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Tax Bracket Reorganization

There will continue to be seven tax brackets, but the rates and thresholds have changed:

1. 10% rate for individuals making up to $9,525 or married filing joint up to $19,050
2. 12% rate for individuals making between $9,526 to $38,700 or married filing joint from $19,051 to $77,400
3. 22% rate for individuals making between $38,701 to $82,500 or married filing joint from $77,401 to $165,000
4. 24% rate for individuals making between $82,501 to $157,500 or married filing joint from $165,001 to $315,000
5. 32% rate for individuals making between $157,501 to $200,000 or married filing joint from $315,001 to $400,000
6. 35% rate for individuals making between $200,001 to $500,000 or married filing joint from $400,001 to $600,000
7. 37% rate for individuals making over $500,000 or married filing joint over $600,000

Above the Line Deductions

Moving deductions and reimbursements—suspended through 2025 except for military service members who are changing duty stations.  Employer reimbursements (other than military) will be included as taxable wages

Alimony

For agreements or modifications entered into after 12/31/18, alimony will no longer be deductible by the payer, nor will it count as income to the recipient.  For a pre-2019 divorce, the old rules apply (payer can deduct payments and the recipient must pay taxes on them.  The law does permit ex-spouses to modify an earlier divorce agreement to adopt the new rule after it goes into effect in 2019, but both spouses would need to agree to the change

Educator expenses

There is no change to the law where a teacher is allowed to deduct up to $250 paid out of pocket for classroom supplies and professional development courses

Dependent care

There is no change to the law.  An employee can exclude up to $5000 per year from their gross income to provide for dependent care assistance.

Education Provisions

All education provisions remain the same for the following:

• American Opportunity Credit
• Lifetime Learning Credit
• Coverdell Education accounts
• Higher Education interest
• Employer provided education assistance
• Exclusion of qualified tuition reduction
• Exclusion for interest on US savings bonds used for higher education expenses

The only exception is the 529 plan, which now allows for the tax-free withdraw of funds if used for qualifying expenses for K-12 private and religious schools.

Tax Credits and Exemptions

Exemptions

The $4050 exemption per person (taxpayer, spouse, dependents) has been suspended, but don’t panic because the standard deduction has increased to offset this change

The Child Tax Credit

Expanded to $2000 per child under the age of 17 because of this more taxpayers will qualify for this deduction, as the phase out now begins at $200,000 AGI for single filers or $400,000 for MFJ filers

Non-Child Dependent Credit

Allows for a $500 credit per non-child dependent but the same income phase out as the Child Tax Credit applies

Electric Vehicle Credit

Credit has been retained and continues to be a maximum credit of $7,500

Adoption Credit

Credit has been retained and continues to apply to an adopted child under the age of 18, with a maximum credit of $13,570

Alternative Minimum Tax

While AMT was retained, the exemption phase out has increased substantially.  Old tax laws were $160,900 for Married Filing Joint, $80,450 Married Filing Separate, $120,700 single or Head of Household filers.  NEW laws are $1 Million for Married Filing Joint, and $500,000 for all others

Standard Deduction and Itemized Deductions

Standard deduction has nearly doubled:

• Single filers = $12,000 deduction (up from $6,350)
• Head of Household filers = $18,000 (up from $9,350)
• Married Filing Joint = $24,000 (up from $12,700)

Itemized Deductions

Medical deduction has been retained and improved

For 2018, the threshold for deductibility is now 7.5% of Adjusted Gross Income (used to be 10% of AGI)

Itemized deduction phase out

The deduction limitation phase out for higher income taxpayers has been suspended

SALT (State and Local Tax) deduction

The SALT deduction has been capped at $10,000.  This is a combined total of your property taxes + state/local taxes + DMV fees.  In the past, the deduction was not limited

Mortgage interest deduction

Full interest deduction allowed for up to $750,000 of indebtedness on primary/secondary home mortgage.  For loans originated prior to 12/15/17, mortgage indebtedness can be as much as $1 million to qualify for full interest deduction.  Home equity (includes second mortgages) mortgage interest can still be deducted so long as funds from the equity loan was used to buy, build, or substantially improve the home that secures the loan.  The total of all loans must not exceed $750,000 ($1 million for loans originated prior to 12/15/17)

Charitable contributions

The deduction amount has increased, but charitable contributions cannot exceed 60% of a taxpayer’s AGI (up from 50%)

Miscellaneous deductions (subject to 2% of AGI)

Miscellaneous deductions have been suspended through 2025.  Some examples of these types of deductions are unreimbursed employee business expenses, union dues, tax prep fees, investment expenses, casualty losses

Affordable Care Act

The shared responsibility payment (penalty for not having health insurance) has been repealed and will go into effect in 2019

Do any of these impact you? If so, feel free to reach out so we can do some tax planning to avoid surprises in April 2019.

A couple of things that are important when choosing banks (some of which we never knew to ask five years ago) include:

• Is your accountant able to connect your accounting system with free bank feeds, saving you hours and hours of accounting work?
• How automated is your bank? The more automated, the fewer errors, and the more likely the bank is to have competitive services, features and prices.
• What is their policy on holding large deposits?
• Do they offer ACH services?
• Does your payroll withdrawal need to be approved each pay period?

Accountants have experience with banks, so if you are in the market for a new one, feel free to reach out and ask us our opinion on the easiest bank to work with.

• Keep the number of cash accounts to a functional minimum.

Certainly, you’ll need at least a business checking account, often a business savings account, a business PayPal account, and perhaps a petty cash fund.  You may also want a separate account for payroll; a lot of companies do. But if you need more accounts, there should be a functional business reason to support them. That’s already a lot of accounts to reconcile and keep track of each month.

The same is true of credit card accounts.  It’s the keep-it-simple approach.

• Reconcile all of your cash accounts every month.

Keeping all of your cash accounts reconciled each month is a good idea. If a bank error, accounting mistake, or even fraud occurs, you can catch it and get it resolved more quickly than if you delay.

You’ll also have more accurate information about your balances and can move and manage your money better.

As you learn your balances each month, you can also move money around.  Unless you spend a lot out of PayPal, plan to move that money to pay off debt or into your checking account on a regular basis.

• Maintain a cushion in your checking account.

If your checking account hovers close to zero more often than not, you may be wasting precious time watching your bank balance instead of spending time to manage your business.  If you make a small error, you may get hit with costly overdraft fees, making your cash situation even worse.

Instead, consider depositing a fixed amount, like a cushion, that you never spend. You won’t get overdraft fees, and you won’t have to watch your balance so closely.  You may give up some interest income, but the time freed up and the reduced worry will be worth a few extra pennies.

• Watch your liquidity.

Cash is to business as water is to people; we can’t live without it.  Make sure you have enough to cover future obligations, and when possible, build up several months of reserve for emergencies. Anything that you can liquidate quickly, such as accounts receivable, can count toward this fund too.

Try these five cash flow tips to keep bringing home the bacon in your business.

Let P.T. Anderson help you manage your books and let you focus on doing what you do best for your business.

Guidelines

A person that conducts an activity for profit is allowed to deduct the expenses that are ordinary and necessary in that industry. If the expenses exceed the income, the amount can offset other income such as wages, interest, or dividends. However, if your activity is a hobby, you cannot reduce your other income by the losses.

When your losses exceed the three-year rule, the burden of proof now shifts to the taxpayer to prove the activity is a for-profit business. Here are some factors to consider:

•  The manner that you carry on the activity and the expertise of the taxpayer in this industry
•  The time and effort spent in the activity
•  The taxpayer’s history and success in this industry
•  The elements of personal pleasure or recreation

Here are some ways to ensure your for-profit business is not considered as a hobby:

1. Keep thorough and professional books.

2. Use a separate business bank and credit card account(s).

3. Log any personal use on assets, such as a camera.

4. Research trends in similar businesses.

5. Obtain insurance, registrations, certifications, licenses needed for that type of industry.

6. Maintain a second phone listing for business.

7. Document evaluations of your operation to attempt to improve the business’s profitability.

8. Develop a written business plan and update it annually.

9. Keep a detailed calendar of your business activities.

Here’s an example: Joe had a business as a personal chef. This was not his primary way of earning income. He had a W-2 job with a local city. He did earn about $200 to 300 in income; however, his expenses were much more than that. Come to find out, he was hosting dinner parties at his home and wanting to write off the food, subscription to cooking magazines, and seeds for his home garden.

If you are in doubt, just imagine yourself in front of an auditor explaining your specific situation. If it “feels” like the story above, it may not fly with the auditor, but that does not mean it is not a true business. What you need to do is plan and strategize. What can you do today to prove that you are a for-profit business?

Know the rules and then step out in confidence. And, don’t get tax advice from a friend because it might not be the whole truth! Consult your tax preparer to confirm your specific situation qualifies.

Automate your Emails

If you’re sending a lot of the same emails to clients, you may be able to add them to email list management software like Constant Contact or MailChimp. Then you can automate a series of emails using the autoresponder function.

Another way to automate your emails is to set up inbox rules so that certain emails are automatically filed into the folders you’ve set up.  For example, if you get a monthly email for a recurring bill payment, you could send it straight to your bills folder if you don’t want to read it. This will save time in the morning when you sort through the pile of email that’s sent overnight.

Set a Timer

Make a habit of checking your email only once or twice in the day. Plan those times on your calendar and set a timer to stop if you need to. This employs time batching, one of the most productive ideas in time management.  It’s unproductive to stop and read each email exactly as it comes into your box, so setting times restructures the way you work with email for the better.

Create Draft Email answers of your Most Frequently Asked Questions

Do you get a lot of the same questions over and over again in your email? Don’t start from scratch each time you craft an answer. Start with a draft of a previous answer, make it generic, and save it in your drafts folder.  When you get that question again, copy and paste the draft and customize it as necessary.

Repeat this for your top ten (or twenty) most-asked questions or emails that you send. You’ll shave minutes off each email reply from now on.

Learn the Email Software You’re Using

Sure, everyone pretty much knows how to send, reply to, and forward emails. Most even know how to add attachments. But what else do you know and use on a regular basis?

If you are tech-savvy, then simply spend some time reviewing your email settings and functions. There may be some you discover that will make your day.

If you don’t feel very comfortable with all things technical, then sign up for a formal course, preferably in person, where you have a real human teacher that can answer all your questions. It will be a day well spent.

Set up Folders

Folders, labels, or categories in your email software are all good ways to segment email so that it can be processed in a particular order. Your folders might be by priority, client, service type, or something else. In any case, it’s easier on your brain to answer all questions from one client or topic at a time than it is to ping-pong back and forth.

Use folders when you are complete with an email but want to save it for future reference. That way, your inbox will stay cleaner and emptier.

Use the Search Function

Using the search function liberally in your email software when you need to find an old email will help you save tons of time.

Get a new email Address if your Current Email Address is too Spammy

You may be losing the spam battle with email addresses that have been used for more than a few years or that have been hacked. If so, the best solution might just be to switch to a new email.

Choose a good email address in the first place by staying away from email addresses that hackers can guess, like webmaster@yourdomain.com, sales@yourdomain.com, or info@yourdomain.com.  Instead use service@yourdomain.com or a version of your first and last names.

Try these email productivity tips to help you spend less time on email while still getting the job done.

So, before you make big moves to separate or divorce, know the potential tax consequences, and take steps to protect yourself from further trauma and financial pain.

Here are seven tips on some of the most questioned tax topics for people who are divorced or divorcing:

When Are You Actually Divorced?

The IRS sees things differently about your divorce than you might, including the actual date of your divorce. If you get divorced this January 1^st , you will have to file last year’s tax return as married.  The IRS sees your status on December 31^st of the prior year as the story for the whole year.  On the contrary, if your divorce became final in December, you won’t be able to file as married even if that was your status for most of the year.

What Are Your Filing Options?

Even if you are legally still married as of the end of the year but divorce is impending, you may have some options in how to file for that year and can determine which route is most advantageous to both individuals. You could obviously file married filing jointly or married filing separately; however, in some cases, the head of household status – originally created for single taxpayers – might apply to you as well and could save you money.

To qualify as head of household, you have to be “considered unmarried” as of the end of the year (even if legally still married): you must have lived apart from your spouse for the last six months of the year, have paid over half the cost of keeping up your main residence (and it was the main home of your child(ren)), and be able to claim your child(ren) as your dependent(s) under the rules for children of divorced or separated parents. Also, you have to file a separate tax return from your spouse, even if you are still legally married.

The head of household route could significantly improve the overall tax outcome because of more favorable tax rates and higher thresholds for certain deduction items, so it’s worth checking into all of your filing options and determining what’s best for your particular situation.

Watch Out for Capital Gains Tax on the House

You don’t have to pay income taxes on assets that are transferred during a divorce. But keep in mind that if you do get the house in the settlement but want to sell, you will be subject to capital gains tax on the sale as a single person.

Normally, a married couple doesn’t have to pay taxes on a gain of up to $500,000 on their primary residence. If you are single, you can only exempt half of that. So if your house sells for more than $250,000 over what you and your former spouse paid for it, you will owe taxes, and the rate will depend on your income bracket.

Your Kids Aren’t Your Dependents…Unless the Court Order Says So

Custody agreements are often quite creative.  The arrangements are varied compared to the old days, when mothers typically got custody of the kids.  Now, custody is often shared, and the right to claim kids as dependents must be stated in the decree.

Generally, you can claim the kids as dependents only if you were designated to do so by your separation agreement or divorce decree. When there is no such agreement or order, or when joint custody applies, the custodial parent is considered to be the parent who has physical custody of the child for most of the year.

What happens when you share custody equally?  You will need to decide who claims the child, as you both can’t claim him/her as a dependent.  If there is more than one child, couples will often split the dependency of each child between the two parents. If you have two children, the mother can take one and the father can take the other as dependents.

Child Support Is Never Deductible

While alimony is considered a taxable event, child support is always non-taxable.  This basically means that it doesn’t affect your taxes in any way.  It is troublesome for some who are making large child support payments to understand that there is no tax break.  Likewise, the recipient of the child support payments does not have to report them as income.

It can be tempting for some to try to classify child support as alimony to get a tax deduction.  This is never a good idea and can get you in a lot of financial trouble later.  Remember, no matter how much you have to pay or for how long, you can’t deduct child support!

Alimony Affects Both Your Taxes

In 2017, individuals paying alimony get a lower tax bill because they can deduct it even if they don’t itemize.  The recipient must report the alimony as income, thereby increasing his or her tax bill.  What’s more, you most definitely need a written separation or divorce decree stating that alimony payments are not child support.  No written order means no tax break.

Couples who are facing extended divorce proceedings due to finances, custody battles or state laws need to be sure that support during long periods of separation is clearly defined.  If you pay the bills for your spouse while separated, it cannot be deducted as alimony without a written agreement.

The Tax Cuts and Jobs Act of 2017 changes the alimony rule.  For divorce agreements entered into after December 31, 2018 or existing agreements modified after that date that specifically include this amendment in the modification, alimony is no longer deductible by the payer and is not income to the recipient.

Be Aware of Community Property Rules

If you live in a state subject to community property rules (nine states total) and you file separate returns while still technically married (whether as Married Filing Separately or Head of Household), you will be required to report 50 percent of all income generated by community assets during the time you were married. This includes wage income and any income earned from community property (property acquired during marriage), like rental and investment income.

This can have multiple implications, and the most advantageous filing status (joint or separate) can vary largely depending on how long you were married, assets brought into the marriage vs. those acquired while married, income earned by one spouse vs. another, etc. Furthermore, these community property/allocation rules are handled differently in each state , and the interpretation can become somewhat complex.

It’s important to know what income/deduction/credit items should be split 50/50 on the return.  For example, while sole proprietorship income of one spouse is community income that should be split, the self-employment tax on that income is imposed solely on the spouse carrying on the business.

Because of these complexities, it is important to understand the rules of your state and seek guidance in navigating them. If you need help filing your personal or business taxes, reach out to us at P.T. Anderson Accounting.