Post-TCJA, certain strategies that were once tried-and-true will no longer save or defer tax. But some will hold up for many taxpayers. And they’ll be more effective if you begin implementing them this summer, rather than waiting until year end. Consider these three: 1) Take steps to stay out of a higher tax bracket, such as accelerating deductible expenses. 2) Bunch medical expenses into 2018 to exceed the low 7.5% of AGI deductibility floor. 3) Sell depreciated investments to generate losses to offset realized gains. Contact us to discuss your midyear planning.
Because donations to charity of cash or property generally are tax deductible (if you itemize), it only seems logical that the donation of something even more valuable to you — your time — would also be deductible. Unfortunately, that’s not the case. Donations of time or services aren’t deductible. It doesn’t matter if it’s simple administrative work, such as checking in attendees at a fundraising event, or if it’s work requiring significant experience and expertise that would be much more costly to the charity if it had to pay for it, such as skilled carpentry or legal counsel. However, you potentially can deduct out-of-pocket costs associated with your volunteer work. The basic rules As with any charitable donation, for you to be able to deduct your volunteer expenses, the first requirement is that the organization be a qualified charity. You can use the IRS’s “Tax Exempt Organization Search” tool (formerly “Select Check”) at http://bit.ly/2KXWl5b to find out. Assuming the charity is qualified, you may be able to deduct out-of-pocket costs that are: Unreimbursed, Directly connected with the services you’re providing, Incurred only because of your charitable work, and Not “personal, living or family” expenses. Supplies, uniforms and transportation A wide variety of expenses can qualify for the deduction. For example, supplies you use in the activity may be deductible. And the cost of a uniform you must wear during the activity may also be deductible (if it’s required and not something you’d wear when not volunteering). Transportation costs to and from the volunteer activity generally are deductible, either the actual cost or 14 cents per charitable mile driven. But you have to be the volunteer. If, say, you drive your elderly mother to the nature center where she’s volunteering, you can’t deduct the cost. You also can’t deduct transportation costs you’d be incurring even if you weren’t volunteering. For example, if you take a commuter train downtown to work, then walk to a nearby volunteer event after work and take the train back home afterwards, you won’t be able to deduct your train fares. But if you take a cab from work to the volunteer event, then you potentially can deduct the cab fare for that leg of your transportation. Volunteer travel Transportation costs may also be deductible for out-of-town travel associated with volunteering. This can include air, rail and bus transportation; driving expenses; and taxi or other transportation costs between an airport or train station and wherever you’re staying. Lodging and meal costs also might be deductible. The key to deductibility is that there is no significant element of personal pleasure, recreation or vacation in the travel. That said, according to the IRS, the deduction for travel expenses won’t be denied simply because you enjoy providing services to the charitable organization. But you must be volunteering in a genuine and substantial sense throughout the trip. If only a small portion of your trip involves volunteer work, your travel expenses generally won’t be deductible. Keep careful records The IRS may challenge charitable deductions for out-of-pocket costs, so it’s important to keep careful records. If you have questions about what volunteer expenses are and aren’t deductible, please contact us. © 2018
The massive changes the Tax Cuts and Jobs Act (TCJA) made to income taxes have garnered the most attention. But the new law also made major changes to gift and estate taxes. While the TCJA didn’t repeal these taxes, it did significantly reduce the number of taxpayers who’ll be subject to them, at least for the next several years. Nevertheless, factoring taxes into your estate planning is still important. Exemption increases The TCJA more than doubles the combined gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption, from $5.49 million for 2017 to $11.18 million for 2018. This amount will continue to be annually adjusted for inflation through 2025. Absent further congressional action, however, the exemptions will revert to their 2017 levels (adjusted for inflation) for 2026 and beyond. The rate for all three taxes remains at 40% — only three percentage points higher than the top income tax rate. The impact Even before the TCJA, the vast majority of taxpayers didn’t have to worry about federal gift and estate taxes. While the TCJA protects even more taxpayers from these taxes, those with estates in the roughly $6 million to $11 million range (twice that for married couples) still need to keep potential post-2025 estate tax liability in mind in their estate planning. Although their estates would escape estate taxes if they were to die while the doubled exemption is in effect, they could face such taxes if they live beyond 2025. Any taxpayer who could be subject to gift and estate taxes after 2025 may want to consider making gifts now to take advantage of the higher exemptions while they’re available. Factoring taxes into your estate planning is also still important if you live in a state with an estate tax. Even before the TCJA, many states imposed estate tax at a lower threshold than the federal government did. Now the differences in some states will be even greater. Finally, income tax planning, which became more important in estate planning back when exemptions rose to $5 million more than 15 years ago, is now an even more important part of estate planning. For example, holding assets until death may be advantageous if estate taxes aren’t a concern. When you give away an appreciated asset, the recipient takes over your tax basis in the asset, triggering capital gains tax should he or she turn around and sell it. When an appreciated asset is inherited, on the other hand, the recipient’s basis is “stepped up” to the asset’s fair market value on the date of death, erasing the built-in capital gain. So retaining appreciating assets until death can save significant income tax. Review your estate plan Whether or not you need to be concerned about federal gift and estate taxes, having an estate plan in place and reviewing it regularly is important. Contact us to discuss the potential tax impact of the TCJA on your estate plan. © 2018
Many Americans relocate to another state when they retire. If you’re thinking about such a move, state and local taxes should factor into your decision.
Income, Property and Sales Tax
Choosing a state that has no personal income tax may appear to be the best option. But that might not be the case once you consider property taxes and sales taxes.
For example, suppose you’ve narrowed your decision down to two states: State 1 has no individual income tax, and State 2 has a flat 5% individual income tax rate. At first glance, State 1 might appear to be much less expensive from a tax perspective. What happens when you factor in other state and local taxes?
Let’s say the property tax rate in your preferred locality in State 1 is 5%, while it’s only 1% in your preferred locality in State 2. That difference could potentially cancel out any savings in state income taxes in State 1, depending on your annual income and the assessed value of the home.
Also keep in mind that home values can vary dramatically from location to location. So if home values are higher in State 1, there’s an even greater chance that State 1’s overall tax cost could be higher than State 2’s, despite State 1’s lack of income tax.
The potential impact of sales tax can be harder to estimate, but it’s a good idea at minimum to look at the applicable rates in the various retirement locations you’re considering.
More to Think About
If states you’re considering have an income tax, also look at what types of income they tax. Some states, for example, don’t tax wages but do tax interest and dividends. Others offer tax breaks for retirement plan and Social Security income.
In the past, the federal income tax deduction for state and local property and income or sales tax could help make up some of the difference between higher- and lower-tax states. But with the Tax Cuts and Jobs Act (TCJA) limiting that deduction to $10,000 ($5,000 for married couples filing separately), this will be less help — at least through 2025, after which the limit is scheduled to expire.
There’s also estate tax to consider. Not all states have estate tax, but it can be expensive in states that do. While under the TJCA the federal estate tax exemption has more than doubled from the 2017 level to $11.18 million for 2018, states aren’t necessarily keeping pace with the federal exemption. So state estate tax could be levied after a much lower exemption.
As you can see, it’s important to factor in state and local taxes as you decide where to live in retirement. You might ultimately decide on a state with higher taxes if other factors are more important to you. But at least you will have made an informed decision and avoid unpleasant tax surprises. Contact us to learn more.
If you received a large refund after filing your 2017 income tax return, you’re probably enjoying the influx of cash. But a large refund isn’t all positive. It also means you were essentially giving the government an interest-free loan. That’s why a large refund for the previous tax year would usually indicate that you should consider reducing the amounts you’re having withheld (and/or what estimated tax payments you’re making) for the current year. But 2018 is a little different. TCJA and withholding To reflect changes under the Tax Cuts and Jobs Act (TCJA) — such as the increase in the standard deduction, suspension of personal exemptions and changes in tax rates and brackets —the IRS updated the withholding tables that indicate how much employers should hold back from their employees’ paychecks, generally reducing the amount withheld. The new tables may provide the correct amount of tax withholding for individuals with simple tax situations, but they might cause other taxpayers to not have enough withheld to pay their ultimate tax liabilities under the TCJA. So even if you received a large refund this year, you could end up owing a significant amount of tax when you file your 2018 return next year. Perils of the new tables The IRS itself cautions that people with more complex tax situations face the possibility of having their income taxes underwithheld. If, for example, you itemize deductions, have dependents age 17 or older, are in a two-income household or have more than one job, you should review your tax situation and adjust your withholding if appropriate. The IRS has updated its withholding calculator (available at irs.gov) to assist taxpayers in reviewing their situations. The calculator reflects changes in available itemized deductions, the increased child tax credit, the new dependent credit and repeal of dependent exemptions. More considerations Tax law changes aren’t the only reason to check your withholding. Additional reviews during the year are a good idea if: You get married or divorced, You add or lose a dependent, You purchase a home, You start or lose a job, or Your investment income changes significantly. You can modify your withholding at any time during the year, or even multiple times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically will go into effect several weeks after the new Form W-4 is submitted. (For estimated tax payments, you can make adjustments each time quarterly payments are due.) The TCJA and your tax situation If you rely solely on the new withholding tables, you could run the risk of significantly underwithholding your federal income taxes. As a result, you might face an unexpectedly high tax bill when you file your 2018 tax return next year. Contact us for help determining whether you should adjust your withholding. We can also answer any questions you have about how the TCJA may affect your particular situation. © 2018
What 2017 tax records can you toss once you’ve filed your 2017 return? The answer is simple: none. You need to hold on to all of your 2017 tax records for now. But it’s the perfect time to go through old tax records and see what you can discard.
The 3-year and 6-year rules
At minimum, keep tax records for as long as the IRS has the ability to audit your return or assess additional taxes, which generally is three years after you file your return. This means you potentially can get rid of most records related to tax returns for 2014 and earlier years. (If you filed an extension for your 2014 return, hold on to your records at least until the three-year anniversary of when you filed your extended return.) However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%. What constitutes an understatement may go beyond simply not reporting items of income. So a common rule of thumb is to save tax records for six years from filing, just to be safe.
What to keep longer
You’ll need to hang on to certain tax-related records beyond the statute of limitations:
- Keep tax returns themselves forever, so you can prove to the IRS that you actually filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.
- Hold on to W-2 forms until you begin receiving Social Security benefits. Questions might arise regarding your work record or earnings for a particular year, and your W-2 could provide the documentation needed.
- Retain records related to real estate or investments as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return (or six years if you want to be extra safe).
- Keep records associated with retirement accounts until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years.
We’ve covered retention guidelines for some of the most common tax-related records. If you have questions about other documents, please contact us. 336-725-0635 © 2018
Perhaps. It depends on several factors, such as your parent’s income and how much financial support you provided. If you qualify for the adult-dependent exemption on your 2017 income tax return, you can deduct up to $4,050 per qualifying adult dependent. However, for 2018, under the Tax Cuts and Jobs Act, the dependency exemption is eliminated.
Income and support
For you to qualify for the adult-dependent exemption, in most cases your parent must have less gross income for the tax year than the exemption amount. (Exceptions may apply if your parent is permanently and totally disabled.) Generally Social Security is excluded, but payments from dividends, interest and retirement plans are included.
In addition, you must have contributed more than 50% of your parent’s financial support. If you shared caregiving duties with a sibling and your combined support exceeded 50%, the exemption can be claimed even though no one individually provided more than 50%. However, only one of you can claim the exemption.
Keep in mind that, even though Social Security payments can usually be excluded from the adult dependent’s income, they can still affect your ability to qualify. Why? If your parent is using Social Security money to pay for medicine or other expenses, you may find that you aren’t meeting the 50% test.
Don’t forget about your home. If your parent lived with you, the amount of support you claim under the 50% test can include the fair market rental value of part of your residence. If the parent lived elsewhere — in his or her own residence or in an assisted-living facility or nursing home — any amount of financial support you contributed to that housing expense counts toward the 50% test.
Other savings opportunities
Sometimes caregivers fall just short of qualifying for the exemption. Should this happen, you may still be able to claim an itemized deduction for the medical expenses that you pay for the parent. To receive a tax benefit on your 2017 (or 2018) return, you must itemize deductions and the combined medical expenses paid for you, your dependents and your parent for the year must exceed 7.5% of your adjusted gross income.
The adult-dependent exemption is just one tax break that you may be able to employ to ease the financial burden of caring for an elderly parent. For 2018 through 2025, while the exemption is suspended, you might be eligible for a $500 “family” tax credit for your adult dependent. We’d be happy to provide additional information. Contact us to learn more. 336-725-0635 © 2018
Like their for-profit counterparts, not-for-profits are increasingly allowing employees to telecommute. Done right, work-at-home arrangements, either full time or on an occasional basis, can pay off for both employers and employees. But you’ll need to be proactive to avoid some pitfalls.
Bevy of benefits
Primary among the advantages of telecommuting is cost containment. An employee who doesn’t need to go into the office spends less money on things like commuting, work clothes, dry cleaning or going out to lunch. And the organization might be able to downsize its space needs, resulting in rent and other overhead savings.
Your organization is also likely to enjoy reduced recruiting expenses by landing top candidates regardless of where they live — and retaining them. Productivity may climb, too. Some employers worry about telecommuters slacking off. But research has suggested the opposite is true and that these workers put in more hours per week than their office-based counterparts.
Effective telecommuting arrangements require careful planning and management. Tackle these issues first:
Policy. Develop policies with a team of human resources staff, managers and employees. You’ll need your telecommuting policy to address — among other things — eligibility, home office requirements, training, communication, work hours, performance evaluations, and technology security. Employees approved for telecommuting should sign an agreement acknowledging the policy and expectations.
Communications. Both managers and employees must be proactive in their communications. You might find it helpful to establish standards for how promptly staffers should respond to email, the times when managers or employees will be available and similar matters. And because employees who aren’t in the office can sometimes miss out on information that spreads through the workplace, managers should schedule regular one-on-ones.
Fairness. Resentment can develop if workers in the office question whether their telecommuting colleagues are truly pulling their weight. It’s not unusual for an “us vs. them” mentality to develop. Managers can keep a lid on ill will by using team meetings to publicly praise both telecommuters and in-office employees and explicitly acknowledge their contributions to the organization.
When first dipping your toes in the telecommuting waters, you’d be wise to seek legal advice. Telecommuting puts a twist on a range of compliance, from confidentiality to wage and hour laws, and raises critical questions related to use of company property.
Contact us for more information. 336-725-0635
Whether you’re claiming charitable deductions on your 2017 return or planning your donations for 2018, be sure you know how much you’re allowed to deduct. Your deduction depends on more than just the actual amount you donate.
Type of gift
One of the biggest factors affecting your deduction is what you give:
Cash. You may deduct 100% gifts made by check, credit card or payroll deduction.
Ordinary-income property. For stocks and bonds held one year or less, inventory, and property subject to depreciation recapture, you generally may deduct only the lesser of fair market value or your tax basis.
Long-term capital gains property. You may deduct the current fair market value of appreciated stocks and bonds held for more than one year.
Tangible personal property. Your deduction depends on the situation:
• If the property isn’t related to the charity’s tax-exempt function (such as a painting donated for a charity auction), your deduction is limited to your basis.
• If the property is related to the charity’s tax-exempt function (such as a painting donated to a museum for its collection), you can deduct the fair market value.
Vehicle. Unless the vehicle is being used by the charity, you generally may deduct only the amount the charity receives when it sells the vehicle.
Use of property. Examples include use of a vacation home and a loan of artwork. Generally, you receive no deduction because it isn’t considered a completed gift.
Services. You may deduct only your out-of-pocket expenses, not the fair market value of your services. You can deduct 14 cents per charitable mile driven.
First, you’ll benefit from the charitable deduction only if you itemize deductions rather than claim the standard deduction. Also, your annual charitable donation deductions may be reduced if they exceed certain income-based limits.
In addition, your deduction generally must be reduced by the value of any benefit received from the charity. Finally, various substantiation requirements apply, and the charity must be eligible to receive tax-deductible contributions.
While December’s Tax Cuts and Jobs Act (TCJA) preserves the charitable deduction, it temporarily makes itemizing less attractive for many taxpayers, reducing the tax benefits of charitable giving for them.
Itemizing saves tax only if itemized deductions exceed the standard deduction. For 2018 through 2025, the TCJA nearly doubles the standard deduction ? plus, it limits or eliminates some common itemized deductions. As a result, you may no longer have enough itemized deductions to exceed the standard deduction, in which case your charitable donations won’t save you tax.
You might be able to preserve your charitable deduction by “bunching” donations into alternating years, so that you’ll exceed the standard deduction and can claim a charitable deduction (and other itemized deductions) every other year.
Let us know if you have questions about how much you can deduct on your 2017 return or what your charitable giving strategy should be going forward, in light of the TCJA. © 2018
Cloud computing promises lower technology costs and greater efficiency and productivity. Yet many nonprofits have yet to move to the cloud, possibly because their staffs are smaller and their IT expertise is limited. Fortunately, cloud computing is a simple concept that’s easy to adopt.
Cloud computing, also known as “software as a service,” uses a network of remote third-party servers made available online. Rather than relying on your organization’s own computers or server, you remotely share software and storage to process, manage and share information.
For many nonprofits, the greatest advantage of using cloud services is lower costs. The technology generally eliminates pricey contracts and per-user licensing fees. Instead, cloud customers pay a monthly subscription fee or are billed based on actual usage. What’s more, service providers update their offerings and provide security patches on an ongoing basis.
Another benefit is the scalability of cloud services. You can scale up when you need more storage or data capacity and scale back when you need less. Also, because cloud services aren’t limited to a physical location and can be accessed from anywhere, they make it easy for colleagues, board members and volunteers to collaborate on projects. Finally, cloud services can make it easier to track and report funds over multiple time periods and to analyze budgets, expenses and cash flows. They can also produce specialized data reports.
Most reputable services boast stronger security, including firewalls, authorization restrictions and data encryption, than your own nonprofit could afford to put in place on its own. And cloud services typically offer continuous data backup and disaster recovery capabilities.
That said, your nonprofit can’t possibly have as much control over a cloud system as it would of its own infrastructure. So if control is a priority, you need to weigh it against the benefits of cloud computing.
You’ll want to look for a service that:
• Frequently updates features,
• Immediately responds to security threats,
• Protects the privacy of your data, and
• Backs up data in multiple locations.
Cost is another major consideration when selecting a vendor. But your nonprofit may qualify for discounts or even gratis services. Get satisfaction Before leaping into the cloud, be sure to research your options and get recommendations from other nonprofits and from IT experts. Contact us for help finding a cost-effective cloud provider. © 2018
With rising health care costs, claiming whatever tax breaks related to health care that you can is more important than ever. But there’s a threshold for deducting medical expenses that may be hard to meet. Fortunately, the Tax Cuts and Jobs Act (TCJA) has temporarily reduced the threshold. What expenses are eligible? Medical expenses may be deductible if they’re “qualified.” Qualified medical expenses involve the costs of diagnosis, cure, mitigation, treatment or prevention of disease, and the costs for treatments affecting any part or function of the body. Examples include payments to physicians, dentists and other medical practitioners, as well as equipment, supplies, diagnostic devices and prescription drugs. Mileage driven for health-care-related purposes is also deductible at a rate of 17 cents per mile for 2017 and 18 cents per mile for 2018. Health insurance and long-term care insurance premiums can also qualify, with certain limits. Expenses reimbursed by insurance or paid with funds from a tax-advantaged account such as a Health Savings Account or Flexible Spending Account can’t be deducted. Likewise, health insurance premiums aren’t deductible if they’re taken out of your paycheck pretax. The AGI threshold before 2013, you could claim an itemized deduction for qualified unreimbursed medical expenses paid for you, your spouse and your dependents, to the extent those expenses exceeded 7.5% of your adjusted gross income (AGI). AGI includes all of your taxable income items reduced by certain “above-the-line” deductions, such as those for deductible IRA contributions and student loan interest. As part of the Affordable Care Act, a higher deduction threshold of 10% of AGI went into effect in 2014 for most taxpayers and was scheduled to go into effect in 2017 for taxpayers age 65 or older. But under the TCJA, the 7.5% of AGI deduction threshold now applies to all taxpayers for 2017 and 2018. However, this lower threshold is temporary. Beginning January 1, 2019, the 10% threshold will apply to all taxpayers, including those over age 65, unless Congress takes additional action. Consider “bunching” expenses into 2018. Because the threshold is scheduled to increase to 10% in 2019, you might benefit from accelerating deductible medical expenses into 2018, to the extent they’re within your control. However, keep in mind that you have to itemize deductions to deduct medical expenses. Itemizing saves tax only if your total itemized deductions exceed your standard deduction. And with the TCJA’s near doubling of the standard deduction for 2018, many taxpayers who’ve typically itemized may no longer benefit from itemizing. Contact us if you have questions about what expenses are eligible and whether you can qualify for a deduction on your 2017 tax return. We can also help you determine whether bunching medical expenses into 2018 will likely save you tax. © 2018
Individual taxpayers who itemize their deductions can deduct either state and local income taxes or state and local sales taxes. The ability to deduct state and local taxes — including income or sales taxes, as well as property taxes — had been on the tax reform chopping block, but it ultimately survived. However, for 2018 through 2025, the Tax Cuts and Jobs Act imposes a new limit on the state an[...] d local tax deduction. Will you benefit from the sales tax deduction on your 2017 or 2018 tax return? Your 2017 return The sales tax deduction can be valuable if you reside in a state with no or low income tax or purchased a major item in 2017, such as a car or boat. How do you determine whether you can save more by deducting sales tax on your 2017 return? Compare your potential deduction for state and local income tax to your potential deduction for state and local sales tax. This isn’t as difficult as you might think: You don’t have to have receipts documenting all of the sales tax you actually paid during the year to take full advantage of the deduction. Your deduction can be determined by using an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale plus the tax you actually paid on certain major purchases (for which you will need substantiation). Your 2018 return Under the TCJA, for 2018 through 2025, your total deduction for all state and local taxes combined — including property tax — is limited to $10,000. You still must choose between deducting income and sales tax; you can’t deduct both, even if your total state and local tax deduction wouldn’t exceed $10,000. Also keep in mind that the TCJA nearly doubles the standard deduction. So even if itemizing has typically benefited you in the past, you could end up being better off taking the standard deduction when you file your 2018 return. So if you’re considering making a large purchase in 2018, you shouldn’t necessarily count on the sales tax deduction providing you significant tax savings. You need to look at what your total state and local tax liability likely will be, as well as whether your total itemized deductions are likely to exceed the standard deduction. Questions? Let us know if you have questions about whether you can benefit from the sales tax deduction on your 2017 return or about the impact of the TCJA on your 2018 tax planning. We’d be pleased to help. © 2018
For 2018, fewer taxpayers will be eligible for a home office deduction. Employees claim home office expenses as a miscellaneous itemized deduction. For 2017, this means there’s a tax benefit only if these expenses plus other miscellaneous itemized expenses exceed 2% of adjusted gross income. For 2018, the Tax Cuts and Jobs Act suspends miscellaneous itemized deductions subject to the 2% floor. But if you’re self-employed, you can deduct eligible home office expenses against self-employment income. Additional rules and limits apply; contact us for details.
The IRS has just announced that it will begin accepting 2017 income tax returns on January 29. You may be more concerned about the April 17 filing deadline, or even the extended deadline of October 15 (if you file for an extension by April 17). After all, why go through the hassle of filing your return earlier than you have to? But it can be a good idea to file as close to January 29 as possible: Doing so helps protect you from tax identity theft. All-too-common scam Here’s why early filing helps: In an all-too-common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. This is usually done early in the tax filing season. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns. A victim typically discovers the fraud after he or she files a tax return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the same tax year. The IRS then must determine who the legitimate taxpayer is. Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the tax return filed by a potential thief that will be rejected — not yours. The IRS is working with the tax industry and states to improve safeguards to protect taxpayers from tax identity theft. But filing early may be your best defense. W-2s and 1099s Of course, in order to file your tax return, you’ll need to have your W-2s and 1099s. So another key date to be aware of is January 31 — the deadline for employers to issue 2017 Form W-2 to employees and, generally, for businesses to issue Form 1099 to recipients of any 2017 interest, dividend or reportable miscellaneous income payments. If you don’t receive a W-2 or 1099, first contact the entity that should have issued it. If by mid-February you still haven’t received it, you can contact the IRS for help. Earlier refunds Of course, if you’ll be getting a refund, another good thing about filing early is that you’ll get your refund sooner. The IRS expects over 90% of refunds to be issued within 21 days. E-filing and requesting a direct deposit refund generally will result in a quicker refund and also can be more secure. If you have questions about tax identity theft or would like help filing your 2017 return early, please contact us. © 2018
On December 20, Congress completed passage of the largest federal tax reform law in more than 30 years. Commonly called the “Tax Cuts and Jobs Act” (TCJA), the new law means substantial changes for individual taxpayers.
The following is a brief overview of some of the most significant provisions. Except where noted, these changes are effective for tax years beginning after December 31, 2017, and before January 1, 2026.
• Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%.
• Near doubling of the standard deduction to $24,000 (married couples filing jointly), $18,000 (heads of households), and $12,000 (singles and married couples filing separately).
• Elimination of personal exemptions.
• Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit.
• Elimination of the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty — effective for months beginning after December 31, 2018, and permanent.
• Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes — for 2017 and 2018.
• New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income taxes; $5,000 for separate filers).
• Reduction of the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for separate filers), with certain exceptions.
• Elimination of the deduction for interest on home equity debt.
• Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters).
• Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses).
• Elimination of the AGI-based reduction of certain itemized deductions.
•Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances).
• Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year — permanent.
• AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers.
• Doubling of the gift and estate tax exemptions, to $10 million (expected to be $11.2 million for 2018 with inflation indexing).
Be aware that additional rules and limits apply. Also, there are many more changes in the TCJA that will impact individuals. If you have questions or would like to discuss how you might be affected, please contact us. ©
Charitable giving can be a powerful tax-saving strategy: Donations to qualified charities are generally fully deductible, and you have complete control over when and how much you give. Here are some important considerations to keep in mind this year to ensure you receive the tax benefits you desire. Delivery date To be deductible on your 2017 return, a charitable donation must be made by Dec. 31, 2017. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” But what does this mean? Is it the date you, for example, write a check or make an online gift via your credit card? Or is it the date the charity actually receives the funds — or perhaps the date of the charity’s acknowledgment of your gift? The delivery date depends in part on what you donate and how you donate it. Here are a few examples for common donations: Check. The date you mail it. Credit card. The date you make the charge. Pay-by-phone account. The date the financial institution pays the amount. Stock certificate. The date you mail the properly endorsed stock certificate to the charity. Qualified charity status To be deductible, a donation also must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions. The IRS’s online search tool, Exempt Organizations (EO) Select Check, can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access EO Select Check at http://bit.ly/2gFacut Information about organizations eligible to receive deductible contributions is updated monthly. Potential impact of tax reform The charitable donation deduction isn’t among the deductions that have been proposed for elimination or reduction under tax reform. In fact, income-based limits on how much can be deducted in a particular year might be expanded, which will benefit higher-income taxpayers who make substantial charitable gifts. However, for many taxpayers, accelerating into this year donations that they might normally give next year may make sense for a couple of tax-reform-related reasons:
1. If your tax rate goes down for 2018, then 2017 donations will save you more tax because deductions are more powerful when rates are higher.
2. If the standard deduction is raised significantly and many itemized deductions are eliminated or reduced, then it may not make sense for you to itemize deductions in 2018, in which case you wouldn’t benefit from charitable donation deduction next year.
Many additional rules apply to the charitable donation deduction, so please contact us if you have questions about the deductibility of a gift you’ve made or are considering making — or the potential impact of tax reform on your charitable giving plans. © 2017
We’re entering the giving season, and if making financial gifts to your loved ones is part of your plans — or if you’d simply like to reduce your capital gains tax — consider giving appreciated stock instead of cash this year. Doing so might allow you to eliminate all federal tax liability on the appreciation, or at least significantly reduce it. Leveraging lower rates Investors generally are subject to a 15% tax rate on their long-term capital gains (20% if they’re in the top ordinary income tax bracket of 39.6%). But the long-term capital gains rate is 0% for gain that would be taxed at 10% or 15% based on the taxpayer’s ordinary-income rate. In addition, taxpayers with modified adjusted gross income (MAGI) over $200,000 per year ($250,000 for joint filers and $125,000 for married filing separately) may owe the net investment income tax (NIIT). The NIIT equals 3.8% of the lesser of your net investment income or the amount by which your MAGI exceeds the applicable threshold. If you have loved ones in the 0% bracket, you may be able to take advantage of it by transferring appreciated assets to them. The recipients can then sell the assets at no or a low federal tax cost. The strategy in action Faced with a long-term capital gains tax rate of 23.8% (20% for the top tax bracket, plus the 3.8% NIIT), Rick and Sara decide to transfer some appreciated stock to their adult daughter, Maia. Just out of college and making only enough from her entry-level job to leave her with $25,000 in taxable income, Maia falls into the 15% income tax bracket. Therefore, she qualifies for the 0% long-term capital gains rate. However, the 0% rate applies only to the extent that capital gains “fill up” the gap between Maia’s taxable income and the top end of the 15% bracket. In 2017, the 15% bracket for singles tops out at $37,950. When Maia sells the stock her parents transferred to her, her capital gains are $20,000. Of that amount $12,950 qualifies for the 0% rate and the remaining $7,050 is taxed at 15%. Maia pays only $1,057.50 of federal tax on the sale vs. the $4,760 her parents would have owed had they sold the stock themselves. Additional considerations Before acting, make sure the recipients won’t be subject to the “kiddie tax.” Also consider any gift and generation-skipping transfer (GST) tax consequences. For more information on transfer taxes, the kiddie tax or capital gains planning, please contact us. We can help you find the strategies that will best achieve your goals. © 2017
People are naturally inclined to make charitable gifts around the holidays. With the end of the year fast approaching, your not-for-profit should prepare now to take advantage of donors’ generosity. Here are four tips for making the most of the season:
1. Strike early. Plan events or solicitations for early December or sooner. By being one of the first to appeal to givers’ seasonal generosity, you increase the odds of securing an early commitment and avoiding the donor fatigue that may set in later as solicitations and holiday financial demands mount.
2. Target qualified prospects. Rather than blitz every prospect in your database, identify the best prospects among current donors. Past donors are more likely to give again and in larger amounts than those who have never donated before. Consider factors such as how often individuals have given in the past, how recently they’ve given, their likely ability to give and their degree of attachment to your organization. You can then write meaningful, personal appeals that encourage a greater commitment.
3. Make it personal. The more personal a solicitation, the more effective it’s likely to be, with face-to-face appeals being especially powerful. The holiday season is the ideal time for executives and board members to solicit past supporters and promising new ones.
4. “Missionize” late-year events. Attendees are already inclined to give; it’s just that most need to be inspired to give more. So don’t allow an event to take place without making a brief but carefully crafted pitch for your nonprofit. Make your mission come alive through your remarks or a short video presentation. When telling the audience about the great work you’re doing, mention how much more you could do with their help and talk about specific needs for cash, in-kind goods and services. People are more likely to give when they clearly understand the difference their gifts can make.
The holiday season is an opportune time to raise funds for your nonprofit. All you have to do is ask — but in the right way. Contact us for more fundraising ideas. © 2017
Not-for-profit board members need to keep an eye on how well their organizations are meeting major goals and furthering their missions. One of the easiest, quickest ways for boards to do this is with a “dashboard” of key performance indicators. Just as an automobile dashboard gives drivers a quick glimpse of their car’s status, a performance dashboard provides an at-a-glance look at an organization’s financial health.
Concise and Focused
Although most boards regularly receive financial reports to review, a dashboard can be more effective because it’s designed to be concise and focus on the most critical numbers. Plus, the information is displayed in a format that all board members can easily understand — even if they aren’t accustomed to analyzing financial statements. For example, an organization whose primary goal is to diversify revenue sources might use a pie chart on its dashboard to display the percentage of income from each source. All board members need to do is monitor whether slices of the pie are becoming more equal in size over time. Or a nonprofit might use various simple graphics and data displays to track the number of new clients served, volunteer hours, and the number of individual and corporate donors.
To develop your own dashboard, consider these questions:
• What are your nonprofit’s top priorities or objectives?
• What key aspects of your operations do you want to monitor?
• What is the best way to display progress toward goals in key areas?
• How often do you want board members to receive the dashboard for review — such as quarterly or at every meeting?
Include only the most important key indicators on your dashboard so that board members don’t get distracted and can detect trends quickly and take corrective action as necessary.
One of the most important roles of nonprofit boards is to set strategic direction and establish priorities for their organizations. To carry out this duty, your board needs relevant information that’s easy to monitor and understand. We can help you provide it. © 2017
Preparing your not-for-profit’s annual budget is probably one of the least appealing parts of your job. Here’s how to make the process a little less painful.
1. Count your chickens. Before you start allocating resources, figure out what they are. This includes not only the amount of your income, but its nature. Remember that restricted or planned gifts aren’t necessarily available for spending.
2. Get with the program — costs. With the input of staff and board members, determine the costs of current programs and what your nonprofit expects to offer in the next year. Be careful not to underestimate needs. Make necessary adjustments to the previous year’s expenses for inflation and other higher costs that may disproportionately affect your nonprofit.
3. Pay attention to other expenses. List your direct expenses, breaking them down into specific line items. Payroll is probably the largest item — likely at least 50% of total expenses. Add to current salaries any expected salary increases and payroll taxes and benefits. Other direct costs may include rent, utilities, supplies, equipment maintenance, insurance, contracted services and transportation. Account for indirect expenses as well. These benefit multiple programs, such as costs related to payroll for business management, recordkeeping and financial reporting. You may have to allocate salaries for certain positions to several categories.
4. Play with the numbers. What you have at this point is a rough draft. You’ll need to make at least some adjustments to your numbers, assumptions and plans before getting to where your staff and board want to be — whether that means you break even, spend from reserves earned in prior years or plan for a surplus. Be sure to compare your budget to last year’s and to the actual results, paying attention to large variances. An unanticipated one-time event might explain going over budget. But if you routinely overspend, you probably need to be more realistic about your income and expenses.
5. Ask for direction. Don’t hesitate to get assistance if you need it. Your board members may be able to help you prepare an effective budget. But if you’re uncertain, contact us. After all, your annual budget is one of the keys to current and long-term financial stability. © 2017
There are more than 87,000 foundations in the United States — including family, corporate and community foundations — according to the Foundation Center. If your not-for-profit isn’t actively seeking grants from these groups, you’re neglecting a potentially significant income source. Know your target Probably the most important thing to remember when approaching foundations is that they tend to specialize, making grants to certain types of charities or in specific geographic regions. It’s not enough to be a 501(c)(3) organization — though your exempt status is critical. Your nonprofit’s mission and programs will need to match the interests of the foundation to which you’re applying. So it’s essential to research foundations before you apply for grants. Review annual reports, tax filings, press releases and any other information you can get your hands on. One place to start is the Foundation Center’s online directory at foundationcenter.org. Once you have a list of matches, don’t just start sending out long, detailed proposals. Call your target foundations and talk to staff members about the kind of information they need and their communication preferences. Most will be happy to provide insights into their decision-making process and shed light on your chances of securing a grant. Successful qualities The most successful foundation grant proposals have several qualities in common. For example, foundations like projects that are well defined and data driven with specific goals. They also want to know that their gifts are effective, so achievement of such goals needs to be measurable. It’s important to outline a project’s life cycle and how you plan to fund it to completion. Many foundations provide the money to initiate projects but expect nonprofits to use their own funds and other grants to continue them. In fact, if you hope to establish a long-term relationship with a foundation that has given you a grant, you must successfully finish what you started. If at first ... Keep in mind that a rejected proposal doesn’t have to shut the door on future opportunities. If your request is turned down, ask the foundation to explain its decision and to provide tips on making your proposals stronger. Many organizations are competing for the same foundation funds, so tenacity is crucial. Contact us for more tips on getting the funding your organization needs. © 2017
The Social Security Administration (SSA) announced on Friday that the maximum amount of wages in 2018 subject to the 6.2% Social Security tax (old age, survivor, and disability insurance) will rise from $127,200 to $128,700, an increase of a little more than 1%. By comparison, the 2017 wage base increased more than 7% over the 2016 wage base.
The maximum amount of Social Security tax a taxpayer could pay will therefore increase from $7,886.40 in 2017 to $7,979.40 in 2018, an increase of $93.
The SSA also announced that Social Security beneficiaries will get a 2% increase in benefits in 2018, after receiving a 0.3% increase in benefits in 2017 and no increase in 2016. The average retiree will receive an increase of $27 a month.
Among the other increases is the amount a worker under full retirement age can earn before he or she has Social Security benefits reduced. The limit increases from $16,920 for 2017 to $17,040 for 2018, after which $1 in benefits is withheld for every $2 earned above the limit.
There is no limit on the amount of wages subject to the other portion of the FICA tax, the 1.45% Medicare tax.
—JOURNAL Of ACCOUNTANCY - Sally Schreiber (Sally.Schreiber@aicpa-cima.com) is a JofA senior editor.
Term limits for not-for-profit board members can be a double-edged sword. They can allow you to easily let go of unsuccessful board members, but they also can cause you to lose the best sooner than you’d like. Consider some of the issues involved before making a decision. Review the pros Term limits allow you to remove inactive or difficult members politely and, hopefully, without hurting their feelings. They also can create an opportunity for new board members with fresh ideas and perspectives to come on board and provide flexibility as your organization grows. Suppose, for example, that a board member’s term is expiring and a key initiative is to replace outdated technology. This is an ideal time to add a new board member with IT expertise. Term limits can help board members, too. By knowing in advance that their terms will be expiring, they can move on to other nonprofit boards without feeling guilty. And they can exit gracefully if age or life-changing situations affect their participation. Recognize the cons But in some circumstances, term limits do more harm than good. First, your organization may have to look for qualified and dedicated volunteers every couple of years — which can be difficult and time consuming. Also, term limits require your board and organization to commit to an endless cycle of new member training. This can diminish your board’s return on its training investment — by the time a member becomes a valuable asset and is effective, his or her term may be up. What’s more, you may sacrifice your most dedicated members. Although ideally all board members contribute significantly and equally, nonprofits often have a few members that perform the bulk of the board’s work. Losing one of these key people can be devastating. Last, you may lose institutional knowledge and organizational history when founding and experienced members leave. Other options If term limits aren’t appropriate for your organization but you want to ensure board members are active and engaged, think about developing an advisory committee to evaluate members and assess their ongoing interest. To discuss your options, contact us. © 2017
Out-of-pocket medical expenses may be deductible if they exceed 10% of your adjusted gross income. By “bunching” nonurgent medical expenses into alternating years, you may be able to exceed the floor. The “Unified Framework for Fixing Our Broken Tax Code” President Trump and congressional Republicans released on Sept. 27 proposes, among other things, increasing the standard deduction and eliminating most itemized deductions, which likely would include the medical expense deduction. So bunching such expenses into 2017 may be tax-smart. Contact us to learn more.