Understanding The New Tax Code: Estate Planning 2018

Posted on December 10, 2018February 20, 2019 by PM Editor

2018 Estate Planning

Most of the media coverage and attention on the new tax code, The Tax Cuts and Jobs Act (TCJA), have been focused on changes to income taxes (individual and corporate) and their respective brackets. Although the new law did not “repeal” the Federal Estate Tax, it does include some provisions that could impact some tax payers and their estate planning.

Exemption Increases

The biggest change in the new tax code regarding estate planning is that it more than doubles the exemption amounts for gift and estate tax exemptions and the generation-skipping transfer (GST) tax exemption, from $5.49 million for 2017 to $11.18 million (or $20 million for married couples with proper planning) for 2018. The top marginal rate for all three taxes remains at 40% — only three percentage points higher than the top income tax rate.

This is good news for those with large estates, however absent congressional action, the exemptions will revert to their 2017 levels (adjusted for inflation) in 2026. Although these “doubled exemption” amounts only affect a small population of taxpayers, it is important for those with estates in the roughly $6 million to $11 million range (double that for married couples) to consider making tax-free asset and wealth transfers prior to 2026 when the higher exemption amounts are set to expire.

It is important to consider however for taxpayers not affected by the above exemption amounts it may behoove them to hold assets until death. Specifically, when a a taxpayer gives away an appreciated asset the recipient takes over their tax basis in the asset which would trigger a capital gains tax should the recipient turnaround and sell it. On the contrary, when an appreciated asset is inherited, the recipient’s basis is “stepped up” to the asset’s fair market value on the date of death, which could significantly reduce (or even erase) the capital gain. Hence, retaining appreciating assets for taxpayers with estates less than $11 million ($22 million for married couples) can you save your heirs a significant amount of income taxes.

It is also important to keep in mind that some states have their own estate taxes whose exemption amounts are almost always lower than the federal amounts.

Updates to Section 529 plans

Another key change brought with the new tax code has been the expansion in tax benefits for 529 plans. Many tax professionals have long been proponents for families using 529 plans to grow money tax-free for their children’s education. Previously, 529 plans could only be used for eligible colleges and universities, but the TCJA now allows them for private, public, and religious kindergarten through 12th grade – up to $10,000 per year per child. This lucrative savings method for families can also be extended to other relatives like grandparents who can pare down their estates by making contributions to 529 plans while benefiting their grandchildren and their education.

The complexity of estate planning can be a daunting task for even the most sophisticated taxpayer, therefore it is always a good idea to consult a tax professional like those found at TaxPM who can help you review, and if necessary revise your estate planning strategies.

Understanding The New Tax Code: Home Interest Deduction

Posted on November 21, 2018February 20, 2019 by PM Editor

2018 Home Mortgage Interest Deduction

President Donald Trump signed into law the Tax Cuts and Jobs Act (TCJA) on December 22, 2017. With its passage many important changes and revisions were made. Once such item that has undergone some important changes is the,”home mortgage interest deduction”. The IRS has long incentivized home ownership by offering taxpayers a tax deduction for mortgage interest. This long-standing tax perk has fueled one of the cornerstones of the “American Dream”, home ownership!

Under the Tax Reform Act of 1986, home mortgage interest was allowed only up to $1,000,000 of debt principal that was used to acquire, build, or substantially improve a principal residence or a second home; and the debt was secured by that residence respectively. However, under the TCJA, the limits on itemized mortgage interest deduction have been reduced to $750,000. Notably, existing home owners are grandfathered in under the older $1,000,000 limit. Furthermore, there is one important tidbit to consider, and that is the ever confusing IRS terminology, in this particular case – “acquisition indebtedness”. Taxpayers are responsible for determining how much of their mortgage interest is or isn’t deductible based on this IRS jargon if you will, of acquisition indebtedness. And of course, to add anxiety and confusion to the taxpayer the IRS expects the taxpayer to keep extensive records on how the mortgage proceeds were actually used, irregardless of how the loan is structured or what the lender calls it.

Further complicating the matter, the passing of the TCJA has completely eliminated the ability to deduct interest on home equity indebtedness, hence taxpayers need to inform themselves as to what exactly the IRS determines are these types of loans by their standard. This is effective for 2018 and beyond there are no grandfathering provisions for existing home equity debt.

Don’t be to eager to deduct the mortgage interest (if any) on your second home, especially if you rent out the second home. To qualify for this deduction there are a variety of rules and many times it is best to consult a tax professional like TaxPM who can determine how much(if any) of the mortgage interest can be deducted for a second home, and if it in fact falls into the “home mortgage interest deduction” or otherwise needs to be treated differently per the tax code. Also be aware that the rules and difficulty to ascertain the deduction change substantially if you rent the second home for more than 14 days.

In closing, one would hope that it would be as simple as receiving a mortgage interest statement and reporting that number directly on the tax return – well it’s not that simple. Although there are many potential tax breaks with owning a home, like, home mortgage interest deduction, taxpayers need to pay close attention to the rules and changes that were adopted by the new tax code with the passing of the Tax Cuts and Jobs Act (TCJA).

2018 Tax Brackets

Posted on November 14, 2018February 20, 2019 by PM Editor

2018 Income Tax Brackets and Standard Deduction Rates

The Tax Cuts and Jobs Act (TCJA) was signed into law by President Donald Trump on December 22, 2017. With its passage many tax payers were given some much needed tax relief. Notable changes include:

• Elimination of personal exemptions

• Elimination of the “Pease” limitation on itemized deductions

• Expansion of the Child Tax Credit

• Standard deduction for single filers increased by $5,500 and by $11,000 for married couples filing jointly (see Table 2 below)

• Tax table changes (see Table 1 below)

To protect individuals that are pushed into higher income tax brackets due to reduced value from credits and deductions instead of increase in real income (known as “bracket creep”), the act also requires that the IRS adjust numerous tax provisions for inflation.

Table 1. 2018 Income Tax Brackets and Rates

Table 2. 2018 Personal Exemption and Standard Deduction

The personal exemption for 2018 is eliminated

Child Tax Credit

The Child Tax Credit under TCJA is worth up to $2,000 per qualifying child. The age cut-off stays at 17 (child must be under 17 at the end of the year for taxpayers to claim the credit). The refundable portion of the credit is limited to $1,400. This amount will be adjusted for inflation after 2018.

Tax Season 2019

Posted on November 7, 2018February 20, 2019 by PM Editor

Spring of each year is a dreaded time for most Americans as tax returns are due, and unlike last year when the due date landed on a Sunday allowing an extra couple days for taxpayers to mail in their returns, the date to file personal returns is Monday April 15th, 2019. It may sound off into the distant future but rest assured it will be here before you know it. So we recommend reviewing what information you currently have and getting organized now to get ahead of any potential issues. Of course, many of you will not be able to prepare your return this early as you are awaiting year-end statements and other tax related documents (e.g. 1099’s and W2’s). Notwithstanding, it’s advisable to start preparing for the 2019 Tax Season now. Here are some tips to help you get organized and ready for next years tax season:

1. Create a Checklist

The best way to get started is with a Checklist, and the best way to create your list is by using your most recent filed tax return to help jog your memory of the various forms and schedules you will need to prepare for. As the corresponding tax related documents and statements arrive for each form you can check them off your list.

2. Collect tax related documents

Well-organized records make it easier to prepare a tax return and help provide answers if your return is selected for examination or if you receive an IRS notice. The IRS requires you to keep records, such as receipts, canceled checks, and other documents that support an item of income, a deduction, or a credit appearing on a return as long as they may become material in the administration of any provision of the Internal Revenue Code, which generally will be until the period of limitations expires for that return.

The IRS also recommends the following:

Property Records

Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. You must keep these records to figure your basis for computing gain or loss when you sell or otherwise dispose of the property.

Healthcare Insurance

You should keep records of your own and your family members’ health care insurance coverage, including records of employer-provided coverage or premiums paid and type of coverage for private coverage, so you can show that you and your family members had and maintained required minimum essential coverage. If you’re claiming the premium tax credit, you’ll need information about any advance credit payments you received through the Health Insurance Marketplace, the premiums you paid, and the type of coverage you obtained at the Marketplace. If you or any of your family members are exempt from minimum essential coverage, you should retain certificates of exemption you may receive from the Marketplace or any other documentation to support an exemption claimed on your tax return.

Business Income and Expenses

If you’re in business, there’s no particular method of bookkeeping you must use. However, you must use a method that clearly and accurately reflects your gross income and expenses. The records should substantiate both your income and expenses. If you have employees, you must keep all your employment tax records for at least 4 years after the tax becomes due or is paid, whichever is later.

3. Find a Tax Preparer

It doesn’t really matter whether you are an individual or a business owner, you will need tax planning and preparation strategy that includes tax saving tactics and strategies like insurance strategies, employee benefit plans, financing alternatives and more. All these things can be overwhelming for an ordinary person, but the experts in this field like TaxPM are doing this on a daily basis for dozens of individuals and businesses.

Got mail (from IRS)? Don’t Panic…

Posted on July 27, 2018February 20, 2019 by PM Editor

It can be a terrifying experience when you go to retrieve your mail, and among the usual bills and junk mail, there is the “dreaded” plain white envelope from the Internal Revenue Service. Like most Americans you get this uneasy feeling in your gut and the anxiety sets in.

Don’t Panic, the IRS sends out millions of letters to taxpayers every year, most of these are automated. Notwithstanding, you should open the letter immediately as many of these notices must be addressed by specific due dates. Ignoring these notices or putting them off could worsen the situation, especially if they are disputing money owed, they can rapidly rack up interest and penalties! However, as mentioned before these notices should not always be the cause for concern. The IRS send out notices for a host of reasons, first thing to do is understand the reason for the notice.

Why was I notified by the IRS?

The IRS sends notices and letters for the following reasons:

- You have a balance due.
- You are due a larger or smaller refund.
- We have a question about your tax return.
- We need to verify your identity.
- We need additional information.
- We changed your return.
- We need to notify you of delays in processing your return.

Once you have identified the reason for the notice maintain calm, and read it very carefully. If you are unsure how to proceed or simply prefer to have more experienced person address the IRS on your behalf, contact the professionals at TaxPM™ today!

Here are some recommended actions that the IRS advises if you’ve received a letter from them.

Read

Each notice or letter contains a lot of valuable information, so it’s very important that you read it carefully. If they changed your tax return, compare the information we provided in the notice or letter with the information in your original return.

Respond

If your notice or letter requires a response by a specific date, there are two main reasons you’ll want to comply:

to minimize additional interest and penalty charges.
to preserve your appeal rights if you don’t agree.

Pay

Pay as much as you can, even if you can’t pay the full amount you owe. You can pay online or apply for an Online Payment Agreement or Offer in Compromise. Visit IRS payments page for more information.

Keep a copy of your notice or letter

It’s important to keep a copy of all notices or letters with your tax records. You may need these documents at a later date.

Contact IRS

They provide their contact phone number on the top right-hand corner of the notice or letter. Typically, you only need to contact them if you don’t agree with the information, if they requested additional information, or if you have a balance due. You can also write them at the address in the notice or letter. If you write, allow at least 30 days for their response.

The location of the notice or letter number

You can find the notice (CP) or letter (LTR) number on either the top or the bottom right-hand corner of your correspondence.

When the notice or letter looks suspicious

Please visit IRS Report Phishing page if you receive a notice or letter that looks suspicious and was designed to appear as though it came from the IRS. You can also call 800-829-1040. The IRS never ask taxpayers for personal information via e-mail or social media.