Learning Center for Tax and Financial Insights

Article Highlights: Shared-Responsibility Payment Originated in 2014 Fully Effective in 2016 How It Is Calculated Eliminated in 2019 Note: This one of a series of articles that explain how the various tax changes in the GOP’s Tax Cuts & Jobs Act (referred to as “the Act” in this article), which passed in late December of 2017, could affect you and your family—both in 2018 and in future years. This series offers strategies that you can employ to reduce your tax liability under the new law. Beginning in 2014, the Affordable Care Act, also known as Obamacare, imposed what a “share-responsibility payment” on taxpayers who did not sign up for minimum essential health coverage. This payment is essentially a penalty for not being insured. The penalty was phased in during 2014 and 2015, and it became fully effective in 2016. The penalty also began to be inflation adjusted after 2017. The penalty for 2018 is the greater of the sum of the family’s flat dollar amounts or 2.5% of the amount by which the household’s income exceeds the income-tax filing threshold. For 2018, the flat dollar amounts are $700 per year ($58.33 per month) for each adult and $350 per year ($29.17 per month) for each child; the maximum family penalty using this method is $2,100 per year ($175 per month).

Article Highlights: Tax Benefits Types of Tax-advantaged Education Savings Plans Differences in Permitted Contributions Differences in Qualified Education New $10,000 Allowance Note: This one of a series of articles explaining how the various tax changes in the GOP’s Tax Cuts & Jobs Act (referred to as “the Act” in this article), which passed in late December of 2017, could affect you and your family, both in 2018 and in future years. This series offers strategies that you can employ to reduce your tax liability under the new law. Tax law provides two tax-advantaged savings plans for the Qualified State Tuition Plan (commonly referred to as a 529 Plan). They are similar in that contributions to the plans are not tax deductible (although some states do allow a deduction for contributions to their plans) and the earnings are tax deferred and tax free if used for qualified education expenses. They are different in that only $2,000 per year can be deposited into a Coverdell account, whereas contributions to a 529 plan are only limited by gift tax considerations and the cost of attending the state’s highest-cost university. This generally means the annual contribution to a 529 plan is limited to the annual gift tax exclusion amount ($15,000 for 2018) in order to avoid gift tax complications. However, the annual gift limit is per contributor and multiple individuals, typically grandparents, can also contribute to a 529 plan. On the other hand, a maximum of only $2,000 can be contributed to a Coverdell account regardless of the number of contributors. Thus, 529 plans typically accept the largest amount of college savings funds.

Article Highlights: Filing Status Claiming the Children as Dependents Child Exemption Head-of-Household Filing Status Tuition Tax Credit Child Care Tax Credit Child Tax Credit Medical Insurance Earned-Income Tax Credit Alimony If you are recently divorced or are contemplating divorce you will have to deal with or plan for significant tax issues such as asset division, alimony, and tax-return filing status. If you have children, additional issues include child support; claiming of the children as dependents; the child, child care, and education tax credits; and perhaps even the earned-income tax credit (EITC). Filing Status – Your filing status is based on your marital status at the end of the year. If, on December 31, you are in the process of divorcing but are not yet divorced, your options are to file jointly or to each submit a return as married filing separately. There is an exception to this rule however; if a couple has been separated for all of the last 6 months of the year, and if one taxpayer has paid more than half the cost of maintaining a household for a qualified child, then that spouse can use the more favorable head-of-household filing status. If each spouse meets the criteria for that exception, they can both file as heads of household; otherwise, the spouse who doesn’t qualify must have the status of married filing separately. If your divorce has been finalized and if you haven’t remarried, your filing status will be single or, if you meet the requirements, head of household. Claiming the Children as Dependents – A common (and commonly misunderstood) issue for those who are divorced or separated and who have children is the choice regarding who claims a child for tax purposes. This can be a hotly disputed issue between parents; however, tax law includes very specific (albeit complicated) rules about who profits from child-related tax benefits. At issue are a number of benefits, including the child, child care credit, higher-education tuition, and earned-income tax credits, as well as, in some cases, filing status. This is actually one of the most complicated areas of tax law, and both taxpayers and inexperienced tax preparers can make serious mistakes when preparing returns, especially if the parents are not communicating well. When parents cooperate with each other, they often can work out the best tax result overall, even though it may not be the best for them individually, and can then compensate for discrepancies in other ways. When a court awards physical custody of a child to one parent, the tax law is very specific in awarding that child’s dependency to the parent who has physical custody, regardless of the amount of child support that the other parent provides. However, the custodial parent may release this dependency to the noncustodial parent by completing the appropriate IRS form. CAUTION – The decision to relinquish dependency should not be taken lightly, as it impacts a number of tax benefits. On the other hand, if a court awards joint physical custody of a child, only one of the parents can claim the child for tax purposes. If the parents cannot agree on who will claim the child and the child, or if both actually claim the child, the IRS tiebreaker rules apply. Per these rules, a child is treated as a dependent of the parent with whom the child resided for the greater number of nights during the tax year; if the child resides with both parents for the same amount of time, the parent with the higher adjusted gross income claims the child as a dependent. Child’s Exemption – Under prior law, a child’s tax-exemption deduction ($4,150 in 2017) was generally an issue; the parent claiming the child as a dependent claimed the exemption allowance. However, because of the recent tax reform, the tax deduction for such exemptions has been suspended through 2025; although this is no longer an issue for this benefit, a child’s dependency is still a consideration for other tax issues. Head of Household Filing Status – An unmarried parent can claim the more favorable head-of-household (rather than single) filing status if that person (a) is the custodial parent and (b) pays more than one-half of the cost of maintaining the household that acts as the principal place of residence for the child (i.e., where the child lives for more than half of the year). Tuition Credit – If the child qualifies for either of two higher-education tax credits (the American Opportunity Tax Credit [AOTC] or the Lifetime Learning Credit), the credit goes to whoever claims the child as a dependent. Credits are significant tax benefits because they reduce the dollar-for-dollar tax bill; deductions, on the other hand, reduce taxable income before the tax amount is calculated according to the individual’s tax bracket. For instance, the AOTC provides a tax credit of up to $2,500, 40% of which is refundable. However, both education credits phase out for high-income taxpayers. For instance, the AOTC phases out between $80,000 and $90,000 for unmarried taxpayers and between $160,000 and $180,000 for married taxpayers.

Professional Fees & Dues: Dues paid to professional societies related to your occupation are deductible. Deductions are allowed for payments made to a union as a condition of initial or continued membership. Such payments include dues, but not those that go toward defraying expenses of a personal nature. However, the portion of union dues that goes into a strike fund is deductible. Educational expenses are deductible under either of 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 job skills. Costs 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. Uniforms & Upkeep Expenses: Generally, the costs of your uniforms are fully deductible. IRS rules specify that work clothing cost and the cost of maintenance are deductible if: (1) the uniforms are required by your employer (if you’re an employee); and (2) the clothes are not adaptable to ordinary street wear. Normally, the employer’s emblem attached to the clothing indicates it is not for street wear. 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 as follows: (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. Out-of-Town Travel: Expenses incurred when traveling away from “home” overnight on job-related or continuing-education trips that were not reimbursed or reimbursable by your employer are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include transportation, meals, lodging, tips and miscellaneous items like laundry, valet, etc.

Homeowners Receive Big Tax BreaksHome ownership can provide you with important tax benefits: Deductions for real estate taxes and home mortgage interest, and Gain exclusion if you meet certain occupancy and holding period requirements. If you install a solar electric system on your residence before 2022, you can qualify for a substantial tax credit. In fact, tax breaks are probably one of the biggest reasons you decided to buy your home in the first place. Unfortunately, some homeowners lose getting the most from their home’s tax advantages because they aren’t aware that certain limits apply. The purpose of this brochure is to highlight how you as a homeowner can best keep your home’s favorable tax edge. Your Home's Basis The amount of the gain exclusion permitted under current tax law tends to make most taxpayers forget about keeping track of their home improvements. Although inflation has been low in recent years, it could eventually take its toll, and the exclusion limits may not be as significant as they are today, or the law may change again. In either case, it may be appropriate to keep a record of the improvements on your home. Once you buy a home, you need to begin keeping records related to your home’s “basis,” i.e., the amount you have spent on the property. If you acquired your home through purchase, your basis is what you paid for it originally, including purchase expenses, PLUS improvement costs you incur while you own it. Keeping track of basis is extremely important in order to accurately compute gain or loss if you decide to sell. For the purpose of computing basis, it’s important to distinguish between “improvements” and repairs; only improvement costs add to your basis. Minor repairs like replacing faucet washers, painting a bedroom or patching a hole in the roof don’t need to be tracked. In general, improvements are of a more permanent nature than repairs. They enhance the value of your home and are likely to last more than one year. If you make the same improvement more than once, only the most recent improvement adds to your basis. You should log costs of items like the following in a home improvement record (be sure you keep your backup receipts and canceled checks): Room additions Landscaping New driveway Walkways Fence Retaining wall Sprinkler system Swimming pool Exterior lighting Satellite dish Intercom Security system Storm windows/doors Roof Central vacuum Heating system Central air Furnace Filtration system Light fixtures Wiring upgrade Water heater Soft water system Insulation Built-in appliances Kitchen upgrade Bathroom upgrade Flooring Wall-to-wall carpet Solar System Whenever there’s doubt about whether an expenditure qualifies as an improvement, make a note of it in your record anyway.That way, the ultimate decision about qualification can be made later when (and if) you decide to sell. The cost of items eligible for energy-saving credits must be reduced by the amount of the credit that was claimed when figuring your basis. Deductions Related to Your Home Certainly not all costs related to your home are deductible. For example, unless you use your home for business (e.g., you have an office in your home), costs for insurance, repairs, utilities, condo or homeowner association fees, etc., aren’t deductible. However, you generally will be able to deduct: Real Estate Taxes Home Mortgage Interest Keep in mind, however, that home mortgage interest deductions can be limited. The following rules are in effect from 2018 through 2025.Home acquisition mortgages obtained before 12/16/2017 Generally, you can deduct the interest from home acquisition debt (mortgages) of up to $1 million dollars on a combination of your first and second homes, provided they were the original loans. As the principal on these loans is paid down, the reduced loan amount becomes the new limitation, not to exceed $1 million. If you later refinance the home for more than the remaining balance on the original loan, the excess would have to be used for home improvements to qualify as home acquisition debt interest. If not, a portion of the interest would be equity debt interest. Home acquisition mortgages obtained after 12/15/2017 As a result of the tax reform legislation passed in 2017, the deductible interest is limited to the interest on the first $750,000 of debt on a combination of your first and second homes, provided they were the original loans. If you later refinance the home for more than the remaining balance on the original loan, not to exceed $750,000, the excess would have to be used for home improvements to qualify as home acquisition debt interest. If not, a portion of the interest would be equity debt interest. Home Equity Interest Prior to 2018 homeowners were also allowed to deduct the interest on the first $100,000 of debt secured by the home that exceeded the $1 million acquisition debt limit. The 2017 tax reform legislation suspended (temporarily repealed) the interest deduction for home equity debt. Loan Points: A question often comes up about the deduction for points on a home loan. Points are another name for prepaid interest – they may be called loan origination fees or some similar term. One point equals 1% of the loan amount. When points are paid for services a lender provides to set up a loan, the points aren’t deductible. However, when the points are paid as a charge for the use of money, the following rules apply: As a general rule, points are only deductible over the life of a loan. Say, for example, you paid $3,000 in points on a 30-year refinance loan. Your tax deduction would be limited to $100 a year ($3,000/30 years). If you decided to pay your loan off early, say after 15 years, you could write off the balance of the points ($1,500) in that year. An exception to the general rules lets you deduct, in full, points you pay in connection with obtaining a mortgage to purchase, construct, or improve your main home. Seller-paid points can even be deducted by a home buyer, but the amount deducted reduces the home’s basis.

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