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Tax Tip of the Week | The New Kiddie Tax: How It Might Change Gift Giving November 21, 2018

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Planning Tips, Tax Tip, Taxes, Uncategorized , add a comment

The New Kiddie Tax: How It Might Change Gift Giving


The following article is about a tax that we seldom deal with, but one which can be significant when it comes into play – the so-called Kiddie Tax. The article was written by Bob Carlson and was taken directly from the Accountants’ Daily News (10-16-2018), and discusses changes to the tax and how it is computed.
-Norman S. Hicks, CPA

By Bob Carlson

Opinions expressed by Forbes Contributors are their own.

“Beginning in 2018, youngsters who are subject to the Kiddie Tax will pay tax on their unearned income using the same tax tables as trusts. There will be no reference to the parents’ tax rate.

Take a good look at the new Kiddie Tax before making gifts to children and grandchildren.

The Tax Cuts and Jobs Act greatly simplified the Kiddie Tax. The tax was imposed in the Tax Reform Act of 1986 on unearned (investment) income of children. The idea was to end income splitting. That was the practice of high-income earners shifting some of their income to relatives in lower tax brackets, usually by giving investment assets to children directly or through trusts. Initially, only children under age 14 were subject to the tax. The scope was increased over the years.  Now, it applies to most children under 18 and full-time college students under 24 who don’t pay for more than half of their support.

The original Kiddie Tax had the children paying taxes on their investment income at their parents’ highest tax rate. It required a separate form and some complicated computations. It also required parents to share their tax information with their children.

Beginning in 2018, youngsters who are subject to the Kiddie Tax will pay tax on their unearned income using the same tax tables as trusts. There will be no reference to the parents’ tax rate. That greatly simplifies computation of the tax and means parents don’t have to share their data. But the new rules mean many who are subject to the Kiddie Tax will pay higher taxes than they would have under the old rules.

For example, the maximum 20% capital gains tax is imposed on trusts when taxable income reaches $12,700. Last year, that rate wasn’t imposed on an individual until taxable income exceeded $400,000. Throughout the tax tables, higher tax rates are imposed on trusts at much lower income levels than for individuals.

But some children will pay lower income taxes under the new rules.  When a child’s parents are in the top tax bracket and the child receives only a few thousand dollars of investment income, the income will be taxed at a lower rate under the new rules. The child won’t be in the top tax bracket.

The Kiddie Tax applies to all unearned income. That, of course, includes all types of investment income, but also includes distributions from traditional IRAs and 401(k)s and some Social Security survivor benefits.

A child subject to the Kiddie Tax receives a $1,050 standard deduction that makes that amount of unearned income tax free. The next $1,050 of unearned income is taxed at a lower rate, but tax advisors disagree on whether it is taxed at the child’s tax rate or using the trust tax tables. The rule is unclear until the IRS issues guidance.

This means the first $2,100 of unearned income earned by a child or grandchild is either untaxed or taxed at a low rate. Additional income will be taxed using the trust tax tables. So, parents and grandparents have to monitor a youngster’s unearned income sources carefully before giving additional income-producing investments or selling long-term capital assets held in the youngster’s name.

If you plan to leave assets to a youngster as part of your estate plan, you should consider leaving a child who might be subject to the Kiddie Tax a Roth IRA instead of a traditional IRA. There might be a family member in a lower tax bracket who should inherit the traditional IRA.

Another strategy for grandparents might be to give appreciated property to the parents instead of to the grandchildren. Suppose the grandparents are in the top tax bracket but the parents are in a lower bracket. The grandparents have an investment asset with a significant long-term capital gain. They want to sell the asset to help pay for the grandchild’s education or other needs.

The grandparents would owe the 20% capital gains rate if they sold the asset, and the grandchild also would owe the 20% rate if the amount of the gain plus other investment income put him or her in the top trust tax bracket. But the parents might owe only a 15% (or lower) rate if they were given the property and sold it.

The irony is that under the new rules, top-bracket parents or grandparents probably can transfer more money to youngsters before triggering a higher tax than lower-bracket adults can. The top tax rate of 37% begins at $600,000 of taxable income for married taxpayers filing jointly and at $12,500 for trusts. That means a top-bracket family can transfer up to $12,500 of gains or other unearned income to a child or grandchild before the 37% rate is triggered on the child. But an adult in a lower tax bracket has to transfer less than $12,500 before the child begins paying a higher rate than the adult would pay

The new Kiddie Tax makes computing the tax easier, but it can make planning more complicated for many families.”

Bob Carlson is a contributing editor of Forbes Media and is the editor of Retirement Watch, a monthly newsletter and web site he founded in 1990.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Norman S. Hicks, CPA

–until next week

Tax Tip of the Week | The Worst Investment Strategies You Can Make from a Tax Standpoint October 31, 2018

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The Worst Investment Strategies You Can Make from a Tax Standpoint

Needless to say, income taxes can be a big bite. On the other hand, the performance of your overall investment portfolio is obviously important. And, it may be good or bad. But, which is more important – saving income taxes or protecting the overall future of your portfolio by taking some chips off the table now. Do you cash-in your investment now knowing that income taxes may be as low as 0%, or as high as somewhere between 23.8% to 43%. Or, do you risk missing out on an investment gain by failing to cash in because you can’t bring yourself to write an “income tax” check? This answer varies by individual. Each person may have a VERY different tax situation in terms of other income and expenses, loss carryforwards, capital loss carryforwards, credit carryforwards, amount of estimated taxes paid, AMT, NIIT, additional Medicare tax, social security benefits – just to mention a few off the cuff. The other side of the coin is that individuals also have significantly different investment holdings. Both factors may be huge considerations – one cannot be simply ignored to the exclusion of the other.

The article that follows goes into greater depth and covers several examples of what may be considered poor tax planning.

1.     Selling stock too soon.  Capital gains on holdings of more than a year are taxed favorably at rates from zero for those in the lowest bracket to 23.8% for those in the highest individual rates. Efforts should be made, if possible, to retain stocks for at least one year to get the favorable rates.
2.    Not realizing losses when there are taxable gains.  In years that you have taxable gains, you should try to offset taxes as much as possible by realizing losses embedded in your portfolio and selling some of those shares.
3.    Having losses offset the wrong type of capital gains.  If there is a choice, it is better to offset short term gains with long term losses. This way, you will get the full benefit of the loss against income that would be taxed at regular rates. Offsetting long-term gains with short-term losses wipes out income that would have been taxed favorably. This strategy requires some advance calculations and planning.
4.    Not carrying forward capital losses.  Capital losses can offset capital gains with up to $3,000 of losses in excess of gains used to offset other income. Losses not deductible can be carried forward indefinitely until used up, at amounts of $3,000 per year.
5.    Thinking that a surviving spouse can utilize capital losses.  Carried-forward capital losses disappear at death and cannot be used by a surviving spouse who previously filed a joint return if those losses are not attributed to him/her.
6.    Not properly utilizing losses on options trades.  Those that trade in stock options and have losses can offset these against capital gains. If options are sold, income is not recognized until they are repurchased at a gain or expire. If the options are exercised, the amount received is added to the sale price of the shares. If you buy options and exercise them, their cost is added to the purchase price of the acquired shares.
7.    Unintentionally creating a wash sale.  People who trade and have losses and then reacquire shares in the same company within 30 days before or after selling them will have a “wash” sale and cannot recognize the loss. They need to be careful of falling into this trap. See point #8 below for a way to avoid the wash sale rules.
8.    Not harvesting losses.  People with tax losses can harvest these losses to be used currently or in future years without running afoul of the wash-sale rules. This is done by selling the loss shares and immediately buying shares in similar companies so that the market risk hasn’t changed. An example is to sell shares in a certain sector and buy the exchange traded fund (“ETF”) for that sector…hold it for 31 days…and then sell that and repurchase the prior shares that were sold. This puts your portfolio in the same position as before the first sale, but you have the losses to offset current or future capital gains. You can also do this with mutual funds and index funds, not just ETFs. Your risk is that the substituted funds or ETFs don’t perform similarly during that 31-day period as the individual stock you sold.
9.    Putting stocks in children’s names and then selling them.  People who put stocks in their children’s names will not get any tax benefit because, except for minimal amounts, the Kiddie tax will be at the same rates as the parents (As of 2018, Kiddie Tax is now taxed at the trust rates). But this can be done with other people you might be supporting, such as an elderly parent. Caution:  Watch for interactions on their returns that need to be factored in, such as triggering a tax on Social Security benefits.
10.    Owning publicly traded partnerships (“PTP”) in retirement accounts.  Certain types of income from PTPs are considered “unrelated business taxable income” and are subject to taxation even though they are in a tax-deferred or tax-advantaged account, such as an IRA, Roth IRA or 401(k). Also, owning PTPs in your own name can increase your tax preparation fee, since many of these entities issue multiple-page K-1s (up to 10 pages) rather than a single-page 1099.
11.    Buying tax-free government bonds when their earnings will result in higher tax payments. People who buy tax-free government bonds to avoid federal income tax can still be subject to the Alternative Minimum Tax if the bonds are for private activities…or returns from these bonds can trigger a tax on Social Security benefits. You have to run the numbers.
12.    Wrong asset location.  Many investors have stock in their tax-deferred accounts, and tax-exempt bonds in their own names. But income earned in a tax-deferred account, such as an IRA or 401(k), is taxed as ordinary income when distributed, regardless of the nature of the income in the IRA—this means capital gains and dividends would lose their beneficial rates. A better way is to have the tax-deferred account own corporate bonds and keep stock in your personal accounts. The overall yield will increase since corporate bonds pay higher interest than tax-exempt bonds, and the stock will provide capital gains and dividends that will be favorably taxed. Also, unrealized stock appreciation will never be taxed if owned at death.
13.    Not using retirement accounts for active trading.  Tax-deferred accounts should be used by active traders who generate extensive short-term gains or if they trade or sell options. Active traders who have IRAs or self-directed retirement accounts should not overlook doing this.
14.     Investing in mutual funds at the wrong time of the year.  Many mutual funds declare and pay their capital gains dividends for the year in December. Buying such shares in November or December could cause you to pay tax on money you are receiving back from what you just invested. You then pay tax on your own money rather than on earnings.

As I always say, taxes are complicated and need an understanding to not fall into traps or to have you engage in costly strategies. These strategies can help you avoid or minimize your taxes from investing transactions. It’s always wise to review your investment strategies with a tax adviser and not just your investment adviser.

Credit to Edward Mendlowitz, CPA, ABV, PFS (Money, September 15, 2017)

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C Bradstreet, CPA

–until next week

Tax Tip of the Week | Gifts to Charity: Six Facts About Written Acknowledgements September 19, 2018

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Tax Tip of the Week
September 19, 2018

Throughout the year, many taxpayers contribute money or gifts to qualified organizations eligible to receive tax-deductible charitable contributions. Taxpayers who plan to claim a charitable deduction on their tax return must do two things:

•    Have a bank record or written communication from a charity for any monetary contributions.
•    Get a written acknowledgment from the charity for any single donation of $250 or more.

Here are six things for taxpayers to remember about these donations and written acknowledgements:

1.    Taxpayers who make single donations of $250 or more to a charity must have one of the following:
o    A separate acknowledgment from the organization for each donation of $250 or more.
o    One acknowledgment from the organization listing the amount and date of each contribution of $250 or more.
2.    The $250 threshold doesn’t mean a taxpayer adds up separate contributions of less than $250 throughout the year.
o    For example, if someone gave a $25 offering to their church each week, they don’t need an acknowledgement from the church, even though their contributions for the year are more than $250.
3.    Contributions made by payroll deduction are treated as separate contributions for each pay period.
4.    If a taxpayer makes a payment that is partly for goods and services, their deductible contribution is the amount of the payment that is more than the value of those goods and services.
5.    A taxpayer must get the acknowledgement on or before the earlier of these two dates:
o    The date they file their return for the year in which they make the contribution.
o    The due date, including extensions, for filing the return.
6.    If the acknowledgment doesn’t show the date of the contribution, the taxpayers must also have a bank record or receipt that does show the date.

This article was provided by the Internal Revenue Service in Tax Tip 2017-59.  If you have any questions concerning charitable donations, let us know.  We can help.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

–until next week.

Tax Tip of the Week | Miscellaneous Itemized Deductions Are Now Gone September 5, 2018

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Uncategorized , add a comment

Tax Tip of the Week
Sept 5, 2018 
 

Keep the Common Misconceptions coming, we have had wonderful feedback, thank you!  Let us know via email, what are common business misconceptions that you have come across; markb@bradstreetcpas.com?   

As discussed before, the new tax law has nixed miscellaneous itemized deductions. They are no longer a part of your itemized deductions on Schedule A. These include your unreimbursed employee business expenses such as mileage, meals, travel, uniforms and other expenses such as tax prep fees, brokerage fees, etc. Some of the aforementioned expenses are still deductible as business expenses – that hasn’t changed.

Many people are upset about the loss of these tax deductions. Before deciding if a person has the right to be upset, some questions must first be answered. First, how much income tax did you save as a result of these deductions? Well, if you were ineligible to itemize your deductions, you didn’t miss out on anything – nada. And, even if you were able to itemize, the total miscellaneous deductions must exceed 2% of adjusted gross income (AGI) before any benefit is realized. Lastly, even If you cleared these first two hurdles, you may still flunk because of additional Alternative Minimum Tax (AMT) being created.

So, let’s walk through a real-life example – your AGI is $150,000 and itemizing your deductions is to your benefit.  More good news – you are not subject to AMT. The grand total of your miscellaneous tax deductions is $4,000. Now, remember that only the portion that exceeds 2% of the $150,000 AGI or a $3,000 floor is of any value at all. Yes, in this case, we have a $1,000 additional deduction or tax savings of roughly $275. Better than nothing – but not worth writing home about. Also, no benefit exists on either the Ohio or School District returns. Sometimes, the unreimbursed employee business expenses are deductible to a taxing city but they almost always generate tax correspondence which takes away most of that fun.

So, at the end of the day, the press is making a big to do about taking away something most people never had anyway!

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 472 | The Tax Cuts and Jobs Act August 8, 2018

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Tax Tip of the Week | Aug 8, 2018 | No. 472 | The Tax Cuts and Jobs Act

We have shared information on various aspects of the Tax Cuts and Jobs Act in several previous tax tips. The following is a nice refresher brought to us by our Western CPE sponsors which we wanted to share this week.

Tax Reform and What it Means for Your Personal Taxes 

President Trump, when he was on the campaign trail, promised that he would push for tax reform legislation. On Dec, 22, 2017, he signed The Tax Cuts and Jobs Act into law, the first major tax reform in 31 years. The new law makes many changes to the tax code. Every taxpayer is impacted. A highlight of the changes follows:

Tax rates.  Tax rates are reduced. The top rate is reduced from 39.6% to 37%. Lower rates are also reduced.

Exemptions and the child tax credit.  The deduction for personal exemptions is eliminated. An expanded child tax credit will help make up for the loss of personal exemptions for some families. The credit is increased to $2,000 (from $1,000) for qualifying children under 17. For children 17 and older and for other dependents, the credit is $500.

Standard deduction.  The new tax reform law doubles the standard deduction. The higher standard deduction ($12,000 for singles, $18,000 for heads of household, and $24,000 for married filing joint) means that fewer taxpayers will benefit from itemizing deductions.

Itemized deductions.  Itemized deductions for all state and local taxes, including property taxes, are capped at $10,000. The limit on mortgage debt for purposes of the mortgage interest deduction is reduced from $1,000,000 to $750,000 for loans made after Dec. 15, 2017. Loans made before Dec. 15, 2017 are grandfathered at the $1,000,000 debt limit. The interest on home equity borrowing is no longer deductible in most cases. The threshold for medical expense deductions is lowered to 7.5% of adjusted gross income (from 10%) for tax years 2017 and 2018. Miscellaneous itemized deductions subject to the 2% of AGI limitation are not allowed. Miscellaneous itemized deductions lost because of the new law include employee business expenses, investment adviser fees, union dues, and tax preparation fees. Personal casualty losses are not allowed unless the losses were suffered in a federally declared disaster area.

Alimony.  The new tax reform law eliminates the alimony deduction for agreements signed after Dec. 31, 2018. Alimony income is not taxable for agreements signed after Dec. 31. 2018. There is no change to the law for agreements signed before Jan. 1, 2019.

Moving expenses.  The new tax reform law eliminates the moving expense deduction and makes employer reimbursement of moving expenses taxable to the employee beginning in 2018.

AMT.  The new tax reform law temporarily increases the alternative minimum tax (AMT) exemption for tax years 2018 through 2025. The increase in the exemption, as well as the elimination of major tax preferences (exemptions, state taxes above $10,000 and miscellaneous itemized deductions) means that fewer people will be subject to AMT under the new law.

Education.  The new tax reform law modifies qualified tuition programs – §529 plans. Funds in the 529 plan can now be used to pay for grades K to 12 private school tuition. The above-the-line deduction for college tuition expenses was renewed in later legislation, but only for 2017. The American Opportunity and the Lifetime Learning credits continue to be available.

Roth IRA conversions.  The new tax reform law repeals the special rule permitting recharacterization of Roth IRA conversions. A conversion of a traditional IRA to a Roth IRA may still be advisable, but once the conversion is completed, it can’t be undone.

These are just a few of the changes included in the Tax Cuts and Jobs Act. Your 2018 taxes will be affected. That’s guaranteed by the scope of the changes. The degree of impact depends on your personal situation.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author – Norman S. Hicks, CPA

–until next week.

Tax Tip of the Week | No. 468 | New Tax Laws and Buying Your Dream Vacation Home July 12, 2018

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Tax Tip of the Week | July 11, 2018 | No. 468 | New Tax Laws and Buying Your Dream Vacation Home

Vacation-home buyers are impacted by the Tax Cuts and Jobs Act of 2017, passed by Congress in December of last year. Aside from a few exceptions the new laws are effective on January 1, 2018. The new laws that impact vacation homes generally revolve around the deductibility of mortgage interest and property taxes. This tax tip will not delve into any tax aspects of a second home rental.

Let’s chat first about the property taxes on your dream vacation home.
These property taxes are still deductible. But, like the property taxes on your personal residence there are now more hoops to jump through and they are higher. Being able to itemize now is more difficult since all of your taxes, a part of your itemized deductions, may not exceed $10,000.

Moving on to the deductibility of mortgage interest whether it be from home-equity loans, home-equity lines of credit (HELOCS) or second mortgages have also been adversely affected by the new tax laws.

Generally, mortgage interest is no longer deductible unless the loan proceeds are used to purchase, construct or significantly improve the home that secures the loan. Often, in the past, prior to the passage of the new tax laws – vacation-home buyers of ski chalets and oceanfront homes were using mortgages on their primary residence to purchase the second home. IRS now says that this interest is no longer deductible since the mortgage is on another home. However, it is okay to use a first mortgage on your vacation home for its purchase. But you must keep in mind that you can only deduct the interest on a grand total of $750,000 in mortgage loans. Any “excess” interest is not deductible.

First mortgages on your vacation home or on your primary residence will typically bear similar interest rates. However, unlike a HELOC on your primary residence used for the purchase of a vacation home, lending institutions will ask for at least a 15% down payment for mortgages placed on your vacation home. Be sure to factor this possibility into your cash planning forecast.

Of course, the best work around for managing the mortgage interest deduction on your dream home is not to have any debt. PAY CASH! NOW THAT WOULD BE A DREAM!

Credit given to Robyn A. Friedman, Wall Street Journal, Friday, May, 11, 2018

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 461 | Who Gets the Biggest Breaks Under the New Tax Law? May 23, 2018

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Tax Tip of the Week | May 23, 2018 | No. 461 | Who Gets the Biggest Breaks Under the New Tax Law?

The richest 1 percent of Americans (annual earnings of more than $732,800) will receive on average a tax savings of about $33,000. The poorest Americans (annual earnings of less than $25,000) will save on average a whopping $40. Yes! $40! Whopping! Dollars! Interesting to say the least!

Now, the good news is that the new personal income tax provisions will reduce taxes for more than 60% of all USA residents. However, the size of the tax savings by state and by taxable income is uneven as shown by the following chart:

Average Tax Savings

UNDER          $25,000 –     $48,000 –      $86,000 –
$25,000        $48,000        $86,000        $148,000

$40              $320              $780            $1,500

When considering all entity tax cuts including corporate income taxes, the richest Americans receive a combined savings of $51,140 while the poorest will save only $60.

Looking at the tax savings by state – how does Ohio fare?  Not that bad. For Ohioans, 69% of its taxpayers will realize savings. North Dakota is at the top of the savings list at 75%. New York, California and New Jersey are among the states with lowest savings.

Note: Please keep in mind that the federal income tax withheld on each of your 2018 paychecks will be calculated using the new withholding tables for 2018. As a result, your federal withholding should decrease at least some so that your tax savings from the new tax law will be received on each pay check as opposed to having a larger tax refund on your 2018 income tax return. I don’t want taxpayers who receive much of their income via a Form W-2 thinking that their new tax savings will be realized instead through a larger tax refund.

Credit given in part to Jeff Stein, Washington Post, published on Sunday, April 2, 2018 in the Dayton Daily News.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 459 | The New Tax Law and Your Charitable Deductions May 9, 2018

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Tax Tip of the Week | May 9, 2018 | No. 459 | The New Tax Law and Your Charitable Deductions

Granted, for many people, the tax savings is not the number one driver for making charitable contributions, “but rather it’s your desire to impact the lives of others that motivates you to give.” However, having said that, it is always nice for Uncle Sam to give you an even bigger bang for the buck by granting you a tax deduction for your contributions. The resulting tax savings, effectively, helps you fund the contribution.

Much press has been devoted to the new tax law and its impact on your itemized tax deductions. Your charitable contributions are but one of your itemized deductions. And, to be able to “itemize”, you must exceed the standard deduction. Which is all well and fine but the new law increased the amount of the standard deduction. As a result, fewer people will be itemizing since the standard deduction will result in a greater benefit. If you use the standard deduction you will not receive any tax benefit for your charitable contributions. Currently about 30% of the United States itemizes when filing their taxes. Only about half of those will continue to itemize under the new tax law.

The Dayton Foundation, along with other organizations, has what is known as a Donor-Advised Fund or Charitable Checking Account (CCA). The idea behind these are to create the ability to “bundle your charitable giving by making large gifts into your fund or account in one year then dispersing grants to charity over a multi- year period. This allows you to take advantage of the charitable deduction in the year you itemize while taking the standard deductions in other years when you may not meet the threshold.” Please note that the “bundling” technique is not necessary if you have enough to itemize.

Other new changes include “an increase on the limitation of cash gifts to a charity from 50% of adjusted gross income to 60% as well as a doubling of the estate tax threshold.  One thing that hasn’t changed, however, is the IRA Charitable Rollover provision. Donors ages 70-1/2 or older should consider this tax-wise option first when making a charitable gift. These individuals can donate up to $100,000 annually from their IRA to any 501(c)(3) charitable organization without treating the distribution as taxable income.” In my opinion, this IRA Charitable Rollover provision is one of the more under-utilized provisions in the tax law.

Many other charitable and estate planning opportunities other than the ones above exist. Be sure to work hand in hand with your financial planner and your CPA to optimize the tax savings for yourself and to maximize the dollars that flow to the charitable organizations that you support.

Credit to Joseph Baldasare, MS, CFRE, Chief Development Officer of the Dayton Foundation for some ideas, concepts and excerpts from his article, How the New Tax legislation Could Affect your Charitable Deductions.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 458 | Beware of the New Cap on Business Losses May 2, 2018

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Tax Tip of the Week | May 2, 2018 | No. 458 | Beware of the New Cap on Business Losses

Making money in the business world is not easy. Not many business owners would contest that statement. In spite of the best-laid plans and intentions, business losses can and do occur. I suspicion the IRS and/or Congress became concerned that someone might “create” a business loss only for tax saving purposes using some of the newly enacted faster write-offs for certain fixed assets. For that reason, I believe the IRS and/or Congress developed some of their own self-serving parameters to limit what they deemed as potential abuse. Thusly, the cap on “excess” business losses was apparently born.

This new tax law provision seems to have flown in under the radar. For the most part the press has chosen to write about other more popular topics. This limitation on “excess” business losses applies to individuals. However, remember that the income taxes on profits for many “flow-through” businesses are paid by the individuals on their own individual income tax returns. This new loss provision has been nicknamed the “anti-tax-shelter” measure. In certain instances, it treats taxpayers as though their business losses were from a tax shelter. This loss limitation was created to limit the ability of taxpayers (other than C Corporations) to use business losses to offset other sources of income, such as investment income. Limitations on business losses are not new. The ones already in place include passive activity loss limitations (PAL) and the at-risk basis limitations. Both of these are complicated and may have far-reaching consequences. The new loss limitation adds yet another hurdle to a loss deduction in addition to the ones already in place.

“Excess business loss” is essentially defined as the excess of aggregate business deductions over the taxpayer’s aggregate business income as defined in Internal Revenue Code Section 461(l), plus a floor amount. For 2018, the floor is $500,000 for married filing jointly taxpayers and $250,000 for all other taxpayers. The “excess business loss” that exists for the tax year is disallowed and becomes a net operating loss that will be carried forward for possible use in the future.

Thusly, the new law limits a taxpayer’s net business loss deduction to the threshold amount in the tax year incurred. The limitation also forces taxpayers to wait at least one year before these losses may be used. (Ouch!) In some instances one could draw some parallels between this business loss limitation and the Alternative Minimum Tax (AMT) – both are sneaky behind the curtain calculations that may result in an unpleasant tax surprise.

For illustration purposes:

A married taxpayer filing jointly has investment income from various sources of $875,000. She also has aggregate business losses of $1.2 million. The taxpayer’s excess business loss is $700,000 ($1.2 million aggregate loss – $500,000 threshold). This excess business loss may not be deducted in the year created. It will instead be treated as part of a net operating loss carryforward to later years. As a result, the taxpayer’s gross income for 2018 is $375,000 ($875,000 investment income – $500,000 limited business loss.)

This illustration demonstrates how the new law could limit a taxpayer’s ability to offset his other income with his business losses and result in a tax liability. Under prior law, the taxpayer’s business losses would have been deducted in full. For taxpayers that anticipate aggregate business losses above the threshold amount, they may need to engage in further tax planning.

As with other aspects of the new tax law, we await further IRS guidance and explanations about some of the technical aspects of this provision. We also are aware that further guidance may never be received.

Credit given for some ideas, concepts and excerpts from Tax Reform – The New Overall Loss Limitation February 20, 2018 – Aimee Reaving

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 454 | New Tax Law (TCJA) – How It Will Affect Alimony Payments April 4, 2018

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Tax Tip of the Week | April 4, 2018 | No. 454 | New Tax Law (TCJA) – How It Will Affect Alimony Payments

These new changes take effect for divorces and legal separations after 2018.

Prior law:  Under the current rules, an individual who pays alimony can deduct the alimony or separate maintenance payments paid during the years as an “above the line” deduction. An “above-the-line” deduction is a deduction that a taxpayer need not itemize to deduct. These deductions are more valuable than an itemized deduction.

And, under current rules, alimony and separate maintenance payments are taxable to the recipient spouse.

Please note that the rules for “child support”—remain unchanged. Payers of child support don’t receive a taxable deduction. Recipients of child support don’t pay tax on those amounts.

New law:  A tax deduction for alimony no longer exists for the payor. Also, alimony is no longer taxable income to the recipient. So, for divorces and legal separations that are executed after 2018, the alimony-paying spouse will no longer be able to deduct these payments and the alimony-receiving spouse doesn’t include the payments in gross income.

Note: TCJA rules are not applicable to existing divorces and separations. It’s important to emphasize that the current rules continue to apply to already-existing divorces and separations, as well as divorces and separations that are executed before 2019.

Under a special rule, if taxpayers have an existing (pre-2019) divorce or separation decree, and that agreement is legally modified, then the new rules don’t apply to that modified decree, unless the new agreement expressly states that the TCJA rules are to apply. Situations may exist where applying the TCJA rules voluntarily is advantageous for the taxpayers.

If you wish to discuss the impact of these rules on your particular situation, please give us a call.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are very much appreciated. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.