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Tax Tip of the Week | New Tough Tax Rules for Business Losses March 4, 2020

Posted by bradstreetblogger in : 2019 Taxes, Business consulting, Deductions, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip, Taxes, Uncategorized , add a comment

March 4, 2020

Some businesses are very profitable, others are not – many businesses exist somewhere in the middle. Until recently, a Net Operating Loss (NOL) could be carried back two (2) years and the remainder forward for twenty (20) years (all within various limitations). Things have changed. For the vast majority of businesses, NOLs may only be carried forward without a sunset provision. BUT and there always is a BUT with the tax law – NOLs may not exceed certain amounts and percentages.  This is explained in greater detail below:
                                -Mark Bradstreet

Okay, you’re not in business to lose money but it can happen from time to time. The tax law has new rules in store for you when it comes to writing off business losses in 2018 and beyond. These rules make it more difficult to use losses to save taxes.

Net operating loss

Essentially, a net operating loss arises when the amount of a current business loss is greater than what can be used in the current year (i.e., greater than taxable income), and it becomes a net operating loss (NOL). (Technical rules apply to make an NOL more complicated than this.)

When and how the NOL is used has been changed by the Tax Cuts and Jobs Act.

•    NOLs arising prior to 2018. Generally these NOLs can be carried back for 2 years (there are some special rules for certain situations and an option to waive the carry-back) and forward for up to 20 years. The NOLs can offset up to 100% of taxable income.
•    NOLs arising in 2018 and beyond. No carry-back is allowed (other than for certain farming losses and losses of property and casualty insurance companies), but there’s an unlimited carry-forward. However, the NOL can only offset up to 80% of taxable income.

Record-keeping. If you have a carry-forward of a pre-2018 NOL, be sure to keep track of it separately from newer ones so you can use it as a 100% offset going forward. NOLs are taken into account in the order in which they are generated, so that old NOLs are used before newer ones. This rule hasn’t changed.

Non-corporate excess business losses

If you own a pass-through entity—sole proprietorship, partnership, S corporation, or limited liability company—the rules for writing off your losses have changed dramatically. Until now, if you had $1 million in revenue and $1.6 million in expenses, the $600,000 loss passed through to you would be deductible on your return (limited by your basis in the business).

Now there’s an important change in the treatment of losses. Instead of being currently deductible, excess business losses are characterized as net operating losses that must be carried forward.

What is a non-corporate excess business loss?This is the excess of business deductions for the year over the sum of (1) gross income or gain from the business, plus (2) $250,000 for singles or $500,000 for joint filers (with these dollar amounts adjusted for inflation after 2018).

So continuing the example I started earlier, under the new loss limit, instead deducting $600,000 in 2018, assuming you’re single, you’d only be able to write off $350,000 ($1.6 million – [$1 million + $250,000]). The balance of the loss–$250,000—is treated as a net operating loss that becomes deductible in 2019 to the extent permissible (explained earlier).

For owners of partnerships and S corporations, the limit is applied at the owner level, based on the owner’s distributive share of business income and expenses.

The excess business loss limit applies after applying the passive activity loss limit. The excess business loss limit is effective from 2018 through 2025.

Conclusion

To sum it up, when you’re doing well, the government is your partner by sharing in your good fortune via taxes. But when you aren’t doing well, the government doesn’t want to know you anymore. The Tax Cuts and Jobs Act rewards profitable businesses by lowering the taxes to be paid on profits. But this same law essentially penalizes unprofitable businesses by imposing limits on utilizing losses. In the past, for example, if you had an NOL, you could carry it back to generate an immediate cash refund that could be ploughed into the business. In effect, a loss could be turned into a gain. No longer.

Perhaps the lesson here is: Be profitable. Take the steps you need to ensure this—cut expenses, raise prices, etc. And work with your tax advisor to see what other measures can be used to keep you in the black.

Credit given to – Barbara Weltman

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. 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.  

Today’s author – Mark Bradstreet

– until next week.

Tax Tip of the Week | Rental Property Deduction Checklist for Landlords January 8, 2020

Posted by bradstreetblogger in : Business Consulting, Deductions, Depreciation options, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes , 1 comment so far

A business tax deduction is typically of more value than a personal tax deduction. Personal tax deductions are commonly in the form of itemized deductions. These may be of no value though if the standard deduction exceeds the so-called long form (itemized) deductions.

The following article by G. Brian Davis discusses business tax deductions specific to rentals. As an addition to his article, I will add that rental losses, if deductible on your federal income tax return, are also deductible on the State of Ohio and School District income tax returns. Within income limitations, rental income is not taxed to Ohio but is taxed by municipalities and school districts.

One lofty goal in the tax world is converting what otherwise was a nondeductible personal expense into a tax deduction. The world of rentals provides such opportunities.

                                            -Mark Bradstreet

The billionaires of the world are not doctors or lawyers, they’re entrepreneurs. Specifically, they are people who started their own businesses, whether those businesses are online, brick and mortar, or real estate empires.

Starting and owning a business provides a long list of tax advantages, and real estate investments provide all the usual tax advantages plus some extras unique to real property. Every expense associated with rental properties – plus some just-on-paper expenses – are tax deductible.

However, tax laws change fast and that means it is imperative for all those who invest in real estate must educate themselves. So, before you jump into the rental property deductions checklist, make sure you’re up to speed on how the new tax law affects landlords’ tax returns.

The changes in the Tax Cuts and Jobs Act of 2017 (TCJA) impacted homeowners, real estate investors and landlords alike. Here’s an outline of what you need to know as a real estate owner, and when in doubt, hire a professional who knows accounting with a real estate investing focus. Ideally one who invests in real estate themselves.

Lower Income Tax Rates

From 2018 through 2025, rental property investors will benefit from generally lower income tax rates and other favorable changes to the tax brackets. The TCJA retains seven tax rate brackets, although six of the brackets’ rates are lower than before. In addition, the new tax law retains the existing tax rates for long-term capital gains.

No Self-Employment Taxes for Landlords

In many ways, landlords get the best of both worlds: the tax benefits of owning a business, without the downside of self-employment taxes.

Real estate flippers can sometimes fall under the “dealer” category, and find themselves subject to double FICA taxes. FICA taxes fund Social Security and Medicare, and cost both employees and employers 7.65% of all income paid. Self-employed people end up having to pay both sides of FICA taxes, at 15.3% of total income.

But the Tax Cuts and Jobs Act of 2017 ended up leaving landlords and their rental income free from any FICA taxes.

New Passive Income Loss Rule

If you have losses from “passive activities” such as owning rental properties, typically you can only deduct those losses to offset other passive income sources, such as other rental properties. For example, if you earn $10,000 from one rental property and have an $8,000 loss on another, you can offset your $10,000 income with the $8,000 loss, for a net taxable rental income of $2,000.

But if you have a net loss, that can’t be used as a deduction against your active income from your 9-5 job. You can carry it forward however, to offset future passive income earnings and rents.

Here’s how the TCJA changes matters: there’s a new $250,000 cap for single filers, $500,000 cap for married filers, for passive losses. Any passive losses that you’re allowed, in excess of those caps, must be carried forward to the next tax year.

It won’t affect most landlords, but it’s something to be aware of.

20 Tax Deductions for Landlords

Here are 20 rental property expenses you can deduct on your tax return, to keep more of your money in your pocket where it belongs. It’s not 100% exhaustive, as there are a few obscure tax deductions that only apply to a few landlords, but think of this as a rental property deductions checklist for the average landlord.

IMPORTANT: These rental property tax deductions are “above the line” deductions, meaning they come directly off your taxable income for rental properties. That means you can deduct these expenses, and still take the standard deduction.

1. Losses from Theft or Casualty
The TCJA suspended the itemized deduction for personal casualty and theft losses for 2018 through 2025. Before 2018 deductions of this kind were permitted when they exceeded $100. But landlords can still deduct losses from theft or damage to their rental properties, as business expenses.

2. Property Depreciation
This is a handy “paper expense.” Much of the cost of buying your property can be written off as a tax deduction, although it must be spread over 27.5 years (don’t ask me where that number came from). Buildings lose value as they age (at least theoretically), so the IRS lets you deduct 1/27.5 of the property’s cost each year.

Major property upgrades and “capital improvements” must be depreciated as well, rather than deducted in the year you make them. For example, a new roof is a capital improvement that must be depreciated, rather than deducted all at once.

But the patching of a roof leak? That’s a repair.

3. Repairs & Maintenance
Basic repairs and maintenance such as new paint and new carpets are deductible for your rental properties. That’s not the case for your primary residence, in which repairs are not deductible. Remember, if it’s a large improvement or replacement (like the roof example), it may count as a “capital improvement,” in which case you’ll have to spread the deduction over multiple years, in the form of depreciation.

The line isn’t always crystal clear however, like the roof example above. Here’s an example of how it gets blurry: if you replace all your windows to modernize and improve your energy efficiency, it’s a capital improvement. If a baseball goes through one window, which you replace, it’s a repair. But what if you replaced a few windows last year, but not all? Talk to an accountant, and build a defensible argument for any repairs you deduct.

4. Segmented Depreciation
Some improvements, such as landscaping and “personal property” inside the rental/investment property (e.g. refrigerators) can be depreciated faster than the building itself. It’s more paperwork, to segment the depreciation of certain improvements as separate from the building’s depreciation, but it means a lower tax bill right now, not in the far distant, unknowable future.

5. Utilities
Do you pay for gas, heating, trash removal, sewer or any other utility for your rental? They are tax deductible.

Take heed however, if your tenant reimburses you for a utility, that would be considered income. So, you have to declare both the income and the expense, even though they offset each other.

6. Home Office
This is a popular deduction, but it’s also one you need to be careful about, as it can trigger audits. You have to set aside a percentage of your home for only doing work/business/real estate investing-related activities, and that percentage of your housing bill can be deducted. And 2018 may see this deduction scrutinized even more.

One new downer: no more home office deduction for those who work for others in the comfort of their home. But as a real estate investor, you’re a business owner, so you can still claim it if you use the space exclusively for “business.”

Make sure and talk to an accountant about this, and keep the percentage realistic.

7. Real Estate-Related Travel
Another popular-but-dangerous deduction, you can deduct travel expenses if your travel was for your real estate investing business… and you can prove it. Many people get cute with this one, and when they go on vacation, they’ll go see one or two “potential investment” properties and then write the entire trip off as a business expense.

Whenever you plan on deducting travel expenses, put together as much documentation as you possibly can so that you can make a strong case that it was an actual business trip. For example, meet with a real estate agent in the area, and keep all of your email correspondence with them. Keep all listing information and investment calculations for any properties you visit. Track your mileage for all driving done to and from rental properties.

C-Y-A!

8. Closing Costs
Many closing costs are tax deductible, and others can be depreciated over time as part of your acquisition cost. Use an accountant with a deep knowledge of real estate investments, and send them the HUD-1 (settlement statement) for each property you bought last year.

9. Mortgage Insurance (PMI/MIP)
No one likes mortgage insurance (other than banks). At least you can deduct the cost from your taxable rental property income.

10. Property Management Fees
Paid a property manager to handle the headaches for you and field those dreaded 3 AM phone calls from tenants? You can write off their management fees, including both monthly fees and tenant placement fees.

11. Rental Property Insurance/Landlord Insurance
Like homeowner’s insurance for your primary residence, your landlord insurance premium for each property is also tax deductible.

12. Mortgage Interest
All interest you pay to your mortgage lender on rental property loans remains tax deductible. As mentioned above, it’s an “above the line” deduction that simply comes off of your taxable rental property income.

But for your primary residence, 2018 limits the deductibility of mortgage interest only up to $750,000 of home mortgage debt.

13. Accounting, Legal & Other Professional Fees
All professional fees associated with your rental properties are tax deductible. Bookkeeping, accounting, attorney, real estate agent and any other fees you pay out for professional services can be deducted from your taxable income. Don’t forget the cost of any bookkeeping or landlord software (ahem!) you use.

One wrinkle introduced by the TCJA however is that personal tax preparation expenses are no longer deductible from 2018 onward. But business accounting – such as for your real estate LLC or S-corp – is still deductible as a rental business expense for landlords. Talk to your accountant about shifting as many of your tax preparation expenses as possible to the “business” side of the books!

14. Tenant Screening
If you paid for tenant credit reports, criminal background checks, identity verifications, eviction history reports, employment and income verification or housing history verification, those fees are deductible.

Even better, have the applicant pay directly for tenant screening report costs. Which, I might add, our landlord software allows you to do!

15. Legal Forms
Bought a state-specific lease agreement this year? Eviction notices? Property management contracts? The cost of legal forms is also deductible.

16. Property Taxes
Under the Tax Cuts and Jobs Act of 2017, landlords can still deduct rental property taxes as an expense.

But it’s a little more complicated for homeowners, and even though this is a list of landlord tax deductions, let’s take a moment to review the changes for homeowners, shall we?

In 2018, you can no longer deduct for state and local taxes in excess of $10,000. These state taxes include things like: state and local income tax, sales taxes, personal property tax, and… property taxes.

What does this mean for high-tax states like New York, New Jersey or Connecticut? Well, it could mean that more people may relocate to lower-tax states like Florida, and may even spark lower property values in states such as New Jersey. Only time will tell.

17. Phones, Tablets, Computers, Phone Service, Internet
Bought a new phone this year? Maybe a new laptop or tablet? If you use it for work, you can probably persuade your accountant (and the IRS) that the costs should be deducted from your taxable income. Likewise, for internet bills, phone service charges and the like, with the caveat that you need to be able to document that it was for business purposes. Printer toner, computer paper, pens, and the like; keep those receipts.

18. Licensing Fees
Licensing and registration fees are sometimes a local requirement for rental properties. For instance, in the city of Philadelphia, a rental license fee is required along with an inspection of the property.

So, if you’ve had to purchase or renew a landlord or rental license for the property, that cost is deductible.

Furthermore, some localities will require a vacation rental license for short term rentals such as seasonal, AirBnB and the like. These licensing costs are deductible as well.

19. Occupancy Tax
There are states that assess an occupancy tax on collected rental amounts, comparable to paying sales tax. This is more of a common practice in states where short-term rentals are common. Florida, Arizona and New Jersey are examples of states that charge an occupancy or tourist tax.

If you own rental property in an area that charges an occupancy-like tax, then the amount is tax deductible. Remember, however, that the tax will not only differ from state to state but also from local jurisdictions like cities and counties.

20. Business Entity Pass-Through Deduction
There are significant changes in 2018 tax regulations on how legal entities (e.g. LLCs) and pass-throughs and the like are going to be treated. Sole Proprietorship, Partnership, and Corporate Entities are now entitled to a “pass-through” deduction as long as the rental activities meet the requirements for business tax purposes.

The short version is that landlords can deduct 20% of their rental business income from their taxable business income amount. For example, if you own a rental property that netted you $10,000 last year, the pass-through deduction reduces your taxable rental business income from $10,000 to $8,000. Pretty sweet, eh?

There are restrictions, of course. The deduction phases out for single tax payers with adjusted gross incomes over $157,500, and married taxpayers earning over $315,000. Although under some conditions, higher-earning landlords can still take advantage of the pass-through deduction – definitely discuss with your accountant.

One more reason, beyond asset protection, to own rental properties under a legal entity!

Final Word

It’s hard to get ahead if 50% of your income is going to taxes (which it probably is, if you add up everything you pay in sales tax, property tax, federal income tax, state income tax, local income tax and FICA taxes). But by being savvier with your documentation and deductions, landlords and real estate investors can pay less in taxes than other people, and truly realize the advantages of entrepreneurship.

Remember to always document every expense you plan to deduct. That means keeping receipts, invoices and bills throughout the year as expenses pop up; to help with this, keep a separate checking account for your real estate expenses if you don’t already. Never swipe that debit card or write a check from that account without first getting documentation!

Credit Given to:  G. Brian Davis

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. 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 | The Most Common Tax Forms for the New Year January 1, 2020

Posted by bradstreetblogger in : Business consulting, Business Consulting, Deductions, General, Tax Planning Tips, Tax Preparation, Uncategorized , add a comment

Happy New Year!

Now it’s time to get ready for the tax filing season.

Hopefully, you followed some of the suggestions outlined in Publication 552 to organize your records. If you did, great! This will make filing your tax returns a lot easier this year. It also means that you and your tax advisor can spend more time on tax and financial planning issues for 2020 vs. looking back to 2019. 

This week we will look at some of the more common forms that you should be watching for in the coming weeks and months:

W-2:    Employers should mail these by 1/31/20. If you have moved during the year, make sure former employers are aware of your new address. Some employers provide W-2’s to their employees via a website. Be sure to login and print out your W-2 after it is available.

W-2G:    Casinos, Lottery Commissions and other gambling entities should mail these by 1/31/20 if you have gambling winnings above a certain threshold. Note:  Some casinos will issue you a W-2G at the time you win a jackpot. Make sure you have saved those throughout the year.

1098-C:    You might receive this form if you made contributions of motor vehicles, boats, or airplanes to a qualified charitable organization. A donee organization must file a separate Form 1098-C with the IRS for each contribution of a qualified vehicle that has a claimed value of more than $500. All filers of this form may truncate a donor’s identification number (social security number, individual taxpayer identification number, adoption taxpayer identification number, or employer identification number), on written acknowledgements. Truncation is not allowed, however, on any documents the filer files with the IRS.

1099-MISC:   This form reports the total paid during the year to a single person or entity for services provided. Certain Medicaid waiver payments may be excludable from the income as difficulty of care payments.  A new check box was added to this form to identify a foreign financial institution filing this form to satisfy its Chapter 4 reporting requirement.

1099-INT:    This form is used to report interest income paid by banks and other financial institutions. Box 13 was added to report bond premium on tax-exempt bonds. All later boxes were renumbered. A new check box was added to this form to identify a foreign financial institution filing this form to satisfy its Chapter 4 reporting requirement.

1099-DIV:    This form is issued to those who have received dividends from stocks. A new check box was added to this form to identify a foreign financial institution filing this form to satisfy its Chapter 4 reporting requirement.

1099-B:     This form is issued by a broker or barter exchange that summarizes the proceeds of sales transactions. For a sale of a debt instrument that is a wash sale and has accrued market discount, a code “W” should be displayed in box 1f and the amount of the wash sale loss disallowed in box 1g.

1099-K:    This form is given to those merchants accepting payment card transactions. Completion of box 1b (Card Not Present transactions) is now mandatory.

K-1s:    If you are a partner, member or shareholder in a partnership or S corporation, your income and expenses will be reported to you on a K-1. The tax returns for these entities are not due until 3/16/20 (if they have a calendar-year accounting). Sometimes, you may not receive a K-1 until shortly after the entity’s tax return is filed in March.

If you are a beneficiary of an estate or trust, your share of the income and expenses for the year will also be reported on a K-1. These returns will be due 4/15/20 so you might not receive your K-1 before the due date of your Form 1040.

NOTE:  Many times corporations, partnerships, estates and trusts will put their tax returns on extension. If they do, the due date of the return is not until 9/15/20 or later. We often see clients receiving K-1s in the third week of September.

If you receive, or expect to receive, a K-1 it is best if you place your personal return on extension. It is a lot easier to extend your return than it is to amend your return after receiving a K-1 later in the year.

1098:    This form is sent by banks or other lenders to provide the amount of mortgage interest paid on mortgage loans. The form might also show real estate taxes paid and other useful information related to the loan.

1098-T:    This form is provided by educational institutions and shows the amounts paid or billed for tuition, scholarships received, and other educational information. These amounts are needed to calculate educational credits that may be taken on your returns.

So start watching your mailbox and put all of these statements you receive in that new file you created!

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 | Your 2019 Guide to Tax Deductions December 11, 2019

Posted by bradstreetblogger in : Business Consulting, Deductions, Depreciation options, General, tax changes, Tax Deadlines, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes , add a comment

Practically all of the significant federal tax law changes were first effective on your 2018 federal income tax return. Many of these changes are still in place for your 2019 income tax return. Apparently, the media believes these changes to be old news; and, therefore, are not giving it any press coverage. But, the impact of these changes were so far-reaching, a refresher for all of us should be in order.

                               -Mark Bradstreet

Here are all of the tax deductions still available to American households and the requirements for claiming each one.

The Tax Cuts and Jobs Act was the biggest overhaul to the U.S. tax code in decades, and it made some significant changes to the tax deductions that are available. Many tax deductions were kept intact, but others were modified, and some were eliminated entirely.

There are also several different types of tax deductions, and these can get a bit confusing. For example, some tax deductions are only available if you choose to itemize deductions, while others can be taken even if you opt for the standard deduction. With all that in mind, here’s a rundown of what Americans need to know about tax deductions as the 2019 tax filing season opens.

What is a tax deduction?

The term “tax deduction” simply refers to any item that can reduce your taxable income. For example, if you pay $2,000 in tax-deductible student loan interest, this means your taxable income will be reduced by $2,000 for the year in which you paid the interest.

There are several different types of tax deductions. The standard deduction is one that every American household is entitled to, regardless of their expenses during the year. Taxpayers can claim itemizable deductions instead of the standard deduction if it benefits them to do so. Above-the-line deductions, which are also known as adjustments to income, can be used by households regardless of whether they itemize or not. And finally, there are a few other items that don’t really fit into one of these categories but are still tax deductions.

The standard deduction
When filling out their tax returns, American households can choose to itemize certain deductions (we’ll get to those in a bit), or they can take the standard deduction — whichever is more beneficial to them.

The Tax Cuts and Jobs Act nearly doubled the standard deduction. Before the increase, about 70% of U.S. households used the standard deduction, but now it is estimated that roughly 95% of households will use it. For the 2018 and 2019 tax years, here are the standard deduction amounts.

Tax Filing Status2018 Standard Deduction2019 Standard Deduction
Married Filing Jointly$24,000$24,400
Head of Household$18,000$18,350
Single$12,000$12,200
Married Filing Separately$12,000$12,200

DATA SOURCE: IRS.

To be perfectly clear, unless your itemizable deductions exceed the standard deduction amount for your filing status, you’ll be better off using the standard deduction.

Itemized deductions

The alternative to taking the standard deduction is choosing to itemize deductions. Itemizing means deducting each and every deductible expense you incurred during the tax year.

For this to be worthwhile, your itemizable deductions must be greater than the standard deduction to which you are entitled. For the vast majority of taxpayers, itemizing will not be worth it for the 2018 and 2019 tax years. Not only did the standard deduction nearly double, but several formerly itemizable tax deductions were eliminated entirely, and others have become more restricted than they were before.

With that in mind, here are the itemizable tax deductions you may be able to take advantage of when you prepare your tax return in 2019.

Mortgage interest

The mortgage interest deduction is among the tax deductions that still exist after the passage of the Tax Cuts and Jobs Act, but for many taxpayers it won’t be quite as valuable as it used to be.

Specifically, homeowners are allowed to deduct the interest they pay on as much as $750,000 of qualified personal residence debt on a first and/or second home. This has been reduced from the former limit of $1 million in mortgage principal plus up to $100,000 in home equity debt.

On that note, the deduction for interest on home equity debt has technically been eliminated for the 2018 tax year and beyond. However, if the home equity loan was used to substantially improve the home, the debt is considered a qualified residence loan and can therefore be included in the $750,000 cap.

Charitable contributions

This is perhaps the least changed of the major tax deductions. Contributions to qualified charitable organizations are still deductible for tax purposes, and in fact the deduction has become a bit more generous for the ultra-charitable. U.S. taxpayers can now deduct charitable donations of as much as 60% of their adjusted gross income (AGI), up from 50% of AGI.

One negative change to note: If you donate to a college in exchange for the ability to buy athletic tickets, that is no longer considered a charitable donation for tax purposes.

Medical expenses

The IRS allows taxpayers to deduct qualified medical expenses above a certain percentage of their adjusted gross income. The Tax Cuts and Jobs Act reduced this threshold from 10% of AGI to 7.5%, but only for the 2017 and 2018 tax years. So, when you file your 2018 tax return this year, you can deduct qualified medical expenses exceeding 7.5% of your AGI. For example, say your AGI is $50,000, and you incur $5,000 in qualified medical expenses. The threshold you need to cross before you can start deducting those expenses is 7.5% of $50,000, or $3,750. Your expenses are $1,250 above the threshold, so that’s the amount you can deduct from your taxable income.

However, the medical deduction threshold is set to return to 10% of AGI starting with the 2019 tax year. So, when you file your 2019 tax return in 2020, you’ll use this higher percentage to determine whether you qualify for the deduction.

State income tax or state sales tax

The IRS gives taxpayers the choice to claim either their state and local income tax or their state and local sales tax as an itemized deduction. Naturally, if your state doesn’t have an income tax, the sales tax deduction is the way to go. On the other hand, if your state does have an income tax, then deducting that will generally save you more money than deducting sales tax.

One quick note: If you choose the sales tax deduction, you don’t necessarily need to save each and every receipt to document how much sales tax you’ve paid. The IRS provides a handy calculator you can use to easily determine your sales tax deduction.

Property taxes

If you pay property tax on a home, car, boat, airplane, or other personal property, you can count it toward your itemized deductions. This deduction and the deduction for income or sales tax are collectively known as the SALT deduction — that is, the “state and local taxes” deduction.

There’s one major caveat when it comes to the SALT deduction. The Tax Cuts and Jobs Act limits the total amount of state and local taxes you can deduct — including property taxes and sales/income tax — to $10,000 per year. So if you live in a high-tax state or simply own some valuable property that you pay tax on, this could significantly limit your ability to deduct these expenses.

The bottom line on itemizable deductions

That wraps up the major itemizable deductions that are still available under the newly revised U.S. tax code. As you can see, there aren’t many of them, and some of those that remain — such as the medical expense and SALT deductions — are quite limited.

For itemizing to be worth your while, you need some combination of these deductions to exceed your standard deduction. It’s easy to see why most taxpayers won’t itemize going forward.

As a personal example, my wife and I have traditionally itemized our deductions. However, in 2018 we’ll have about $9,000 in deductible mortgage interest, a few thousand dollars in charitable contributions, and about $6,000 in state and local taxes, including property taxes. In previous years, this would have made itemizing well worth it, but it looks like we’ll be using the standard deduction when we file our return in 2019.

Above-the-line tax deductions

While you need to itemize deductions to take advantage of the deductions I discussed in the previous section, there are quite a few tax deductions that you can use regardless of whether you itemize or take the standard deduction.

These are known as adjustments to income and are more commonly referred to as above-the-line tax deductions. And with a few exceptions, most of these survived the recent tax reform unscathed. Here are the above-the-line deductions you may be able to take advantage of in 2019.

Tax-deferred retirement contributions

If you contribute to any tax-deferred retirement accounts, you can generally deduct the contributions from your taxable income, even if you don’t itemize. This includes:

Contributions to a qualified retirement plan such as a traditional 401(k) or 403(b). For 2018, the maximum elective deferral by an employee is $18,500, and for the 2019 tax year this is increasing to $19,000. If you’re 50 or older, these limits are raised by $6,000 each year.

Contributions to a traditional IRA. The IRA contribution limit is $5,500 for the 2018 tax year and $6,000 for 2019, with an additional $1,000 catch-up contribution allowed if you’re 50 or older. However, it’s important to point out that if you or your spouse is covered by a retirement plan at work, your ability to take the traditional IRA deduction is income-restricted.

If you are self-employed, your contributions to a SEP-IRA, SIMPLE IRA, or Solo 401(k) are generally deductible, unless they are made on an after-tax (Roth) basis.

Health savings account (HSA) and flexible spending account (FSA) contributions

If you contribute to a tax-advantaged healthcare savings account (HSA), your contributions are tax-deductible up to the IRS’s contribution limits. The 2018 contribution limit is $3,450 for those with single healthcare policies or $6,900 those with family coverage. In 2019, these limits will increase to $3,500 and $7,000, respectively. There’s also a $1,000 catch-up allowance if you’re 55 or older.

An HSA has many unique features. Most importantly, you can withdraw your HSA funds tax-free from your account at any time to cover qualifying medical expenses. That means you can get a tax break on both your contribution and your withdrawal — a perk that no IRA or 401(k) offers. Once you turn 65, you can withdraw money for non-healthcare purposes for any reason without paying a penalty — though you’ll have to pay income tax on withdrawals that don’t go toward qualifying medical expenses. Additionally, unlike a flexible spending account (more on this below), an HSA allows you to carry over and invest your money year after year.

You can participate in an HSA if all of the following apply:

You’re covered by a high-deductible health plan (HDHP)

You’re not covered by another health plan that is not an HDHP

You’re not enrolled in Medicare

You’re not claimed as a dependent on someone else’s tax return

If you don’t qualify for an HSA, you may still be able to contribute to a flexible spending account, or FSA. The FSA contribution limit is $2,650 in 2018 and $2,700 in 2019. While FSAs aren’t quite as beneficial as HSAs, they can still shelter a good amount of your income from taxation. Beware that you can only roll over up to $500 in leftover funds to the following year, so for the most part, FSAs are “use it or lose it” accounts.

Dependent care FSA contributions

There’s another type of flexible spending account that’s designed to help families pay for child care expenses. Married couples filing jointly can set aside as much as $5,000 per year on a pre-tax basis, and single filers can set aside as much as $2,500 to be spent on qualifying dependent care expenses.

Note that you can’t use a dependent care FSA and the popular Child and Dependent Care tax credit for the same expenses. However, with child care expenses running well into the five-figure range in many parts of the country, it’s fair to say that many parents should be able to take advantage of both child care tax breaks.

Teacher classroom expenses

If you’re a full-time K-12 teacher and have paid for any classroom expenses out of pocket, you can deduct up to $250 of those expenses as an above-the-line tax deduction. Potential qualifying expenses could include classroom supplies, books you use in teaching, and software you purchase and use in your classroom, just to name a few.

Student loan interest

The IRS allows taxpayers to take an above-the-line deduction for up to $2,500 in qualifying student loan interest per year. To qualify, you must be legally obligated to pay the interest on the loan — essentially this means the loan is in your name. You also cannot be claimed as a dependent on someone else’s tax return, and if you choose the “married filing separately” status, it will disqualify you from using this deduction.

One important thing to know: Your lender will only send you a tax form (Form 1098-E) if you paid more than $600 in student loan interest throughout the year. If you paid less than this amount, you are still eligible for the deduction, but you’ll need to log into your loan servicer’s website to get the required information.

Half of the self-employment tax

There are some excellent tax benefits available to self-employed individuals (we’ll discuss some in the next section), but one downside is the self-employment tax.

If you’re an employee, you pay half of the tax for Social Security and Medicare, while your employer pays the other half. Unfortunately, if you’re self-employed, you have to pay both sides of these taxes, which is collectively known as the self-employment tax.

One silver lining is that you can deduct one-half of the self-employment tax as an above-the-line deduction. While this doesn’t completely offset the additional burden of paying the tax, it certainly helps to lessen the sting.

Home office deduction

If you use a portion of your home exclusively for business, you may be able to take the home office deduction for expenses related to its use. The IRS has two main requirements you need to meet. First, the space you claim as your office must be used regularly and exclusively for business. In other words, if you regularly set up your laptop in your living room where you also watch TV every night, you shouldn’t claim a home office deduction for the space.

Second, the space you claim must be the principal place you conduct business. Generally, this means you’re self-employed, but there are some circumstances in which the IRS allows employees to take the home office deduction as well.

There are two ways to calculate the deduction. The simplified method allows you to deduct $5 per square foot, up to a maximum of 300 square feet of dedicated office space. The more complicated method involves deducting the actual expenses of operating in that space, such as the proportion of your housing payment and utility expenses that are represented by the space, as well as expenses relating to the maintenance of your home office. You are free to use whichever method is more beneficial to you.

Other tax deductions

In addition to the itemizable and above-the-line deductions I’ve discussed, there are a few tax deductions that deserve separate mention, because they generally apply only if you have specific types of income.

Investment losses: If you sold any investments at a loss, you can use these losses to offset any capital gains income that you have. Short-term losses must first be used to offset short-term gains, while long-term losses must first be applied to long-term gains. And if your investment losses exceed your gains for the year, you can use up to $3,000 in remaining net losses to reduce your other taxable income for the year. If there are still losses remaining, you can carry them forward to future years.

Pass-through income: This deduction is a product of the Tax Cuts and Jobs Act and is designed to help small-business owners save money. U.S. taxpayers can now use as much as 20% of their pass-through income as a deduction. This includes income from an LLC, S-Corporation, or sole proprietorship, as well as partnership income and income from rental real estate, just to name some of the potential sources. The deduction is not available to certain taxpayers whose income comes from “specified service businesses” (more details here) and exceeds certain thresholds.

Gambling losses: You can deduct gambling losses on your taxes, but only to the extent that you have gambling winnings. In other words, if none of your income came from gambling, you can’t deduct the $500 you lost on your last trip to Las Vegas.

Other self-employed deductions: Finally, if you’re self-employed, there are a ton of business deductions you may be able to take advantage of. You can deduct business-related travel expenses, office supplies and equipment, and health insurance premiums from your self-employment income, just to name a few potential deductions. And don’t forget about the special retirement accounts for the self-employed that we covered earlier.

Credit Given to:  Matthew Frankel, CFP

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. 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 | Make These 2019 Tax Moves Now – Before It’s Too Late December 4, 2019

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

Although it has been two (2) years now since the sweeping tax law changes of 2017, many taxpayers are still missing out on many of the new available tax planning opportunities. Eleven (11) such tax savings strategies follow as outlined in the following article by Laura Saunders in the WSJ weekend edition of November 2-3, 2019. I will put my own “spin” on some of the bigger opportunities that many business owners are either unaware of or not optimizing.

(1)  Some of the higher deduction retirement plans MUST be set up by year end (December 31, 2019). Too often, I will meet with a taxpayer dropping off their tax detail who mentions their desire of contributing to a Solo 401(k) plan or a profit-sharing plan, etc. Sure, that is fine ONLY IF the plan was established prior to year-end even though the plan contributions are made the following year.

(2)  We see many retired taxpayers who may have low or negative taxable income after their standard or itemized deductions BUT have mega bucks in retirement accounts.  In these situations, a retirement plan distribution could have been taken federally tax free up to the amount of negative taxable income (provided they are over 59 ½). We meet with many retirees to make this calculation near the end of each year.

(3)  Too many taxpayers make conventional charitable contributions ignoring the better options of using IRAs or appreciated stock. These options create an opportunity of potentially “doubling” the tax value of this conventional tax deduction by deducting the full market value without the appreciation ever being taxed. This is truly the best of both worlds which is rare indeed in the tax world.

(4)  Maximizing the 199A pass-through deduction aka the 20% business income deduction or QBID. Many of the factors in this calculation may be optimized to maximize this deduction e.g. salaries and guaranteed payments.  

The article by Ms. Saunders follows.

                           –    Mark Bradstreet

It’s Year Two following the massive tax overhaul of 2017. For Americans who are still getting used to the new rules, it’s important to sort things out before the year ends.

“People are confused about their withholding and refunds, and whether they need to save receipts to prove itemized deductions—plus other things,” says Terry Durkin, an enrolled agent in Burlington, Mass., who prepares over 300 tax returns a year.

Most filers must pay 90% of their income and self-employment taxes by year-end or soon after, or else face penalties. The IRS forgave these penalties for many people for 2018, but it won’t for 2019.

There are few ways to cut a 2019 tax bill after Dec. 31, so now is the time to make moves that will lower your tax bill in April.

> Check your withholding. At the top of Ms. Durkin’s, and many tax advisers’, to-do list for clients: Check your withholding or estimated taxes. The overhaul, followed by automatic changes to paycheck withholding in 2018, brought bad refund surprises to many filers last spring.

As it turned out, overall refunds changed little. For both 2017 and 2018, about three-quarters of filers received refunds, which averaged $2,800. But these results conceal wide variations. For 13 million filers earning between $100,000 and $250,000, average 2018 refunds dropped 11% compared with 2017, according to mid-July data from the Internal Revenue Service.

This shift got the attention of the IRS, which has since improved its withholding calculator. Employees and retirees can use it to find out what they owe under Uncle Sam’s pay-as-you-earn system and then fine-tune their refunds. Taxpayers who aren’t employees need to use complex worksheets in IRS Publication 505 or talk to a tax preparer.

But the law contains a boon for many employees. Usually they won’t owe penalties if they increase their withholding late in the year—even if it’s for a spouse’s self-employment income, according to an IRS spokesman.

> Make your payments. Those with income not covered by employer-paycheck withholding must usually make quarterly payments based on earnings for each period to avoid penalties. Are you behind on payments? The sooner a mistake is corrected, the less damage it does.

> Assess itemized deductions. As a result of the 2017 overhaul, more than 25 million taxpayers have switched to claiming the standard deduction rather than itemizing write-offs on Schedule A. The share of returns with Schedule A has dropped to about 10% from about 30%.

For 2019, the standard deduction is $12,200 for single filers and $24,400 for married couples filing jointly.

The most common itemized deductions are for state and local taxes (SALT), charitable donations and mortgage interest. Now that Congress has limited the SALT deduction to $10,000 per return both for single and married joint filers, it’s often easier for singles than couples to benefit from itemizing.

For example, a married couple who deducts the limit of $10,000 of SALT needs more than $14,400 of other deductions to benefit from itemizing for 2019, because their standard deduction is $24,400. But a single filer who deducts $10,000 of SALT only needs other write-offs totaling more than $2,200, because his standard deduction is $12,200.

Filers taking the standard deduction don’t need to save receipts to prove their write-offs.

> Check deadlines for retirement-savings contributions. There are significant differences.

Savers eligible for traditional IRAs and Roth IRAs for 2019 can open and fund them up to April 15, 2020.

SEP IRAs, for taxpayers with self-employment income, often have higher contribution limits and longer deadlines. Many taxpayers can set up and fund SEP IRAs until Oct. 15, 2020, if they extend the due date of their 2019 return.

Solo 401(k) plans are also for self-employment earnings and have contribution limits higher than those for traditional or Roth IRAs. For 2019, taxpayers can fund a solo 401(k) until Oct. 15, 2020, if they extend their due date. But the plans must usually be set up by Dec. 31, 2019, even if contributions come later.

> Take required payouts from retirement plans. Savers must often begin taking annual payouts from tax-sheltered retirement plans when they turn 70½. Congress is considering raising the beginning date to age 72, but it hasn’t yet.

The payout deadline is Dec. 31, 2019, for most people, and the withdrawal is based on the account value as of the last day of 2018. However, savers taking their first required payout this year have until April 1, 2020. Think twice before doing this, because it means taking two withdrawals in one year and perhaps moving to a higher tax bracket.

Currently no annual payouts are required from Roth IRAs, except for heirs who aren’t spouses.

Required payouts from 401(k) plans are somewhat different, although the deadline for beginning withdrawals is often age 70½. But many still-working employees who are 70½ and older needn’t take required withdrawals from their firm’s 401(k) if the plan allows that.

Also remember that 401(k) payouts can’t be aggregated as IRA payouts can. For example, a saver with four traditional IRAs can take the total required withdrawal from just one IRA. But if required payouts are due from two 401(k)s, the saver must take the required amount from each one.

> Strategize charitable giving, including from IRAs. The higher standard deduction poses a hurdle for donors who want a tax break. One way around it is to bunch charitable gifts by combining several years’ donations into one larger amount every few years that—together with other write-offs on Schedule A—is larger than the standard-deduction amount.

Such givers should also consider donor-advised funds. These popular accounts enable charitably minded taxpayers to make one or more gifts and take a deduction. The donor can then designate charitable recipients later, and meanwhile the assets can be invested and grow tax-free.

Do think twice before writing a check to a charity. A better move is often to give appreciated investments held in taxable accounts, such as stock shares. The donor gets an immediate deduction for the full market value, within certain limits, while not owing capital-gains tax on the growth.

Donors with traditional IRAs who are 70½ or older have another good option: They can donate up to $100,000 of IRA assets directly to one or more charities and have the gifts count toward their required payouts. This move can help lower Medicare premiums.

> Evaluate capital gains and losses. Check up on your positions in taxable accounts.
Investors can use realized capital losses to offset realized capital gains plus $3,000 of ordinary income such as wages, every year. Unused losses can carry forward for future use.

Sometimes it makes sense to sell an underwater investment at a loss before the end of the year, or to take gains if you have realized losses.

Also beware of increases in investment income that could trigger a 3.8% surtax. This levy takes effect at $250,000 of adjusted gross income for most married couples filing jointly and at $200,000 for most single filers.

> Take care with cryptocurrency. The IRS is cracking down on cryptocurrency tax compliance, and tax preparers will follow suit on 2019 returns. Now is the time to get ready by taking gains to use up losses and losses to offset gains. This may mean getting records in order, but crypto investors only have until Dec. 31 to make moves for 2019.

> Make 529 college-savings contributions. There’s no federal deduction for contributions to 529 college-savings plans, although some states allow a deduction on their returns. Contributions to these accounts can grow tax-free, and withdrawals used to pay eligible college expenses are also tax-free. Contributions for 2019 must be often made by Dec. 31, although a few states allow them by the following April 15, according to Mark Kantrowitz, publisher of Savingforcollege.com.

> Review eligibility for the 199A pass-through deduction. The tax overhaul added a 20% deduction for the net income of many businesses that pass through profits and losses to their owners’ tax returns, including rental real estate. This benefit is often curtailed for owners whose incomes exceed certain limits.

In 2019, the limits are taxable income of $160,725 for single filers and $321,400 for married couples filing jointly.

Business owners whose incomes will exceed these limits can sometimes get below the threshold by making tax-deductible donations to charity or contributing more to tax-deductible retirement plans.

> Be aware of the so-called Kiddie Tax. It’s a levy on the “unearned” income of young people as old as 23, above an annual exemption currently set at $2,200.

The 2017 overhaul changed the Kiddie Tax rates and brackets so that children of lower- and middle-income families often owe more now than under the prior law, so plan accordingly.

Grandparents, for example, might want to give stock shares that will help pay college tuition to the parents of a grandchild, not to the grandchild.

> Remember extenders. Congress hasn’t extended dozens of provisions that expired in 2017, 2018 and 2019 but it may. Among them are breaks for tuition, medical expenses, taxes on mortgage-debt forgiveness, and energy efficiency investments.

Stay tuned for coverage if Congress manages to move forward on these provisions.

Credit Given to: Laura Saunders.  You can write to Laura Saunders at laura.saunders@wsj.com.

Corrections & Amplifications

Contributions for 2019 to 529 college-savings plans must often be made by Dec. 31, although a few states allow them as late as the following April 15. An earlier version of this article incorrectly stated the deadline was Dec. 31 for all states. (Nov. 1, 2019)

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. 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 | Should You Gift Land (or Anything Else) in 2019? November 20, 2019

Posted by bradstreetblogger in : Business consulting, Deductions, Depreciation options, General, tax changes, Tax Planning Tips, Tax Tip, Taxes , add a comment

Our current lifetime estate and gift exemption is currently $11.4 million per person (indexed for inflation) through 2025. In other words, you may gift or have an estate of that value without any gift or estate tax. And, your spouse also has the same $11.4 million exemption. So, each couple has a combined total exemption of $22.8 million per couple. This current lifetime exclusion has never been higher. But as the old saying goes – nothing is forever. The House has proposed a new bill to carve 2 years from the 2025 sunset provision. Some of the Presidential candidates propose ending this $11.4 million exemption even sooner than 2023 as proposed by the House.

Considering the current law, pending tax proposals and campaign trail promises, one may make a good argument, that 2019 may be as good of a year as ever to consider making a gift. Please remember that you may make an annual gift of up to $15 thousand a person(s) without it counting against your lifetime exclusion of $11.4 million and your spouse may likewise do the same.

                                     –    Mark Bradstreet

“Tax reform doubled the lifetime estate and gift exemption for 2018 through 2025. This means in 2019, you can gift during your lifetime or have assets in your estate of $11.4 million and not owe any estate or gift tax. Your spouse has the same amount. However, many states continue to assess an estate tax. Be sure to check on your state’s rules (Note: currently Ohio does not have an estate tax.)

This means farm couples worth $30 million or more won‘t owe any estate or gift tax. Discounts of around 30% (or more) reduce the value of land (or other assets) put into a limited liability company (LLC) or another type of entity. Gifts during your lifetime will shrink the amount subject to an estate tax.

Understand The Numbers

For example, mom and dad have farmland and other assets worth $30 million. They place the land into an LLC with a gross value of $20 million. This qualifies for a 35% discount ($7 million), dropping the estate valuation to $13 million. This drops their taxable estate to $23 million, which is about equal to their combined lifetime exemption amounts.

However, there is a chance the lifetime exemption will go back to the old numbers (or even less). The House has proposed a new bill that will make the exemption revert to the old law two years earlier. Some Presidential candidates propose making it even sooner or perhaps reducing it even lower (some would like to see it go to $3.5 million).

Let’s look at our previous example. If the exemption amount reverts to the old numbers, the heirs would face an estate tax liability of about $5 million. But if they make a gift of about $12 million now, no estate tax would be due.

Now might be the time to consider gifting some of your farmland to your kids, grandkids or into some type of trust. We normally like to have grain, equipment and other assets go through an estate so we can get a step-up in basis and a new deduction for the heirs.

However, farmland is not allowed to be depreciated. If it will be in the family for multiple generations, a step-up does not create any value anyway.

If your net worth is more than $10 million, now is a good time to discuss this with your estate tax planner. If you wait and the rules change, you could cost your heirs a lot of money.

Gifting Assets is Powerful

Remember you and your spouse can give $15,000 each year to as many people as you’d like in the form of gifts (not a total of $15,000 each year). This does not eat into your lifetime exemption. As a result, it is a smart strategy to take advantage of gifting each year.

For instance, if mom and dad have five kids, each married, they can give $150,000 total (including spouses, or children and spouses) without filing a gift tax return or eating into their lifetime exemption amount.

Credit is given to Paul Neiffer. This article was published in the Farm Journal article in September, 2019.  Paul gives some great examples and further commentary on this topic.  

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. 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 | Could You or Someone You Know Be Missing Out On Earned Income Credit? October 16, 2019

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

The Earned Income Tax Credit aka EIC is a benefit in the form of an income tax credit designed for working people with low to moderate income. To be eligible, one must meet certain requirements including filing an income tax return even if a tax return was not otherwise necessary to file. EIC is a refundable tax credit which means that a refund may be due you even if a tax liability did not exist. This credit may be as much as $6,431 so we can be talking about some real money. Although, the calculation is not complex, there are enough moving parts that estimating it short of preparing the income tax return is difficult. Many people miss out on this credit by not filing. Too often, a taxpayer looks at the tax return filing requirements and concludes filing a return is not necessary because their income is below the filing threshold. In many of these instances, the taxpayer may be walking away from a very significant refund.

The below Detroit Free Press article by Susan Tomporat was published on February 7, 2019. It provides additional information on the Earned Income Credit.

                                                     -Mark Bradstreet

The Earned Income Tax Credit is the biggest single check many working families see in a year. But they have to file a tax return — and be aware of the credit — to get the money.

Three years ago, low- to moderate-income households in Detroit left upwards of $80 million in unclaimed money by not claiming the credit. It was estimated that about 26,000 Detroit households were eligible for the credit but did not file tax returns to apply.

After a targeted awareness campaign that began in 2017, though, city officials say an average of 13,500 more Detroit residents each year have claimed their EITC. On average, $63 million more is being claimed each year. 

About $300 million has been claimed on average annually for the 2016 and 2017 tax years by Detroiters. The average EITC Refund: $4,600. The amounts represent a combination of state and federal earned income tax credits. 

Nearly 88,000 returns for Detroiters included the Earned Income Tax Credit. 

“It was a blessing to learn about this tax credit,” said Renee Perkins, 29, who works at MGM Grand Detroit at game tables dealing cards.

Perkins, a single mother with two children ages 7 and 1, expects to receive a tax refund of about $6,000 this year for state and federal taxes. It’s money she plans to save and use one day toward opening her own business offering assisted living to the elderly.

In the past, she has used the credit to pay down her debt and also put a down payment on a home once owned by the Detroit Land Bank.

“The extra cash helped me to accomplish a lot,” she said Tuesday as part of an awareness campaign event held at Focus: HOPE in Detroit.

Even so, the credit still remains overlooked by thousands of families. Here’s what you need to know:

Who qualifies to get the credit?

You must have earned income from a job and meet other requirements. For example, both your earned income and your adjusted gross income must be less than $45,802 in 2018 to qualify if you are single and have two qualifying children.

The limit is less than $51,492 for married couples filing a joint return with two qualifying children.

What’s the credit worth? 

The credit, for example, can be worth up to $6,431 this year for a working couple who qualifies with three or more children. 

But the size of the tax refund would vary considerably depending on your income, filing status and the number of qualifying children claimed on the tax return. 

To claim the credit, a tax return must be filed. 

The refundable tax credit enables tax filers to get back more from the federal government than you paid in taxes, so there’s a good chance for a significant refund. 

Nationwide, 25 million eligible workers and families received about $63 billion in the Earned Income Tax Credit during 2018. 

The average amount of EITC received nationwide was about $2,488.

Do you need a child to get the credit? 

No. But the income limits and the actual amount of the credit are significantly lower for those without children. 

The credit ranges from $2 to $519 for those with no qualifying children.

If you do not have children, your earned income and adjusted gross income must be less than $15,270 if you’re single to qualify for the credit. The limit is $20,950 for those who have no children and are married filing a joint return. 

Special EITC rules also apply for calculating the credit for those receiving disability benefits or have a qualifying child with a disability, members of the military, and ministers or members of the clergy. 

Why don’t people file for the credit?

Some don’t understand the credit. They might not have qualified in other years but may qualify now because their income has fallen. 

Some people think they just paid their taxes through payroll withholding and don’t need to file a return. They don’t understand how the complex credit can help get them more money.

Some people who don’t make a lot of money may not actually be required to file a federal income tax return. 

For some people, things could be more confusing this tax season. 

Under the new tax rules, the filing requirement thresholds have increased on 2018 returns somewhat because of the new standard deductions, according to Marshall Hunt, certified public accountant and director of tax policy for the Accounting Aid Society’s tax assistance program in metro Detroit.

“For example, as a general rule, a single person under 65 is required to file with gross income of $12,000 or more,” Hunt said.

“And for a married filing joint couple under 65 it’s $24,000.”

Last year, he noted, the amounts were $10,400 and $20,800. However, many should file in order to get a refund of money through credits such as the Earned Income Tax Credit even if they’re not required to file, Hunt said.

Returns can be amended for up to three years for any unclaimed benefits.

Families and individuals with incomes up to $55,000 may be eligible for the Accounting Aid Society’s free full service tax help. If so, the service offers to prepare and file your federal, state and local income tax returns, and to ensure you receive all of your federal and state Earned Income Tax Credits.

When do you receive a tax refund? 

Early filers may have to wait longer than expected, if they’re claiming the Earned Income Tax Credit or the Additional Child Tax Credit on a tax return.

The Protecting Americans from Tax Hikes Act, passed in 2015, mandated that the Internal Revenue Service cannot issue tax refunds that benefit from the Earned Income Tax Credit or the Additional Child Tax Credit before mid-February. The mid-February rule was put into place to combat tax refund fraud. 

This tax season, the IRS said people will have to wait until at least Feb. 27 for refunds with those credits to be available in their bank accounts or on their debit cards via direct deposit. That’s if there are no other issues with their tax return.

Credit given to: Susan Tomporat.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. 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 | How Divorce Affects Social Security Benefits?? October 2, 2019

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

Social Security Benefits experts are difficult to find. I am not one. We understand the calculations of Social Security and Self Employment taxes along with some areas (and entity choices) in which they may be minimized. But, the nuances of Social Security Benefits do not fall directly into our world of income taxes, accounting and business consulting.

Social Security Benefits are complicated and a divorce increases this level of complexity.  Practically 50% of USA marriages end in divorces. The following article explains some of these rules and also walks us through an example of a divorced couple.

                                     -Mark Bradstreet

Here’s how a divorce can affect your Social Security situation.

A whopping 91% of Americans over the age of 50 don’t understand what factors determine the amount they can potentially receive in Social Security benefits, a survey from the Nationwide Retirement Institute found.

There are several factors that can affect how much you receive in Social Security benefits, such as the age at which you claim benefits, whether you continue working after you claim benefits, and how much you earned during the years you paid into Social Security.

One factor that’s easy to overlook, however, is divorce. If you are currently divorced and were married for at least 10 years, you or your ex-spouse could be earning more in Social Security benefits than you think.

How divorce affects Social Security

Not all divorced couples are eligible to receive additional benefits once they start claiming Social Security, and there are certain requirements you’ll have to meet.

The first thing to consider is how your benefits compare to your ex-spouse’s. If you’re receiving more in Social Security benefits than your ex-spouse (or if you haven’t claimed yet but are expected to receive more than your ex-spouse), you’re not eligible for any additional money each month. But if you’re receiving less each month than your ex, you may be eligible for an increase in benefits based on your ex-spouse’s work record.

Assuming you’re receiving less than your ex-spouse in benefits, there are a few other requirements you’ll need to meet. First, you and your former spouse need to have been married for at least 10 years, and you cannot currently be married (although it doesn’t matter whether your ex-spouse has remarried or not). In order to start claiming benefits, you also need to be at least 62 years old.

If you and your ex-spouse are old enough to file for benefits but your ex hasn’t claimed them yet, you can still claim your benefits based on their work record if you have been divorced for at least two years. Also, if you’re eligible for benefits based on your own work record, that money will be paid out first. Then if you’re also eligible to receive extra benefits based on your ex-spouse’s record, you’ll receive an additional amount each month.

Exactly how much extra you’ll receive depends on the age at which you claim. In order to receive the full amount you’re entitled to, you’ll have to wait until your full retirement age (FRA) – which is either age 66, 67, or somewhere in between. If you claim before then (as early as age 62), your benefits will be reduced. By waiting until your FRA, assuming you’re eligible to receive benefits based on your ex-spouse’s record, you can receive half of the amount he or she is receiving in benefits.

One last thing to keep in mind is that regardless of how much someone is receiving in benefits based on their ex-spouses record, it doesn’t affect how much the other person or their current spouse receives in benefits. So, if, say, your ex-wife is receiving benefits based on your record, you and your current wife’s benefits will not be reduced as a result.

Social Security in action: A hypothetical example

Figuring out whether you can claim benefits based on an ex-spouse’s record and calculating what you’d actually receive is complicated and confusing. So, let’s look at a hypothetical example to make it a little easier to understand.

Let’s say you and your husband were married 20 years, and you never remarried after the divorce. Your FRA is 67 years old, and if you claim at that age, you’d be receiving $1,000 per month based on your own work record and earnings. Your ex-husband, however, is currently receiving $2,500 per month in benefits. Because you were married at least 10 years, you’re unmarried now, and you’re eligible to receive less in benefits than your ex-spouse, you can apply for benefits based on your ex-husband’s record.

For simplicity’s sake, let’s say you wait until your FRA to claim. By doing so, you’ll receive the full $1,000 you’re entitled to based on your own record. Based on your ex-husband’s work record, you’re eligible to receive half of what he’s receiving, or $1,250 per month. With ex-spouse benefits, you’re not allowed to “double dip” – meaning you won’t receive your $1,000 plus $1,250 based on your ex-husband’s record. Rather, you’ll receive your $1,000 and an additional $250 per month so that your total benefit amount is equal to half of what your ex-spouse is receiving in benefits.

Also, all the normal Social Security restrictions still apply here. So, if, for example, you claim earlier than your FRA, your benefits will be reduced. And if you continue working after claiming benefits, you may see a (temporary) reduction in benefits as well, depending on how much you’re earning.

Social Security benefits can seem complex, and there are many factors that contribute to how much you’ll receive each month. But by understanding how much you’re entitled to and whether you’re eligible for additional benefits, you can maximize your monthly checks – and enjoy a more financially stable retirement.

Credit given to:  Katie Brockman, The Motley Fool This was published on July 1, 2019

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. 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 | Should Uncle Sam Be A Consideration – When or If We Marry September 25, 2019

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Planning Tips, Tax Tip, Taxes , 1 comment so far

The new tax law passed in 2017 eliminated some of the so-called “marriage tax penalty.”  But, significant differences still exist when comparing the tax burden of a married couple versus two single taxpayers. One rule of thumb is when both spouses have about the same taxable income; their combined income tax is typically more than had they stayed single. When one spouse has significantly more taxable income than the other spouse then often their combined income tax is less than if they had stayed single. We often cringe when we see weddings near the end of the year. Often, had the couple waited just a few days until after the 1st of the year, significant tax dollars may have been saved. It is difficult explaining to a newly married couple who both received refunds as single taxpayers for the prior year but now have a tax liability as a married couple. Some things in the tax law just simply don’t make sense.

                                -Mark Bradstreet

More than two million American couples will get married this year. Many of them will pay more in taxes because they tied the knot.

The Republican tax overhaul passed in 2017 lowered the cost of being married for many couples. Even so, being married is often more expensive than being two single filers come tax time. If a couple has children and both spouses earn income, they can owe Uncle Sam thousands of dollars every year just for being married.

These marriage penalties, as they’re called, prompt some committed couples to leave the knot untied. Some even have big weddings but don’t marry legally.

While most couples choose to keep this decision private, one famous (well, famous for economists) couple has been pretty open about the decision.

Betsey Stevenson and Justin Wolfers, economists with international reputations at the Gerald R. Ford School of Public Policy at the University of Michigan, have been together for years. They are the parents of two children. But they aren’t married and say one reason is taxes.

Filing as two single people provides the couple with significant tax savings, according to Ms. Stevenson, though she declined to say how much.

By being public, the couple hopes to stimulate policy discussion.

A common complaint about the current tax structure is a difference between couples that have similar incomes and couples in which one partner earns much more. Under the law, a couple whose incomes are far apart often pay less if they’re married, while couples whose earnings are more evenly split often pay the same as or more than two singles.

“Any household where one earner is generating the same income that Justin and I generate together is better off than we are, because of the value of the stay-at-home spouse’s time,” says Ms. Stevenson. She has proposed a tax credit for the second-earning spouse.

Here’s how marriage bonuses and penalties work in practice, based on examples computed on the Tax Policy Center’s 2019 Marriage Calculator. It’s free and useful for what-if calculations.

Marriage Penalties

Many tax provisions penalize married joint filers because the benefit for them isn’t twice the amount that single filers receive.


Maximum deduction for student-loan interest       Single $2,500   Joint  $2,500 

Maximum capital losses deductible from ordinary income  Single  $3,000   Joint  $3,000

Maximum deduction for state and local taxes      Single  $10,000  Joint  $10,000

Traditional IRA deduction disallowance begins      Single  $64,000   Joint $103,000

Roth IRA contribution disallowance begins     Single  $122,000   Joint  $193,000

3.8% tax on net investment income begins     Single  $200,000  Joint  $250,000

Additional 0.9% Medicare tax on wages begins    Single  $200,000  Joint  $250,000

20% rate on certain capital gains and dividends begins  Single  $434,550  Joint  $488,850

37% rate on taxable income begins        Single  $510,300  Joint  $612,350

Mortgage debt eligible for interest deduction      Single  $750,000  Joint  $750,000

Say that two couples each have total income of $225,000 and no children or itemized deductions.

In the first couple, one partner earns $210,000 and one earns $15,000. If they marry, they’ll save about $8,400 compared with filing as two singles.

In the second couple, one partner earns $145,000 and the other earns $80,000. Being married will save them about $300 compared with filing as two singles.

Things change if each couple has two young children and typical deductions for mortgage interest, state taxes and charity. The couple with one high and one low earner has a marriage bonus, although it drops to about $3,200.

The second couple now has a big marriage penalty.

They owe about $4,000 more than they’d pay as two single filers—just for one year. Having a $50,000 capital-gain windfall would add nearly $1,000 to their penalty.

The reasons for these disparities are complex, says Roberton Williams, a tax economist at the University of Maryland.

He says that in a system that imposes higher rates as income rises, like America’s, it’s impossible to tax married couples based on their total income regardless of who earns it while also taxing married couples so they owe the same as two single people.

“The U.S. system creates marriage bonuses and penalties. Other countries avoid this by taxing married couples as two individuals,” Mr. Williams adds. Shifting to such a system could be difficult in the U.S., in part because of community-property laws in some states.

The tax code also has marriage penalties in specific provisions.

For example, singles can’t directly contribute the maximum amount to a Roth IRA for 2019 if they earn more than $122,000. For married couples the limit is $193,000—not $244,000.

The 2017 tax overhaul repealed some marriage penalties and broadened some tax brackets, helping many two-earner married couples. But it retained other marriage penalties and added more.

One is the new $10,000 limit on deductions for state and local taxes, or SALT. This limit is per return, so married joint filers who list deductions on Schedule A get only a $10,000 write-off, while two single filers living together get a $20,000 write-off.

Affluent married couples hoping to buy a home in expensive areas like San Francisco, Washington, D.C., or New York could also feel a pinch. The overhaul dropped the maximum mortgage debt that’s eligible for an interest deduction on new purchases to $750,000 from about $1 million, and the limit is per return.

So an unmarried couple can deduct interest on $1.5 million of mortgage debt, while the limit for a married couple is $750,000.

For couples contemplating marriage, estimating the tax cost can be hard.

One reason is that marriage penalties often vary over time. For example, a two-earner couple may not owe a penalty when they are first married. If they become a one-earner couple when they have children, they may get a marriage bonus.

If both spouses work and prosper, however, their penalty could grow.

Says Ms. Stevenson: “People tell me, ‘I didn’t mind paying more tax when we were first married, but now it’s enough to put a dent in college tuition.’”

Laws also change. Marriage penalties removed by the 2017 overhaul will return after 2025 if Congress doesn’t act.

Yet another complication is that the U.S. tax code provides marriage bonuses, even to couples who owe marriage penalties. For example, a spouse who inherits a traditional IRA or 401(k) account has better options than a non-spouse heir.

Unmarried couples face other costs and issues, of course. They may pay more for health coverage, and they have to prepare two tax returns. They’ll need to take special care with health proxies, powers of attorney and other legal documents giving them decision-making powers over each other and children.

Married couples who currently owe penalties have options for lowering them, but not many. One is to reduce reported  income where possible, say by contributing to tax-deductible retirement plans or spreading taxable capital gains over more than one year.

Also consider the “married, filing separately” status. This choice doesn’t allow couples to file as two singles, and it usually raises taxes. But sometimes it lowers them, as when one partner has a small business that qualifies for a 20% deduction if a higher-earning spouse’s income is excluded. It could also help if one partner has high medical expenses.

How about getting divorced? That’s a lot harder than getting married. And the Internal Revenue Service for decades has had the power to disregard divorces that are solely for tax reasons.

Credit given to:  Laura Sanders.  This was published July 20-21, 2019 in the Wall Street Journal. You can write to Laura Saunders at laura.saunders@wsj.com

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. 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 | Tax Considerations for Working Kids September 18, 2019

Posted by bradstreetblogger in : Deductions, General, Tax Deadlines, Tax Planning Tips, Tax Preparation, Taxes, Taxes , add a comment

When we file children’s income tax returns, nasty surprises are not commonplace BUT on the other hand they are not rare either. Some not so pleasant surprises may result from the Form W-4 that children will complete for their tax withholdings. Being over withheld may create a larger tax refund but a smaller net payroll check each pay period. On the other hand, withholding too little makes each net payroll check look awesome but may create a tax balance when the income tax return is filed. Another surprise situation may occur when the child receives a Form 1099 (no withholding) instead of a Form W-2 (has withholdings). In this instance, their income tax world immediately becomes more complicated as tax estimates will most likely be needed along with accounting for their income and expenses. As soon as you discover that your child will receive a Form 1099, you should contact your CPA for further information concerning estimated amounts and various tax deadlines. Please remember that not making any required estimated income tax payments may create interest and penalties along with the potential for a large balance due with the tax return.

The below article by Bill Bischoff of MarketWatch drills down further into some of my comments above and discusses some additional ones.  

                            -Mark Bradstreet

5 questions and answers about kids and money

Is your kid earning money from a summer job or some other activity? If so, what are the tax implications? And BTW, what kid-related tax breaks can you collect? Good questions. Here are some answers.

Does my kid need to file a tax return?

Maybe. For 2019, a dependent child must file a federal income tax return on Form 1040 in any of the following situations:

* The child has unearned income of more than $1,100. If your child has more than $2,200 of unearned income, he or she may be subject to the dreaded Kiddie Tax. More on that later.

* The kid’s gross income exceeds the greater of: (1) $1,100 or (2) earned income up to $11,650 plus $350.

* The child’s earned income exceeds $12,200.

* The kid owes other taxes such as the self-employment tax or the alternative minimum tax (AMT). Relatively unlikely, but it happens.

The good news is your child can shelter his or her income with the standard deduction. For 2019, the standard deduction for a dependent kid with only investment income is $1,100. If your child has earned income from summer jobs or whatever, the standard deduction equals the lesser of: (1) earned income plus $350 or (2) $12,200. So up to $12,200 of earned income can be sheltered with the standard deduction. Good.

Key Point: Even if no return is required for your child, one should be filed if federal income tax was withheld for any reason and would be refunded if a return is filed. Filing a return is also necessary to benefit from certain beneficial tax elections, such as the election to currently report accrued Savings Bond income that would be sheltered by your kid’s standard deduction.

Who is responsible for filing the kid’s return?

According to IRS Publication 929 (Tax Rules for Children and Dependents), a child is generally responsible for filing his or her own federal income tax return on Form 1040 and for paying any tax, penalties, or interest. If a child cannot file for any reason, the child’s parent, guardian, or other legally responsible person must file for the child. If the child can’t sign the return, a parent or guardian must sign the child’s name followed by the words “By (signature), parent (or guardian) for minor child.” Your child may also need to file a state income tax return. If so, that probably winds up on your plate too.

Key Point: If you sign a return on your child’s behalf, you can deal with the IRS on all matters related to the return. In general, a parent or guardian who doesn’t sign can only provide information concerning the return and pay the child’s tax bill.

Can’t I just report the kid’s income on my own return?

Probably. If your child will be under age 19 (or under age 24 if a full-time student) as of 12/31/19 and his or her only income is from interest and dividends, including mutual fund capital gain distributions, you can generally choose to report the kid’s income on your return by including Form 8814 (Parents’ Election To Report Child’s Interest and Dividends) with your Form 1040. Read the Form 8814 instructions to see if you qualify for this option. If you do, it may or may not result in a lower tax bill for the kid’s income.

What’s that ‘Kiddie Tax’ I’ve heard about?

Good thing you asked. For 2018-2025, the Tax Cuts and Jobs Act (TCJA) revamped the Kiddie Tax rules to tax a portion of an affected child’s or young adult’s unearned income at the higher rates paid by trusts and estates. Those rates can be as high as 37% or as high as 20% for long-term capital gains and dividends. Before the TCJA, the Kiddie Tax rate equaled the parent’s marginal rate–which for 2017 could have been as high as 39.6% or 20% for long-term capital gains and dividends.

If your kid is a student, the Kiddie Tax can potentially be an issue until the year the child turns age 24. For that year and future years, your child is finally Kiddie-Tax-exempt.

To calculate the Kiddie Tax, first add up the child’s net earned income and net unearned income. Then subtract the child’s standard deduction to arrive at taxable income. The portion of taxable income that consists of net earned income is taxed at the regular rates for a single taxpayer. The portion of taxable income that consists of net unearned income and that exceeds the unearned income threshold ($2,200 for 2019) is subject to the Kiddie Tax and is taxed at the higher rates that apply to trusts and estates.
Unearned income for purposes of the Kiddie Tax means income other than wages, salaries, professional fees, and other amounts received as compensation for personal services. So, among other things, unearned income includes capital gains, dividends, and interest. Earned income from a job or self-employment is never subject to the Kiddie Tax.

Calculate the Kiddie Tax by completing IRS Form 8615 (Tax for Certain Children Who Have Unearned Income). Then file Form 8615 with your kid’s Form 1040. Beware: the Kiddie Tax rules are complicated

Here are the most-common ones.

$2,000 tax credit for under-age-17 child

For 2018-2025, the TCJA increased the maximum child credit to $2,000 per qualifying child (up from $1,000 under prior law). Up to $1,400 can be refundable, meaning you can collect it even when you don’t owe any federal income tax. Under the TCJA, the income levels at which the child tax credit is phased out are significantly increased, so many more families now qualify for the credit.

$500 tax credit for over-age-16 dependent child

For 2018-2015, the TCJA established a new $500 tax credit that can be claimed for a dependent child (or young adult) who is not under age 17 and who lives with you for over half the year. Dependent means you pay over half the child’s support. However, a child in this category must also pass an income test to be classified as your dependent for purposes of the $500 credit. According to IRS Notice 2018-70, your over-age-16 dependent child passes the income test for 2019 if his or her gross income does not exceed $4,200.

Two higher education tax credits

The American Opportunity credit can be worth up to $2,500 during the first four years of a child’s college education. The Lifetime Learning credit can be worth up to $2,000 annually, and it can cover just about any higher education tuition costs. Both credits are phased out as your income goes up, but the Lifetime Learning credit is phased out at much lower income levels than the American Opportunity credit.

Head of household filing status

HOH filing status is preferable to single filing status because the tax brackets are wider and the standard exemption is bigger. HOH status is available if: (1) your home was for more than half the year the principal home of a qualifying child for whom a personal exemption deduction would be allowed under prior law and (2) your paid more than half the cost of maintaining the home.

Student loan interest deduction

This deduction can be up to $2,500 for qualified student loan interest expense paid by a parent, subject to phase-out for higher-income parents.

The bottom line

There you have it: most of what you need to know about kids and taxes. As always, kids are a chore and an expense. But they usually turn out to be worth it in the end. Fingers crossed.

Credit given to:  Bill Bischoff  of MarketWatch. Article is titled “When kids make money at a summer job, who files their taxes?”

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. 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.