The medical expense tax deduction is one of the only retroactive potential tax benefits from the new tax bill. If you itemize your deductions and experienced significant unreimbursed medical costs during 2017 the new lower threshold limit of 7.5% of adjusted gross income may be of benefit to you.
Prior to the passage of the Tax Cut and Jobs Act in December 2017, only qualified medical expenses in excess of 10% of adjusted gross income were eligible for itemized deduction. With the new expansion of the medical expenses deduction, the threshold has been reduced from 10% to 7.5%.
For example, if your adjusted gross income for 2017 is $75,000, the first $5,625 of medical expenses would not be deductible under the new rules. If you incurred $10,000 in medical expenses during the year, you would now be able to deduct $4375, a $1875 bigger deduction than previously.
It’s important to note, this reduced threshold is good only for the 2017 and 2018 tax years. Beginning with January 2019, all taxpayers may deduct only the amount of the total unreimbursed allowable medical care expenses for the year that exceeds 10% of their adjusted gross income.
So what does this mean? If you think you’re likely to itemize deductions and had quite a few medical and/or dental expenses during the 2017 year, for yourself, spouse, and dependents, add up those receipts.
Include unreimbursed prescription costs, durable medical equipment such as crutches, orthodontia, contact lenses or glasses, and any other medical expenses not covered by your insurance or reimbursed elsewhere. The IRS maintains a list of qualified expenses in publication 502 beginning on page 5 if you aren’t sure what to include.
If your total is greater than 7.5% of your adjusted gross income, you can likely reduce your taxes owed with this deduction. Consult your tax professional with any questions or to help you accurately determine the medical expenses deduction for you.
Paying federal taxes is a responsibility that all wage earners share. In December 2017, the federal government completed a major overhaul of the US tax code. This new tax code went into effect starting January 1, 2018. There are several major changes to the tax code, which could have a big impact on a wide variety of people.
Personal Exemptions and Standard Deductions
One of the biggest changes for 2018 is the change for personal exemptions and standard deductions. In 2017, you received around $4,000 for each dependent and a standard deduction of around $6,000 for individuals and $12,000 for married couples. Starting with the 2018 tax year, personal exemptions have been eliminated and standard deductions are now $12,000 for an individual and $24,000 for a married couple.
Another big change for the tax code is the change to housing deductions on your tax return. Starting in 2018, mortgage interest that is deducted is limited to interest on the first $750,000 of loan balance, down from $1 million the prior year. Another major change is that state and local taxes, which include property taxes and state income taxes, are now capped at $10,000 in deductions.
Child Tax Credit
For those that have children, there are some significant new benefits. The child tax credit has been increased to $2,000 per child, up from $1,000 per child. Furthermore, the phase out for income for the tax credit now starts at around $400,000. This is a significant increase compared to the prior year when the phase out started around $110,000.
New Tax Brackets
Another big change that came with the new tax code are the new tax brackets. While there are still just as many tax brackets as before, the tax percentages in each category are lower. This should result in a tax savings for many people. The highest tax bracket overall is now 37%, which is compared to 39.6% under the prior tax law.
As a way of encouraging people to make charitable donations, the IRS allows you to take a deduction on your tax return based on your contribution to charities. However, the limits and rules involved can be confusing.
In order to deduct a charitable contribution, you must itemize your taxes. Less than 40% of American taxpayers do and choose the standard deductions instead. If you take the standard deduction, you can’t deduct charitable contributions.
As to the limits for individuals, you will be able to deduct at a minimum 20% of your adjusted gross income (AGI) and up to 50% of your AGI at a maximum. Nevertheless, if in a particular year you end up contributing more than 50% of your AGI, you should not feel like that will not count in your tax deduction since IRS provides an option. For such a case, IRS allows you to carry over your excess contribution to the following tax years up to the fifth year. According to the new Tax Cuts and Jobs Act recently signed off on by President Trump, the new maximum charitable contribution deduction for 2018 will be 60% of the AGI.
Now that there is a tax deduction opportunity, how can you maximize on it?
Make sure you donate to qualified organizations
The IRS has provided a complete list of the organizations that qualify for the charitable donations. You also need to verify if the organization you are contributing to qualifies for the 50% contribution limit or if it is a 30% limit type of an organization.
Keep proper records of your contributions
To claim a deduction, you must provide the IRS with supporting documents. Have a good record of such documents as canceled checks, receipts, and letters from the recipients. For cash and property worth $250 or less, a receipt indicating the amount or the item donated will be enough. For money or property worth more than $250, you will need written documents from the receiving organization. However, property donations worth more than $500 require documentation of how you obtained the property and those above $5,000 need a professional appraisal.
Account even for the small donations
Many are the times when you press the “donate $1” button at the store’s cashier, and you forget about it. If you account for that $1 donation and the $15 you gave the local leading cheering squad, it will surprise you what this can add up to in a fiscal year.
Do not inflate numbers
To avoid triggering a tax audit on yourself, always ensure that you provide the right figures for deduction on non-cash goods donated. The IRS has an average amount that a person within your household income range can give per year. If you exceed these figures, you may trigger a tax audit. However, do not let the fear of a tax audit hinder you from asking for a legitimate refund; all you need is proper documentation to back up your claim.
To ensure that you do not inflate your deductions, know the fair market value of the goods or property you are donating, which is not equivalent to the retail price of the good. Fortunately, most charitable organizations provide valuation guidelines for frequently donated goods.
Keep track of your cost of doing good
Ensure you account for the miscellaneous amounts you spend while doing charitable work. This includes keeping track of the total miles you drive for charity and the cost involved in delivering the donation.
Accurate bookkeeping is a necessary practice for small businesses and large ones alike. Knowing where your money is and what you’re spending it on could mean the difference between success and failure. Here’s a look at some common bookkeeping mistakes and how to avoid or fix them:
1. Improper Categorization
One of the most common bookkeeping mistakes is categorizing expenses improperly. If you or your hired bookkeeper doesn’t pay careful attention, expenses can be improperly categorized and result in a mess with the IRS. Correctly filing your profits and expenses, and knowing what expenses are tax deductible, helps prevent some hassle at tax time and can result in huge tax savings.
2. No Bank Reconciliation
When personal and business accounts are mixed, it becomes extremely difficult to accurately track, categorize, and manage profits and expenses. For effective bookkeeping, it is crucial that bank accounts are reconciled regularly and often. In case of an audit, you need to provide accurate documentation regarding your income and business-related expenses. If bank accounts are not properly reconciled, providing this documentation becomes a hassle that can cause loss of money.
3. No Data Backups
In our increasingly digital world, much bookkeeping is done on computers. While this makes keeping track of profits and expenses more convenient and streamlined, it is still possible for this data to be lost. To avoid hassle and lost profits, make sure you keep regularly updated backups of all your books. If a file is lost or corrupted or a computer malfunctions, you’ll still have access to all your data.
4. Not Managing Reimbursements
Many business owners end up paying for business expenses out-of-pocket. When this happens, it is necessary that this reimbursable expenses are tracked and managed. Without management, reimbursements often get overlooked and lost over time, resulting in a loss of profits and tax deductions. Always manage and track your reimbursements in your books to keep everything balanced.
5. Lack of Communication
In many businesses, the accounting department is often viewed as separate from the rest of this business. When this occurs, it is difficult for bookkeepers to keep accurate records of expenses and profits. Good communication between your accountants, bookkeepers, and other employees keeps the books well-managed and allows the bookkeepers to provide accurate statements about the business’ finances.
One of the best ways to ensure your bookkeeping is done accurately and effectively is to work with us. We provide tax preparation, payroll processing, bookkeeping, and financial advice services to our clients to keep their businesses running smoothly, efficiently, and profitably. If you’re ready to let experts keep your books and avoid the hassle of doing it yourself, contact us today to see what we can do for you!
The tax reform bill known as the Tax Cuts and Jobs Act (“The Act”) passed both houses of Congress on December 20, 2017, and was signed by President Trump on December 22, 2017. This is the largest change to the tax law since Ronald Reagan’s Tax Reform Act was signed in 1986. We have reviewed the many changes under this new law that takes effect in 2018 and are summarizing the major changes that will impact most of our readers.
- Lower Tax Rates—the number of brackets remains at seven, but they have been reduced to 10%, 12%, 22%, 24%, 32%, 35% and 37%. Most people will see that their tax bracket is reduced anywhere from 1-3%. The financial website Business Insider projected average 2018 tax savings for a single taxpayer who uses the standard deduction. It amounts to $369 at the $25,000 level, $2,129 at the $75,000 level and $5,240 at the $175,000 level. For a taxpayer with a family of four, the amount of savings was projected to be $100, $2,244 and $3,095 respectively. For seniors, a projection by the non-partisan Tax Policy Center show savings ranging from $300 to $1,000.
- Capital Gains Rates—these remain the same, but the income levels at which the rates apply are now adjusted for inflation.
Changes to Adjusted Gross Income
- Alimony Major Changes—this is no longer deductible by the payer and includible as income for the payee for agreements executed after December 31, 2018.
- Moving Expenses Eliminated—except for military personnel. Moving expense reimbursements are now taxable (except if military).
- IRA Recharacterizations—The Act excludes conversion contributions to ROTH IRAs from the rule that allows IRA contributions from one type of IRA to another IRA. This is designed to prevent taxpayers from using this law to unwind a ROTH conversion.
- New Deduction for Pass-Through Income—individuals can deduct 20% of “qualified business income” from partnerships, S corporations, sole proprietorships, REIT dividends, qualified cooperative dividends and publicly traded partnership income. The deduction is limited to 50% of the W-2 wages paid by the business. Excluded from this deduction are specified services businesses—accounting, health, law, consulting, athletic, financial services, brokerage services or any business where the principal asset of the business is the reputation or skill of one or more of its employees.
- Like-Kind Exchanges—for exchanges completed after December 31, 2017, these are limited to exchanges of real property that is not primarily held for sale.
Deductions and Exemptions
- Standard Deduction Increased—it is now $24,000 for taxpayers who file married filing jointly (”MFJ”), $18,000 for head of household (“HOH”) and $12,000 for all others. The additional standard deduction amounts for the elderly and blind taxpayers were not eliminated in The Act.
- Itemized Deductions Increased—the overall limitation was repealed.
- Personal Exemptions Eliminated—these have been repealed and are in effect included with the increased standard deductions.
- Medical Expenses Expanded—the threshold to deduct has been reduced from 10% to 7.5%.
- Mortgage Interest Deduction Reduced—the limit on acquisition indebtedness has been reduced from $1 million to $750,000 for all binding written contracts after December 15, 2017. Also, the deduction for interest on home equity loans was repealed.
- State and Local Tax Deduction Reduced—you are now allowed to deduct only up to $10,000 in state and local income or property taxes.
- Charitable Contribution Deduction Increased—now it is based on 60% of your income (up 10%).
- Miscellaneous Itemized Deductions Eliminated—they were previously those that exceeded 2% of your adjusted gross income.
- Casualty Losses Restricted—you can now only deduct this if the loss is attributable to a disaster declared by the President.
- Child Tax Credit Increased—it was increased to $2,000 per qualifying child, and the maximum refundable portion is $1,400. There is also a new non-refundable $500 credit for qualifying defendants who are not qualifying children.
- Education Provisions Limited—Sec. 529 plans can only distribute $10,000 in expenses for tuition incurred at an elementary or secondary school. Also, there are now some exceptions from exclusion of student loan discharges from income.
Other Significant Provisions
- Alternative Minimum Tax—the exemption was increased to $109,400 for MFJ, $54,700 for MFS and $70,300 for others (not including estates and trusts). The phase-out thresholds are increased to $1 million for MFJ and $500,000 for all others (except estates and trusts). The exemption and threshold amounts will be indexed for inflation.
- Estate Tax Exemption Expanded—The Act doubles the estate and gift tax exemption after 2017.
- Individual Mandate Eliminated—the penalty for not having insurance under Obamacare was eliminated effective after 2018.
- Business Tax Rates Reduced—the graduated corporate tax rates have been replaced by a flat rate of 21%.
Expenses and Deductions
- Interest Expense Limited—to the sum of (1) business interest income (not including investment interest) + (2) 30% of the taxpayer’s adjusted taxable income + (3) the taxpayer’s floor plan financing interest. Any disallowed interest can be carried forward. If the taxpayer meets the $25 million gross receipts test, they are exempt from the interest deduction limitation. The limitation also does not apply to real property activities or farming.
- Entertainment Deductions Eliminated—The Act disallows the deduction for entertainment, amusement, recreation and membership dues. The 50% deduction for meals was retained; however, we expect to see clarification on what this means from the IRS.
- Transportation Fringe Benefits Deduction Eliminated.
- Compensation to Employees of Publicly Traded Corporations—rules have changed as to who this applies to and removes exceptions for commissions and performance-based compensation.
Depreciation and Amortization
- Bonus Depreciation Expanded—100% deduction now allowed, and it applies to new and used property.
- Luxury Auto Depreciation Limits Increased—these have more than doubled in most cases and are now $10,000 for the first year, $16,000 for the second year, $9,600 for the third year and $5,760 for all subsequent years.
- Section 179 Deduction Increased—the maximum deduction is $1 million, and the phase-out threshold is now $2.5 million. It also now includes improvements to non-residential real property for roofs, heating, air conditioning, fire protection and alarm and security systems.
- Amortization of R&D—must be capitalized and amortized over a five-year period (15-year if research is conducted outside of the U.S.).
- Orphan Drug Credit Reduced—from 50% to 25%.
- Rehabilitation Credit Modified—the 10% credit for pre-1936 buildings was repealed, and the 20% credit for certified historic structures was retained. The credit must be claimed over a five-year period.
- Family or Medical Leave Credit—eligible employers can claim a tax credit of 12.5% of the amount of wages paid to employees on medical leave if they are paid at least 50% of their normal wages. For each percent the payment exceeds 50%, the credit increases .25%. The maximum medical leave is 12 weeks, and the credit is only available in 2018 and 2019.
Other Significant Provisions
- Corporate Alternative Minimum Tax Eliminated.
- Domestic Production Activities Deduction Eliminated.
- Cash Method of Accounting—now can be used by taxpayers with average annual gross receipts of $25 million or less in the past three years (up from $10 million). This will be indexed for inflation.
- Inventories—cash-basis taxpayers will not be required to account for inventories under Sec. 471. They can be treated as cost of sales or can conform to their financial accounting treatment. Also, cash-basis taxpayers are not subject to the UNICAP rules of Sec. 263A.
- Net Operating Losses Limited—to 80% of taxable income (determined without regard to the deduction) for losses. The two-year carryback was repealed (expect for farming businesses). Losses must be carried forward and can be done so indefinitely.
- Dividend Deduction—there is a 100% dedication for the foreign-sourced portion of dividends received from specified 10%-owned foreign corporations by domestic corporations that are U.S. shareholders of those foreign corporations. Also, no deduction is allowed for stock held by the corporation for 365 days or less.
- Foreign Tax Credit Disallowed—for taxes with respect to a dividend that qualifies for the deduction.
- Repatriation—for any tax year beginning before January 1, 2018, taxpayers must include in income its pro rata share of the accumulated post 1986 deferred foreign income of the corporation. Many other new rules apply to this topic.
The IRS mails millions of letters to taxpayers every year for many reasons. Here are seven simple suggestions on how individuals can handle a letter or notice from the IRS:
1. Don’t panic. Simply responding will take care of most IRS letters and notices.
2. Read the entire letter carefully. Most letters deal with a specific issue and provide specific instructions on what to do.
3. Compare it with the tax return. If a letter indicates a changed or corrected tax return, the taxpayer should review the information and compare it with their original return.
4. Only reply if necessary. There is usually no need to reply to a letter unless specifically instructed to do so, or to make a payment.
5. Respond timely. Taxpayers should respond to a letter with which they do not agree. They should mail a letter explaining why they disagree. They should mail their response to the address listed at the bottom of the letter. The taxpayer should include information and documents for the IRS to consider. The taxpayer should allow at least 30 days for a response.
When a specific date is listed in the letter, there are two main reasons taxpayers should respond by that date:
- To minimize additional interest and penalty charges.
- To preserve appeal rights if the taxpayers doesn’t agree.
6. Don’t call. For most letters, there is no need to call the IRS or make an appointment at a taxpayer assistance center. If a call seems necessary, the taxpayer can use the phone number in the upper right-hand corner of the letter. They should have a copy of the tax return and letter on hand when calling.
7. Keep the letter. A taxpayer should keep copies of any IRS letters or notices received with their tax records.
If you are still unsure about what to do, remember we are just a phone call or email away for assistance and guidance.
On November 9, the United States Senate Committee on Finance unveiled their legislative tax proposal titled the “Tax Cuts & Jobs Act”. For businesses there are big differences from the House proposal. Most critical is that it would delay corporate tax rate cuts until 2019. Once this passes the Senate then both the Senate and House must get together and negotiate the differences between the two bills before being presented to President Trump for his signature.
The Tax Cuts and Jobs Act provides fiscally responsible middle-class tax relief by cutting tax rates across the board, reducing the tax burden on American job creators and modernizing our tax system. Under this proposal, a typical family of four earning the median family income (around $73,000) will see its taxes cut by nearly $1,500. The bill will also reduce the tax burden on small businesses and put American companies on a level playing field with their foreign competitors in order to grow the economy and create more jobs here at home. Combined, all of this will mean bigger paychecks for middle-class workers and families, more American jobs and a stronger U.S. economy.
Relief for American Workers and Families
The Tax Cuts and Jobs Act:
▶ Lowers individual tax rates for low- and middle-income Americans by effectively expanding the zero tax bracket and maintaining a 10 percent bracket, allowing hardworking taxpayers to keep more of their hard-earned money, make ends meet and save for retirement. The bill includes a reformed rate structure that targets tax relief to the middle class while maintaining the existing tax distribution and a 38.5 percent bracket for high-income earners.
▶ Nearly doubles the standard deduction to reduce or eliminate the federal income tax burden for tens of millions of American families. The standard deduction will increase from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples. For single parents, the standard deduction will increase from $9,300 to $18,000.
▶ Recognizes the unique challenges faced by parents with young children by:
- Expanding the child tax credit from $1,000 to $1,650 and allowing many more parents to claim the credit by substantially lifting existing caps;
- Preserving the child and dependent care tax credit to help working parents care for their children and older dependents–such as an aging grandparent–who need support;
- Preserving the adoption tax credit to help families with the high costs of adopting children; and
- Allowing parents to more effectively save for the education costs of unborn children
▶ Preserves the deduction for charitable contributions, continuing a long recognition of the importance of private philanthropy for the churches and community organizations that daily provide aid and assistance to those in need.
▶ Protects the home mortgage interest deduction for existing mortgages and maintains the deduction for newly purchased homes up to $1 million. This incentive for homeownership provides tax relief to current and aspiring homeowners.
▶ Continues popular retirement savings programs such as 401(k)s and Individual Retirement Accounts to help Americans build their retirement nest eggs and prepare for the future.
▶ Preserves the earned income tax credit to provide tax relief to low-income Americans working to build better lives for themselves.
▶ Preserves additional important elements of the existing individual tax system, including:
- Deduction for medical expenses
- Enhanced standard deduction for the blind and elderly
- Education relief for graduate students
▶ Repeals the alternative minimum tax (AMT) to simplify the tax code and eliminate uncertainty for millions of Americans who are required to calculate their taxes twice each year.
▶ Provides relief from the death tax by doubling the current exemption. This will reduce uncertainty and costs for family-owned farms and businesses by making it less likely that Washington will impose an unnecessary layer of taxation on Americans who want to pass on their life’s work to the next generation.
Relief for Job Creators of All Sizes
▶ Permanently lowers the corporate tax rate to 20 percent so American companies no longer have to face the highest tax rate in the industrialized world, which will allow them to better compete in the global marketplace, create more jobs and increase wages.
▶ Substantially lowers the tax burden on Main Street job creators through:
- A simple and easy-to-administer deduction for pass-through businesses of all sizes, allowing more small businesses to grow, invest, hire new workers and increase wages while also preventing abuse of the reformed system;
- Enhanced Section 179 expensing to promote business investment and growth; and
- Enhanced cash accounting, allowing more businesses to use the simple cash-basis accounting method.
▶ Full and immediate expensing of new equipment, which encourages growth and increases investment, productivity and wages.
▶ Protects the ability of small businesses to deduct interest on loans that allows Main Street employers to expand, invest and hire new workers.
▶ Preserves important elements of the existing business tax system, including:
- Low-income housing credit to continue encouraging businesses to invest in affordable housing and provide individuals and families with expanded opportunities.
- Research and development tax credit, which enhances investments in American products, technology and innovations.
▶ Permanently modernizes our outdated international tax system by eliminating the antiquated “worldwide” system in order to eliminate double taxation, enhance the competitiveness of American companies and bring business and investment back to the United States.
▶ Eliminates the “lock-out effect” by making it simpler and less onerous for American multinationals to bring foreign earnings back to America for investment and growth here at home.
▶ Makes the United States a better place to do business by eliminating incentives for companies to shift jobs, profits and intellectual property overseas, and by creating incentives for companies to both locate in America and bring economic activity back to America.