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Many factors are involved when choosing a business entity

Are you planning to launch a business or thinking about changing your business entity? If so, you need to determine which entity will work best for you — a C corporation or a pass-through entity such as a sole-proprietorship, partnership, limited liability company (LLC) or S corporation. There are many factors to consider and proposed federal tax law changes being considered by Congress may affect your decision.

The corporate federal income tax is currently imposed at a flat 21% rate, while the current individual federal income tax rates begin at 10% and go up to 37%. The difference in rates can be mitigated by the qualified business income (QBI) deduction that’s available to eligible pass-through entity owners that are individuals, estates and trusts.

Note that non-corporate taxpayers with modified adjusted gross income above certain levels are subject to an additional 3.8% tax on net investment income.

Organizing a business as a C corporation instead of as a pass-through entity can reduce the current federal income tax on the business’s income. The corporation can still pay reasonable compensation to the shareholders and pay interest on loans from the shareholders. That income will be taxed at higher individual rates, but the overall rate on the corporation’s income can be lower than if the business was operated as a pass-through entity.

Other considerations
Other tax-related factors should also be considered. For example:

• If substantially all the business profits will be distributed to the owners, it may be preferable that the business be operated as a pass-through entity rather than as a C corporation, since the shareholders will be taxed on dividend distributions from the corporation (double taxation). In contrast, owners of a pass-through entity will only be taxed once, at the personal level, on business income. However, the impact of double taxation must be evaluated based on projected income levels for both the business and its owners.
• If the value of the business’s assets is likely to appreciate, it’s generally preferable to conduct it as a pass-through entity to avoid a corporate tax if the assets are sold or the business is liquidated. Although corporate level tax will be avoided if the corporation’s shares, rather than its assets, are sold, the buyer may insist on a lower price because the tax basis of appreciated business assets cannot be stepped up to reflect the purchase price. That can result in much lower post-purchase depreciation and amortization deductions for the buyer.
• If the entity is a pass-through entity, the owners’ bases in their interests in the entity are stepped-up by the entity income that’s allocated to them. That can result in less taxable gain for the owners when their interests in the entity are sold.
• If the business is expected to incur tax losses for a while, consideration should be given to structuring it as a pass-through entity so the owners can deduct the losses against their other income. Conversely, if the owners of the business have insufficient other income or the losses aren’t usable (for example, because they’re limited by the passive loss rules), it may be preferable for the business to be a C corporation, since it’ll be able to offset future income with the losses.
• If the owners of the business are subject to the alternative minimum tax (AMT), it may be preferable to organize as a C corporation, since corporations aren’t subject to the AMT. Affected individuals are subject to the AMT at 26% or 28% rates.

These are only some of the many factors involved in operating a business as a certain type of legal entity. For details about how to proceed in your situation, consult with us.

© 2021

Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2021. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

January 15

• Pay the final installment of 2020 estimated tax.
• Farmers and fishermen: Pay estimated tax for 2020.

February 1 (The usual deadline of January 31 is a Sunday)

• File 2020 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
• Provide copies of 2020 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.
• File 2020 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS.
• File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2020. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
• File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2020. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”)
• File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2020 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

March 1 (The usual deadline of February 28 is a Sunday)

• File 2020 Forms 1099-MISC with the IRS if: 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is March 31.)

March 16

• If a calendar-year partnership or S corporation, file or extend your 2020 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2020 contributions to pension and profit-sharing plans.

© 2020

Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2019. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us at 901-685-9411 to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

January 31

• File 2018 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
• Provide copies of 2018 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.
• File 2018 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS.
• File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2018. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 11 to file the return.
• File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2018. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 11 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944,“Employer’s Annual Federal Tax Return.”)
• File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2018 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 11 to file the return.

February 28

• File 2018 Forms 1099-MISC with the IRS if 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is April 1.)

March 15

• If a calendar-year partnership or S corporation, file or extend your 2018 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2018 contributions to pension and profit-sharing plans.

You likely know that, last year in December 2017, Congress enacted the biggest tax reform law in 30 years with the passage of the Tax Cuts and Jobs Act.   The law is complex and makes sweeping changes in the way individuals and businesses will determine taxable income and taxes due for 2018 and beyond. There are some actions which can be taken now, prior to year- end, to minimize your 2018 tax liability. However, these suggestions are not applicable for everyone and they should be checked with us before utilizing any of these strategies.

2018 Last-Minute Section 199A Strategies

One of the biggest impacts of the new law is the 199A deduction. In general, 199A allows you to take a 20% deduction against your business income before calculating your tax. Note that this deduction does not apply to S Corporation salaries or partnership guaranteed payments.

If your taxable income is above $157,500 (or $315,000 on a joint return), then your type of business, wages paid, and property can reduce and/or eliminate your Section 199A tax deduction.   Below are some strategies to reduce your income if you expect your total taxable income to be above these limits.

Strategy 1: Harvest Capital Losses

Capital gains add to your taxable income, and taxable income is the income that

• determines your eligibility for the Section 199A tax deduction,
• sets the upper limit (ceiling) on the amount of your Section 199A tax deduction, and
• establishes the thresholds above which you need wages and/or property to obtain your maximum deductions.

If the capital gains are hurting your Section 199A deduction, you have time before the end of the year to harvest capital losses to offset those harmful gains.

Strategy 2: Make Charitable Contributions

Since the Section 199A deduction uses taxable income for its thresholds, you can use itemized deductions to reduce and/or eliminate threshold problems and increase your Section 199A deduction.

Charitable contribution deductions are the easiest way to increase your itemized deductions before the end of the year.

Consider doing one or all of the following:

• Donate appreciated stock.
• Prepay (before December 31) your planned 2019 charitable contributions so you can claim them as deductions this year.
• Create a Donor Advised Fund. These allow you to contribute a sizeable amount of money, which you can deduct this year, to a fund for charitable donations that you control.

Strategy 3: Make Retirement Contributions

Any retirement contributions you make directly reduce your taxable income—and you still have the money inside the retirement account, growing free of taxes until you take it out of the account.

If you are a sole proprietor, your retirement contributions don’t reduce your qualified business income (QBI). Therefore, as long as your QBI is the basis for your Section 199A deduction, you can put away as much as you want using a traditional IRA, SIMPLE IRA, SEP-IRA, or individual 401(k) without damaging your Section 199A deduction.

If you are an S corporation owner, your retirement strategy can achieve the same result as the proprietor’s by using an employee salary or wage contribution to the retirement plan and no contribution by the S corporation.

Strategy 4: Buy Business Assets

Thanks to 100 percent bonus depreciation and Section 179 expensing, you can write off the entire cost of most assets you buy and place in service before midnight, December 31, 2018.

This can help your Section 199A deduction in two ways:

1. The big asset purchase and write-off can reduce your taxable income and increase your Section 199A deduction when the write-off gets your taxable income under the threshold.
2. The big asset purchase and write-off can contribute to an increased Section 199A deduction if your Section 199A deduction currently uses the calculation that includes the 2.5 percent of unadjusted basis in your business’s qualified property (UBIA). In this scenario, your asset purchases increase your UBIA, which in turn increases the deduction you already depend on.

 

2018 Last-Minute Year-End General Business Deductions

Your year-end tax planning doesn’t have to be hard. Outlined below are five strategies that will increase your tax deductions or reduce your taxable income so that Uncle Sam gets less of your 2018 cash.

1. Prepaying your 2019 expenses right now reduces your taxes this year, without question. While it’s true you kicked the can down the road some, perhaps you have an offset with a big deduction planned for next year. And even if you don’t have such a plan at the moment, you have plenty of time to create one or to put more big deductions in place for 2019.
2. The easiest year-end strategy of all is simply to stop billing your customers, clients, and patients. Once again, this kicks the can down the road some and makes your 2019 tax planning more important.
3. With 100 percent bonus depreciation and increased Section 179 expensing in 2018, you can make significant purchases of equipment, machinery, and furniture and write off 100 percent of the value. Make sure you place the assets in service on or before midnight, December 31, 2018, to get the deduction this year. Note there are still limits to the deductibility of luxury autos.
4. Charges to your credit cards can create deductions on the day of the charge. This is absolutely true if you are a sole proprietor or you operate as a corporation and the credit card is in the name of the corporation. But if you operate as a corporation and the credit card is in your personal name, your corporation needs to reimburse you before midnight, December 31, to create the 2018 deduction at the corporate level.
5. And finally, claim all your legitimate deductions. Don’t think you have too many, and don’t try to guess which of your too-many deductions could be a red flag. First, it’s unlikely you could have enough deductions to create a red flag. Second, no one knows what those red flags are. Third, if the deduction is legitimate, it doesn’t matter if the IRS audits it—you’ll win.

As you can see from the five strategies above, there’s much you can do to control your tax bite.

 

2018 Last-Minute Year-End Tax Strategies for Your Stock Portfolio

The beauty of tax planning your year-end stock portfolio is that it might cost you pennies in commissions but allow you to pocket real money.

Here’s the basic strategy:

• Avoid the high taxes (up to 40.8 percent) on short-term capital gains and ordinary income.
• Lower the taxes to zero—or if you can’t do that, then lower them to 23.8 percent or less by making the profits subject to long-term capital gains.

Think of this: you are paying taxes at a 71.4 percent higher rate when you pay at 40.8 percent rather than the tax-favored 23.8 percent.

Strategy 1

Examine your portfolio for stocks that you want to unload, and make sales where you offset short-term gains subject to a high tax rate such as 40.8 percent with long-term losses (up to 23.8 percent). In other words, make the high taxes disappear by offsetting them with low-taxed losses, and pocket the difference.

Strategy 2

Use long-term losses to create the $3,000 deduction allowed against ordinary income. Again, you are trying to use the 23.8 percent loss to kill a 40.8 percent tax (or a 0 percent loss to kill a 12 percent tax, if you are in the 12 percent or lower income tax bracket).

Strategy 3

As an individual investor, avoid the wash-sale loss rule. Under the wash-sale loss rule, if you sell a stock or other security and purchase substantially identical stock or securities within 30 days before the date of sale or after the date of sale, you don’t recognize your loss on that sale. Instead, the code makes you add the loss amount to the basis of your new stock.

If you want to use the loss in 2018, then you’ll have to sell the stock and sit on your hands for more than 30 days before repurchasing that stock.

Strategy 4

If you have lots of capital losses or capital loss carryovers and the $3,000 allowance is looking extra tiny, sell additional stocks, rental properties, and other assets to create offsetting capital gains. If you sell stocks to purge the capital gains, you can immediately repurchase the stock after you sell it—there’s no wash-sale “gain” rule.

Important. Don’t die with large capital loss carryovers—they’ll disappear.

• If your carryover originated from you only, then it all goes away if not used on your joint return in the year of your death.
• If your carryover came from joint assets, then your surviving spouse gets 50 percent of the carryover to use going forward.

Strategy 5

Do you give money to your parents to assist them with their retirement or living expenses? How about children (specifically, children not subject to the kiddie tax)? If so, consider giving appreciated stock to your parents and your non-kiddie-tax children. Why? If the parents or children are in lower tax brackets than you are, you get a bigger bang for your buck by

• gifting them stock,
• having them sell the stock, and then
• having them pay taxes on the stock sale at their lower tax rates.

Strategy 6

If you are going to make a donation to a charity, consider appreciated stock rather than cash because a donation of appreciated stock gives you more tax benefit. It works like this:

• Benefit 1. You deduct the fair market value of the stock as a charitable donation.
• Benefit 2. You don’t pay any of the taxes you would have had to pay if you sold the stock.

Strategy 7

If you could sell a publicly traded stock at a loss, do not give that loss-deduction stock to a 501(c)(3) charity. Why? If you sell the stock, you have a tax loss that you can deduct. If you give the stock to a charity, you get no deduction for the loss—in other words, you can just kiss that tax-reducing loss goodbye.

Solution. Sell the stock first to create your tax-deductible loss. Then give the charity the cash realized from your sale of the stock to create your deduction for the charitable contribution.

 

2018 Last-Minute Vehicle Purchases to Save on Taxes

Under the new law, you will no longer be able to defer gains on automobiles or equipment by trading for a replacement. Instead, taxpayers will be required to recognize any gain on a traded asset, which will increase the basis in the new asset. In many cases, this may not be an issue due to the increased ability to expense asset purchased, but it may also be a trap for the unwary.

Two questions:

1. Do you need a replacement business car, SUV, van, or pickup truck?
2. Do you need tax deductions this year?

If you answered “yes” to both questions, here are some ideas for you to consider:

1. Buy a New or Used SUV, Crossover Vehicle, or Van with a GVWR Greater than 6,000 Pounds

Let’s say that on or before December 31, 2018, you or your corporation buys and places in service a new or used SUV or crossover vehicle that the manufacturer classifies as a truck and that has a gross vehicle weight rating (GVWR) of 6,001 pounds or more. This newly purchased vehicle gives you four big benefits:

2. Bonus depreciation of 100 percent (new, thanks to the TCJA)
3. Section 179 expensing of up to $25,000
4. MACRS depreciation using the five-year table
5. No luxury limits on vehicle depreciation deductions

Buy a New or Used Pickup with a GVWR Greater than 6,000 Pounds

If you or your corporation buys and places in service a qualifying pickup truck (new or used) on or before December 31, 2018, then this newly purchased vehicle gives you four big benefits:

1. Bonus depreciation of 100 percent
2. Section 179 expensing of up to $1,000,000
3. MACRS depreciation using the five-year table
4. No luxury limits on vehicle depreciation deductions

To qualify for full Section 179 expensing, the pickup truck must have

• a GVWR of more than 6,000 pounds, and
• a cargo area (commonly called a “bed”) of at least six feet in interior length that is not easily accessible from the passenger compartment.

Short bed. If the pickup truck passes the more-than-6,000-pound-GVWR test but fails the bed-length test, tax law classifies it as an SUV. That’s not bad. It’s still eligible for the $25,000 SUV expensing limit plus 100 percent bonus depreciation. See Section 1 above for how this works.

3. Buy a New or Used Qualifying Cargo or Passenger Van with a GVWR Greater than 6,000 Pounds

A new or used cargo or passenger van bought and placed in service on or before December 31, 2018, can qualify for four big tax benefits:

1. Bonus depreciation of 100 percent
2. Section 179 expensing of up to $1,000,000
3. MACRS depreciation using the five-year table
4. No luxury limits on vehicle depreciation deductions

Cargo van. To qualify for full Section 179 expensing, the cargo van must

• have a GVWR of more than 6,000 pounds,
• fully enclose the driver compartment and load-carrying area,
• not have seating behind the driver’s seat, and
• have no body section that protrudes more than 30 inches ahead of the leading edge of the windshield.

If the van passes the GVWR test but fails one of the other qualifying tests listed above, the law deems it an SUV.

Passenger van. If the van has a GVWR of greater than 6,000 pounds and seats more than nine people behind the driver’s seat, it is a tax law–defined passenger van, not an SUV, and it qualifies for full Section 179 expensing of up to $1,000,000 and 100 percent bonus depreciation.

4. Buy a Depreciation-Limited New or Used Car, SUV, Truck, or Van

If you or your corporation buys and places in service a new or used passenger vehicle such as a car (or a pickup, SUV, or van with a GVWR of 6,000 pounds or less) on or before December 31, 2018, then you or your corporation may claim up to $8,000 in bonus depreciation.

Tax reform increased the 2018 luxury passenger vehicle depreciation limits to

• $10,000 for the first taxable year in the recovery period,
• $16,000 for the second taxable year in the recovery period,
• $9,600 for the third taxable year in the recovery period, and
• $5,760 for each succeeding year in the taxable period.

Here’s how this works: Say you buy a car. You add the $8,000 in bonus depreciation to the $10,000 car limit, for a 2018 limit of $18,000. To get to this limit, you can use a combination of bonus depreciation and regular depreciation. You reduce the $18,000 limit by any personal use.

 

2018 Last-Minute Year-End Tax Deductions for Existing Vehicles

It’s time to examine your existing cars, SUVs, trucks, and vans for some profitable year-end business tax deductions. Your first step is to identify your gain or loss on sale. Once you have the gain or loss, know these basic rules:

• Gains attributable to depreciation produce ordinary income.
• Gains in excess of original basis produce capital gains. (This is unlikely to happen on most business vehicles, but it can happen with classic and antique business vehicles because they can go up in value.)
• Losses on business vehicles produce ordinary deductions.

In general, at this time of year we suspect you are looking for vehicle loss deductions, so that’s where we will look.

1. Take Your Child’s Car and Sell It

We know. This sounds horrible. But stay with us. What did you do with your old business car? Do you still have it? Is your child driving it? Or perhaps your spouse has it as a personal car.

We ask because that old business vehicle could have a big tax loss embedded in it. If that loss is inside that old business vehicle, your strategy is easy. Take the vehicle and sell it to a third party before December 31 so that you have a tax-deductible loss this year.

Your loss deduction depends on your percentage of business use. That’s one reason to sell this vehicle now: the longer you let your spouse or teenager use it, the smaller your business percentage becomes and the less tax benefit you receive.

2. Self-Employed? Use the Buy-and-Sell Strategy

Now, thanks to the TCJA tax reform, all business vehicles have gain or loss on sale or trade-in. Here’s how the strategy works:

• The sale to a third party or the “trade-in sale” of your existing business vehicle produces a gain or loss that does not increase or decrease your self-employment taxes.
• The purchase of the replacement vehicle creates depreciation and, if elected, Section 179 expensing deductions. These deductions reduce your self-employment taxes. (Note: This is also true with IRS mileage rates because such rates include depreciation as a component.)

3. Cash In on Past Vehicle Trade-Ins

In the past (before 2018) when you traded vehicles, you pushed your old business basis to the replacement vehicle under the old Section 1031 tax-deferred exchange rules. (But remember—this rule doesn’t apply any longer to Section 1031 exchanges of vehicles or other personal property occurring after December 31, 2017.)

Regardless of whether you used IRS mileage rates or the actual expense method for deducting your business vehicles, you could find a big deduction here. Check out how Sam finds a $27,000 tax-loss deduction on his existing business car. Sam has been in business for 11 years, during which he

• converted his original personal car to business use;
• then traded in the converted car for a new business car (car 2);
• then traded in car 2 for a replacement business car (car 3); and
• then traded in car 3 for another replacement business car (car 4), which he is driving today.

During the 11 years Sam has been in business, he has owned four cars. Further, he deducted each of his cars using IRS standard mileage rates. To get a mental picture of how this one sale produces a cash cow, consider this: when Sam sells car 4, he is really selling four cars—because the old Section 1031 exchange rules added the old basis of each vehicle to the replacement vehicle’s basis.

Examine your car for this possible loss deduction. Have you been trading business cars? If so, your loss could be big!

 

2018 Last-Minute Year-End Medical and Retirement Deductions

When you get busy with your business, it’s easy to forget about your retirement accounts and medical coverages and plans. But year-end is approaching, and now’s the time to take action.

Included below are six action steps for 2018 that can help you reduce your taxes and pocket extra money.

1. Put your retirement plan in place no later than December 31 so you are absolutely sure that you have a plan. In fact, be sure to make a contribution to the plan before December 31.
2. Convert to a Roth IRA. The long-term savings here can be huge. Make sure to leave the converted funds in the Roth for at least five years.
3. If you have a Section 105 plan in place and you have not been reimbursing expenses monthly, do a reimbursement now to get your 2018 deductions, and then put yourself on a monthly reimbursement schedule in 2019.
4. If you have not reimbursed your qualified small employer health reimbursement account (QSEHRA), make sure to get that done properly now. If you have not yet put a QSEHRA in place and you plan to do so on January 1, do that now and just suffer that $50-per-employee penalty should you be found out.
5. If you operate your business as an S corporation and you want an above-the-line tax deduction for the cost of your health insurance, you need the S corporation to (a) pay for or reimburse you for the health insurance and (b) put it on your W-2. Make sure that happens before December 31.
6. Claim the tax credit for the health insurance you give your employees. If you provide your employees with health insurance, see whether your pay structure and number of employees put you in a position to claim a 50 percent tax credit for some or all of the monies you paid for health insurance in 2018 and, possibly, prior years.

 

2018 Last-Minute Year-End Tax Strategies for Marriage, Kids, and Family

Here are five year-end tax-deduction strategies that apply if you are getting married or divorced, have children who did or could work in your business, and/or have situations where you give money to relatives and friends.

1. Put Your Children on Your Payroll

Did your children under age 18 help you in your business this year? Did you pay them for their work? You should pay them for the work—and pay them on a W-2. Why?

First, W-2 wages paid by the parent to the parent’s under-age-18 child for work done on the parent’s Form 1040 Schedule C business are both

• deductible by the employer-parent, and
• exempt from federal payroll taxes for both the parent and the child.

Thus, if you operate your business as a sole proprietorship or single-member LLC taxed on Schedule C or as a spousal partnership, then you face no federal payroll taxes on the W-2 wages you pay your under-age-18 child. (And in most states, you also face no state payroll taxes.) Further, your child faces no federal payroll taxes. If you operate as a corporation, your child and the corporation pay payroll taxes. But that does not eliminate the benefits; it simply reduces them.

Second, thanks to tax reform, your child can use the 2018 standard deduction to eliminate income taxes on up to $12,000 in wages.

Third, your child can contribute up to $5,500 to either of the following:

2. A tax-deductible IRA, and deduct that amount from federal taxation. This is the best strategy to use if the child has more than $12,000 in W-2 wages and you want the child to have more tax-free money.
3. A Roth IRA, which is not tax-deductible, but the child can (a) remove the contributions (money put in) at any time, tax- and penalty-free, and (b) remove the earnings tax-free after age 59 1/2. This is the best strategy to use if the child has less than $12,000 in total W-2 wages and other earned income, because the child has no need for a tax deduction.
4. Get Divorced after December 31

The marriage rule works like this: you are considered married for the entire year if you are married on December 31. Although lawmakers have made many changes to eliminate the differences between married and single taxpayers, in most cases the joint return will work to your advantage. Thus, wait until next year to finalize the divorce if alimony is not involved.

Warning on alimony! The Tax Cuts and Jobs Act (TCJA) changed the tax treatment of alimony payments under divorce and separate maintenance agreements executed after December 31, 2018:

Under the old rules, the payor deducts alimony payments and the recipient includes the payments in income.

Under the new rules, which apply to all agreements executed after December 31, 2018, the payor gets no tax deduction and the recipient does not recognize income. And if you are married on December 31, don’t file in April as married, filing separately. In most cases, this is a sure way to overpay your taxes.

3. Get Married on or before December 31

Remember, if you are married on December 31, you are married for the entire year. If you are thinking of getting married in 2019, you might want to rethink that plan for the same reasons that apply in a divorce (as described above). The IRS could make big savings available to you if you are married on December 31, 2018.

Again, you have to run the numbers in your tax return both ways to know the tax benefits and detriments for your particular case. A quick trip to the courthouse may save you thousands.

4. Make Use of the 0 Percent Tax Bracket

In the old days, you used this strategy with your college student. Today, this strategy does not work with the college student, because the kiddie tax now applies to students up to age 24. But this strategy is a good one, so ask yourself this question: Do I give money to my parents or other loved ones to make their lives more comfortable?

If the answer is yes, is your loved one in the 0 percent capital gains tax bracket? The 0 percent capital gains tax bracket applies to a single person with less than $37,650 in taxable income and to a married couple with less than $75,300 in taxable income. If the parent or other loved one is in the zero capital gains tax bracket, you can get extra bang for your buck by giving this person appreciated stock rather than cash.

Every taxpayer’s individual situation is unique. The activities described above are general in nature and may not apply to all taxpayers. Any major financial decisions or tax-planning activities in light of this new legislation should be considered with the advice of a tax professional. Call us at 901-685-9411 if you have questions regarding your particular situation.

You likely know that, last year in December 2017, Congress enacted the biggest tax reform law in 30 years with the passage of the Tax Cuts and Jobs Act.   The law is complex and makes sweeping changes in the way individuals will determine taxable income and taxes due for 2018 and beyond. There are some actions which can be taken now, prior to year- end, to minimize your 2018 tax liability. However, these suggestions are not applicable for everyone and they should be checked with us before utilizing any of these strategies.

 

2018 Last-Minute Year-End Timing of Income and Deductions Strategies

Why pay tax now when you could pay later?

Generally, you want to accelerate deductions and defer income. The theory being that money is more valuable today than in the future, but that assumes that the marginal tax rate is identical in future years. There are opportunities for taxpayers to accelerate or defer both items of income and deductions. Potential items of income that a taxpayer can control to a degree include bonuses, consulting income or self-employment income. On the deduction side, taxpayers can control the timing of payments for state and local income taxes, interest payments, real estate taxes and charitable contributions. It is worthwhile to note that bills paid with a credit card are deductible in the year they are charged to the credit card even though you may not pay the credit card bill until after the end of the tax year.

 

2018 Last-Minute Year-End Itemized Deduction Strategies

One of the biggest impacts of the new law is the increase in the standard deduction. For 2018, the standard for individuals is $12,000 and for married filing joint the deduction is $24,000. This will mean that many taxpayers who have historically itemized their deductions will now be claiming the standard deductions.

Below are some strategies to manage your deductions to achieve the lowest income tax possible.

Strategy 1: Bunch Itemized Deductions

If your itemized deductions fall short of standard deduction amount, you should consider bunching your itemized deductions into alternating years. Under the bunching strategy you would double up on an itemized deduction (such as contributions) in one year so that your itemized deductions are in excess of the standard deduction and then in the net year, make no contributions and claim the standard deduction.

Strategy 2: Make Charitable Contributions

Charitable contribution deductions are the easiest way to increase your itemized deductions before the end of the year. Remember that you must have receipts for charitable donations for them to be deductible.

Consider doing one or all of the following:

• Donate appreciated stock.
• Prepay (before December 31) your planned 2019 charitable contributions so you can claim them as deductions this year.
• Create a Donor Advised Fund. These allow you to contribute a sizeable amount of money, which you can deduct this year, to a fund for charitable donations that you control.

 

New Law Changes that May Hurt You

While the increased standard deduction and lower overall tax brackets will benefit most tax payers, a few of the new law changes will likely be to your disadvantage. Keep these in mind as you plan for the end of the year:

• Your deductions for state and local taxes will be limited to $10,000.
• Mortgage interest is limited to mortgages of no more than $750,000.
• Miscellaneous itemized deductions subject to the 2% limit were eliminated. This means unreimbursed employee business expenses and investment expenses, among other things, will no longer be deductible.

 

2018 Last-Minute Year-End Tax Strategies for Your Stock Portfolio

The beauty of tax planning your year-end stock portfolio is that it might cost you pennies in commissions but allow you to pocket real money.

Here’s the basic strategy:

• Avoid the high taxes (up to 40.8 percent) on short-term capital gains and ordinary income.
• Lower the taxes to zero—or if you can’t do that, then lower them to 23.8 percent or less by making the profits subject to long-term capital gains.

Think of this: you are paying taxes at a 71.4 percent higher rate when you pay at 40.8 percent rather than the tax-favored 23.8 percent.

Strategy 1

Examine your portfolio for stocks that you want to unload, and make sales where you offset short-term gains subject to a high tax rate such as 40.8 percent with long-term losses (up to 23.8 percent). In other words, make the high taxes disappear by offsetting them with low-taxed losses, and pocket the difference.

Strategy 2

Use long-term losses to create the $3,000 deduction allowed against ordinary income. Again, you are trying to use the 23.8 percent loss to kill a 40.8 percent tax (or a 0 percent loss to kill a 12 percent tax, if you are in the 12 percent or lower income tax bracket).

Strategy 3

As an individual investor, avoid the wash-sale loss rule. Under the wash-sale loss rule, if you sell a stock or other security and purchase substantially identical stock or securities within 30 days before the date of sale or after the date of sale, you don’t recognize your loss on that sale. Instead, the code makes you add the loss amount to the basis of your new stock.

If you want to use the loss in 2018, then you’ll have to sell the stock and sit on your hands for more than 30 days before repurchasing that stock.

Strategy 4

If you have lots of capital losses or capital loss carryovers and the $3,000 allowance is looking extra tiny, sell additional stocks, rental properties, and other assets to create offsetting capital gains. If you sell stocks to purge the capital gains, you can immediately repurchase the stock after you sell it—there’s no wash-sale “gain” rule.

Important. Don’t die with large capital loss carryovers—they’ll disappear.

• If your carryover originated from you only, then it all goes away if not used on your joint return in the year of your death.
• If your carryover came from joint assets, then your surviving spouse gets 50 percent of the carryover to use going forward.

Strategy 5

Do you give money to your parents to assist them with their retirement or living expenses? How about children (specifically, children not subject to the kiddie tax)? If so, consider giving appreciated stock to your parents and your non-kiddie-tax children. Why? If the parents or children are in lower tax brackets than you are, you get a bigger bang for your buck by

• gifting them stock,
• having them sell the stock, and then
• having them pay taxes on the stock sale at their lower tax rates.

Strategy 6

If you are going to make a donation to a charity, consider appreciated stock rather than cash because a donation of appreciated stock gives you more tax benefit. It works like this:

• Benefit 1. You deduct the fair market value of the stock as a charitable donation.
• Benefit 2. You don’t pay any of the taxes you would have had to pay if you sold the stock.

Strategy 7

If you could sell a publicly traded stock at a loss, do not give that loss-deduction stock to a 501(c)(3) charity. Why? If you sell the stock, you have a tax loss that you can deduct. If you give the stock to a charity, you get no deduction for the loss—in other words, you can just kiss that tax-reducing loss goodbye.

Solution. Sell the stock first to create your tax-deductible loss. Then give the charity the cash realized from your sale of the stock to create your deduction for the charitable contribution.

 

2018 Last-Minute Year-End Medical and Retirement Deductions

When you get busy, it’s easy to forget about your retirement accounts and medical coverages and plans. But year-end is approaching, and now’s the time to take action.

Included below are six action steps for 2018 that can help you reduce your taxes and pocket extra money.

1. Consider making the maximum allowable contribution to your retirement accounts. For employer plans, your contributions must be made before year-end. IRA contributions can be made until April 15, 2019.
2. Consider converting to a Roth IRA. The long-term savings here can be huge. Make sure to leave the converted funds in the Roth for at least five years.
3. If you have a Section 105 plan in place and you have not been reimbursing expenses monthly, do a reimbursement now to get your 2018 deductions, and then put yourself on a monthly reimbursement schedule in 2019.

 

2018 Last-Minute Year-End Tax Strategies for Marriage, Kids, and Family

Here are five year-end tax-deduction strategies that apply if you are getting married or divorced and/or have situations where you give money to relatives and friends.

1. Get Divorced after December 31

The marriage rule works like this: you are considered married for the entire year if you are married on December 31. Although lawmakers have made many changes to eliminate the differences between married and single taxpayers, in most cases the joint return will work to your advantage. Thus, wait until next year to finalize the divorce if alimony is not involved.

Warning on alimony! The Tax Cuts and Jobs Act (TCJA) changed the tax treatment of alimony payments under divorce and separate maintenance agreements executed after December 31, 2018:

Under the old rules, the payor deducts alimony payments and the recipient includes the payments in income.

Under the new rules, which apply to all agreements executed after December 31, 2018, the payor gets no tax deduction and the recipient does not recognize income. And if you are married on December 31, don’t file in April as married, filing separately. In most cases, this is a sure way to overpay your taxes.

2. Get Married on or before December 31

Remember, if you are married on December 31, you are married for the entire year. If you are thinking of getting married in 2019, you might want to rethink that plan for the same reasons that apply in a divorce (as described above). The IRS could make big savings available to you if you are married on December 31, 2018.

Again, you have to run the numbers in your tax return both ways to know the tax benefits and detriments for your particular case. A quick trip to the courthouse may save you thousands.

3. Make Use of the 0 Percent Tax Bracket

In the old days, you used this strategy with your college student. Today, this strategy does not work with the college student, because the kiddie tax now applies to students up to age 24. But this strategy is a good one, so ask yourself this question: Do I give money to my parents or other loved ones to make their lives more comfortable?

If the answer is yes, is your loved one in the 0 percent capital gains tax bracket? The 0 percent capital gains tax bracket applies to a single person with less than $37,650 in taxable income and to a married couple with less than $75,300 in taxable income. If the parent or other loved one is in the zero capital gains tax bracket, you can get extra bang for your buck by giving this person appreciated stock rather than cash.

 

2018 Last-Minute Year-End Annual Gift Tax Exclusions

Consider making gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $15,000 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes when an income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

These are just some of the year-end steps that can be taken to save taxes. Remember these strategies are based on general assumptions and may not apply to everyone. If you believe any of these strategies could apply to you, please contact us at Rikard & Neal so we can tailor a particular plan that will work best for you.