As the end of the year approaches, it is a good time for you to consider a tax planning strategy that will help lower your tax bill for this year and possibly future years. Planning can be especially important if you have had significant changes in your life that could affect your taxes. Please remember, effective tax planning strategies may save you significant tax dollars and help manage cash flow. If you are in doubt, please contact our office.
The tax planning tips in this letter, 17 for individuals (pages 2-4) and 9 for businesses (pages 4-6), are oriented towards the time-honored approach of deferring income and accelerating deductions to minimize 2017 taxes. As always, however, year-end tax planning doesn’t occur in a vacuum. It must take into account your particular situation and planning goals, with the aim of minimizing taxes to the greatest extent possible. While most taxpayers will come out ahead by following the traditional approach, others with special circumstances may have to follow an alternate plan.
To that end, we have compiled a checklist of tips that can help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you or a family member may benefit from many of them. We can narrow down the specific actions that you can take once we meet with you. In the meantime, please review the following list and contact us if you have any questions so that we can advise you on which tax-saving moves to make.
For a PDF version of this letter, click this link: Year End Tax Planning 2017
TAX PLANNING IN A LOW INCOME YEAR
As always, it is generally important that you fully utilize deductions and consider using the lower 10 and 15 percent tax brackets if you are to maximize your tax planning strategies. For 2017, these lower tax brackets apply to $75,900 of taxable income for a married couple filing jointly and $37,950 of taxable income for singles. If your income is below those amounts and anticipated to rise next year, it may be advantageous to accelerate income and defer deductions for 2017.
For Oregon residents, if your estate (combined with your spouse, if applicable) will be worth more than $1 million (the State of Oregon limit) when you die (including any life insurance your estate may receive), then you probably need to consider advanced estate and gift tax planning. There are many ways to reduce inheritance taxes. For Federal purposes, each individual can currently transfer up to $5,490,000 ($5,600,000 in 2018) in their lifetime without incurring estate or gift tax, in addition to the annual gift tax exclusion of up to $14,000 per person for 2017. The annual gift tax exclusion will increase to $15,000 in 2018.
If your will has not been updated in the last five years, a review may be worthwhile. Even with an estate valued at less than $1 million, there are many family circumstances or philanthropic wishes that make an update a good idea.
YEAR END TAX PLANNING TIPS
The following is designed to highlight some tips that might be implemented to minimize your tax burden, either this year or in total over the next few years.
1) Determine if you are subject to the Federal Alternative Minimum Tax (AMT) and plan accordingly. Certain deductions (e.g. property and state taxes) are not deductible for AMT purposes. More taxpayers are finding themselves subject to AMT every year. The AMT tax rate is 26% on AMT income (after the exemption) up to $187,800 ($93,900 if married filing separately) and 28% on AMT income above those amounts. Any tax-savings strategies will need to be evaluated for their AMT consequences. For instance, if prepayment of state taxes will push you into AMT, then there is no advantage to accelerating payment.
2) Where possible, manage the timing of your income and deductions to your advantage:
a. Prepay deductible expenses or delay income if you are in the higher tax brackets. In most cases, you can use credit cards or credit lines to prepay deductible expenses.
b. Accelerate income into 2017 or delay paying deductible expenses until 2018 if you have no or low income in 2017 and expect higher income next year.
Postponing income until 2018 and accelerating deductions in 2017 to lower your 2017 tax bill may be especially valuable if Congress succeeds in lowering tax rates next year in exchange for slimmed-down deductions. Regardless of what happens in Congress, this strategy could enable you to claim larger deductions, credits, and other tax breaks for 2017 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changes in financial circumstances.
3) Consider selling stocks or other investments with gains or losses to increase or decrease your income as appropriate. The long-term capital gain rate is 15% if your modified adjusted gross income is $470,700 or less for married couples filing jointly or $418,400 or less for a single individual. This also applies to qualified corporate dividends. The federal rate is 0% for those in the 10% or 15% tax bracket!
4) Analyze your passive losses (including prior year carry forwards) to see if they are being limited and what steps can be taken to increase their use.
5) If you have reached the age of 70 ½, take required minimum distributions (RMDs) from your IRA or employer-sponsored retirement plan. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn. If you turned age 70 ½ in 2017, you can delay the first RMD until April 1, 2018. If you do so, you will have both 2017 and 2018 RMDs in your 2018 income which could put you in a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to delay if you will be in a substantially lower bracket for 2018-for example if you plan to retire late this year.
6) If you are receiving Social Security payments, be sure your year-end planning takes into account how it affects the taxability or possible repayment of your Social Security benefits.
7) Maximize your retirement plan contributions:
a. If your employer offers a qualified plan (401(k), SIMPLE IRA, SEP, etc.) consider increasing your contributions in the 4th quarter to take advantage of as much of the deferral contribution limit as possible.
b. Make an IRA contribution (up to $5,500 in 2017; $6,500 if age 50 or older) particularly if it is deductible and lowers your taxes, or a Roth IRA contribution if you are in a low tax bracket. This can be done until April 17, 2018. Please contact our office for help in determining how much to contribute and which type of IRA benefits you most.
8) Consider converting your existing IRA to a Roth IRA. If you have already made a conversion in 2017, you can reverse (recharacterize) the conversion if the account has decreased in value to reduce your tax bill. You can reconvert by the due date of your tax return (including extension). This may only be done once during the year. There is no longer an income limitation on conversions.
9) If you are eligible to make a Health Savings Account (HSA) contribution, you have until April 17, 2018 to make a 2017 contribution. If you become eligible late this year, you can make a full year’s worth of contributions even if you were not eligible for the entire year. Contributions to an HSA are deductible (within IRS-prescribed limits), earnings on the account are tax-deferred, and distributions are tax-free if made for qualifying medical expenses.
If you make mid-year changes to a qualifying plan due to enrolling in Medicare, coverage changes due to a new employer, or employer’s benefits renew mid-year, you may need to pro-rate your HSA contribution limit.
10) Determine if your medical expenses have exceeded 10% of your adjusted gross income. If they have, and it lowers your tax burden, pay all outstanding medical bills by the end of the year to maximize the deduction. (Note: 10% now applies to ALL taxpayers, even those age 65 and over.)
11) Prepay state income taxes by December 31, 2017 to get a deduction on your 2017 tax return, especially if you are in a high tax bracket in 2017 (assuming you are not affected by the Alternative Minimum Tax (AMT)).
12) Consider refinancing personal debt with a home mortgage loan so that interest expense could be deductible (generally up to $100,000 of refinancing debt). Remember home mortgage interest is only deductible for a personal residence and the total deductible mortgages cannot exceed $1,100,000, including $100,000 of home equity indebtedness.
13) Charitable Contributions:
a. Acquire written receipts for ALL charitable contributions.
b. Keep detailed records of non-cash contributions-list the property, condition, and fair market (thrift shop) value. Attach a detailed list to the receipt you receive Also, if the non-cash donation is valued over $5,000, you must have a qualified appraiser sign IRS Form 8283.
c. Contribute appreciated stock to your favorite charity. You get a deduction for the fair market value of the stock, but pay no tax on the capital gain.
d. Taxpayers age 70 ½ or older can make a qualified charitable distribution up to $100,000 per year from their IRAs.
e. Before December 31, 2017, take advantage of the Oregon Cultural Tax Credit by contributing any amount to a qualifying Oregon nonprofit cultural organization AND contributing a similar amount to the Oregon Cultural Trust. Then take a 100% dollar –for-dollar tax credit against your Oregon tax liability equal to your Oregon Cultural Trust contribution (up to the maximum limits of $500 for individuals, $1,000 for couple filing jointly or $2,500 for Oregon corporations). See their website www.culturaltrust.org or call us for more information.
14) Apply a bunching strategy to miscellaneous itemized deductions by paying expenses in 2017 to increase potentially deductible amounts (e.g. payment of professional dues, licenses or subscriptions). These deductions must exceed 2% of your adjusted gross income to be deductible, so evaluate whether a prepayment will be beneficial.
15) Remember to complete this year’s annual gifts (up to $14,000 per person for 2017) free of taxes by December 31, 2017 if you need to reduce potential estate taxes.
16) Assess the adequacy of your 2017 income tax withholdings to determine if an increase is needed to avoid any underestimated tax penalties.
17) For Oregon residents saving for college, consider contributing to the Oregon 529 plan and deduct up to $4,660 ($2,330 for single filers) on your Oregon tax return. You have until April 17, 2018 to do so.
1) Increase (or start) your retirement plan contributions. Remember certain qualified plans (e.g. single member, profit sharing, 401(k), etc.) if desired for 2017, must be set up by December 31, 2017. However, SIMPLE IRAs and 401(k)s with multiple participants need to be set up before September 30 in the initial year for deductible contributions. Contributions can be made as late as the extended due date of your tax return. SEP plans can be set up and funded as late as the extended due date of the tax return. For 2017, the maximum contribution rate is generally 25% of earned income (a contribution maximum of $54,000: $60,000 if 50 years or older, for most defined contribution plans).
2) Consider paying your children wages if they are working in your business and are in lower tax brackets. This probably will not be as beneficial for a partnership or a corporation and also will not be as effective if your children are over age 18 since Social Security taxes would have to be withheld and matched. It may, however, provide early retirement savings opportunities for your child. Worker’s compensation coverage may be required if you employ your children.
3) Purchase needed equipment and furniture (new or used) and place in service by December 31, 2017 in order to potentially qualify for up to $500,000 of IRC §179 depreciation expense. Remember that there are special rules that may limit depreciation on certain vehicles.
4) Businesses also should consider making buying new property that qualifies for the 50% bonus first year depreciation if bought and placed in service this year (the bonus percentage declines to 40% in 2018). The bonus depreciation deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 50% first-year bonus writeoff is available even if qualifying assets are in service for only a few days in 2017.
5) A C-corporation should consider deferring income until 2018 if it will be in a higher bracket this year than next. If Congress succeeds in dramatically reducing the corporate tax rate beginning next year, deferral of income until 2018 may be even more beneficial.
6) Consider paying a bonus out of your corporation to address reasonable compensation issues and withholding needs.
7) Consider tax benefits of incorporating certain limited liability structures if you are a sole proprietor or partnership.
8) Consider increasing your basis in your partnership or S-corporation to make possible a 2017 loss deduction (if your losses are being limited by basis or the “at-risk” rules).
9) Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2017 deductions even if you don’t pay your credit card bill until after the end of the year.
Reporting requirements-Due January 31, 2018:
Please keep in mind that we would be glad to prepare any or all of these forms and /or reports for you or help with the preparation.
a. Form 1099-MISC must be sent by January 31, 2018 to anyone (other than corporations) who provided personal services to you totaling $600 or more in 2017. This includes consultants, attorneys, accountant, painters, janitors, etc. Also, a Form 1099 must be sent for all rents paid. Since there is up to a $100 penalty for each Form 1099 not sent, our philosophy is: if in doubt, send one. Starting in 2016, Fischer, Hayes, Joye & Allen, LLC was not incorporated, so a Form 1099 needs to be sent to us. We can provide a W-9 upon request. A Form 1099 must be sent to attorneys even if they are incorporated. Doctors who are incorporated and who you have paid over $600 also get Form 1099 if the money you paid them is a business deduction. . The information must also be filed with Federal and Oregon agencies by January 31, 2018. Oregon now requires that ALL 1099 MISC forms be electronically filed
b. Form 1099-INT needs to be sent to anyone (other than corporations) who was paid more than $10 of interest in 2017 if the interest is a business deduction. This includes interest paid to owners or other related non-corporate business entities.
c. Form W-2 must be given to employees by January 31, 2018. The info must also be submitted to the Social Security Administration AND to the State of Oregon by January 31, 2018.
d. Oregon Form WR needs to be filed by all businesses with an Oregon Business Id number (BIN) by January 31, 2018.
Remember that wages reported must be adjusted for:
*Health insurance paid for S Corporation shareholders who own at least 2%
of company stock
*Life Insurance provided in excess of $50,000 in coverage
*Personal use of company vehicles
If you need assistance calculating the correct inclusion amounts for life insurance or personal use of company vehicles, please contact us. We have attached a form for you to provide information regarding vehicle usage.
The Social Security tax limit for 2017 is $127,200. This increases in 2018 to 128,700. The 6.2% rate for both employees and employers in unchanged. The Medicare tax is unchanged at 1.45% for employees and employers with no income limitation. Self-employed persons pay a total of 15.3% up to the Social Security limit and 2.9% above that limit. The additional .9% Medicare withholding tax has not changed and is required when an employee’s compensation exceeds $200,000. Keep in mind income subject to Social Security tax impacts retirement plan contribution limits.
OUR RECORDS RETENTION POLICY
Based on the standards of our profession, our firm’s policy is to retain copies of tax returns and related work papers for six years after the date of filing. We suggest taxpayers keep all of their original receipts and records for seven years. Any documentation relating to “basis” (e.g. the closing statement for a property purchase) should be kept until seven years after receipt of the final payment from the property sale is reported. We also suggest that taxpayers retain copies of their individual and business tax returns indefinitely.
Please remember that developing tax strategies prior to December 31, 2017 could affect the size of your refund come next spring or reduce your overall tax burden. We strongly encourage you to contact us at your earliest convenience to set up a time to go over your individual tax situation if that is necessary this year. We also encourage you to visit our website at www.fhjacpas.com for recent tax law changes as well as other helpful information for you and/or your business. In addition, your tax organizer will be sent to you the first part of January.
Very truly yours,
Fischer, Hayes, Joye & Allen, LLC
Personal Use of Company Auto
Fischer, Hayes, Joye & Allen, LLC - Information Sheet for Tax Year 2017
Please be advised, if you use a company owned or leased vehicle, the IRS requires that written records be maintained to document the business use of vehicles. Any unsubstantiated use of a company vehicle is considered personal use, and as such, is a taxable fringe benefit. The fair market value of this personal use is includable in your gross income and is subject to federal and state withholding as well as Social Security, Medicare and employment taxes.
It is not necessary to substantiate business use of company owned vehicles if either of the following conditions exists:
1. You have a written policy in place that prohibits all personal use of company vehicles.
2. The vehicle is considered a Qualified Non-personal Use Vehicle. Such a vehicle is one that, because of its design, would not likely be used for personal use, (i.e. tow truck, school bus, police cars).
Please complete the information below for each company owned vehicle used this year and we will calculate the taxable fringe benefit to be included in each W-2, if any.
• Business Name: __________________________________________________________
• Employee Name: _________________________________________________________
• Description of Vehicle: ____________________________________________________
• Date of purchase/lease: ____________________________________________________
• Purchase price/fair market value at time of lease: _______________________________
• Dates used, if less than the full year __________________________________________
• Odometer reading: Beginning _______________ Ending _________________
• Was the vehicle leased? YES / NO
• Was the vehicle available for personal use during off-duty hours? YES / NO
• Did you have another vehicle available for your personal use? YES / NO
• Did the company pay the cost of fuel consumed by this vehicle? YES / NO
• Please provide the number of miles in each of the following categories
o Total commuting miles ______________
o Total other personal (non-commuting miles) ______________
o Total business miles ______________