- 2017 Recap of Tax Provisions for Individuals
- Business Tax Provisions: the Year in Review
- Five Common Budgeting Errors & How to Avoid Them
- Tax Advantages of Health Savings Accounts
- Tax Reform Update: The Tax Cuts and Jobs Act
- Retirement Contributions Limits Announced for 2018
- Don’t Forget about College Tax Credits for 2017
- Take Retirement Plan Distributions by December 31
- Flexible Spending Accounts (FSAs)
- Tips for Taxpayers: Travel Expenses for Charitable Work
2017 Recap of Tax Provisions for Individuals
Many of the tax changes affecting individuals and businesses for 2017 were related to the Protecting Americans from Tax Hikes Act of 2015 (PATH) that modified or made permanent numerous tax breaks (the so-called “tax extenders”). To further complicate matters, some provisions were only extended through 2016 and are set to expire at the end of this year while others were extended through 2019. With that in mind, here’s what individuals and families need to know about tax provisions for 2017.
The personal and dependent exemption for tax year 2017 is $4,050.
The standard deduction for married couples filing a joint return in 2017 is $12,700. For singles and married individuals filing separately, it is $6,350, and for heads of household the deduction is $9,350.
The additional standard deduction for blind people and senior citizens in 2017 is $1,250 for married individuals and $1,550 for singles and heads of household.
Income Tax Rates
In 2017 the top tax rate of 39.6 percent affects individuals whose income exceeds $418,400 ($470,700 for married taxpayers filing a joint return). Marginal tax rates for 2017–10, 15, 25, 28, 33 and 35 percent–remain the same as in prior years.
Due to inflation, tax-bracket thresholds increased for every filing status. For example, the taxable-income threshold separating the 15 percent bracket from the 25 percent bracket is $75,900 for a married couple filing a joint return.
Estate and Gift Taxes
In 2017 there is an exemption of $5.49 million per individual for estate, gift and generation-skipping taxes, with a top tax rate of 40 percent. The annual exclusion for gifts is $14,000.
Alternative Minimum Tax (AMT)
AMT exemption amounts were made permanent and indexed for inflation retroactive to 2012. In addition, non-refundable personal credits can now be used against the AMT.
For 2017, exemption amounts are $54,300 for single and head of household filers, $84,500 for married people filing jointly and for qualifying widows or widowers, and $42,250 for married people filing separately.
Marriage Penalty Relief
The basic standard deduction for a married couple filing jointly in 2017 is $12,700.
Pease and PEP (Personal Exemption Phaseout)
Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) limitations were made permanent by ATRA (indexed for inflation) and affect taxpayers with income at or above $261,500 for single filers and $313,800 for married filing jointly in tax year 2017.
Flexible Spending Accounts (FSA)
Flexible Spending Accounts (FSAs) are limited to $2,600 per year in 2017 (up from $2,550 in 2016) and apply only to salary reduction contributions under a health FSA. The term “taxable year” as it applies to FSAs refers to the plan year of the cafeteria plan, which is typically the period during which salary reduction elections are made.
Specifically, in the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,600 limit for the subsequent plan year.
Further, employers may allow people to carry over into the next calendar year up to $500 in their accounts, but aren’t required to do so.
Long Term Capital Gains
In 2017 taxpayers in the lower tax brackets (10 and 15 percent) pay zero percent on long-term capital gains. For taxpayers in the middle four tax brackets the rate is 15 percent and for taxpayers whose income is at or above $418,400 ($470,700 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent.
Individuals – Tax Credits
In 2017 a nonrefundable (i.e. only those with a lax liability will benefit) credit of up to $13,570 is available for qualified adoption expenses for each eligible child.
Child and Dependent Care Credit
The child and dependent care tax credit was permanently extended for taxable years starting in 2013. If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.
For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.
Child Tax Credit
For tax year 2017, the child tax credit is $1,000. A portion of the credit may be refundable, which means that you can claim the amount you are owed, even if you have no tax liability for the year. The credit is phased out for those with higher incomes.
Earned Income Tax Credit (EITC)
For tax year 2017, the maximum earned income tax credit (EITC) for low and moderate income workers and working families increased to $6,318 (up from $6,269 in 2016). The maximum income limit for the EITC increased to $53,930 (up from $53,505 in 2016) for married filing jointly. The credit varies by family size, filing status, and other factors, with the maximum credit going to joint filers with three or more qualifying children.
Individuals – Education Expenses
Coverdell Education Savings Account
You can contribute up to $2,000 a year to Coverdell savings accounts in 2017. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.
American Opportunity Tax Credit
For 2017, the maximum American Opportunity Tax Credit that can be used to offset certain higher education expenses is $2,500 per student, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.
Employer-Provided Educational Assistance
In 2017, as an employee, you can exclude up to $5,250 of qualifying post-secondary and graduate education expenses that are reimbursed by your employer.
Lifetime Learning Credit
A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2017, the modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $112,000 for joint filers and $56,000 for singles and heads of household.
Student Loan Interest
In 2017 you can deduct up to $2,500 in student-loan interest as long as your modified adjusted gross income is less than $65,000 (single) or $135,000 (married filing jointly). The deduction is phased out at higher income levels. In addition, the deduction is claimed as an adjustment to income, so you do not need to itemize your deductions.
Individuals – Retirement
For 2017, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $18,000 (same as 2016). For persons age 50 or older in 2017, the limit is $24,000 ($6,000 catch-up contribution). Contribution limits for SIMPLE plans remain at $12,500 (same as 2016) for persons under age 50 and $15,500 for anyone age 50 or older in 2017. The maximum compensation used to determine contributions increased from $265,000 to $270,000.
In 2017, the adjusted gross income limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and-moderate-income workers is $62,000 for married couples filing jointly, $46,500 for heads of household, and $31,000 for married individuals filing separately and for singles.
Please call if you need help understanding which deductions and tax credits you are entitled to.
Business Tax Provisions: the Year in Review
Whether you file as a corporation or sole proprietor here’s what business owners need to know about tax changes for 2017.
Standard Mileage Rates
The standard mileage rates in 2017 are as follows: 53.5 cents per business mile driven, 17 cents per mile driven for medical or moving purposes, and 14 cents per mile driven in service of charitable organizations.
Health Care Tax Credit for Small Businesses
Small business employers who pay at least half the premiums for single health insurance coverage for their employees may be eligible for the Small Business Health Care Tax Credit as long as they employ fewer than the equivalent of 25 full-time workers and average annual wages do not exceed $52,000 (adjusted annually for inflation). In 2017 this amount is $52,400.
In 2017 (as in 2016, 2015, and 2014), the tax credit is worth up to 50 percent of your contribution toward employees’ premium costs (up to 35 percent for tax-exempt employers). For tax years 2010 through 2013, the maximum credit was 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities.
Section 179 Expensing and Depreciation
The Section 179 expense deduction was made permanent at $510,000 by the Protecting Americans from Tax Hikes Act of 2015 (PATH). For equipment purchases, the maximum deduction is $500,000 of the first $2.03 million of qualifying equipment placed in service during the current tax year. The deduction is phased out dollar for dollar on amounts exceeding the $2 million threshold amount (indexed for inflation) and eliminated above amounts exceeding $2.5 million. In addition, Section 179 is now indexed to inflation in increments of $10,000 for future tax years.
The 50 percent bonus depreciation has been extended through 2019. Businesses are able to depreciate 50 percent of the cost of equipment acquired and placed in service during 2015, 2016 and 2017. However, the bonus depreciation is reduced to 40 percent in 2018 and 30 percent in 2019. The standard business depreciation amount is 25 cents per mile.
Please call if you have any questions about Section 179 expensing and the bonus depreciation.
Work Opportunity Tax Credit (WOTC)
Extended through 2019, the Work Opportunity Tax Credit has been modified and enhanced for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) and is generally equal to 40 percent of the first $6,000 of wages paid to a new hire. Please call if you have any questions about the Work Opportunity Tax Credit.
SIMPLE IRA Plan Contributions
Contribution limits for SIMPLE IRA plans increased to $12,500 for persons under age 50 and $15,500 for persons age 50 or older in 2017. The maximum compensation used to determine contributions increases to $270,000.
Please contact the office if you need help understanding which deductions and tax credits you are entitled to.
Five Common Budgeting Errors & How to Avoid Them
When it comes to creating a budget, it’s essential to estimate your spending as realistically as possible. Here are five budget-related errors commonly made by small businesses and some tips for avoiding them.
- Not Setting Goals. It’s almost impossible to set spending priorities without clear goals for the coming year. It’s important to identify, in detail, your business and financial goals and what you want or need to achieve in your business.
- Underestimating Costs. Every business has ancillary or incidental costs that don’t always make it into the budget–for whatever reason. A good example of this is buying a new piece of equipment or software. While you probably accounted for the cost of the equipment in your budget, you might not have remembered to budget time and money needed to train staff or for equipment maintenance.
- Forgetting about Tax Obligations. While your financial statements may seem adequate, don’t forget to set aside enough money for tax (e.g., sales and use tax, payroll tax) owed to state, local, and federal entities. Don’t make the mistake of thinking this is “money in the bank” and use it to pay for expenses you can’t really afford or worse, including it in next year’s budget and later finding out that you don’t have the cash to pay for your tax obligations.
- Assuming Revenue Equals Positive Cash Flow. Revenue on the books doesn’t always equate to cash in hand. Just because you’ve closed the deal, it may be a long time before you are paid for your services and the money is in your bank account. Easier said than done, perhaps, but don’t spend money that you don’t have.
- Failing to Adjust Your Budget. Don’t be afraid to update your forecasted expenditures whenever new circumstances affect your business. Several times a year you should set aside time to compare budget estimates against the amount you actually spent, and then adjust your budget accordingly.
Please call if you need assistance setting up a budget to meet your business financial goals.
Tax Advantages of Health Savings Accounts
While similar to FSAs (Flexible Savings Plans) in that both allow pre-tax contributions, Health Savings Accounts or HSAs offer taxpayers several additional tax benefits such as contributions that roll over from year to year (i.e., no “use it or lose it”), tax-free interest on earnings, and when used for qualified medical expenses, tax-free distributions.
What is a Health Savings Account?
A Health Savings Account is a type of savings account that allows you to set aside money pre-tax to pay for qualified medical expenses. Contributions that you make to a Health Savings Account (HSA) are used to pay current or future medical expenses (including after you’ve retired) of the account owner, his or her spouse, and any qualified dependent.
Caution: Medical expenses that are reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return are not eligible.
Caution: Insurance premiums for taxpayers younger than age 65 are generally not considered qualified medical expenses unless the premiums are for health care continuation coverage (such as coverage under COBRA), health care coverage while receiving unemployment compensation under federal or state law.
You cannot be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care and you cannot be claimed as a dependent on someone else’s tax return. Spouses cannot open joint HSAs. Each spouse who is an eligible individual who wants an HSA must open a separate HSA.
An HSA can be opened through your bank or another financial institution. Contributions to an HSA must be made in cash. Contributions of stock or property are not allowed. As an employee may be able to elect to have money set aside and deposited directly into an HSA account; however, if this option is not offered by your employer, then you must wait until filing a tax return to claim the HSA contributions as a deduction.
High Deductible Health Plans.
A Health Savings Account can only be used if you have a High Deductible Health Plan (HDHP). Typically, high-deductible health plans have lower monthly premiums than plans with lower deductibles, but you pay more health care costs yourself before the insurance company starts to pay its share (your deductible).
A high-deductible plan can be combined with a health savings account, allowing you to pay for certain medical expenses with tax-free money that you have set aside. By using the pre-tax funds in your HSA to pay for qualified medical expenses before you reach your deductible and other out-of-pocket costs such as copayments, you reduce your overall health care costs.
Calendar year 2018. For calendar year 2018, a qualifying HDHP must have a deductible of at least $1,350 for self-only coverage or $2,700 for family coverage. Annual out-of-pocket expenses (e.g., deductibles, copayments, and coinsurance) of the beneficiary are limited to $6,650 for self-only coverage and $13,300 for family coverage. This limit doesn’t apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies.
Last month rule. Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers).
You can make contributions to your HSA for 2017 until April 17, 2018. Your employer can make contributions to your HSA between January 1, 2018, and April 17, 2018, that are allocated to 2017. The contribution will be reported on your 2018 Form W-2.
Summary of HSA Tax Advantages
- Tax deductible. You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize your deductions on Schedule A (Form 1040).
- Pre-tax dollars. Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.
- Tax-free interest on earnings. Contributions remain in your account until you use them and are rolled over year after year. Any interest or other earnings on the assets in the account are tax-free. Furthermore, an HSA is “portable” and stays with you if you change employers or leave the workforce.
- Tax-free distributions. Distributions may be tax-free if you pay qualified medical expenses.
- Additional contributions for older workers. Employees, aged 55 years and older are able to save an additional $1,000 per year.
- Tax-free after retirement. Distributions are tax-free at age 65 when used for qualified medical expenses including amounts used to pay Medicare Part B and Part D premiums, and long-term care insurance policy premiums. However, you cannot use money in an HSA to pay for supplemental insurance (e.g., Medigap) premiums.
Questions about HSAs? Don’t hesitate to call.
Tax Reform Update: The Tax Cuts and Jobs Act
The Tax Cuts and Jobs Bill (H.R. 1) is the first significant tax reform effort undertaken by Congress in more than 30 years. The bill was passed by both the House and the Senate and signed into law by President Trump.
Tax Brackets. The number of tax brackets remains at seven; however, the tax rates and income covered have changed.
For individuals, the following tax rates apply:
- 10% up to $9,525
- 12% up to $38,700
- 22% up to $82,500
- 24% up to $157,500
- 32% up to $200,000
- 35% up to $500,000
- 37% over $500,000
For married couples filing jointly, the following rates apply:
- 10% up to $19,050
- 12% up to $77,400
- 22% up to $165,000
- 24% up to $315,000
- 32% up to $400,000
- 35% up to $600,000
- 37% over $600,000
Standard Deduction. The standard deduction increases to from $6,350 (2017) to $12,000 for individuals, from $9,300 (2017) to $18,000 for heads of household and from $12,700 (2017) to $24,000 for married couples.
Personal Exemption. The deduction for personal exemptions is repealed through 2025.
Child Tax Credit. The Child Tax Credit increases to $2,000 from the current $1,000. An additional $500 credit is provided for each non-child dependent. Also, Social Security numbers for children are required before claiming the enhanced credit.
Alternative Minimum Tax. The AMT remains but exemption amount increase to $70,300 for individuals and $109,400 for married filing jointly, affecting fewer taxpayers.
Capital Gains and Dividends. The maximum tax rate remains at 23.8% (20% plus the 3.8% Medicare tax for taxpayers with income above $200,000 or $250,000 married filing jointly). The 20% capital gains income threshold increases to $425,800 for other individuals ($479,000 for married taxpayers filing jointly).
Estate Tax. The exemption (currently $5.5 million) immediately doubles to $11.2 million in 2018 and remains at this level for the next six years, after which time the estate tax is is eliminated completely (tax year 2026 and beyond).
Education-Related Tax Credits and Deductions. 529 Savings Plans are expanded to allow some funds (up to $10,000 for certain expenses) to be used for K-12 education. Rollovers to Achieving a Better Life Experience (ABLE) Sec. 529A accounts will be allowed as well. The student loan interest deduction remains.
Mortgage Interest Deduction. Remains but with a few changes such as allowing interest deduction for up to $750,000 (currently $1 million) in mortgage principal on new homes. Existing mortgages are grandfathered in. Homes entered into contract before December 15, 2017, and closed on by April 1, 2018, are able to use the prior limit of $1 million.
Home-equity loans. The home-equity loan interest deduction is repealed through 2025.
State and Local Income Tax Deduction. Preserved. Deduction allowed for up to $10,000 a year in state and local income or property taxes.
Note:Taxpayers who prepay 2018 state income taxes, a common tax planning strategy, cannot take the prepaid 2018 amount as a deduction on their 2017 tax returns.
Charitable Contributions. Deductions for charitable donations remain; however, for charitable contributions of cash to public charities the percentage of income limit increases to 60%.
Medical Expense Deductions. The Medical expense deduction (currently 10% of AGI) is temporarily lowered to 7.5% of income for tax years 2017 and 2018.
Miscellaneous Deductions. Many are repealed through 2025 including those relating to tax preparation, alimony payments (after December 31, 2018), and moving expenses with the exception of the moving expense reimbursement for members of the Armed Forces on active duty who move because of a military order.
Adoption Tax Credit. Remains.
Electric Vehicles. The $7,500 tax credit (Sec. 30D) for the purchase of electric vehicles remains.
Individual Healthcare Mandate. Penalty is eliminated for tax years starting in 2018.
Corporate Tax Rate. Starting January 1, 2018, the corporate tax rate is reduced to a flat rate of 21% (down from 35%). THe corporate AMT is repealed.
Territorial Taxation. Companies with offshore earnings, currently taxed at a 35% rate, would transition to a territorial tax system. Under the tax reform bill income derived from offshore earnings, if repatriated, would be subject to an effective tax rate of 15.5% for earnings held in liquid assets (i.e. cash) and 8% for illiquid (other) assets.
Business Interest. Small businesses (under $25 million) retain the ability to write off interest on loans subject to limitations.
Business Expensing. Businesses would be allowed to immediately write off the full cost of new equipment at 100% through tax year 2022, after which it would be phased down over a four-year period.
Business Entertainment Expenses Deduction. The deduction for business entertainment expenses is eliminated.
Pass-through Entities. The tax rate on pass-through business entities is reduced to a maximum of 20% for tax years starting January 1, 2018, and ending on December 31, 2025.
Low-income Housing Tax Credit. Remains.
Research & Development Tax Credit. Remains.
Work Opportunity Tax Credit. Remains.
Endowment Assets. A 1.4% excise tax is imposed on investment income derived from endowment funds at private colleges and universities. An exclusion is provided for an institution with less than 500 full-time equivalent students whose endowment (fair market value) is less than $500,000 per student.
Retirement Contributions Limits Announced for 2018
Cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for the tax year 2018 have been announced by the IRS. Here are the highlights:
In general, income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the saver’s credit all increased for 2018. In addition, the contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $18,000 to $18,500. However, contribution limits for SIMPLE retirement accounts for self-employed persons remains unchanged at $12,500.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions; however, if during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-out amounts of the deduction do not apply. Here are the phase-out ranges for 2018:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is $63,000 to $73,000, up from $62,000 to $72,000.
- For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $101,000 to $121,000, up from $99,000 to $119,000.
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $189,000 and $199,000, up from $186,000 and $196,000.
- For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not 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 is $120,000 to $135,000 for singles and heads of household, up from $118,000 to $133,000. For married couples filing 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 known 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.
Limitations that remain unchanged from 2017
- The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains unchanged at $6,000.
- The limit on annual contributions to an IRA remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
Don’t Forget about College Tax Credits for 2017
With another school year in full swing, now is a good time for parents and students to see if they qualify for either of two college tax credits or other education-related tax benefits when they file their 2017 federal income tax returns next year.
American Opportunity Tax Credit or Lifetime Learning Credit. In general, the American Opportunity Tax Credit or Lifetime Learning Credit is available to taxpayers who pay qualifying expenses for an eligible student. Eligible students include the taxpayer, spouse, and dependents. The American Opportunity Tax Credit provides a credit for each eligible student, while the Lifetime Learning Credit provides a maximum credit per tax return.
Though a taxpayer often qualifies for both of these credits, he or she can only claim one of them for a particular student in a particular year. To claim these credits on their tax return, the taxpayer must file Form 1040 or 1040A and complete Form 8863, Education Credits.
The credits apply to eligible students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions. The credits are subject to income limits that could reduce the amount taxpayers can claim on their tax return.
Normally, a student will receive a Form 1098-T from their institution by January 31, 2018. This form shows information about tuition paid or billed along with other information. However, amounts shown on this form may differ from amounts taxpayers are eligible to claim for these tax credits.
Many of those eligible for the American Opportunity Tax Credit qualify for the maximum annual credit of $2,500 per student. Students can claim this credit for qualified education expenses paid during the entire tax year for a certain number of years:
- The credit is only available for four tax years per eligible student.
- The credit is available only if the student has not completed the first four years of post-secondary education before 2017.
Here are some more key features of the credit:
- Qualified education expenses are amounts paid for tuition, fees and other related expenses for an eligible student. Other expenses, such as room and board, are not qualified expenses.
- The credit equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
- Forty percent of the American Opportunity Tax Credit is refundable. This means that even people who owe no tax can get a payment of up to $1,000 for each eligible student.
- The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the limit is $160,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $180,000 or more, and singles, heads of household and some widows and widowers whose MAGI is $90,000 or more.
Lifetime Learning Credit. The Lifetime Learning Credit of up to $2,000 per tax return is available for both graduate and undergraduate students. Unlike the American Opportunity Tax Credit, the limit on the Lifetime Learning Credit applies to each tax return, rather than to each student. Also, the Lifetime Learning Credit does not provide a benefit to people who owe no tax.
Though the half-time student requirement does not apply to the lifetime learning credit, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. Other features of the credit include:
- Tuition and fees required for enrollment or attendance qualify as do other fees required for the course. Additional expenses do not.
- The credit equals 20 percent of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition and fees and has sufficient tax liability.
- Income limits are lower than under the American Opportunity Tax Credit. To claim the full credit for 2017 your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly). You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly). You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers). For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return.
Eligible parents and students can get the benefit of these credits during the year by having less tax taken out of their paychecks. They can do this by filling out a new Form W-4 with their employer to claim additional withholding allowances.
There are a variety of other education-related tax benefits that can help many taxpayers. They include:
- Scholarship and fellowship grants–generally tax-free if used to pay for tuition, required enrollment fees, books, and other course materials, but taxable if used for room, board, research, travel or other expenses.
- Tuition and fees deduction claimed on Form 8917–for some, a worthwhile alternative to the American Opportunity Tax Credit or Lifetime Learning Credit.
- Student loan interest deduction of up to $2,500 per year.
- Savings bonds used to pay for college–though income limits apply, interest is usually tax-free if bonds were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years old.
- Qualified tuition programs, also called 529 plans, used by many families to prepay or save for a child’s college education.
Taxpayers with qualifying children who are students up to age 24 may be able to claim a dependent exemption and the Earned Income Tax Credit.
If you have any questions about college tax credits, please contact the office.
Take Retirement Plan Distributions by December 31
Taxpayers born before July 1, 1947, generally must receive payments from their individual retirement arrangements (IRAs) and workplace retirement plans by December 31.
Known as required minimum distributions (RMDs), typically these distributions must be made by the end of the tax year, in this case, 2017. The required distribution rules apply to owners of traditional, Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE) IRAs but not Roth IRAs while the original owner is alive. They also apply to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.
An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount on Form 5498 in Box 12b. For a 2017 RMD, this amount is on the 2016 Form 5498 normally issued to the owner during January 2017.
A special rule allows first-year recipients of these payments, those who reached age 70 1/2 during 2017, to wait until as late as April 1, 2018, to receive their first RMDs. What this means that those born after June 30, 1946, and before July 1, 1947, are eligible. The advantage of this special rule is that although payments made to these taxpayers in early 2018 can be counted toward their 2017 RMD, they are taxable in 2018.
The special April 1 deadline only applies to the RMD for the first year. For all subsequent years, the RMD must be made by December 31. So, for example, a taxpayer who turned 70 1/2 in 2016 (born after June 30, 1945, and before July 1, 1946) and received the first RMD (for 2016) on April 1, 2017, must still receive a second RMD (for 2017) by December 31, 2017.
The RMD for 2017 is based on the taxpayer’s life expectancy on December 31, 2017, and their account balance on December 31, 2016. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. For most taxpayers, the RMD is based on Table III (Uniform Lifetime Table) in IRS Publication 590-B. For a taxpayer who turned 72 in 2017, the required distribution would be based on a life expectancy of 25.6 years. A separate table, Table II, applies to a taxpayer whose spouse is more than ten years younger and is the taxpayer’s only beneficiary. If you need assistance with this, don’t hesitate to call.
Though the RMD rules are mandatory for all owners of traditional, SEP and SIMPLE IRAs and participants in workplace retirement plans, some people in workplace plans can wait longer to receive their RMDs. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions; however, there may be a tax on excess accumulations. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.
For more information on RMDs, please call.
Flexible Spending Accounts (FSAs)
Flexible Spending Accounts or FSAs provide employees a way to use tax-free dollars to pay medical expenses not covered by other health plans. Because eligible employees need to decide how much to contribute through payroll deductions before the plan year begins, now is when many employers are offering employees the option to participate during the 2018 plan year.
Interested employees who wish to contribute to an FSA during the new year must make this choice again for 2018, even if they contributed in 2017. Self-employed individuals are not eligible.
An employee who chooses to participate can contribute up to $2,650 during the 2018 plan year (up from $2,600 in 2017). Amounts contributed are not subject to federal income tax, Social Security tax or Medicare tax. If the plan allows, the employer may also contribute to an employee’s FSA.
Throughout the year, employees can then use funds to pay qualified medical expenses not covered by their health plan, including co-pays, deductibles and a variety of medical products and services ranging from dental and vision care to eyeglasses and hearing aids. Interested employees should check with their employer for details about eligible expenses and claim procedures.
Under the use or lose provision, participating employees must often incur eligible expenses by the end of the plan year, or forfeit any unspent amounts. But under a special rule, employers may, if they choose, offer participating employees more time through either the carryover option or the grace period option.
Under the carryover option, an employee can carry over up to $500 of unused funds to the following plan year–for example, an employee with $500 of unspent funds at the end of 2018 would still have those funds available to use in 2019. Under the grace period option, an employee has until 2 1/2 months after the end of the plan year to incur eligible expenses–for example, March 15, 2019, for a plan year ending on December 31, 2018. Employers can offer either option, but not both, or none at all.
Employers are not required to offer FSAs. Accordingly, interested employees should check with their employer to see if they offer an FSA. Please call if you have any questions about how FSA contributions affect your taxes.
Tips for Taxpayers: Travel Expenses for Charitable Work
Do you plan to donate your time to charity this holiday season? If travel is part of your charitable giving, for example, driving your personal auto to collect donations from local business, you may be able to these travel expenses on your tax return and lower your tax bill. Here are five tax tips you should know if you travel while giving your services to charity.
1. Qualified Charities. To be able to deduct your costs, your volunteer work must be for a qualified charity. Most groups must apply to the IRS to become qualified. Churches and governments are generally qualified and do not need to apply to the IRS. Ask the group about its status before you donate. You can also use the “Exempt Organizations Select Check” search tool on IRS.gov to check a group’s status or call the office.
2. Out-of-Pocket Expenses. You can’t deduct the value of your services that you give to charity. But you may be able to deduct some out-of-pocket costs you pay to give your services. This can include the cost of travel, but they must be necessary while you are away from home. All out-of-pocket costs must be:
- Directly connected with the services,
- Expenses you had only because of the services you gave, and
- Not personal, living or family expenses.
3. Genuine and Substantial Duty. Your charity work has to be real and substantial throughout the trip. You can’t deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.
4. Value of Time or Service. You can’t deduct the value of your time or services that you give to charity. This includes income lost while you serve as an unpaid volunteer for a qualified charity.
5. Travel You Can Deduct. The types of expenses that you may be able to deduct include Air, rail and bus transportation, car expenses, lodging costs, cost of meals, and taxi or other transportation costs between the airport or station and your hotel.
6. Travel You Can’t Deduct. Some types of travel do not qualify for a tax deduction. For example, you can’t deduct your costs if a significant part of the trip involves recreation or vacation.
Don’t hesitate to call if you have any questions about travel expenses related to charitable work.
Working with QuickBooks’ Vendor Records
QuickBooks never forgets. That is one of the reasons you use it. You create a record or transaction, enter a note about a customer, or write a check, for example, and the information gets stored in your QuickBooks file. If you do not remember exactly where it is, you can search for it. No more flipping through a card file or folder, or digging in drawers.
QuickBooks makes it possible–easy, even–to maintain thorough records of your vendors, the individuals, and companies who provide you with office supplies, product parts, computer equipment –everything you need to keep your business operating. Once you have started building a vendor record, you will be able to use it in transactions and reports and be able to refer to it when you need some information.
If you are just starting to use QuickBooks, part of your setup will involve entering vendor details in the record template the software supplies. If you have been a QuickBooks user for a while, but you have only supplied enough information about vendors to create transactions, consider fleshing out those elements of your accounting file as you have time.
Filling in Fields
To create a vendor record, open the Vendors menu and select Vendor Center. Above the tabbed table, there is a small toolbar. Open the New Vendor menu and click on New Vendor. A window like this will open:
Figure 1: You can store an enormous amount of detailed information about your vendors in these record templates.
At the top of the screen (not pictured here) is a box labeled Vendor Name. Enter it, then move on to the Opening Balance field and supply the amount and date. If you don’t understand the concept of opening balances, please call the office and one of our QuickBooks professionals will go over this with you.
Fill in as many of these fields as you can, and then click on the Payment Settings tab in the toolbar on the left. The fields in this window–Payment Terms, Credit Limit, etc.–are optional, but complete what you are able to. The more you can fill out now, the less work you will have to do later, since much of the information here automatically comes up when you create transactions.
The other tabs here open windows where you can specify:
- Tax Settings. Vendor Tax ID and 1099 eligibility.
- Account Settings. Here, you can select the default account that should be automatically selected when you enter a bill or expense for this vendor (for example, phone bills=Utilities: Telephone). Give the office a call if you aren’t clear about this particular step. It’s OK to leave it blank for now.
- Additional Info. Vendor Type (subcontractors, for example) and Custom Fields (fields you can define for your own use).
When you are done, click OK.
Viewing Your Records
Once you have created one or more vendor records, the Vendor Center will display a list of them in its left pane. Click on one to highlight it, and you will see something like this in the right pane:
Figure 2: The Vendor Information window displays contact information in the top pane (not pictured here), and additional details below.
Here is where your conscientious work creating records starts to pay off. Click on any of the five tabs in the top toolbar to display that vendor’s Transactions, the Contacts from that company, any related To Do’s, Notes you have taken, and Sent Email. Once your lists grow unwieldy, you can search by a variety of filters.
Using Records in Transactions
There are numerous transaction types that require vendor information, like purchase orders, bills, checks, and sales tax payments. When you open one of these transaction forms and click the down arrow in the Vendor field, your list will drop down. Select one, and related details that you’ve already entered will automatically appear in the correct fields.
You can create vendor transactions from either the home page or the menus. You can also do so from the Vendor Center. With either the Vendors or Transactions tab active, you would click on the New Transactions link in the upper toolbar and select the one you want to launch.
Figure 3: QuickBooks provides numerous paths to creating vendor-related transactions.
The mechanics of filling in the fields in vendor records and using that information in transactions are not overly complicated. But as noted here, you may run across unfamiliar concepts. If you need help with any aspect of QuickBooks’ vendor records, please call.
Tax Due Dates for December 2017
Employees who work for tips – If you received $20 or more in tips during November, report them to your employer. You can use Form 4070.
Corporations – Deposit the fourth installment of estimated income tax for 2017. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.
Employers Social Security, Medicare, and withheld income tax – If the monthly deposit rule applies, deposit the tax for payments in November.
Employers Nonpayroll withholding – If the monthly deposit rule applies, deposit the tax for payments in November.
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