Tax Tips

Regular financial checkups give you an opportunity to identify where you can improve your overall tax situation. They also help identify areas of concern that may require more detailed attention. In a similar fashion, regularly reviewing your tax situation with a financial professional can identify opportunities to improve your tax picture and can often shed light on areas where you may be paying too much in taxes. Simple strategies that range from adjusting your withholding to timing the sales of securities can be employed to potentially reduce your tax bill.

Adjust Your Withholding

This is a simple and basic move. If you had too little tax withheld last year, you ended up paying the IRS what you owed when you filed your return and may incur a penalty. If you had too much tax withheld, you received a tax refund. You may regard a large tax refund as a plus — but the reality is that a large tax refund is simply an interest-free loan of your money to the government. It may make more sense to have less tax withheld up front and receive more in your paycheck. That way, you can save or invest the money and potentially earn interest, dividends, or perhaps enjoy a capital gain on your investments.

Time the Sale of Securities

How long you own a profitable asset before you sell it can impact how much income tax you pay on your gain. Holding on to an appreciated asset for more than one year before you sell it results in long-term capital gain. The tax rate on long-term capital gains is 0%, 15%, or 20% depending on your taxable income and filing status. For example, if you are married and filing jointly in 2021, the long-term capital gains rate is 0% with income of up to $80,800, 15% with income between $80,801 and $501,600, and 20% with income over $501,600. In contrast, short-term capital gains are taxed at higher ordinary income tax rates.

If you have capital losses, look into selling investments in your taxable accounts to generate capital gains that can be offset by the losses. You could also potentially reduce taxes by investing in municipal bonds. Interest on municipal bonds is generally exempt from federal income taxes and might be exempt from state and local income taxes as well. Of course, credit ratings should be analyzed before purchase.

Add to Your Retirement Plan

You could potentially lower your income tax liability by increasing the amount you contribute to your tax-favored retirement plan (limits apply). If you’re age 50 or older, and your plan permits, you may be able to add to your retirement account by making catch-up contributions in addition to your regular plan contributions.

Consider a Health Savings Account

A health savings account (HSA) can also be a good tax saving option. You can contribute pretax income to an employer-sponsored HSA or make deductible contributions to an HSA you open on your own provided you are covered by a qualified high-deductible health plan. You can invest in an HSA and have it grow in a tax-deferred manner similar to an individual retirement account. And HSA withdrawals for qualified medical expenses are tax free. You can also carry over a balance from year to year, allowing the account to grow.

Carrying out a post-tax season review of your income tax return can be very helpful way to gain new insight into your financial situation. It’s a bit like looking at a familiar place from a different and fresh perspective — you never know what you might discover. See what a review of your federal income tax return might reveal about the following issues.

Investments — Your Winners and Losers

Look for evidence of excessive gains and losses within a compressed time frame. If you are a trader, this might be typical. However, if you are an average investor, these gains or losses may point to the fact that you are buying and selling too frequently. You should consider the fees associated with excessive trading as well as whether your portfolio is structured in a way that meets your goals and your tolerance for risk.

You may have a capital loss carryforward that represents an unused loss you are carrying over to offset future capital gains. If you intend to rebalance* your taxable account investments, see if there will be capital gains that can be offset by the loss you are carrying forward.

Another possible way to reduce taxes is to consider municipal bonds. Interest on municipal bonds is generally exempt from federal income taxes and possibly state and local income taxes. Of course, the credit ratings of municipals should be analyzed before purchase. Although bonds with lower credit ratings may offer higher yields, they typically carry a higher risk of default.

Retirement Planning

You may be able to lower your current year’s income tax liability by increasing the amount you contribute to tax-favored retirement plans (limits apply). If you are taking distributions from a retirement plan still held with a former employer, you may want to consider a rollover into one account to consolidate accounts and simplify your recordkeeping. If you have multiple individual retirement accounts (IRAs), also think about consolidating accounts.

Your Business

If you operate a business, review of your tax return may point to a wealth of tax-saving and other planning opportunities. For example, if you are self-employed as a sole proprietor and filed a Schedule C, look into whether a different business form could make sense. For example, an S corporation can limit a business owner’s personal liability and may offer tax savings. If you do not already have a retirement plan in place, consider establishing one. A retirement plan established through your business allows you to save for your future financial security and deduct your contributions. Additionally, there may be income-shifting opportunities among family members through employment in the business.

Itemized Deductions

Review your Schedule A for potential opportunities. Is it possible to get a better rate and term on your mortgage loan? Would refinancing or switching to a 15-year term make financial sense? If you make charitable donations, look into contributing appreciated stock in place of cash. When you donate appreciated stock held more than one year, you receive a deduction for the value of the gift and you avoid paying capital gains tax on the appreciation.

You could also investigate establishing a charitable remainder trust. Doing so allows you to make a gift to charity, retain an income from the donated assets for life, and claim a current tax deduction for your gift.

Other Considerations

If your filing status has changed due to a life change such as marriage or divorce, make sure that change is reflected when you file this year’s tax return. In addition, be sure to keep your beneficiary designations on your retirement accounts and insurance policies current so that they accurately reflect your present status. If you have children, you may want to consider setting money aside for their future education. There are tax-advantaged college savings opportunities that you should look into further.

A review of your tax return and your investment transaction statements can help you identify areas where you may be able to lower the taxes you’ll have to pay next year. Your financial and tax professionals will be able to assist you in that effort.

*Rebalancing a portfolio may create a taxable event if done outside of a retirement account.

It’s not always easy to keep contributing to your employer-provided retirement plan. Bills and unexpected expenses can eat up most of your salary, leaving little for retirement savings. You might be tempted to forget about it until you start earning more money.

But before you stop or cut back (or never start) contributing to your plan, understand that you could be entitled to a federal tax credit called the Retirement Savings Contributions Credit, or Saver’s Credit, if you meet certain income requirements. In effect, the credit repays a percentage of the contributions you make to your 401(k) or other retirement savings plan by reducing your income tax liability for the year. It may be just the thing that enables you to keep participating in your retirement plan or increase your contributions.

What It Is

The credit is a percentage — 50%, 20%, or 10% — of up to $2,000 in qualified retirement savings contributions for a maximum credit of $1,000 (or twice that amount for a married couple filing jointly who each contribute $2,000). The percentage depends on adjusted gross income (AGI) and filing status. The credit is available for contributions to a 401(k), 403(b), governmental 457(b), SIMPLE IRA, or salary reduction SEP as well as for traditional and Roth IRA contributions.

To claim the credit, you must be at least age 18, not claimed as a dependent on another person’s return, and not a full-time student. You will not be able to claim the credit if your AGI exceeds the top of the range for the 10% credit.

We invite you to request a consultation online now or call us at 404-459-4174 to learn more about how we can help you save money on your taxes.

2019 Tax Credit
	50% of Contribution	20% of Contribution	10% of Contribution	0% of Contribution
Tax Filing Status	Adjusted Gross Income
Married Filing Jointly	$38,500 or less	$38,501-$41,500	$41,501-$64,000	> $64,000
Head of Household	$28,875 or less	$28,876-$31,125	$31,126-$48,000	> $48,000
All other filers*	$19,250 or less	$19,251-$20,750	$20,751-$32,000	> $32,000

*Single, married filing separately, or qualifying widow(er)

Source: irs.gov

Affectionately being referred to as the Pass-Through Deduction, the new tax law will allow partnerships, LLCs, S corporations and sole proprietorships (in other words, pass-throughs) to deduct up to 20% of their Qualified Business Income under revised provisions of IRC § 199A.

How is the Pass-Through Deduction Calculated?

The Pass-Through Deduction usually will be whichever is smaller between 20% of the household’s Qualified Business Income or 20% of the household’s taxable ordinary income. For example, assume a self-employed plumber has $50,000 of Qualified Business Income in 2018, with no other sources of income. If the plumber is a single filer he may claim a $12,000 standard deduction, resulting in $38,000 in taxable income. Therefore, 20% of the plumber’s Qualified Business Income is $10,000 ($50,000 x 20%), while 20% of his taxable income is $7,600 ($38,000 x 20%). The plumber may claim a $7,600 Pass-Through Deduction, the smaller of the two amounts.

What is Qualified Business Income?

In general, Qualified Business Income is net income that is received from a Qualified Trade or Business. However, there are some exclusions, the most common of which are capital gains, dividend and interest income. Additionally, any guaranteed payments or “reasonable compensation” paid to owners must be excluded.

What is a Qualified Trade or Business?

In general, a Qualified Trade or Business is any trade or business that is not a “Specified Service Trade or Business” or the trade or business of performing services as an employee.

The IRS Defines a Specified Service Trade or Business as:

• any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees or owners,
• any banking, insurance, financing, leasing, investing, or similar business,
• any business involving the production or extraction of products of a character with respect to which a deduction is allowable under section 613 or 613A,
• any business of operating a hotel, motel, restaurant, or similar business, and
• any business which involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities.

Income Based Exception for Specified Service Trade or Business Owners

An income-based exception exists for owners of a Specified Service Trade or Business which will allow them to take the Pass-Through Deduction as long as their income is below a certain amount. For 2018, that amount is $207,500 (or $415,000, for MFJ) to be eligible for a partial deduction and $157,500 (or $315,000, for MFJ) to be eligible for the full deduction. Therefore, even if a taxpayer owns a Specified Service Trade or Business if her income is below $157,500 (or $315,000, for MFJ) for the year she may still take the full 20% pass-through deduction. While, if her income is greater than $157,500 (or $315,000, for MFJ) but below $207,500 (or $415,000, for MFJ), she may take a partial deduction.

Phase Out Provisions and other Requirements for Certain Taxpayers

The New Pass-Through Deduction is very complex. While we have discussed the basics here, the new law contains numerous nuances. For example, for taxpayers who have income greater than $207,500 (or $415,000 for MFJ) the deduction must be calculated in a different manner. It is advised that you speak with a tax professional to determine your specific eligibility for the new Pass-Through Deduction.

Dorsey CPA offers a variety of tax planning services to both businesses and individuals. Conscientious tax planning throughout the year can save you money and make tax time easier. Call us at 404-459-4174 and request a free initial consultation to learn more.

The Tax Cuts and Jobs Act (TCJA) raises many questions for taxpayers looking to plan for the coming year. Below are answers to some of them.

Do I need to adjust my withholding allowances, given that tax brackets have changed?

You may notice a change in your net paycheck as a result of the tax law, which alters tax rates, brackets, and other items that affect how much tax is withheld from your pay. The IRS has already issued new withholding tables, and your employer should adjust its withholding without requiring any action on your part. But you may want to take the opportunity to make sure you are claiming the appropriate number of withholding allowances by filling out IRS Form W-4. This form is used to determine your withholding based on your filing status and other information. The IRS suggests that you consider completing a new Form W-4 each year and when your personal or financial situation changes.

Can I take advantage of the new deduction for pass-through business income?

The new rules for owners of pass-through entities — partnerships, limited liability companies, S corporations, and sole proprietorships — allow them to deduct 20% of their business pass-through income. The 20% deduction is available to owners of almost any type of trade or business whose taxable income does not exceed $315,000 (joint return) or $157,500 (other returns). Above those amounts, the deduction is subject to certain limitations based on business assets and wages. Different deduction restrictions apply to individuals in specified service businesses (e.g., law, medicine, and accounting).

Can I still deduct mortgage interest and real estate taxes paid on a second home?

Yes, but the new rules limit these deductions. The deduction for total mortgage interest is limited to the amount paid on underlying debt of up to $750,000 ($375,000 for married individuals filing separately). Previously, the limit was $1 million. Note that the new restriction will not apply to taxpayers with home acquisition debt incurred on or before December 15, 2017. Additionally, the deduction for interest on home equity loans (new and existing) is suspended and will not be available for tax years 2018-2025.

Note that the law also establishes a $10,000 limit on the combined total deduction for state and local income (or sales) taxes, real estate taxes, and personal property taxes. As a result, your ability to deduct real estate taxes may be limited.

Are there any changes to capital gains rates and rules that I should know about?

The rules concerning how capital gains are determined and taxed remain essentially unchanged. But since short-term gains (for assets held one year or less) are taxed as ordinary income, they will be taxed at the new ordinary income rates and brackets. Net long-term gains will still be taxed at rates of 0%, 15%, or 20%, depending on your taxable income. And the 3.8% net investment income tax that applies to certain high earners will still apply for both types of capital gains.

2018 Long-Term Capital Gains Breakpoints

Rate	Single Filers	Joint Filers	Head of Household	Married Filing Separately
0%	Below $38,600	Below $77,200	Below $51,700	Below $38,600
15%	$38,600-$425,799	$77,200-$478,999	$51,700-$452,399	$38,600-$239,499
20%	$425,800 and above	$479,000 and above	$452,400 and above	$239,500 and above

Can I still deduct my student loan interest?

Yes. Although some earlier versions of the tax bill disallowed the deduction, the final law left it intact. That means that student loan borrowers will still be able to deduct up to $2,500 of the interest they paid during the year on a qualified student loan. The deduction is gradually reduced and eventually eliminated when modified adjusted gross income reaches $80,000 for those whose filing status is single or head of household, and over $165,000 for those filing a joint return.

I have a large family and formerly got to take an exemption for each member. Is there anything in the new law that compensates for the loss of these exemptions?

The new law suspends exemptions for you, your spouse, and dependents. In 2017, each full exemption translated into a $4,050 deduction from taxable income which, for large families, added up. Compensating for this loss, the new law almost doubles the standard deduction to $12,000 for single filers and $24,000 for joint filers. Additionally, the child tax credit is doubled to $2,000 per child, and the income levels at which the credit phases out are significantly increased. Depending on your situation, these new provisions could potentially offset the suspension of personal exemptions.

I have been gifting friends and relatives $14,000 per year to reduce my taxable estate. Can I still do this?

Yes, you may still make an annual gift of up to $15,000 in 2018 (increased from $14,000 in 2017) to as many people as you want without triggering gift tax reporting or using any of your federal estate and gift tax exemption. But TCJA also doubles the exemption to an estimated $11.2 million ($22.4 million for married couples) in 2018. So anyone who anticipates having a taxable estate lower than these thresholds may be able to gift above the annual $15,000 per-recipient limit and ultimately not incur any federal estate or gift tax. Note, however, that the higher exemption amount and many of TCJA’s other changes to personal taxes are scheduled to expire after 2025, unless Congress acts to extend them.

This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax circumstances are different. You should contact your tax professional to discuss your personal situation.