The maximum contribution to 401(k) accounts is being raised by $500 in 2018, the first increase in three years. If you have not already done so, now is the time to plan for contributions into your retirement accounts in 2018. Retirement Contribution Limits
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Don't forget to account for any matching programs offered by your employer as you determine your various funding levels for next year.
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Both the House and Senate have passed versions of a tax reform bill. If a combined bill is passed and signed into law, it creates a unique window of possible tax savings during the last few weeks of 2017. But only if you prepare to act. Here are some tips. 4 Last-Minute Tax Moves to Make in 20171. Leverage less-valuable state and property deductions. The new bills reduce and potentially eliminate the ability to take state taxes and property taxes as an itemized deduction.
What to do now. Consider making next year’s initial estimated tax payment before the end of 2017. Do the same thing with property tax payments. As long as you are not subject to the alternative minimum tax (AMT), this is a one-time opportunity to get this tax benefit before it is reduced or eliminated. 2. Some itemized deductions are worth more this year. The tax law changes mean itemized deductions will be worth more to you this year than next. What to do now. Charitable contributions may be more valuable this year because they may offset income taxed at a much higher rate than it will be next year. The same may be true of mortgage interest and medical expense deductions that may be reduced or eliminated next year. 3. New tax rates and income brackets complicate matters. With different income tax rates and income brackets, it will be very difficult to get your withholdings estimated correctly. What to do now. Create a quick tax estimate based on your 2017 information before the end of the year. See if it makes sense to change your withholdings. 4. Lower small business taxes next year provide a unique opportunity. The tax rates on most businesses from C corporations to flow-through entities like S corporations and LLCs will be lower beginning next year with the passage of new legislation. What to do now. Deductions will be worth more to you in the 2017 tax year than next year, when income will be taxed at a lower rate.
If everything goes smoothly, new tax legislation will be signed into law in late December. This timing will give you very little time to act, so now is the time to prepare. The nimble taxpayer may have the opportunity make some tax-efficient moves in the waning days of 2017. There are a lot of new things to get used to when you change jobs, from new responsibilities to adjusting to a new company culture. One thing you may not have considered are the tax issues created when you change jobs. Here are tips to reduce any potential tax problems related to making a job change this coming year. 5 Tax Tips for Job Changers
Finding a new job can be an exciting experience, and one that can create tax consequences if not handled correctly. Feel free to call Ellsworth & Associates to discuss your individual situation. Mutual funds benefit from the long-standing belief that they allow investors to diversify their holdings without buying individual stocks. But to the unwary investor, tax surprises abound. From a tax planning viewpoint, here are some great mutual fund tips. Most of these tips assume your mutual fund investment is not in a retirement account (like a 401(k) or traditional IRA), unless otherwise noted. Maximize Your Mutual Fund Investments
How the Required Minimum Distribution WorksWe're always being reminded to save for retirement in tax-advantaged accounts like 401(k)s or IRAs. But did you know the government does an about-face and forces us to take money out of those accounts once we reach retirement? It's called the required minimum distribution (RMD) rule. Here are some tips you should know about RMDs well before you reach retirement age:
RMD rules can be confusing, and are a good example of why tax planning is such an important component of a retirement strategy. Please call if you have questions about any tax obligations related to your retirement accounts. If you are eligible, now is the time to begin planning to take full advantage of your employer’s health flexible spending arrangement (FSA) during 2018.
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, many employers this fall are offering their employees the option to participate during the 2018 plan year. Interested employees wanting to contribute 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. That’s a $50 increase over 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 on eligible expenses and claim procedures. Under the use-or-lose provision, participating employees often must 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 two and a half months after the end of the plan year to incur eligible expenses — for example, March 15, 2019, for a plan year ending on Dec. 31, 2018. Employers can offer either option, but not both, or they can offer 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. Loaning to friends and relatives is a delicate business, and not simply because of the tension it can cause in your relationships. There are tax issues at play also. If you must loan money to somebody close, here are some tips to do it correctly as far as the IRS is concerned. Charge InterestYes, you should charge interest, even to friends and family. If you don’t charge a minimum rate, the IRS will imply interest in the loan and tax you for the interest they assume you are getting. This can happen even if you’re not getting a dime. Charge Enough InterestNot only should you charge interest, the amount must be reasonable in the eyes of the IRS. If it's not, the IRS will imply interest at their minimum applicable federal rates (AFRs). To stay on the safe side, always charge the interest rate at or above these AFRs, available on the IRS website. The good news is these interest rates are low and usually lower than the prime interest rate. Know the ExceptionsIf you don’t want to charge interest, you don’t have to IF:
If you don’t charge interest and the loan is used to purchase income-producing property such as capital equipment or to acquire a business, special tax rules apply. In this case it’s good to ask for help. Get It in WritingIf you expect repayment, put the terms of your loan in writing. There are a variety of basic loan document formats online that you can use. Creating a loan document may seem needlessly formal when dealing with a friend or family member, but it’s important for two reasons:
Document your tax code compliance. By recording the terms and charging a specified interest rate you can show you are within tax code rules. Avoid misunderstandings. Creating a written document will make it clear that it is a real loan, not an informal gift. Your friend or relative will know that you expect them to pay you back and when you expect repayment. The two most popular shopping days of the year are not far away. Black Friday, on November 24, is the day after Thanksgiving when brick-and-mortar retailers entice shoppers with exceptional deals. Online retailers offer a second round of shopping on November 27. As sellers start to bombard you with ads and emails, here are ideas to help take advantage of these shopping-day spectacles.
Create a list before you shop. This can help cut needless and thoughtless purchases in-store or online. Consider breaking your list into groups, like:
Create a budget and stick to it. If you take time before you shop to see what deals are out there, you'll be less likely spend more than you wanted to. After you make your budget, stick to it. Start looking at ads early. Give yourself plenty of time to check and compare ads. Remember, stores are competing against each other for business. This means there could be equivalent sales and deals at multiple places, including online. Once you find the best ads, you can create a shopping plan. Find the best way to make your purchases. Check both in-store and online sales. Figure out the best way to make your purchases, even if that means buying some things at conventional stores and waiting to take advantage of other deals online. Make sure the deal is worth it. Do your homework. This means you should check the price history, verify the make and model of products (especially for electronics), and read reviews. Make sure there's an actual discount, not just an increased price with a coupon attached. Double-check the return policy. One way to avoid buyer's remorse is to know the return policy for in-store and online purchases. Every business has a unique return policy, which can change for Black Friday deals. Know the return policy, no matter how big or small the purchase. Don't stress out. Try not to let enthusiasm turn into stress and worry. It is easy to make a bad purchase decision caused by the chaos these annual sales events create. Remember, you'll always have more options, no matter what happens this year on Black Friday. Most businesses have seasonal holiday sales in stores and online, so there's ample time left for holiday shopping. If you use an installment sale to help sell real estate, you can benefit from tax deferral and potentially lower your overall tax bill. But you need to watch out for certain tax traps if you do. What Is an Installment Sale?You create an installment sale when you receive payments for sold property in the tax year of the sale and at least one other tax year. For instance, if you sell real estate for a profit in 2017 and receive payments in 2017 through 2021, your real estate transaction is an installment sale. Tax ImplicationsAn installment sale creates a tax event in each year you receive payments. In the above example, part of your gain is taxable in 2017 and each year through 2021. Be aware that real estate held longer than one year qualifies for favorable capital gains tax treatment. The tax rate on long-term capital gains is from 0 to 20 percent, compared with the top ordinary income tax bracket of 39.6 percent. You could also to pay all the tax due on the sale upfront, to avoid paying tax on the installments in future years. In some cases, you'll reduce your overall tax bill this way, though it may require some help with tax planning. Benefits of an Installment SaleWith an installment sale, you may be able to lower your total tax on the sale of the property by spreading this income out over several years. In addition, the buyer will typically pay a rate of interest to you higher than a typical bank loan for the rest of the amount due. Installment Sale Tax TrapsRelated parties caution. If you sell property to a related party and the property is then disposed of within two years, in most cases, all the remaining tax comes due at once. The tax law definition of “related parties” is more expansive than you might think. It includes:
To avoid this major tax surprise, consider stipulating in the contract that the property can’t be disposed of within two years. Depreciation recapture potential. Also be cautious if you took any depreciation on the property in prior years. In some circumstances you will owe extra tax related to that depreciation when you sell the property. Gains not losses. Be aware that installment sale treatment is only available for gains, not losses. Other special rules may apply, so reach out if you need advice specific to your situation. Of course, tax reform discussions now in Congress might impact how installment sales and long-term capital gains are treated. If you're planning an installment sale, consider contacting Ellsworth & Associates for a consultation to discuss the tax implications. Banks are a necessary tool to navigate our daily financial lives. Unfortunately, there are aggravating practices at many banks that drive us crazy or cost us money. Here are five tips to get more out of your bank and pay less.
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