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Smart tax, business and planning ideas from your Trusted Business Advisor SM January 2019

In this issue
1 Double (and triple) IRA season is here
2 Drive cautiously… but carry ample auto insurance
3 IRS says business meal deductions still apply
4 Tax calendar

Double (and triple) IRA season is here

The start of each year might be considered “Double IRA” season. Until mid-April (the 15th, in 2019), you still can make contributions to an IRA for 2018, if you have funds you’d like to save for retirement.Most workers and their spouses may each contribute up to $5,500, or $6,500 for those who were 50 or older at the end of 2018.

If you have additional dollars to invest, you also can put them into an IRA for 2019, now that the year has begun. The sooner you put money into a 2019 IRA and choose investments, the sooner tax-advantaged buildup might begin.

Note that such IRA contributions are permitted even if you also participate in an employer’s retirement plan. The same is true if you participate in a SEP-IRA or SIMPLE IRA through your company or self employment.

Three for the money
Many workers can choose among three types of IRAs.

Deductible IRAs. Whereas most workers and their spouses can contribute to regular (traditional) IRAs, only some people can deduct their contributions. A full deduction is available if you do not participate in an employer’s retirement plan; if you do participate, the deduction allowed depends on your income.

Example 1: Paula Adams, a single taxpayer who participates in a 401(k), must have had modified adjusted gross income (MAGI) of $63,000 or less in 2018 for a full deduction on her 2018 tax return. If her MAGI is greater than $63,000 but less than $73,000, a partial deduction is allowed.

Different MAGI numbers apply to married taxpayers filing joint returns, qualifying widows or widowers, and married taxpayers filing separate returns. Contributions to traditional IRAs are not
allowed after you reach age 70½.

Roth IRAs. Contributions to Roth IRAs are never tax deductible. However, once you have had a Roth IRA account for five years and reach age 59½, all withdrawals ― including withdrawn investment earnings ― are untaxed.

There are no age limits for contributions to a
Roth IRA. However, income limits apply.

Link to Full Article

Tax and Financial Reporting

News and Tools August 2018

The Tax Cuts and Jobs Act (TCJA) generally effective stating in 2018, raised the threshold for the requirement to use the percentage-ofcompletion method (PCM) from $10million average annual gross receipts (AAGR) to $25million for contracts starting in 2018.
(more…)

Smart tax, business and planning ideas from your Trusted Business AdvisorSM November 2018

Year-end planning under the new tax law

The Tax Cuts and Jobs Act of 2017 (TCJA),passed at the end of last year, generallytook effect in 2018. Therefore, the fourthquarter of this year provides the first real opportunity for year-end planning under what has been called the most important tax law passed in more than 30 years. (more…)

How the new tax law affects 529 plans

Now the G.I. Bill is forever
Education as a small-business fringe benefit
Tax calendar

Factoid : Higher education

Measured by market share, total accounts, and assets under management (over $66 billion), Virginia529 is the largest 529 plan in the nation.

 

Did you know ?

The Servicemen’s Readjustment Act of 1944 (G.I. Bill) paid almost $4 billion to nearly 9 million veterans from 1944–1949 in unemployment compensation. The education and training provisions existed until 1956, and the Veterans’ Administration offered insured loans until 1962. The Readjustment Benefits Act of 1966 extended these benefits to all veterans of the armed forces, including those who served during peacetime.

Source: History.com

Article : How the new tax law affects 529 plans

For many years, 529 college savings plans have offered a tax-favored way to save for higher education. These plans, officially qualified tuition programs, are named for the IRC section that provides their advantages.
In brief, 529 plans are funded with after-tax dollars. In college savings plans, account owners choose from a menu of investments, and any earnings are untaxed. Distributions are also tax-free if they do not exceed the qualifying educational expenses of the account beneficiary: payments of tuition, fees, supplies, and certain housing expenses for the account beneficiary’s study at an eligible educational institution. Before 2018, eligible educational institutions included only post-secondary institutions.
(more…)

Tax and Financial Reporting
News and Tools August 2018

 The Tax Cuts and Jobs Act (TCJA) generally effective stating in 2018, raised the threshold for the requirement to use the percentage-ofcompletion method (PCM) from $10million average annual gross receipts (AAGR) to $25million for contracts starting in 2018. (more…)

What’s Inside
More give in the gift tax
Don’t neglect estate planning
Moving your business to a low-tax state
Tax calendar

Factoid : Bountiful bequests

The IRS has clarified that the 2018 indexed federal estate tax exemption amount is $11.18 million, not the original estimate of $11.2 million.

Did you know?

Recognizing tax burdens, the U.S. areas with the highest cost of living are Manhattan, San Francisco, Silicon Valley, and Brooklyn, in that order. Among 253 locations studied, total taxes as a percentage of gross income range from 25% (Casper, WY) to 45% (Manhattan, NY). In lower cost areas such as Memphis, Oklahoma City, and Cincinnati, gross income under $75,000 could provide a standard of living requiring over $300,000 in Manhattan and more than $200,000 in San Francisco.

Source: Wahrheit Ventures (more…)

What’s inside

IRS okays home equity deductions
Buck market volatility with a retirement bucket plan
Coping with summer vacations at your small business
Tax calendar

Factoid : Winning streak

The median U.S. house price reached $241,700 in early 2018, marking 72 consecutive months of year-on-year price gains.

Did you know?

In 2017, total U.S. household consumer debt reached $13 trillion. Non-mortgage debt (car loans, student loans, credit cards, and so on) was reported by 71% of American workers. Only 31% of workers with non-mortgage debt were saving outside the workplace for retirement, compared with 69% of workers without non-mortgage debt.

Source: LIMRA Secure Retirement Institute. (more…)

What’s inside

The new tax law will change divorce tactics
Stretching for yield…carefully
No tax deductions for business entertaining
Tax calendar

 Factoid : Global expansion

The broadest global expansion in seven years occurred during 2017, with economic growth in 120 countries that accounted for three-fourths of world economic output.

 

Did you know ?

Among Baby Boomers (age 52 and older), 46% considered delaying retirement beyond the original target date in 2017. In 2015, the percentage was 47%. By comparison, 41% of Millennials (age 18–35) considered such a delayed retirement in 2017, up from 30% in 2015.

Source: T. Rowe Price

 

Article : The new tax law will change divorce tactics

When couples divorce, financial negotiations often involve alimony. The tax rules regarding alimony were dramatically changed by the Tax Cuts and Jobs Act (TCJA) of 2017, but existing agreements have been grandfathered. In addition, the old rules remain in effect for divorce and separation agreements executed during 2018. Next year, the rules will change, and the roles will be reversed.

Under divorce or separation agreements executed in 2018, and for many years in the past, alimony payments have been tax deductible. Moreover, these deductions reduce adjusted gross income, so they may have benefits elsewhere on a tax return. While the spouse or former spouse paying the alimony gets a tax deduction, the recipient reports alimony as taxable income.

 

Shifting into reverse

Beginning with agreements executed in 2019, there will be no tax deduction for alimony. As an offset, alimony recipients won’t include the payments in income.

Example 1: Joe and Kim Alexander get divorced in 2018. Joe expects to be in a 35% tax bracket in the future, whereas Kim anticipates being in a 22% bracket. Suppose that the proposed agreement has Joe paying $3,500 a month ($42,000 a year) in alimony.

Joe will save $14,700 in tax (35% times $42,000), but Kim will owe $9,240 (22% times $42,000). Net, the couple will save over $5,000 per year in taxes. This type of calculation will affect the negotiations, as it has in the past. Assuming the relevant rules are followed, it may make sense to tip the agreement toward Joe paying alimony to Kim, perhaps in return for other considerations.

Example 2: Assume that the Alexanders’ neighbors, Len and Marie Baker, have identical finances. They divorce in 2019. If Len pays $42,000 a year in alimony, he will get no deduction and won’t get the $14,700 in annual tax savings that Joe did in example 1. Marie, on the other hand, will pocket $42,000, tax-free, without the $9,240 tax bill faced by Kim in example 1.

 

Moving things along

Just as people shouldn’t “let the tax tail wag the investment dog,” so taxes shouldn’t dominate divorce or separation proceedings. However, it’s also true that taxes shouldn’t be ignored. If you are in such a situation, our office can help explain to both parties the possible savings available from executing an agreement during 2018, rather than in a future year.

The new rules will be in effect beginning in 2019. With no alimony deduction and a tax exemption for alimony income, it may be desirable to consider after-tax, rather than pre-tax, income when making decisions. Speaking very generally, there may be less cash for the couple to use after-tax.

Keep in mind that, as of 2019, not all states will have alimony tax laws that conform to the new federal rule. Your state may still offer tax deductions for alimony payments and impose income tax on alimony received. That’s all the more reason to look at after-tax results when calculating a divorce or separation agreement.

Getting personal

The impact of the new TCJA on spousal negotiations may go beyond the taxation of alimony. Among other provisions to consider, the TCJA abolishes personal exemptions. As a tradeoff, the standard deduction was almost doubled (see CPA Client Bulletin, April 2018).

In some past instances, divorcing spouses would agree that the high bracket party would claim the children’s personal exemptions, which effectively were tax deductions, in return for some other consideration. Now those exemptions don’t exist, so they shouldn’t be part of divorce negotiations. If you previously entered into an agreement that included the treatment of children’s personal exemptions, you may want to consult with counsel to see about possible revisions.

Trusted advice

Defining alimony

 

Payments to a spouse or former spouse must meet several requirements to be treated as alimony for tax purposes. The following are some key tests:

• The payments are made under a divorce or separation agreement.

• There is no liability to continue the payments after the recipient’s death.

• The payments aren’t treated as child support or a property settlement.

• The payments are made in cash (including checks or money orders).

 

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