificates that a student redeems when he or she starts college.
  • College savings plans let you make contributions to a state-sponsored savings account to build a fund for your child’s college expenses. These accounts are generally managed by a private mutual fund company. This is the Section 529 plan you’ve probably been hearing about, and it is this type of college plan that is the focus of this article.

How do Section 529 college savings plans work?

  • Make a gift to set up an account. You start by setting up an account and naming your child (or anyone else) as the beneficiary. Your contribution is considered a gift. Your contributions qualify for the $14,000 annual tax-free gift exclusion ($28,000 for married couples making a joint gift).Special rules for 529 plans let you average your gift over five years. This means married couples can make a $140,000 joint gift and individuals can make a $70,000 gift in a single year, without incurring gift tax. However, you cannot make additional gifts to your child for five years, or you may owe gift tax.
  • Your contribution is limited. You aren’t permitted to make contributions to a 529 plan beyond what is necessary to pay for your child’s college expenses. Each plan sets its own limit.Most plans allow you to make either a lump sum contribution or a series of monthly contributions. All contributions must be made in cash; you can’t contribute shares of stock or other property to these plans.
  • You remain in control. You cannot choose the investments in the fund – you must choose one of the plan’s investment options. However, you do remain in charge of all withdrawal decisions. You can allow your child to make withdrawals to pay for college expenses. If your plan permits it, you can change the beneficiary to one of your other children. If you change your mind about maintaining the account, you can even request a refund (tax and penalties will apply).
  • Your child can withdraw money to pay for college expenses. Section 529 funds must be used for qualified higher education expenses, such as tuition, fees, books, and supplies. They can also be used to cover certain room and board expenses, as long as your child attends school at least half-time. If your child receives a scholarship, you can request a penalty-free refund up to the amount of the scholarship. In addition, you can withdraw the funds if your child becomes disabled or dies.If the funds are withdrawn for any other purpose, you (not your child) pay tax on the earnings that have accumulated in the fund.
  • You can change plans. You can make a tax-free rollover to another plan with the same beneficiary. That allows you to move your child’s plan to another state’s plan without losing the tax benefits. This tax-free rollover treatment only applies to one transfer within any 12-month period.

What are the benefits?

  • Section 529 plans offer tax benefits. Your contribution is not tax-deductible, but your investment grows tax-deferred. That allows your money to grow faster than a similar investment in a taxable account. Qualified distributions from Section 529 college savings plans are tax-free.
  • Section 529 plans offer an estate planning opportunity. Section 529 plans let wealthy parents or grandparents transfer wealth out of an estate and into an account a child can use to pay for college expenses.

What are the disadvantages?

While these plans offer an attractive alternative to other college funding plans, they are not without drawbacks. There are a number of factors you should consider before you invest in a Section 529 college savings plan.

  • Substantial penalties apply to nonqualified withdrawals. Any nonqualified distributions will be subject to withdrawal fees and penalties. You’ll also owe income tax on the distribution.
  • Your state plan may not meet your investment expectations. You should choose from among the available plans the one that meets your risk tolerance and performance expectations. But what if you are unhappy with a plan’s investment performance? If your plan allows rollovers, you can move the funds into another plan. If you simply request a refund, you’ll have to pay income tax and penalties on the distribution.

Do your homework.

The same federal income tax rules apply to all Section 529 college savings plans. However, each plan has unique features. Here are some items you should compare when you evaluate different plans.

  • State income taxes.
  • Investment return.
  • Enrollment fees.
  • Maximum contributions.
  • Flexibility in making contributions.
  • Withdrawal fees and penalties.
  • Transferability to another beneficiary or another qualified plan.
  • Choice of schools.
  • Participation by nonresidents.
  • Beneficiary age restrictions.
  • Covered education expenses, including restrictions on room and board.

Section 529 plans provide an attractive, tax-favored way to save for college. However, they are not the right choice for everyone.

Employee Expense Rules Have Changed

One of the things that’s going away under the new tax reform laws implemented this year is an employee’s ability to deduct unreimbursed expenses related to their job.

Farewell to miscellaneous itemized deductions

The deduction for unreimbursed employee expenses was among the qualified 2-percent miscellaneous itemized deductions that were eliminated by the Tax Cuts and Jobs Act (TCJA) passed in late 2017. This could be a blow for employees who had relied on it to deduct unreimbursed expenses for such things as work-related meals, entertainment, gifts, lodging, tools, supplies, professional dues, licensing fees, work clothes and work-related education.

A win-win solution

If you are an employee who has used this tax deduction, here are some tips to minimize its loss:

  • Determine the impact. Review your past tax records to help estimate how much you expect to pay in unreimbursed work expenses and what the tax deduction was worth to you.
  • Discuss the situation with your employer. If the loss of this deduction is a hardship, talk to your employer about how you will be affected.
  • The win-win. Ask your employer to consider reimbursing you for your work-related expenses directly. Your employer can probably deduct those expenses from their business return without increasing your taxable income. This will save them tax dollars when compared with the cost of raising your pay in order to indirectly compensate you for your unreimbursed expenses.

If you are an employer, consider talking to your employees about their unreimbursed expenses now that the tax laws have changed. If you wish to reimburse their qualified business expenses, make sure your reporting adheres to IRS accountable plan rules so that your reimbursements are deductible as a business expense and do not add to your employees’ incomes.

The New World of Charitable Deductions

Your charitable contribution deductions are still a great tax savings tool, but they may require more planning following the passage of the Tax Cuts and Jobs Act (TCJA) last year.

Background

Typically, cash and non-cash charitable donations can be deducted on an itemized return. But with the standard deduction nearly doubling to $12,000 for single filers and $24,000 for married joint filers, itemizing every year is less beneficial for many taxpayers.

This is especially so because many other itemizeable deductions have been reduced by the TCJA, including miscellaneous itemized deductions, state and local tax deductions, and home loan interest deductions.

Leverage charitable tax planning

If you want to donate and get beneficial tax treatment, you can still make it work. Here’s how:

Conduct a year-end tax forecast. Plan now to see how close the amount of all your yearly itemizeable items will come to exceeding your standard deduction threshold.

Bundle two-in-one. Consider bundling two years of charitable giving into one year. This will allow you to maximize your itemizations in one year, while using the tax savings of the standard deduction in the other year to help pay for your donations.

Maximize your charitable deduction. When you can take advantage of the charitable deduction, consider donating appreciated stock held longer than one year. This is a better alternative than writing a check as you avoid paying capital gains and you can deduct the fair market value of the stock as a donation.

Itemized deduction rules have changed, but you can still take advantage of the tax deductibility of your charitable giving. You simply need to adjust your planning. Call if you’d like to discuss this or any other tax-planning strategies.

Know the Top IRS Tax Scams

Every year the IRS releases its list of the most common tax scams. They include ploys to steal personal information, talk people out of money, or engage in questionable tax activity. Here are 10 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’s making great progress on reducing this scam, with identity theft reports down 40 percent from a year ago.

Fake charities. Some fraud uses the mask of charitable activity to get you to donate funds to fake organizations. Only donate to legitimate charities registered with the IRS.

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. 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, which 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.

How to Protect Your Social Security Number from Theft

With the dramatic increase in identity theft, what can be done to protect your Social Security Number (SSN) from these would-be thieves? Here are some ideas.

Do not carry your Social Security Card with you. Your parents were encouraged to do this, but times have changed. You will need to provide it to a new employer, but that is about it.

Know who NEEDS your Social Security Number. The list of those who need to have your number is limited. It includes:

  • Your employer. To issue wages and pay your taxes.
  • The IRS. To process your taxes.
  • The State Revenue department. To process your state taxes.
  • The Social Security Administration. To note your work history and record your benefits.
  • Your retirement account provider. To enable annual reporting to the IRS.
  • Banks. To enable reporting to the IRS.
  • A few others. Those who need to report your activity to the government (example: investment companies.)

Do not use any part of your Social Security number for passwords or account access. Many retirement plans use your Social Security Number to enable you to access their on-line tool. When this happens, reset the login and password as soon as possible.

Do not put your Social Security Number on any form. Unless a business has a legal need for your number, do not provide it. Common requestors of this number are insurance companies and health care providers. Simply write, “not available due to theft risk” in the field that requests your number. If the supplier says they need it, ask them why.

Do not note your full Social Security number on any form. If you are required to give out your number, try marking out the first five numbers. (xxx-xx-1234)

Do not put your Social Security Number on your checks. Certainly not on your pre-printed checks. If requested by the government to place your number on your check to apply your payments, simply put the last four digits on the check.

Never give your number out over the phone or in an email. The only exception is when you make the phone call to a valid source that will need the number to access your account.This list is very limited. It includes calls you make to the IRS, Social Security, your state government, and limited partial numbers to your bank and health care insurance company.

Remember to periodically check your credit with the major agencies to ensure your data has not been stolen. Once stolen, it is often difficult to get a new SSN issued.