Learning Center for Tax and Financial Insights

Article Highlights: Separated Taxpayers Divorced Taxpayers Recently Married Taxpayers Widowed Taxpayers Filing Status Joint and Several Liability Who Claims the Children Alimony Community Property States Affordable Care Act Taxpayers are frequently blindsided when their filing status changes because of a life event such as marriage, divorce, separation or the death of a spouse. These occasions can be stressful or ecstatic times, and the last thing most people will be thinking about are the tax ramifications. But the ramifications are real and the following are some of the major tax complications for each situation. Separated – Separating from a spouse is probably the most complicated life event and is certainly stressful for the family involved. For taxes, a separated couple can file jointly, because they are still married, or file separately. Filing Status – If the couple has lived apart from each other for the last 6 months of the year, either or both of them can file as head of household (HH) provided that the spouse(s) claiming HH status paid over half the cost of maintaining a household for a dependent child, stepchild or foster child. A spouse not qualifying for HH status must file as a married person filing separately if the couple chooses not to file a joint return. The married filing separate status is subject to a host of restrictions to keep married couples from filing separately to take unintended advantage of the tax laws. In most cases, a joint return results in less tax than two returns filed as married separate. However, when married taxpayers file joint returns, both spouses are responsible for the tax on that return (referred to as joint and several liability). What this means is that one spouse may be held liable for all of the tax due on a return, even if the other spouse earned all of the income on that return. This holds true even if the couple later divorces, so when deciding whether to file a joint return or separate returns, taxpayers who are separated and possibly on the path to a divorce should consider the risk of potential future tax liability on any joint returns they file. Children – Who claims the children can be a contentious issue between separated spouses. If they cannot agree, the one with custody for the greater part of the year is entitled to claim the child as a dependent along with all of the associated tax benefits. When determining who had custody for the greater part of the year, the IRS goes by the number of nights the child spent at each parent’s home and ignores the actual hours spent there in a day. Alimony – Alimony is the term for payments made by one spouse to the other spouse for the support of the latter spouse. The recipient of the alimony must include it as income, and the payer can deduct it on their separate returns. A payment for the support of children is not alimony. To be treated as alimony by separated spouses, the payments must be designated and required in a written separation agreement. Voluntary payments do not count as alimony. Community Property – Nine U.S. states – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin – are community property states. Generally, community income must be split 50–50 between spouses according to their resident state’s community property law. This often complicates the allocation of income between spouses, and they generally cannot file based upon just their own income. Divorced – Once a couple is legally divorced, tax issues become clearer because each former spouse will file based upon their own income and the terms of the divorce decree related to spousal support, custody of children and division of property. Filing Status – An individual’s marital status as of the last day of the year is used to determine the filing status for that year. So, if a couple is divorced during the year, they can no longer file together on a joint return for that year or future years. They must, unless remarried, either file as single or head of household (HH). To file as HH, an unmarried individual must have paid over half the cost of maintaining a household for a dependent child or dependent relative who also lived in the home for more than half the year (exception: a dependent parent need not live in their child’s home for the child to qualify for HH status). If both ex-spouses meet the requirements, then both can file as head of household. Children – Normally, the divorce agreement will specify which parent is the custodial parent. Tax law specifies that the custodial parent is the one entitled to claim the child’s dependency and associated tax benefits unless the custodial parent releases the dependency to the other parent in writing. The IRS provides Form 8332 for this purpose. The release can be made for one year or multiple years and can be revoked, with the revocation becoming effective in the tax year after the year the revocation is made. Most recently, family courts have been awarding joint custody. If the parents cannot agree on who can claim a child as a tax dependent, then the IRS’s tie-breaker rule will apply. This rule specifies that the one with custody the greater part of the year, measured by the number of nights spent in each parent’s home, is entitled to claim the child as a dependent. The parent claiming the dependency is also eligible to take advantage of other tax benefits, such as child care credits and higher education tuition credits. Alimony – Alimony is the term for payments made by one spouse to the other spouse for the support of the latter spouse. On their respective individual returns, the recipient of the alimony must include it in their income, and the payer can deduct it. Child support payments are not alimony. Among other requirements, to be treated as alimony by divorced ex-spouses, the payments must be designated and required in the divorce decree. Voluntary payments and division of property do not count as alimony.

Article Highlights: Sec 179 Expensing Tax Planning Tool Placed-in-Service Requirement Section 179 is a provision of tax law that allows owners of small businesses to expense rather than depreciate equipment purchases made during the year. It is also a popular tax-planning tool allowing business owners to reduce their income for the year by making last-minute year-end purchases. For 2017 up $510,000 ($255,000 for married taxpayers filing separate) of qualifying expenses can be written off. Qualifying property includes machinery, tools, computer equipment, certain leasehold improvements, etc. However, there is an often-overlooked requirement of Sec 179: and that is not only must the purchase be made before year-end, the purchased item must be placed-in-service placed in service before year-end in order to expense it in the year purchased.

Professional Fees & Dues: Dues paid to professional societies related to your educational profession are deductible. These could include professional organizations, business leagues, trade associations, chambers of commerce, boards of trade and civic organizations. However, dues paid for memberships in clubs organized for business, pleasure, recreation or other social purpose are not deductible. These could include country clubs, golf and athletic clubs, airline clubs, hotel clubs and luncheon clubs. Deductions are allowed for payments made to a union as a condition of initial or continued membership. Such payments include regular dues, but not those that go toward defraying expenses of a personal nature. The portion of union dues that goes into a strike fund is deductible, however. Continuing Education: Educational expenses are deductible under either two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves your skills in the education profession. The cost of courses that are taken to meet the minimum requirements of a job or that qualify you for a new trade or business are not deductible. NOTE: Education undertaken to qualify a classroom teacher as a school administrator or guidance counselor generally meets the criteria foreducational expense deductions. Communication Expenses: The basic local telephone service costs of the first telephone line provided in your residence are not deductible. However, toll calls from that line are deductible if the calls are business-related. The costs of a second line (basic service and toll calls) in your home are also deductible if that line is used exclusively for business. When communication equipment, such as a cell phone, is used part for business and part personally the cost of the equipment must be allocated to deductible business use and non-deductible personal use. Keep your bills for cellular phone use and mark all business calls. Auto Travel: Your auto expenses are based on the number of qualified business miles you drive. Expenses for travel between business locations or daily transportation expenses between your residence and temporary work locations are deductible; include them as business miles. Expenses for your trips between home and work each day or between home and one or more regular places of work are COMMUTING expenses and are NOT deductible. Document business miles in a record book by the following: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the tax year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance, etc. – and of any reimbursement you received for your expenses.

If you’re retired or near retirement, you’ve probably already done the homework to ensure you’re ready financially. But hopefully your research has not left out the tax ramifications that the transition to retirement usually brings. Every retiree needs an awareness of the possible tax traps they may encounter as their income shifts from reliance on wages or self-employment income to retirement-based pensions, investment income, etc. Lifestyle changes can also pose tax questions – e.g., a home sale and move to a new location. This brochure highlights tax pitfalls retirees should be on the lookout for and offers a few pointers for overcoming them. Social Security BenefitsPre-retirement: If you haven’t yet retired but are trying to predict your retirement cash flow, be sure to request an Earnings and Benefit Statement from the Social Security Administration (SSA). It’s simple to do – just call the SSA at the number listed in your local telephone directory; ask for Form SSA-7004. Fill out the form, return it to the SSA, and they will send you a projection of the benefits you can expect to receive when you retire. You can also obtain this information online at www.ssa.gov. Post-retirement: If you’re already receiving social security, try to avoid traps like these that could cause you to pay some of it back: The SSA limits earnings (i.e., wages, commissions, etc.) of retirees who are under full retirement age (which depends on the year you were born, but is now generally ages 66 to 67). If you think you would like to continue working, it’s wise to make a comparison of how loss of benefits in the short-run may affect possible increases in benefits in the future (i.e., because work continuation allows extra contributions to the social security system). The amount of income tax you pay on your social security will depend on your filing status (married, single, etc.) and the level of your income. Be sure to take advantage of tax planning, particularly if you expect fluctuations in your income from year-toyear – planning ahead may help level the ups and downs and cut the amount of your social security that becomes taxable. Watch your investment choices. Tax-free interest from investments like municipal bonds, for example, can increase the amount of your social security income that is taxable. Here again, tax planning is a key factor that can help keep a larger portion of the benefits in your pocket instead of Uncle Sam’s. IRA AccountsPremature Distributions: If you are under age 59 1/2, be extremely careful about drawing money from your IRA. A federal penalty of 10% applies to certain premature distributions; some states also assess a penalty. However, there are safe methods of withdrawing IRA funds before age 59 1/2. For example, withdrawals of substantially equal periodic payments based on your life expectancy (or the lives of you and a beneficiary) may prevent the IRS from assessing the penalty. Minimum Distributions: You will only be able to contribute to an IRA as long as you receive compensation and you are under age 701/2 (no contribution is allowed for the year you turn 701/2). At age 701/2, you must begin taking at least minimum distributions from your account; otherwise the IRS can assess a penalty. Your required minimum distribution (RMD) is determined by using a factor based on your age from an IRS table called the “Uniform Lifetime Table.” If your spouse is your beneficiary and is more than 10 years younger, you may use the Joint Life & Last Survivor Table instead. To determine the minimum distribution amount, divide the balance of your IRA account on Dec. 31 of the prior year by the factor from the appropriate annuity table. If you have multiple IRA accounts, the total required distribution may be taken from one account or partly from each account or any combination. Choosing A Beneficiary: A beneficiary is someone you choose to receive your IRA in the event of your death. You may choose your spouse, your child(ren), a friend, etc. Choosing a beneficiary also plays a big part in how the IRA is distributed at your death. Be sure to consider the choice carefully before making a final decision. You need to notify the trustee of your IRA of the name of the beneficiary and to update the beneficiary information if circumstances change. For example, if you name your spouse as primary beneficiary and later divorce, your ex-spouse will receive the IRA upon your death if you don’t change the beneficiary designation, even if your will indicates all of your estate is to go to your children. Pension Plan DistributionsAt retirement, you may be faced with many decisions about your pension plan (either employer-provided or your own self-employed plan). Any number of options are usually available for these payouts, among them: An Annuity: An annuity provides a regular income over a period of time; it is generally paid in monthly installments. However, the term over which an annuity is paid varies, depending on how you choose to have payments made. For example, your employer will probably ask if you want your pension paid over a 10-year period, over your lifetime, over the combined lives of you and your beneficiary, etc. When you receive an annuity from a plan to which you made contributions that have already been taxed, a part of each annuity payment you receive is nontaxable. This is called your “investment in the contract.” When you have an investment in the contract, special calculations are necessary to determine how much of your annuity will be taxable.

Article Highlights: Independent Contractors 1099 Filing Requirement Due Dates Penalties Form W-9 and 1099 Worksheet If you operate a business and engage the services of an individual (independent contractor) other than one who meets the definition of an employee, and you pay him or her $600 or more for the calendar year, you are required to issue the individual a Form 1099-MISC soon after the end of the year to avoid penalties and the prospect of losing the deduction for his or her labor and expenses in an audit. The due date for mailing the recipient his or her copy of the 1099-MISC that reports 2017 payments is January 31, 2018. That is also the due date for filing the 1099-MISCs with the IRS. It is not uncommon to have a repairman out early in the year, pay him less than $600, then use his services again later in the year and have the total for the year exceed the $599 limit. As a result, you may have overlooked getting the information from the individual needed to file the 1099s for the year. Therefore, it is good practice to always have individuals who are not incorporated complete and sign an IRS Form W-9 the first time you engage them and before you pay them. Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts. If you have been negligent in the past about having the W-9s completed, it would be a good idea to establish a procedure for getting each non-corporate independent contractor and service provider to fill out a W-9 and return it to you going forward. IRS Form W-9, Request for Taxpayer Identification Number and Certification

It has been a busy time for tax-related news and upcoming changes. We have compiled many of the tax changes, deductions and tax rates for easy reference year round. It is more important than ever to plan ahead and review your options to maximize your financial results. Also please visit our side-by-side comparison of 2017 tax law and and the recently enacted "Tax Cuts and Jobs Act." HIGHLIGHTS OF THE CHANGES AFFECTING 2018 Congress in December of 2017 passed the Tax Cuts and Jobs Act that made sweeping changes to the tax laws. The issues impacting individuals and small businesses are included throughout this pocket tax guide. The following are changes not covered elsewhere in the guide. Itemized Deductions – Congress made some substantial changes in the area of deductions by almost doubling the standard deduction (shown elsewhere in this guide) while limiting and eliminating portions of the itemized deductions: Medical – The Tax Act retains the medical expense deduction and returns the deduction floor to 7.5% for 2017 and 2018, after which it returns to 10%. Taxes – This was a big bone of contention as the Act was being written, with the deduction originally totally eliminated. But that brought push back from taxpayers residing in states with state and local income tax, which can be pretty substantial, especially in states like CA, NJ and NY. In the end, property tax, state and local income tax, or in some cases sales tax, are still deductible. BUT, the deduction is limited to $10,000 per year. Home Mortgage Interest – Home mortgage interest took a big hit. For home acquisition debt incurred prior to December 15, 2017, taxpayers can still deduct interest on up to $1 Million of acquisition debt on 1st and 2nd homes. For mortgages acquired December 15 and later, interest will only be deductible on a maximum of $750,000 of acquisition debt on 1st and 2nd homes. However, the interest on up to $100,000 of equity debt will no longer be deductible beginning in 2018 regardless of when the debt was incurred. Charitable Contributions – Charitable contributions are still deductible as always, but the cap limiting total contribution deductions to 50% of AGI was increased to 60%, allowing a slightly larger deduction in some cases. Miscellaneous Deductions Subject to the 2% of AGI Floor – One category of miscellaneous itemized deductions has only been deductible to the extent the expenses exceed 2% of the taxpayer’s AGI. This category included employee business expenses, legal fees and investment expenses. This entire category is no longer deductible after 2017. Casualty Losses - Personal casualty losses will not be allowed except for those in federally declared disaster areas. Personal casualty gains in excess of personal casualty losses will be treated as capital gains and all such losses as capital losses. Moving Expense Deduction - After 2017, moving expenses and non-taxable employer reimbursement are suspended through 2025. However, the current treatment for moving expenses is allowed to continue for members of the Armed Forces on active duty who move pursuant to a military order. Child & Dependent Tax Credits - The child tax credit increases in 2018 to $2,000 (up from $1,000) with up to $1,400 being refundable. The earned income threshold is reduced to $2,500 (down from $3,000 in 2017) allowing more taxpayers to qualify for the credit. A child must be under the age of 17 and have a Social Security number issued before the return due date to qualify for credit. In addition a non-refundable tax credit of $500 is available for each non-child dependent that does not qualify for the child tax credit. The AGI thresholds at which the credit begins to phase out are substantially increased: to $400,000 for married filing jointly and $200,000 for all other taxpayers, up from $110,000 for married joint, $55,000 for married separate and $75,000 for all others. Discharge of Student Loan Indebtedness – Current law excludes from income the discharge of debt where the discharge was contingent on the student working a specific period of time in certain professions and for certain employers. This provision is modified to also exclude income from the discharge of indebtedness due to death or permanent disability of the student. Alimony - For divorce agreements entered into after December 31, 2018, alimony won’t be deductible by the payer and won’t be income to the recipient. IRA Recharacterizing Rule – The Act repeals the special rule that allows IRA contributions to one type of IRA (either traditional or Roth) to be recharacterized as a contribution to the other type of IRA. Thus, for example, under the provision, a conversion contribution establishing a Roth IRA during a taxable year can no longer be recharacterized as a contribution to a traditional IRA (thereby unwinding the conversion). The provision is effective for taxable years beginning after December 31, 2017. Net Operating Loss – The Act eliminates the 2-year carryback, except for certain farm losses, after 2018. Beginning after December 31, 2017, the NOL deduction is limited to 80% of taxable income (determined without regard to the NOL deduction) for losses arising in taxable years beginning after December 31, 2017. Luxury Auto Limits for Business Autos – The Act increased the luxury auto depreciation deduction limits for the 1st, 2nd, 3rd and subsequent years with year 1 increased to $10,000 and year 2 to $16,000. Deduction for Pass-Through Income - Generally for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the Act adds new Code Sec. 199A, "Qualified Business Income," under which a non-corporate taxpayer, including a trust or estate, who has qualified business income (QBI) from a partnership, S corporation, or sole proprietorship is allowed a deduction for pass-through income for the purpose of computing the taxpayer’s income tax. HERE ARE SOME HELPFUL TAX RATES AND TABLES TO REFERENCE YEAR-ROUND. (Bookmark this page for quick reference)EXEMPTIONS & STANDARD DEDUCTIONSPersonal & Dependent Exemption: Not allowed under the new tax lawStandard Deductions are as follows: An additional standard deduction of $1,300 is allowed for each married elderly (age 65 and over) or blind individual. If elderly and blind, the additional standard deduction is $2,600. Single individuals (elderly or blind) are allowed an additional standard deduction of $1,600. The requirement that higher-income taxpayers phase out their total itemized deductions when their AGI exceeds a specified threshold amount is suspended for 2018 through 2025. SOCIAL SECURITY (OASDI), MEDICARE & SELF-EMPLOYMENT TAXES Wage Base for Soc. Sec. & Self-Employment Tax (2018): $128,400Wage Base for Medicare Hospital Insurance – no limit*Old age, survivor and disability insurance portion of social security tax.**Self-employed individuals are allowed to take an income tax deduction for 50% of the self-employment tax.***Add 0.9% to rate when income exceeds $200,000 ($250,000 for married joint taxpayers, $125,000 if MFS filer) SOCIAL SECURITY BENEFITSEARNINGS TEST – SS benefits of an individual who is under the full retirement age (66) are reduced when earnings from working exceed: $17,040/yr. MAXIMUM RETIREMENT BENEFIT – The maximum retirement benefit for workers retiring in 2018 at age 66 (full retirement age): $2,788/mo.TAXATION THRESHOLDS – A certain % of an individual’s SS benefits are taxed when his or her provisional income* exceeds certain threshold amounts: *Provisional income generally includes adjusted gross income plus nontaxable interest plus one-half of social security benefits. **If married filing separately and lived with spouse at any time during the year, 85% of SS benefits are taxed. CAPITAL GAINSSpecial rates (capital gain rates) apply to gains attributable to sale of capital assets held for more than a year.CAPITAL GAIN RATES: The Tax Cuts and Jobs Act altered the regular individual tax rates, which the capital gains rates were previously tied to. So the Act created a separate rate schedule for capital gains tax. The table below illustrates the CG tax rates by filing status and range of income within the filing status. EXCLUDED FROM THE 0%, 15% AND 20% RATES:Gain attributable to real property depreciation: 25% MaxGain attributable to collectibles & qualified small business stock: 28% MaxMAXIMUM ANNUAL NET LOSS DEDUCTION: $3,000 ($1,500 MFS filers)NETTING SHORT-TERM (ST) AND LONG-TERM (LT) GAINS & LOSSES:ST gains and losses are netted as are LT gains and losses. Then the two are netted together, with the result being either a net ST or LT gain or loss. Taxpayers, when possible, can achieve a better overall tax benefit by offsetting short-term capital gains with long-term capital losses, thus offsetting higher-taxedprofits with lower-taxed losses. LONG-TERM CARE INSURANCE DEDUCTIONSThe maximum deductible amounts of long-term care premiums are based on age and for 2018 are: KIDDIE TAX The Tax Cuts & Jobs Act altered the way children under age 19 and full time students under age 24 who have unearned income are taxed. For 2018 these children will file their own tax returns with earned income taxed at the single rates and unearned income taxed at the very high tax rates for estates and trusts which hits 37% at income of $12,500. The standard deduction for these children is the greater of the following two amounts but not exceeding the standard deduction for singles ($12,000 in 2018): The base amount which is $1,050, or The child’s earned income plus $350. TRADITIONAL IRA – MAX DEDUCTION & LIMITSMaximum Contribution & Deduction for 2018: $5,500 ($6,500 if age 50 & older) (1) The deduction is ratably phased out for higher income individuals who actively participate in an employer-sponsored plan and/or whose spouse is an active plan participant. The following are the phase-out ranges based on Modified AGI: