Will the New Tax Reform Act Impact Me? Part 4

May 1, 2018

Tax Credit Changes

Part 4 of 4

For the past 3 weeks you have already learned that the short answer is: YES! The changes will have some positive and negative effects on taxpayers, and we want you to be in the know about how they will affect you. We’ve broken things down to show you who is winning and who is losing with each change, and fortunately this week, the changes will make nearly everyone a winner.

FACT: The new tax reform bill will impact nearly every taxpayer in the country due to increases in the available tax credits

First let’s break down what a tax credit is – in short, it is a dollar for dollar reduction in the amount of tax you owe. For example, if you received a “tax bill” for $5,000, and you had a $1,000 tax deduction, that would only decrease your tax bill by about $250. With that same example, if you had a $1,000 tax credit, that reduces your tax bill by $1,000. For most taxpayers, the best tax benefit you can receive is to be eligible for tax credits.

The most common tax credits are those for families with children. And the tax reform bill expanded the amounts and eligibility for family related credits.

The child tax credit has been included in the tax code for quite some time, and for 2017 it was up to $1,000 per child under the age of 17. For 2018, this credit was doubled to $2,000. Plus, the eligibility for this credit was extended to allow higher income earners to take advantage of the credit as well. For 2017, single filer earning over $75,000 would be ineligible for the credit. However, for 2018, single filers with income up to $200,000 will now be eligible for the credit. This is a significant change, that will serve to benefit many more families with younger kids.

Further, a new non-child dependent credit was created for dependents who are over the age of 17. This credit is $500 per dependent and can include older children, or other relationships that result in qualified dependents. This too will serve to benefit families with several dependents.

While the expansion of these credits is great news, remember, it is in your best interest to know about the changes, and then take action to either minimize the negative, or maximize the positives. In this case, you don’t want to wait until April to take advantage of this new tax credit.

With each pay check, you’re paying your tax obligation for the year. If you will be eligible for new and increased tax credits, that means you need to pay in less each pay check to meet your tax obligation. Given that, it makes sense to review your eligibility, and then adjust your W-4 to reduce the amount of tax withheld from your check each pay period. Assessing your eligibility for this tax credit is easy. Follow these simple steps:

First, Review your 2017 tax return:

If you received the child tax credit last year:

Estimate your income in 2018: Will increase significantly from last year to exceed the income thresholds for eligibility?
Is your child is turning 17 during the 2018 tax year?

If you answered no to both these questions, you should be eligible for the $2,000 credit. If your child is turning 17 or older, you should be eligible for the $500 credit.

If you did not receive the child tax credit last year:

Do you have a qualifying child, under the age of 17 for 2018?
Estimate your income in 2018: Will it fall under the income thresholds for eligibility?

If you answered yes to both these questions, you should be eligible for the $2,000 credit. If your child is turning 17 or older, you should be eligible for the $500 credit.

Once you’ve assessed your eligibility and the amount of the credit you should qualify for, you can contact your employer to update your W-4, increase your allowances and increase your take home pay each pay period. Need help with this process? Contact us and we can prepare a simple tax analysis and W-4 update for you.

Will the New Tax Reform Bill Impact Me? Part 3

April 24, 2018

Check on the video log on this topic: Tuesday’s Tax Tips Vol 1 Ep 4 042418

Changes in Deductions

Part 3 of 4

As explained in last two week’s blogs, the short answer is: YES! The changes described last week resulted in everyone being a loser. Fortunately, the changes in deductions will cause some winners and losers. Read on to see if you’ll land in the winner’s column.

FACT: The new tax reform bill will impact every taxpayer in the country due to increases in the standard deduction, and new limitations on itemized deductions.

One of the most talked about changes in the new tax bill is the change in deductions. If you’re a taxpayer who takes the standard deduction, you’ll be excited to learn the standard deduction has doubled! Here is the change in the standard deduction related to each filing status:

new standard deduction

The intention behind the new increased standard deduction is to be greater than the 2017 standard deduction plus the 2017 personal exemption. Therefore, if you use the standard deduction, you will see a net tax decrease as a result of this change. However, if you itemize deductions, this change will have the opposite effect.

Itemized deductions are those that appear on schedule A. The most common itemized deductions in 2017 were:

Mortgage interest
State income taxes or sales tax
Real estate taxes
Charitable contributions
Medical/dental expenses

The new tax reform bill made changes to the deductibility of all 5 of the most common itemized deductions.

Changes to #1 will likely have minimal tax increasing impact to a limited number of taxpayers. Mortgage interest remains deductible for 2018, and the amount to be deducted will not change for most taxpayers. The change to this deduction applies to homes purchased after December 14, 2018. New purchases will only qualify for the deduction for mortgages amounts up to $750K. The prior limit was up to $1M. Further, taxpayers who financed their home with a traditional mortgage and a home equity line of credit (HELOC) can no longer deduct the interest related to the HELOC.

Changes to #2 & #3 will likely have a significant tax increasing impact to many taxpayers. State income and real estate taxes items will remain deductible for 2018, however the amount of the deduction will be limited. The amount deductible for all taxes will be reduced to $10K. This will impact a substantial number of taxpayers who itemize. There are only seven states that do not have a state income tax. Taxpayers who are upper middle-income wage earners will likely pay state income taxes that exceed this limit. Further, this limit is for the combination of state income taxes and real estate taxes. Again, for higher valued homes, the real estate taxes alone may exceed the limit. This may result in a large reduction in the itemized deductions for taxpayers with higher income levels and higher property values. Do a review of your schedule A from 2017 to determine if this limitation will affect you. If the amount that appears on line 9 is greater than $10K you can expect a tax increase this year.

Changes to #4 will likely have a modest tax reducing impact to minimal taxpayers. The limit on amount of charitable deductions increased. In 2017, you could only deduct up to 50% of your adjusted gross income (AGI) as a charitable deduction. Meaning if your total income was $160K, the maximum deduction was $80K. This limit was increased to 60% of your AGI, therefore at $160K of income your maximum deduction is now $96K.

Changes to #5 will likely have a modest tax increasing impact to minimal taxpayers. The medical and dental expense deduction is not utilized by most taxpayers because the amount spent on these expenses has to be significant to be deductible. In 2017, medical and dental expenses were not deductible until they exceeded 7.5% of your AGI. The new tax reform now requires the expenses to exceed 10% of your AGI before any can be deducted. Most tax payers did not qualify for this deduction at the 7.5% rate of phase out, therefore it is not anticipated that many will be affected by this change.

Fortunately, there are other ways to obtain an equal (or greater) tax deduction for some of the expenses subject to new limitations. There are too many variables for each taxpayer to provide viable options in this context, but just the awareness of the changes will serve to equip you to manage your tax liability. If your deductions will decrease this year, contact us to learn more about your options to find new ways to reduce your tax liability.

Will the New Tax Reform Bill Impact Me? Part 2

April 17, 2018

Check out the video log on this topic: Tuesday’s Tax Tips Vol 1 Ep 3 041718

Personal Exemption Changes

Part 2 of 4

As explained in last week’s blog, the short answer is: YES! The logical second question is: will that impact be to my benefit or detriment? There is no short answer to that question, but we’re giving you the tools to help you determine if you are a big winner…or, a big loser.

FACT: The new tax reform bill will impact every taxpayer in the country due to elimination of the personal exemption.

When it comes to this change, everyone is a loser. The personal exemption was granted to all taxpayers in every tax return. For the 2017 tax year, the personal exemption equaled $4,050 and was applied to the taxpayer, spouse and dependents. For example, a family of four would receive a total personal exemption of $16,200 [calculated as $4,050 x 4]. The personal exemption serves to exempt or exclude that amount from your taxable income. As we described in last week’s blog, your taxable income dictates which tax bracket you will fall into. This change will serve to increase everyone’s taxable income which will impact you in the following two ways.

First, this change will increase the amount of income you have that is subject to tax. Considering only this change, if your income remained the same in 2018 compared to 2017, your tax bill would increase. Using our same family of four referred to above, the loss of the $16,200 exemption would increase the family’s taxable income by that same amount. If we presume this two-income family had taxable income of $150K in 2017, they would fall in the 28% tax bracket. The loss of the personal exemption means their taxable income would rise to $166,200 [calculated as $150,000 + $16,200]. As a result, their income tax bill would increase by at least $4,536 [calculated at $16,200*28%].

Second, this change would also bump the family into the next higher tax bracket. Expanding this same example, the family’s income of $150K in 2017 landed them in the 28% tax bracket. However, based on the new tax brackets, and their new higher taxable income of $166,200, this family would now land in the 32% tax bracket. This would result in a total income tax increase of $5,184 [calculated at $16,200*32%].

In essence, that means even at the lowest bracket you can expect to see your tax bill go up by a minimum of $405 [calculated at $4,050*10%]. According to IRS statistics, the median household contains 3 people and falls into the 24% bracket for 2018. That means the median household would experience an increase of $2,916 in their tax bill based on the loss of the person exemption [calculated at $4,050*3*24%].

Take a look back at last week’s post to identify the ways you can reduce your taxable income using pre-tax contributions. Another approach to reducing taxable income is maximizing your adjustments to income. These are commonly referred to as “above-the-line deductions” or deductions to arrive at AGI. Here are the top 3 adjustments that would serve to reduce your taxable income:

Individual Retirement Account (IRA) Contributions: If you are not covered by an employer’s plan, you can deduct contributions to a traditional IRA up to $5,500 for 2018, or $6,500 if you’re 50+.
Health Savings Accounts (HSA) Contributions: Individuals can deduct contributions up to $3,450 for self-coverage, or $6,850 for family coverage.
Student Loan Interest: You can deduct up to $2,500 of student loan interest paid.

Bear in mind, this post isolates the personal exemption for a simplified explanation of this change. The ultimate change to your tax position must consider all changes in the new bill, including the change to brackets covered last week, and deductions. We’ll go over that element of the new tax bill in next week’s blog. And remember, when you’re ready to do more to reduce your tax bill, contact us to develop a custom tax plan tailored to your specific tax needs. We’ve helped our clients employ tax loopholes that allow them to deduct 100% of their student loan payments, not just the interest!

Will the New Tax Reform Bill Impact Me? Part 1

April 10, 2018

Check out the video log on this topic: Tuesday’s Tax Tips Vol 1 Ep 2

Tax Bracket Changes

Part 1 of 4

The short answer is: YES! For some, it will have a positive effect. But for others, it will result in a tax increase. We’re giving you the tools to help you determine if you are a big winner…or, a big loser.

FACT: The new tax reform bill will impact every taxpayer in the country due to tax bracket changes.

Right now the focus is on 2017 tax returns, therefore most taxpayers have not looked ahead to understand what the new tax reforms will mean for them. That means many people may be surprised about this time next year when they’re preparing their 2018 tax return. Given that, we want to help you avoid surprises and break down some of the ways the tax reforms will affect us all.

The first is due to the change in the tax brackets and the tax rates. The new bill drops the top rate from 39.6% to 37% impacting single filers whose taxable income is over $300K. Meanwhile, the bottom rate remains at 10% and a new rate was established at 12% impacting single filers whose taxable income is under $38,750. In short, this means those in the highest bracket will be taxed at a lower rate, and people who will fall into the lower brackets will experience the same. While that’s great news for those who fall into the far ends of the brackets, if you fall into the middle section you may experience the opposite effect. For example, a single filer whose taxable income was $200k last year paid tax at 33%; a single filer at that same income level would pay 35% this year. This is the impact that will be felt by most upper middle-income households with income that is reported on a W-2. This impact is expected to be felt by single filers with income over ~$92K, and married filers with income over ~$158K. If your household income exceeds these number you will experience a significant tax increase this year.

Here is a side by side comparison of the old brackets in 2017 compared to the new brackets for 2018. For simplicity we’ve limited this review to single filers. The trend seen in single filers applies to all taxpayers. Use these tables to find where you are, and what bracket you will fall in for each year.

tax braket comparison

If you find you’re in a higher bracket, you’ll need to take actions to improve your tax position. Even if you find yourself in a lower bracket, be mindful that this is just the first of many ways the tax reforms will impact you. Therefore, we’re providing action items that you can employ to improve your tax position.

Bear in mind, your tax bracket is based on your taxable income. The lower your taxable income, the lower bracket you’ll fall into. Now, you certainly don’t want to take a pay cut just to fall into a lower tax bracket, but you can lower your taxable income without changing your actual income. The way to do so is to maximize your pre-tax contributions.

Here are the top 5 pre-tax contributions that nearly every taxpayer can use to their advantage:

Retirement Savings: Pre-tax contributions to an employer-sponsored retirement plan such as a 401(k) or 403(b).
Medical Expenses: Pre-tax contributions to a flexible spending account (FSA) can be used to cover out-of-pocket medical expenses including co-pays, deductibles, prescriptions and OTC drugs.
Childcare Expenses: Pre-tax payroll deductions can be used to fund a dependent-care account to cover childcare costs.
Insurance Expenses: Pre-tax deductions can be used to cover group health insurance premiums. If you purchase life insurance through your employer, those premiums are also taken from your paycheck before tax.
Charitable contributions: You can also contribute to many 501(c)3 charities on a pre-tax basis.

Contact your employer to incorporate these pre-tax contributions that serve to improve your overall tax position. These changes alone will be helpful to all taxpayers. Then, when you’re ready to add in more layers to a tax savings strategy, contact us. We can help to ensure you pay less tax in 2018 than you have any year prior.

The IRS Does Not Play Fair

April 3, 2018

Responding to IRS letters

When it comes to dealings with the Internal Revenue Service, it is more important than ever to know the rules of the game. Many taxpayers receive a threatening letter from the IRS, and immediately call the IRS using the number provided on the letter. Sadly, some of the mistakes made on that initial phone call can set you up for failure when attempting to resolve your tax issue. Other taxpayers will simply ignore the letter from the IRS and hope the issue goes away. Unfortunately neither of those responses are the right answer.

First, it’s key to take immediate action when you receive a letter from the IRS, your tax issues will not go away on their own. What’s equally important is to recognize that those immediate actions may set you up for failure, or set you up for success. In order to avoid the common pitfalls taxpayers make, you need to be well informed.

FACT: The IRS will use anything you say or documentation you provide against you.

Information you share with the IRS via phone, or in written correspondence can be utilized by them to assist them in their enforcement and collection efforts against you. In fact, IRS agents will often ask for more information that needed, hoping that you overshare and they can use that information as leverage against you. For example, a bank statement utilized to provide evidence for one item, could also contain damaging information as it relates to another tax matter. Even worse, it can give you problems related to other governmental agencies including federally backed student loans, child support, and other legal matters. Further, the information you provide for a given tax year, could create implications related to prior and future tax years.

Often taxpayers find themselves in very challenging situation due to over-sharing. Having a “less is more” philosophy will serve your well, as you have no duty to disclose information beyond what is needed to resolve your tax matter. Unfortunately, you likely do not know what information is needed, or that sharing more information can work to your detriment. Be diligent when corresponding with the IRS to ensure you are not negatively impacting your situation by sharing too much information.

Lastly, bear in mind, the goal of the IRS is to collect a debt. They are not on your side, and they are not there to help you. You need someone on your side, and we have had the privilege to work with taxpayers just like you, protecting them from the IRS. Get Started with us today to have a strong advocate working on your tax issues.

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