Learning Center for Tax and Financial Insights

Article Highlights: High-Income Professionals Specified Service Trade or Business Sec. 199A Deduction Defined Contribution Retirement Plans Defined Benefit Retirement Plans Tax Savings If you are a high-income professional who is excluded from the new pass-through deduction because you are in a specified service trade or business (SSTB), you may be able to use retirement plan contributions as a work-around so that you can benefit from that new 20% deduction. An SSTB generally includes the following trades or businesses: Health (services by physicians, nurses, dentists, veterinarians, and other similar health care providers, although this does not apply to spas and health clubs); Law; Accounting; Actuarial science; Performing arts (but this does not apply to the services of others in the industry, such as promoters and broadcasters); Consulting; Athletics; and Financial services. The new deduction includes limits based upon an individual’s taxable income. For individuals in SSTBs, these limitations do not kick in as long the taxpayer’s taxable income is below the phase-out threshold. For SSTBs, the deduction phases out if your taxable income is between $315,000 and $415,000 for married couples filing jointly and between $157,500 and $207,500 for other filing statuses. Thus, once your taxable income is more than the $415,000 or $207,500 level, there is no 199A deduction based on income from the SSTB. One way to reduce taxable income is by contributing to deductible retirement plans. But IRAs won’t cut it because they can only shelter $5,500 ($6,500 for those age 50 or older), plus their deductibility is phased out for higher-income taxpayers.

The Alternative Minimum Tax (AMT) is a tax that was originally intended to ensure that wealthier taxpayers with large write-offs and tax-sheltered investments pay at least a minimum tax. To accomplish this, Congress created a second (alternative) tax computation that adds back to income certain tax preferences and eliminates some deductions. Taxpayers then compute their tax both ways and pay the higher of the two taxes. When it originated back in the ‘70s, the AMT impacted just a few, very wealthy, individuals. However, unlike the regular tax computation, the AMT has not been fully adjusted for inflation and years of inflation have driven everyone’s income up to where the number of taxpayers being affected by the AMT increased. However, tax reform passed by Congress in 2017, and effective in 2018, increased the amount of income that’s exempt from the AMT, including significantly upping the threshold at which the exemption phases out. Along with other tax reform changes that effectively remove some of the deductions previously targeted by the AMT, fewer individuals will be subject to the AMT, at least through 2025 when many of the changes will revert to prior law unless Congress extends the tax reform provisions. Anticipating when the AMT will affect you is difficult, because it is usually the result of a combination of circumstances. Although it is not always possible to avoid the AMT, it is sometimes possible to minimize this punitive tax by taking certain steps. Therefore, it is important for a taxpayer to have a basic understanding of the circumstances that can create an AMT. The AMT includes a myriad of adjustments and preference items and full or partial disallowances of certain deductions that are otherwise perfectly legal and allowed in figuring the regular income tax. There are far too many to discuss, especially those that are rarely encountered by the average taxpayer. There are, however, certain AMT issues that frequently affect taxpayers. They are listed below with comparisons to the regular tax computation, along with actions that might be taken to mitigate the effects of the AMT. Personal ExemptionsFor years 2018-2025 the personal exemption deduction is suspended for federal purposes and does not factor into the federal AMT computation. For years other than 2018-2025, every taxpayer, spouse and dependent included on a taxpayer’s tax return generates an exemption deduction for regular tax purposes. For AMT purposes, the personal exemption deduction is not allowed at all. When two individuals can possibly claim the exemption, such as in the case of a multiple support agreement between children supporting elderly parents, care should be taken to ensure the exemption is not claimed by one who is subject to the AMT. Standard DeductionFor regular tax purposes, a taxpayer can choose between using the standard deduction or itemizing deductions. For AMT purposes, this creates sort of a dilemma for those who don’t have enough deductible expenses to itemize for regular tax purposes but do have substantial itemized deductions that can be used to offset the AMT. However, taxpayers can elect to itemize even if the deductions are less than the standard deduction. Itemized DeductionsThe itemized deductions allowed for the AMT are far more restrictive than those allowed for regular tax purposes. The following is a comparison of the two: Taxes – For regular tax purposes and as part of the itemized deductions, taxpayers are allowed to deduct certain taxes they pay, including home and investment real estate taxes, state income or sales tax, personal property tax, foreign taxes, etc. For AMT purposes, none of these taxes are deductible. When the AMT is anticipated, it might be beneficial to accelerate tax payments in the prior year or defer them to the subsequent year. This would include paying the fourth quarter state estimated tax installment after the end of the year. Taking a credit for foreign income taxes is generally more beneficial than taking it as an itemized deduction anyway, and if being taxed by the AMT, taking the credit is the only way to achieve any benefit. Taxpayers can annually elect to capitalize rather than deduct property taxes on unimproved and non-productive real estate. Home Mortgage Interest – Generally, for regular tax purposes, a deduction is allowed for interest paid on home acquisition debt (and for years other than 2018 through 2025 home equity debt) within certain debt limits. For AMT purposes, however, only home acquisition debt interest is deductible. Many taxpayers have incurred equity debt on their homes to pay off credit cards, purchase cars, etc., in the belief that the equity debt interest is deductible, which it is not for either regular tax or AMT for federal purposes for 2018-2025. When borrowing money against a home for business, investment, or higher education expenses, it is generally good practice to take out single purpose second loans or lines of credit. This allows the loan to be treated as unsecured by the home and then to trace the interest to a deductible purpose unaffected by the AMT. Home mortgage interest and the AMT is a complex issue. Please call this office for assistance. Nonconventional Home Mortgage – For AMT purposes, interest from debt to acquire a nonconventional home such as a motor home, boat, etc., is not deductible for AMT purposes. The only recourse is to avoid or minimize this type of debt. Charitable Contributions – The deduction for charitable contributions is the same for regular tax and for AMT. Miscellaneous Itemized Deductions – For regular tax purposes, miscellaneous deductions are broken down into two categories. The first category includes such items as gambling losses to the extent of gambling winnings and some other infrequently encountered deductions. This category is allowed as a deduction for both regular and AMT purposes. The other category includes expenses such as investment expenses, union dues, employment-related expenses, certain legal fees, etc., which are allowed for regular tax purposes in years other than 2018-2025 after being reduced by 2% of the taxpayer’s AGI. For AMT purposes, the deductions in this category are not allowed at all. If a significant amount of expenses is incurred for a taxpayer’s employment, if possible, have the employer reimburse the expenses, even if it requires a pay reduction. Nontaxable Interest From Private Activity BondsGenerally, for both regular tax and AMT purposes, income from municipal bonds is tax-free. However, interest from certain municipal bonds used to support private enterprises (referred to as Private Activity Bonds*) is taxable for AMT purposes. If subject to the AMT, consider not investing in Private Activity Bonds* if it makes investment sense.

Overview of Coverdell Education Accountants These accounts, originally referred to as Education IRAs, have been available for over 15 years. These accounts are nondeductible education savings accounts. The investment earnings from a Coverdell account accrue and are withdrawn tax-free, provided the proceeds are used to pay qualified education expenses of the account beneficiary. Annual ContributionsThe allowable nondeductible contribution is $2,000 per year per beneficiary. Contributions are only allowed for designated beneficiaries under the age of 18. ContributionsContributions that CANNOT be made: Those that aren’t made in cash; Those that are made after the accountholder reaches age 18 (special needs students discussed later), or Those that exceed the annual contribution limit (except for rollovers). Timing of the ContributionsContributions to these accounts must be made by April 15 of the subsequent tax year. If April 15 falls on a Saturday, Sunday or legal holiday, the due date is delayed until the next business day. Projecting the Account GrowthThe table below allows you to predict the growth of an account over various periods and at selected investment rates. Example of how to use the table: Assume contributions of $1,500 are made each year for 14 years to the account and the account is earning 4%. From the table, the growth factor for 14 years at 4% is 18.292. To determine the value of the account at the end of the 14-year period, multiply the factor times the annual contribution of $1,500. In this example, the account value would be $27,438. Who Can Make Contributions?Contributions to Coverdell Education Savings Accounts can be made by any individual, including the beneficiary, if the “modified adjusted gross income (AGI)” of the contributor is less than the statutory phase out limit. Corporations and other entities (including tax-exempt organizations) are permitted to make contributions to these accounts, regardless of the amount of the income of the corporation or entity during the year of the contribution. No contributions are allowed once the Coverdell account beneficiary reaches age 18. Phase-Out Limits The annual contribution per beneficiary is available in full only to an individual contributor with a modified AGI below the phase-out limits. “Modified AGI” is figured by adding back to regular AGI any income the contributor excluded under the foreign provisions (e.g., foreign earned income or income from U.S. possessions). The contribution limit is phased out ratably for contributors with modified AGIs between the lower and top modified AGI levels. If you think you will be limited in making contributions because of your AGI level, one option might be gifting the funds for the contribution to either the beneficiary or someone else whose modified AGI is low enough to allow the contribution on behalf of the beneficiary. A 6% excise tax applies to excess contributions - i.e., any contribution over the annual limit. Contributions may be made to both a Coverdell Savings Account and a Qualified Tuition Plan for the same beneficiary without penalty. The excise tax also isn’t charged if: The contribution is withdrawn before the due date (including extensions) of the contributor’s income tax return; or The contribution is a rollover. Qualified Education ExpensesIf a beneficiary’s “qualified education expenses” in a year equal or exceed total Coverdell account distributions for the year, the distributions are 100% excluded from the beneficiary’s gross income. “Qualified education expenses” are limited to expenses for school or higher education and generally include tuition, fees, books, supplies, equipment and certain room and board expenses. The term “school” for this definition includes any school that provides elementary or secondary education (kindergarten through 12th grade, as determined under state law). “Qualified elementary and secondary education expenses” are defined as follows: (a) Expenses for tuition, fees, academic tutoring, special needs services in the case of a “special needs beneficiary,” books, supplies, and other equipment, which are incurred in connection with the enrollment or attendance of the designated beneficiary of a Coverdell account as an elementary or secondary school student at a public, private, or religious school. (b) Expenses for room and board, uniforms, transportation, and supplementary items and services (including extended day programs), which are required or provided by a public, private, or religious school in connection with the enrollment or attendance of the designated beneficiary at the school. (c) Expenses for the purchase of any computer technology or equipment or for Internet access and related services if the technology, equipment, or services are to be used by the beneficiary and the beneficiary’s family during any of the years that the beneficiary is in school. This will not include expenses for computer software designed for sports, games, or hobbies unless the software is educational in nature.

Too many stories are in the news about “trusted” employees who have gone rogue and end up being arrested for embezzlement. Here are some of the common tactics used by the fraudsters.

It’s not as much fun as creating invoices, but the bills must be paid. Here’s how QuickBooks helps. We’re in a bit of a transitional period with business bill-paying. Some paper bills still come via the U.S. Mail, however you may also be getting some through email. Others don’t come at all: You might get a reminder email, but you have to go to the vendor’s site to make a payment. How do you keep track of it all so you don’t miss any due dates? You could record them on a calendar, but you’d still have to go back to the actual bill to retrieve the amount. But where is it? Is it online, in your email inbox, in a file folder, or hanging on the wall? QuickBooks can organize this unpleasant process, saving time and helping you avoid confusion. Here’s how it works. A 2-Step Process QuickBooks divides your accounts payable tasks into two separate processes: entering bills and paying them. It requires some extra time upfront as you complete the first step, but streamlines the second so that the actual bill-paying only takes a few seconds. To get started, click Enter Bills on QuickBooks’ home page to open a window like this: Before you can pay a bill in QuickBooks, you need to create a record for it. The toolbar for the Enter Bills window is not pictured in the image above, but you don’t need it yet. Rather, you start by clicking the down arrow in the field next to VENDOR and selecting the biller’s name from your list (or clicking if you haven’t yet created a record for that entity). The ADDRESS should fill in automatically, as should the date. If you set up default payment TERMS in that vendor’s record, your preference should show in that field and the BILL DUE date should be correct. Enter the AMOUNT DUE and complete any of the optional fields that the transaction requires (REF. NO., DISCOUNT DATE, and MEMO). Since this is a utility bill, the Expenses tab should be highlighted, and the amount you entered above should appear in it. Below that is the ACCOUNT field; open that list and choose the right one. Don’t worry about the CUSTOMER:JOB and BILLABLE fields. These will only be completed when you’re charging a customer for an expense or item.

October 1 - Fiduciaries of Estates and Trusts File a 2017 calendar year return (Form 1041). This due date applies only if you were given an extension of 5 ½ months. If applicable, provide each beneficiary with a copy of K-1 (Form 1041) or a substitute Schedule K-1.October 15 - CorporationsFile a 2017 calendar year income tax return (Form 1120 or 1120-A) and pay any tax, interest, and penalties due. This due date applies only if you timely requested an automatic 6-month extension.October 15 - Taxpayers with Foreign Financial Interests If you received an automatic 6-month extension of time to report your 2017 foreign financial accounts to the Department of the Treasury, this is the due date for Form FinCEN 114. October 15 - Social Security, Medicare and withheld income tax If the monthly deposit rule applies, deposit the tax for payments in September.