Learning Center for Tax and Financial Insights

Article Highlights: Conversion Timing Why Convert? When to Convert? Issues to Consider Before Making the Decision Roth IRA accounts provide the benefits of tax-free accumulation and, once you reach retirement age, tax-free distributions. This is the reason why so many taxpayers are converting their traditional IRA account to a Roth IRA. However, to do so, you must generally pay tax on the converted amount. After making a conversion, your circumstances may change, and you may find yourself wishing you had not made the conversion. In the past, you could change your mind later and undo the conversion. But that option is no longer available under tax reform. So, be careful: once a conversion is made, there is no going back. Timing is everything, and a favorable time to make a traditional IRA to Roth IRA conversion is a year when your income is abnormally low or the value of your traditional IRA has declined. You can also convert portions of your traditional IRA over a number of years, thereby gradually converting the traditional IRA to a Roth IRA, spreading the tax liability over a number of years, and keeping it in a lower tax bracket. If you previously made non-deductible contributions to a traditional IRA, those amounts can be converted tax-free but must be converted ratably with the other funds in the traditional IRA. Many taxpayers overlook some great opportunities to make conversions, such as years when your income is abnormally low or a year when your income might even be negative due to abnormal deductions or business losses. Even the new higher standard deductions may offer a taxpayer the opportunity to convert some or all of their traditional IRA to a Roth IRA without any conversion tax.

Article Highlights: Increase In Standard Deduction Loss of Personal Exemptions Changes to Itemized Deductions Bunching Strategy Employee Business Expenses Business Expensing 20% Flow-through Income Deduction Change in Treatment of Alimony Casualty Losses, Home Equity Interest and Moving No Longer Deductible Tax reform has changed the way most taxpayers need to think about and plan for their taxes. It is no longer business as usual, and those who think it is are in for a rude awakening come tax time next year. For most taxpayers, the most significant change is the increase in their standard deduction, which on the surface seems like a big benefit. But don’t overlook the fact that the same tax reform that nearly doubled the standard deduction took away the personal exemption as a deduction. So, for example, under old law, a married couple’s standard deduction would have been $13,000, and their two personal exemptions would have been $8,300 (2 x $4,150), for a total deduction of $21,300. Under the new law, they will be able to deduct $24,000, the new standard deduction for 2018. So, their total increase over what they would have gotten under prior law is only $2,700. If they have four children, their deductions for 2018 under prior law would have been $37,900 ($13,000 plus 6 x $4,150), as compared to the new law’s $24,000. However, for individuals with children under age 17, the child tax credit for 2018 was increased to $2,000 (with $1,400 being refundable) from the prior $1,000, in many cases making up for the loss in the exemption deduction. Note that a credit is a dollar-for-dollar reduction of the tax, while a deduction reduces the income that is taxable. Tax reform also placed some limitations on itemized deductions by limiting the amount that can be claimed for state and local taxes as well as totally eliminating the deduction for employee business expenses along with some other commonly encountered deductions. Thus, the remaining allowable itemized deduction categories are medical (in excess of 7.5% of AGI), up to $10,000 of state and local taxes, home acquisition debt interest, investment interest, charitable contributions and gambling losses (limited to the amount of gambling income). Some taxpayers may be able to employ what is referred to as the “bunching” strategy as a workaround. This strategy has the taxpayer taking the standard deduction one year and itemizing the next. This is accomplished by doubling up charitable contributions in one year and skipping donations the next year, deferring or pre-paying medical expenses where possible, and paying state estimates in advance for the year of itemizing and prepaying all assessed property taxes, while keeping in mind that the maximum deduction for taxes in any year is $10,000. This strategy should only be used if the shifting of deductions results in total itemized deductions being greater than the year’s standard deduction. Another huge issue is the loss of employee business expenses. This means the likes of long-haul truckers, traveling salespeople and others with large employee business expenses should seek out accountable expense reimbursement plans with their employers, even if they have to reduce their pay to balance it out.

Article Highlights: Solar Promotions Solar Tax Credit Nonrefundable Credit Financing Costs Solar Credit Phase-out Leasing a Solar System There are TV ads, telemarketing phone calls and sales people at your front door all promoting the benefits of solar power, and one of the key considerations and a frequently mentioned benefit is the 30% federal tax credit. What isn’t included in the ads - and something most potential buyers are unaware of - is that the solar credit is a nonrefundable tax credit, meaning the credit can only be used to offset your tax liability. This can come as a very unpleasant surprise and is often a financial hardship when the purchaser of a home solar system finds out that the credit is nonrefundable and that they won’t get the full credit. For example, a married couple with three children, all under age 17, and an annual income of $78,000 installed a solar system costing $20,000 in 2018, expecting a $6,000 credit on their tax return. Their standard deduction in 2018 is $24,000, leaving them with a taxable income of $54,000. The tax on the $54,000 is $6,099. They are also entitled to a $2,000 child tax credit for each child, which reduces their tax liability by $6,000 and results in a tax liability of $99. Since the solar credit is nonrefundable, the only portion of the credit they can use is $99, not the $6,000 they had expected. On top of that, the family is probably financing the solar system, which significantly adds to the system’s cost. If the entire $20,000 cost were financed by a 5% home equity loan for 20 years, then the interest on that loan over its term would be $11,678, bringing the total cost of the solar system to $31,678 or a monthly cost of $132.

Article Highlights: Confirm the Letter Was Not Sent in Error Examine the Contents Avoid Procrastination, Which Leads to Bigger Problems Send Any Payments Consider Change-of-Address Complications Be Aware of ID Theft If you have received an IRS envelope from the Internal Revenue Service (IRS) in your mailbox that does not contain a refund check, it will probably cause an increase your heart rate likely increased. But Don’t panic, though; most of the issues in these letters can be dealt with simply and painlessly. Every year, the IRS sends millions of letters and notices to taxpayers, notifying them of changes to their account, requesting additional information, and alerting them to payments that are due. Many of these letters are issued in error or are sent only because of a misinterpretation of facts. If you get such a letter, it may be for one of several reasons; perhaps you overlooked an item of income or the amounts you reported on your return don’t match other information that the IRS received. It is also possible that someone else is using your SSN or is claiming your child as a dependent. The list goes on. Such a notice normally covers a very specific issue about your account or your tax return. The notice should offer specific instructions on what you need to do to satisfy the inquiry. However, because the law requires that these letters be sent to advise you of your rights and other information, they can be very lengthy and difficult to understand. Thus, it is important to call this office or forward a copy of your letter immediately so that it can be reviewed and handled accordingly. The worst option is to ignore the letter and hope that the issue will go away. Most of these letters are computer-generated, so if the issue is not resolved after a certain period of time, another letter will automatically be sent. As you might expect, each succeeding letter will become more aggressive and more difficult to deal with. Procrastination only makes the situation worse!

Your IRA Contribution OptionsFor over 40 years, individuals have been able to set up personal retirement plans called individual retirement accounts (IRAs). Nearly everyone who receives “compensation,” either as an employee or as a self-employed individual, can contribute to an IRA. You can choose from a variety of different types; some give you a tax deduction, while others don’t. This article highlights in general terms the IRA options available under current law and points out some of the advantages of each. For more details about which IRAs fit best with your specific situation, please call this office. Setting up an IRA: To select the best type of IRA to meet your current income level and your long-term investment goals generally requires the advice of a professional. You are strongly advised to seek the advice of this office before selecting a specific type of IRA and the investment vehicle for your IRA. Although others, not fully cognizant of your current tax planning objectives or your long-range financial and estate planning needs, will be eager to assist you, prudent planning may be more appropriate. Types of Investments: Examples of typical IRA investment vehicles include insurance annuities, stocks, bonds, mutual funds and cash (in savings institutions or brokerage accounts). Definition of Compensation: You can open and contribute to an IRA only if you receive “compensation.” Compensation includes wages, salaries, tips, professional fees, commissions, self-employment income and taxable alimony. Compensation does not include rental income, interest or dividend income, pensions or annuities, deferred compensation, or amounts that are excluded from income. IRA PenaltiesRemember that various penalties can apply to most IRAs. When you contribute more than the IRA limits allow, withdraw from the account too early, or don’t take sufficient distributions when required, penalties can apply. Under certain circumstances, penalties can be avoided for premature IRA withdrawals. Exceptions apply, for example, when withdrawal is due to disability, for paying certain first-time home purchase expenses, and for paying educational costs. Be sure to check with this office concerning the exact rules on penalties to ensure against receiving unwelcome “surprises” when filing your tax return. Tradiitional IRAsWith a Traditional IRA, if you’re under age 70, you can contribute up to the annual limit to your IRA account. However, if your taxable compensation is less than the annual limit in a given year, your contribution will be limited to the amount of your compensation. Traditional IRA contributions are generally deductible on your tax return. However, one can designate them as nondeductible. If this choice is made, you build up a basis in your IRA so that part of each withdrawal is nontaxable when you start making withdrawals from the account. However, the choice not to deduct an IRA contribution should be made with caution in light of your particular tax situation. If you’re married, file jointly, and your spouse has little or no compensation, a Traditional IRA may be set up as a spousal IRA, allowing your spouse to make IRA contributions based upon your compensation. However, neither spouse can deposit more than the annual limit to his/her individual account. Participation in Other Plans: One complication of Traditional IRAs affects taxpayers who actively participate in other retirement plans – e.g., an employer plan, a Keogh or SEP, etc. When you are covered by another retirement plan, your IRA deduction “phases out” (i.e., gradually reduces to zero) depending on your filing status and your income level. Phase-out begins at income levels according to the following schedule: *The Single threshold applies to taxpayers other than those filing joint, except Married Separate taxpayers who have a threshold of $ -0- . If a taxpayer’s income exceeds the above thresholds by less than $10,000 ($20,000 for joint filers), his or her IRA deduction will be limited; if it exceeds the threshold by $10,000 ($20,000 for joint filers), there is no IRA deduction. Break for Spouse of an Active Participant: The limits on deductible IRA contributions do not apply to the spouse of an active participant. Instead, the maximum deductible IRA contributions for an individual who is not an active participant but whose spouse is an active participant, is phased out for the nonactive individual if the couple’s combined AGI is within the phase-out range for the year. Example: In 2019, the wife is an active participant in a retirement plan, but her husband is not. The couple’s combined AGI is $220,000. Neither spouse can take an IRA deduction, because their AGI is over $203,000 But assume the couple’s combined AGI was only $125,000. Since the husband isn’t an active participant in another plan, he can make a deductible IRA contribution. However, his wife can’t make one, because their combined AGI is over the threshold for joint filers (see chart for annual threshold amount). Due Date for Making Traditional IRA Contributions: Traditional IRA contributions (whether deductible or nondeductible) must be made by the due date (without extensions) of the return for the year to which they apply. Roth IRAsYou may be able to open a Roth IRA, a type of IRA that allows only nondeductible contributions. Distributions from these IRAs, including earnings on them, are tax-free if a holding period and other requirements are met. Like the Traditional IRA, annual contributions are limited to the smaller of your compensation or the annual limit. However, if you have other IRAs – for example, a Traditional IRA – your combined annual contributions to all of them (including the Roth IRAs) can’t be more than the annual contribution limit. Roth IRAs allow contributions even after you turn age 70, and spousal Roth IRAs are also allowed. The due date for making your contributions to a Roth IRA is the same as for Traditional IRAs.

Article Highlights: Credit For Child Care Credit Percentage Child Qualifications Employment-Related Expense Taxpayer Earnings Limits Full-Time-Student or Disabled Spouse Qualifying Care State Credit It is almost summertime. Have you figured out what to do with the kids while they are out of school and you are at work? There are possibilities that may qualify you for a break in the form of a tax credit that can help offset the cost of care for children. But not all summertime care solutions may qualify for the tax credit, so here is some information that will help you understand how the credit is determined, what kinds of care qualify and possible limitations. The credit is the percentage of actual care expenses. It can be as high as 35% for lower income taxpayers but is never less than 20% of for higher income taxpayers. The table illustrates credit percentages at various levels of AGI. AGI Over But Not Over Applicable Percent AGI Over But Not Over Applicable Percent 0 15,000 35 29,000 31,000 27 15,000 17,000 34 31,000 33,000 26 17,000 19,000 33 33,000 35,000 25 19,000 21,000 32 35,000 37,000 24 21,000 23,000 31 37,000 39,000 23 23,000 25,000 30 39,000 41,000 22 25,000 27,000 29 41,000 43,000 21 27,000 29,000 28 43,000 No Limit 20 For an expense to qualify for the credit, it must be needed for you and your spouse, if you are married, to work, and it must be for the care of your child, stepchild, foster child, brother, sister or stepsibling (or a descendant of any of these) who is under 13, lives in your home for more than half the year and does not provide more than half of his or her own support for the year. Married couples must file jointly, and both spouses must work (or one spouse must be a full-time student or disabled) to claim the credit. The qualifying expenses are limited to the income you or your spouse, if married, earn from work, using the figure for whoever earns less. However, under certain conditions, when one spouse has no actual earned income and that spouse is a full-time student or disabled, that spouse is considered to have a monthly income of $250 (if the couple has one qualifying child) or $500 (two or more qualifying children). This means the income limitation is essentially removed for a spouse who is a student or disabled. The qualifying expenses can’t exceed $3,000 per year if you have one qualifying child, while the limit is $6,000 per year for two or more qualifying persons. This limit does not need to be divided equally. For example, if you have paid and incurred $2,500 of qualified expenses for the care of one child and $3,500 for the care of another child, you can use the total, $6,000, to figure the credit. The credit is computed as a percentage of your qualifying expenses from the table above—in most cases, 20%.