Tax Planning

2018 Tax Reform

What the Tax Reform Act Means for You

Congress has passed a tax reform act that will take effect in 2018, ushering in some of the most significant tax changes in three decades. There are a lot of changes in the new act, which was signed into law on Dec. 22, 2017.

You can use this memo as a high-level overview of some of the most significant items in the new act. Because major tax reform like this happens so seldom, we recommend you schedule a tax-planning consultation to ensure you reap the most tax savings possible during 2018. 

Key changes for individuals:

Here are some of the key items in the tax reform act that affect individuals:

  • Reduces income tax brackets: The act retains seven brackets, but at reduced rates, with the highest tax bracket dropping to 37 percent from 39.6 percent. The individual income brackets are also expanded to expose more income to lower rates (see charts below).
  • Doubles standard deductions: The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filing jointly. To help cover the cost, personal exemptions and most additional standard deductions are suspended.
  • Limits itemized deductions: Many itemized deductions are no longer available, or are now limited. Here are some of the major examples:
    • Caps state and local tax deductions: State and local tax deductions are limited to $10,000 total for all property, income and sales taxes.
    • Caps mortgage interest deductions: For new acquisition indebtedness, mortgage interest will be deductible on indebtedness of no more than $750,000. Existing mortgages are unaffected by the new cap as the new limits go into place for acquisition indebtedness after Dec. 14, 2017. The act also suspends the deductibility of interest on home equity debt.
    • No more 2 percent miscellaneous deductions: Most miscellaneous deductions subject to the 2 percent of adjusted gross income threshold are now gone.

Tip: If you’re used to itemizing your return, that may change in coming years as the doubled standard deduction and reduced deductions make itemizing less attractive. To the extent you can, make any remaining itemizable expenditures before the end of 2017.

  • Cuts some above-the-line deductions: Moving expense deductions get eliminated except for active-duty military personnel, along with alimony deductions beginning in 2019.
  • Weakens the alternative minimum tax (AMT): The act retains the alternative minimum tax but changes the exemption to $109,400 for joint filers and increases the phaseout threshold to $1 million. The changes mean the AMT will affect far fewer people than before.
  • Bumps up child tax credit, adds family tax credit: The child tax credit increases to $2,000 from $1,000, with $1,400 of it being refundable even if no tax is owed. The phaseout threshold increases sharply to $400,000 from $110,000 for joint filers, making it available to more taxpayers. Also, dependents ineligible for the child tax credit can qualify for a new $500-per-person family tax credit.
  • Doubles estate tax exemption: Estate taxes will apply to even fewer people, with the exemption doubled to $11.2 million ($22.4 million for married couples).

What stays the same for individuals:

  • Itemized charitable deductions: Remain largely the same.
  • Itemized medical expense deductions: Remain largely the same. The deduction threshold drops back to 7.5 percent of adjusted gross income for 2017 and 2018, but reverts to 10 percent in the following years.
  • Some above-the-line deductions: Remain the same, including $250 of educator expenses and $2,500 of qualified student loan interest.
  • Gift tax deduction: Remains and increases to $15,000 from $14,000 for 2018.

Farewell to the healthcare individual mandate penalty

One of the changes in the tax act is the suspension of the individual mandate penalty in the Affordable Care Act (also known as “Obamacare”). The penalty is set to zero starting in 2019, but remains in place for 2018 and prior years.

Tip: Retain your Form 1095s, which will provide evidence of your healthcare coverage. Without it, you may have to pay the individual mandate penalty, which is the higher of $695 or 2.5 percent of income. Beginning in 2019, this penalty is set to zero.

NOTICE: The IRS recently granted employers and health care providers a 30-day filing extension for Forms 1095-B and 1095-C, to March 2, 2018. The IRS clarified that taxpayers are not required to wait until receipt of these forms to file their taxes.

 

New 2018 tax bracket structures for individuals

Single taxpayer

Taxable income over But not over Is taxed at
$0 $9,525 10%
$9,525 $38,700 12%
$38,700 $82,500 22%
$82,500 $157,500 24%
$157,500 $200,000 32%
$200,000 $500,000 35%
$500,000   37%

Head of household

Taxable income over But not over Is taxed at
$0 $13,600 10%
$13,600 $51,800 12%
$51,800 $82,500 22%
$82,500 $157,500 24%
$157,500 $200,000 32%
$200,000 $500,000 35%
$500,000   37%

 

Married filing jointly

Taxable income over But not over Is taxed at
$0 $19,050 10%
$19,050 $77,400 12%
$77,400 $165,000 22%
$165,000 $315,000 24%
$315,000 $400,000 32%
$400,000 $600,000 35%
$600,000   37%

 

Married filing separately

Taxable income over But not over Is taxed at
$0 $9,525 10%
$9,525 $38,700 12%
$38,700 $82,500 22%
$82,500 $157,500 24%
$157,500 $200,000 32%
$200,000 $300,000 35%
$300,000   37%

 

Estates and trusts

Taxable income over But not over Is taxed at
$0 $2,550 10%
$2,550 $9,150 24%
$9,150 $12,500 35%
$12,500   37%

This brief summary of the tax reform act is provided for your information. Any major financial decisions or tax-planning activities in light of this new legislation should be considered with the advice of a tax professional. Call if you have questions regarding your particular situation. Feel free to share this memo with those you think may benefit from it.

Information from Knutte & Associates, Tax Reform Newsletter 12-28-17 was used in this blog post.

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Keeping Savings on Track with a Spousal IRA

Keeping Savings on Track with a Spousal IRA

Being a stay-at-home mom or dad, or working part-time to help take care of the children, can make a big contribution to the balance and well-being of a family. Unfortunately, time out of the workforce could put the caregiving spouse at a disadvantage when it comes to retirement savings. A spousal IRA – funded for a spouse who earns little or no income – offers an opportunity to help keep the retirement savings of both spouses on track. It also offers a larger potential tax deduction for a married couple.

Making Contributions

For the 2017 tax year, an individual with earned income (from wages or self-employment) can contribute up to $5,500 to his or her own IRA and up to $5,500 more to a spouse’s IRA- regardless of whether the spouse works or not – as long as the couple’s combined earned income exceeds both contributions and they file a joint tax return. An additional $1,000 catch-up contribution can be made for each spouse who is age 50 or older. Contributions for 2017 can be made up to the April 2018 tax filing deadline. All other IRA eligibility rules must be met.

Income Phaseouts

If neither spouse actively participates in an employer-sponsored retirement plan, contributions to a traditional IRA are fully tax deductible. However, if one or both are active participants, tax deductibility for joint filers phases out at a modified adjusted gross income (MAGI) of $99,000 to $119,000 for a participating spouse and $186,000 to $196,000 for a nonparticipating spouse (in 2017). Thus, some participants in workplace plans who earn too much to deduct an IRA contribution for themselves may still be able to deduct an IRA contribution for a nonparticipating spouse. Contributions to a Roth IRA are not tax deductible and are not affected by participation in a workplace plan. However, eligibility to contribute to a Roth IRA phases out for joint filers with a MAGI of $186,000 to $196,000 (in 2017). Distributions from traditional IRAs are taxed as ordinary income and may be subject to a 10% federal income tax penalty if withdrawn prior to age 59 ½ . Roth IRA contributions can be withdrawn penalty-free and tax-free at any time, but in order for earnings to qualify for a tax-free and penalty-free withdrawal, a Roth IRA distribution must meet the five-year holding requirement and take place after age 59 ½. (There are IRS exceptions to the early withdrawal penalty and the five-year holding requirement.)

Talk to one of the Professionals at Fox Peterson to learn about how to take advantage of this opportunity. Information from Cambridge Financial Services was used in this blog post.

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Retirement Plan Contribution Limits for 2018

Retirement Plan Contribution Limits for 2018

The Internal Revenue Service issued the annual cost of living adjustments Thursday for 401(k) contributions, pension plans and other retirement-related matters.

The contribution limit for workers who are enrolled in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan has grown from $18,000 to $18,500.

The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements, to contribute to Roth IRAs and to claim the saver’s credit have also increased for 2018.

Taxpayers are able to deduct contributions to a traditional IRA if they meet certain conditions. If either the taxpayer or their spouse was covered by a retirement plan at work over the course of the year, the deduction could be reduced, or phased out, until it’s eliminated, depending on their filing status and income. (If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-outs of the deduction don’t apply.)

Here are the phase-out ranges for 2018:

  • For single taxpayers covered by a workplace retirement plan, the phase-out range goes from $63,000 to $73,000, up from $62,000 to $72,000.
  • For married couples who file jointly, where the spouse making the IRA contribution is covered by a retirement plan at work, the phase-out ranges from $101,000 to $121,000, up from $99,000 to $119,000.
  • For an IRA contributor who isn’t covered by a workplace retirement plan and is married to a spouse who is covered, the deduction is phased out if the couple’s income ranges between $189,000 and $199,000, up from $186,000 and $196,000.
  • For a married taxpayer filing a separate return who’s covered by a retirement plan at work, the phase-out range isn’t subject to an annual cost-of-living adjustment and remains $0 to $10,000.

 

The income phase-out range for taxpayers making contributions to a Roth IRA goes from $120,000 to $135,000 for singles and heads of household, up from $118,000 to $133,000. For married couples who file jointly, the income phase-out range is $189,000 to $199,000, up from $186,000 to $196,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The income limit for the Saver’s Credit (also referred to as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $63,000 for married couples filing jointly, up from $62,000; $47,250 for heads of household, up from $46,500; and $31,500 for singles and married individuals filing separately, up from $31,000.

Some limitations are unchanged from 2017:

  • The limit on annual contributions to an IRA stays unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over isn’t subject to an annual cost-of-living adjustment and remains $1,000.
  • The catch-up contribution limit for employees ages 50 and over who contribute to 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains unchanged at $6,000.

 

Information from Accounting Today was used in this blog post. For more details and technical guidance, see Notice 2017-64. Contact the professionals at Fox Peterson for tax planning and to learn more about how these rules affect your taxes.

 

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Debt Cancellation May be Taxable

Debt Cancellation May be Taxable

If a lender cancels part or all of a debt, a taxpayer must generally consider this as income. However, the law allows an exclusion that may apply to homeowners who had their mortgage debt canceled in 2016.

Here are 10 tips about debt cancellation:

  1. Main Home. If the canceled debt was a loan on a taxpayer’s main home, they may be able to exclude the canceled amount from their income. They must have used the loan to buy, build or substantially improve their main home to qualify. Their main home must also secure the mortgage.
  2. Loan Modification. If a taxpayer’s lender canceled or reduced part of their mortgage balance through a loan modification or ‘workout,’ the taxpayer may be able to exclude that amount from their income. They may also be able to exclude debt discharged as part of the Home Affordable Modification Program, or HAMP. The exclusion may also apply to the amount of debt canceled in a foreclosure.
  3. Refinanced Mortgage. The exclusion may apply to amounts canceled on a refinanced mortgage. This applies only if the taxpayer used proceeds from the refinancing to buy, build or substantially improve their main home and only up to the amount of the old mortgage principal just before refinancing. Amounts used for other purposes do not qualify.
  4. Other Canceled Debt. Other types of canceled debt such as second homes, rental and business property, credit card debt or car loans do not qualify for this special exclusion. On the other hand, there are other rules that may allow those types of canceled debts to be nontaxable.
  5. Form 1099-C. If a lender reduced or canceled at least $600 of a taxpayer’s debt, the taxpayer should receive Form 1099-C, Cancellation of Debt, by Feb. 1. This form shows the amount of canceled debt and other information.
  6. Form 982. If a taxpayer qualifies, report the excluded debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. They should file the form with their income tax return.
  7. Exclusion Extended. The law that authorized the exclusion of cancelled debt from income was extended through Dec. 31, 2016.

 

Information from IRS Tax Tip 2017-23 was used in this blog post

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Do I Need a Living Trust?

Do I Need a Living Trust?

Assets placed in a revocable living trust go directly to your heirs when you die, bypassing the sometimes lengthy and costly process of probate. living-trustsThat can make a living trust a valuable estate planning tool if, for example, you plan to disinherit one of your children or leave unequal amounts to your heirs. If your estate goes through probate, heirs can go to court to contest the terms of your will. If you own a vacation home or other property in another state, a living trust can let you avoid having to go through probate in two states. You normally name yourself trustee and retain the authority to manage property in the trust. You must also name a successor trustee to handle the distribution of assets after you die. The cost to set up a living trust varies depending on your location, but it typically ranges from $1,000 to $1,500 for an individual or $1,200 to $2,500 for a married couple.

Fox Peterson has a number of qualified estate attorneys we can refer to.

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2015 IRA Contribution Facts

2015 IRA Contribution Facts

Did you contribute to an Individual Retirement Arrangement last year? Are you thinking about contributing to your IRA now? If so, you may have questions about IRAs and your taxes. Here are some IRS tax tips about saving for retirement using an IRA:

  • Age Rules. You must be under age 70½ at the end of the tax year in order to contribute to a traditional IRA. There is no age IRA-Contributionslimit to contribute to a Roth IRA.
  • Compensation Rules. You must have taxable compensation to contribute to an IRA. This includes income from wages and salaries and net self-employment income. It also includes tips, commissions, bonuses and alimony. If you are married and file a joint tax return, only one spouse needs to have compensation in most cases.
  • When to Contribute. You can contribute to an IRA at any time during the year. To count for 2015, you must contribute by the due date of your tax return. This does not include extensions. This means most people must contribute by April 18, 2016. If you contribute between Jan. 1 and April 18, make sure your plan sponsor applies it to the year you choose (2015 or 2016).
  • Contribution Limits. In general, the most you can contribute to your IRA for 2015 is the smaller of either your taxable compensation for the year or $5,500. If you were age 50 or older at the end of 2015, the maximum you can contribute increases to $6,500. If you contribute more than these limits, an additional tax will apply. The additional tax is six percent of the excess amount contributed that is in your account at the end of the year.
  • Taxability Rules. You normally don’t pay income tax on funds in your traditional IRA until you start taking distributions from it. Qualified Savers Creditdistributions from a Roth IRA are tax-free.
  • Deductibility Rules. You may be able to deduct some or all of your contributions to your traditional IRA. See IRS Publication 590-A for more.
  • Saver’s Credit. If you contribute to an IRA you may also qualify for the Saver’s Credit. It can reduce your taxes up to $2,000 if you file a joint return. Use Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the credit. You can file Form 1040A or 1040 to claim the Saver’s Credit.
  • New myRA. If your employer does not offer a retirement plan, you may want to consider myRA. It is a new retirement savings plan offered by the U.S. Department of the Treasury. It’s safe and affordable. You can also direct deposit your entire refund or a portion of it into an existing myRA – Retirement Account.

Information from IRA Tax Tip 2016-39 was used in this blog post.

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2015 Tax Organizer

2015 Tax Organizer

The 2015 Fox Peterson tax organizer is now available in two forms. You can A) go to our resources page and fill out the organizer(s) that apply to you and submit them directly to your tax preparer or B) click here to download and print the PDF version.

A customized organizer is also available. Please email or call your tax preparer to request yours.Fox Logo

These resources are meant to be used as a tool to help taxpayers prepare for the upcoming tax season.

As always, if you have any questions you can call Fox Peterson at 480-898-7640

Happy new year!

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2015 Tax Planning Letter

2015 is almost behind us and the time to file income taxes is fast approaching. We are looking forward to seeing you again as we assist you with your income tax preparation over the next several months. We have compiled a list of planning tips and suggestions in our year end letter and recommend that you take some time to read through it. With the implementation of the Affordable Care Act, virtually every taxpayer will be impacted by the laws and regulation changes that have take place in Congress this year. Fox Logo

For your copy of our Year End Tax Planning Letter Click Here.

We appreciate your business and wish you all the best for the Holidays this year!

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Additional Medicare Tax

Additional Medicare Tax

Some taxpayers may be liable for an Additional Medicare Tax if your income exceeds certain limits. Here are six things that you should know about this tax:

  • Tax Rate.  The Additional Medicare Tax rate is 0.9 percent.
  • Income Subject to Tax.  The tax applies to the amount of certain income that is more than a threshold amount. The types of income include your Medicare wages, self-employment income and Medicare Taxrailroad retirement (RRTA) compensation. You must combine your wages and self-employment income to figure the tax.
  • Threshold Amount.  You base your threshold amount on your filing status. If you are married and file a joint return, you must combine your spouse’s wages, compensation, or self-employment income with yours. Use the combined total to determine if your income exceeds your threshold. The threshold amounts are:
Filing Status Threshold Amount
Married filing jointly $250,000
Married filing separately $125,000
Single $200,000
Head of household $200,000
Qualifying widow(er) with dependent child $200,000
  • Withholding / Estimated Tax.  Employers must withhold this tax from your wages or compensation when they pay you more than $200,000 in a calendar year. If you are self-employed you should include this tax when you figure your estimated tax liability.
  • Underpayment of Estimated Tax.  If you had too little tax withheld, or did not pay enough estimated tax, you may owe an estimated tax penalty.

If you owe this tax, file Form 8959, with your tax return. You also report any Additional Medicare Tax withheld by your employer on Form 8959.

Information from IRS Tax Tip 2015-41 was used in this blog.

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2014 IRA Contribution

Still Time to Make Your IRA Contribution for the 2014 Tax Year

Did you contribute to an Individual Retirement Arrangement last year? Are you thinking about contributing to your IRA now? If so, you may have questions about IRAs and your taxes. Here are some IRS tax tips about saving for retirement using an IRA.

  • Age rules.  You must be under age 70½ at the IRA-Contributionsend of the tax year in order to contribute to a traditional IRA. There is no age limit to contribute to a Roth IRA.
  • Compensation rules.  You must have taxable compensation to contribute to an IRA. This includes income from wages and salaries and net self-employment income. It also includes tips, commissions, bonuses and alimony. If you are married and file a joint tax return, only one spouse needs to have compensation in most cases.
  • When to contribute.  You can contribute to an IRA at any time during the year. To count for 2014, you must contribute by the due date of your tax return. This does not include extensions. That means most people must contribute by April 15, 2015. If you contribute between Jan. 1 and April 15, make sure your plan sponsor applies it to the year you choose (2014 or 2015).
  • Contribution limits.  In general, the most you can contribute to your IRA for 2014 is the smaller of either your taxable compensation for the year or $5,500. If you were age 50 or older at the end of 2014, the maximum you can contribute increases to $6,500. If you contribute more than these limits, an additional tax will apply. The added tax is 6 percent of the excess amount that you contributed.
  • Taxability rules.  You normally won’t pay income tax on funds in your traditional IRA until you start taking distributions from it. Qualified distributions from a Roth IRA are tax-free.
  • Deductibility rules.  You may be able to deduct some or all of your contributions to your traditional IRA. Use the worksheets in the Form 1040A or Form 1040 instructions to figure the amount that you can deduct. You may claim the deduction on either form. You may not deduct contributions to a Roth IRA.
  • Saver’s Credit.  If you contribute to an IRA you may also qualify for the Saver’s Credit. The credit can reduce your taxes up to $2,000 if you file a joint return. Use Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the credit.

Information from IRS Tax Tip 2015-50 was used in this post.

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