In the federal budget bill passed February 9, Congress revived dozens of expired tax breaks retroactively for 2017. Here are the ones you may be able to use:
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• The tuition and fees deduction. If you paid qualified tuition and related higher education expenses, you may be able to deduct as much as $4,000 of those costs. This can be done on a regular return (without itemizing). The deduction is capped at $4,000 for single filers with adjusted gross income (AGI) of $65,000 or less ($130,000 joint) and at $2,000 for single filers with AGI of $80,000 or less ($160,000 joint). This tuition and fees deduction can be a nice alternative to using the American Opportunity Tax Credit or the Lifetime Learning Credit.
• Mortgage insurance deduction. If you pay mortgage insurance premiums, you can now deduct them as an itemized deduction. This deduction phases out for taxpayers with AGI of $100,000 or more.
• Mortgage debt forgiveness exclusion. If qualifying mortgage debt on your primary residence was discharged or forgiven, you can exclude that amount from your income taxes.
• Energy-efficient home improvement credit. If you purchased energy-efficient home improvements (such as upgrades to windows, or heating and cooling systems), you may be able to take a tax credit equal to 10 percent of the amount paid, up to $500.
• Bonus Tip: If you're eligible for any of these but you've already filed, you may still be able to claim these by filing an amended tax return.

If you think you qualify for any of these, remember to bring all related documentation to your next tax filing appointment. The IRS is now scrambling to figure out how to apply these late changes to the already published 1040 tax form for 2017.

​Congress has passed tax reform that will take effect in 2018, ushering in some of the most significant tax changes in three decades. Here are some of the most important items in the new bill that impact individual taxpayers.

• Reduces income tax rates. The bill retains seven brackets, but at reduced rates, with the highest tax bracket dropping to 37 percent from 39.6 percent.
• Doubles standard deductions. The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filing jointly. To help cover the cost, personal exemptions and the additional standard deduction are suspended.
• Limits itemized deductions. Many itemized deductions are no longer available, or are now limited. Here are some of the major examples:
  • Caps state and local tax deductions. State and local tax deductions are limited to $10,000 total for all property, income and sales taxes.
  • Caps mortgage interest deductions. Mortgage acquisition indebtedness interest will be deductible for no more than $750,000. Existing homeowners are unaffected by the new cap. The bill also suspends the deductibility of interest on home equity debt.
  • Limits theft and casualty losses. These deductions are now only available for federally declared disaster areas.
  • Removes 2 percent miscellaneous deductions. Most miscellaneous deductions subject to the 2 percent of adjusted gross income threshold are now gone.
• Cuts some above-the-line deductions. Moving expense deductions get eliminated except for active-duty military personnel, along with alimony deductions beginning in 2019.
• Weakens the alternative minimum tax (AMT). The bill retains the alternative minimum tax but changes the exemption to $109,400 for joint filers and the phaseout threshold to $1 million. The changes mean the AMT will affect far fewer people than before.
• Bumps up child tax credit, adds family tax credit. The child tax credit increases to $2,000 from $1,000, with $1,400 of it refundable even if no tax is owed. The phaseout threshold increases sharply to $400,000 from $110,000 for joint filers, making it available to more taxpayers. Also, dependents ineligible for the child tax credit can qualify for a new $500-per-person family tax credit.
• Expands use of 529 education savings plans. Qualified distributions from 529 education savings plans now include amounts to pay tuition for students in K-12 private schools.
• Doubles estate tax exemption. Estate taxes will apply to fewer people, with the exemption doubled to $11.2 million ($22.4 million for a married couple).
• Reduces pass-through business taxes. Most owners of pass-through entities such as S corporations, partnerships, and sole proprietorships will see their income tax lowered with a new 20 percent income reduction calculation.

Because major tax reform like this is so rare, it's worth scheduling a tax planning consultation to ensure you get the most tax savings possible during 2018. Click here to contact Ellsworth & Associates and set up an appointment.

​The IRS recently announced mileage rates to be used for travel in 2018. The business mileage rate increases by one cent. The medical and moving mileage rates are also raised by one cent. Charitable mileage rates are unchanged.

​Remember to properly document your mileage to receive full credit for your miles driven.

​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.

1. 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.

• Cash-basis businesses should pay bills this year rather than next.
• Try to shift sales into next year.
• Look at maximizing section 179 depreciation to expense more of your capital purchases against income that will be taxed at a higher rate this year.

Note: Unfortunately, these lower tax rate proposals for small businesses do not apply to most service businesses (like accounting firms or law firms).

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.

1. Don't forget about in-between pay. It is easy to forget to account for pay received while you're between jobs. This includes severance and accrued vacation or sick pay from your former employer. It may also include unemployment benefits. All are taxable but may not have had taxes withheld, causing a surprise at tax time.
2. Adjust your withholdings. A new job requires you to fill out a new Form W-4, which directs your employer how much to withhold from each paycheck. It may not be best to go with the default withholding schedule, which assumes you have been making the salary of your new job all year. You may need to make special adjustments to avoid having too much or too little taken from your paycheck. This is especially true if there is a significant salary change or you have a period of low-or-no income. Luckily, the IRS provides a withholding calculator on its website. Keep in mind you'll have to fill out a new W-4 in the next year to rebalance your withholding for a full year of your new salary.
3. Roll over your 401(k). While you can leave your 401(k) in your old employer's plan, you may wish to roll it over into your new employer's 401(k) or into an IRA. The best way is to get your retirement funds rolled over directly between investment companies. If you take a direct check, you'll have to deposit it into the new account within 60 days, or you may be assessed a 10 percent penalty and pay income tax on the withdrawal.
4. Deduct job-hunting expenses. Tally up your job-seeking expenses. If they and other miscellaneous deductible expenses total more than two percent of your adjusted gross income for the year, you can deduct them on an itemized return. This includes things like costs for job-search tools, placement agencies and recruiters, and printing, mailing and travel costs. A couple caveats: you can only use these deductions if your expenses were to search for a job in the same industry as your previous job and you were not reimbursed for them by your new employer.
5. Deduct moving and home sale expenses. If you moved to take a new job that is at least 50 miles farther from your previous home than your old job was, you can also deduct your moving expenses. There's another benefit for movers, too. Typically, you can only use the $250,000 capital gain exclusion for home sales if you lived in your primary residence for two of the last five years before you sold it. But there is an exception to the rule if you sold your home to take a new job.

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.

​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.

Recording and reporting business expenses is a missed opportunity for many business owners and employees. Much of what you spend for business purposes is tax-deductible. ​Knowing whether you can or can't expense a purchase for business purposes can be difficult. Nevertheless, here are a few general guidelines to help.
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​According to the IRS, business expenses must be ordinary and necessary to be deductible. That means they are normal and recognized in your business, as well as helpful and appropriate. You'll need to keep records (such as statements and ledgers) and supporting documents (receipts and invoices) to verify your deductions. Some expenses are subject to extra requirements, as described below.

​Travel expenses pertain to business trips and can include transportation to and from airports, your hotel and business meeting places. They also generally include lodging, meals, tips and other related incidentals.

​Entertainment expenses need to be either directly connected to or related to the conduct of your business. That means that business is the foremost purpose of the activities and it's very probable you'll get income or future business benefits as a result. Expenses from entertainment that aren't considered directly related may still be deductible if they are associated with your business and occur just before or after a significant business conversation.

​Business use of your personal car is calculated according to your actual business-related expenses, or by multiplying your business mileage by the prescribed IRS rate (53.5 cents per mile in 2017).

The fall semester is in full swing. As teachers are getting to know a new group of students, they undoubtedly have a lot on their minds other than taxes. Still, remembering what to keep records of at this point can help lower their tax burden. There are three important work-related tax benefits that might help educators lessen their tax bill.

There are tax deductions for teachers who have qualified expenses related to their profession. The cost of paying for things like classroom supplies, training, and travel might be deductible.

The way to take advantage of these tax breaks depends on how you do your taxes: Claiming the Educator Expense Deduction (up to $250) or, for those who itemize their deductions, claiming eligible work-related expenses as a miscellaneous deduction on Schedule A.
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A third key benefit enables many teachers and other educators to take advantage of various education tax benefits for their continuing educational pursuits, especially the Lifetime Learning Credit or, in some cases depending on your circumstances, the American Opportunity Tax Credit.

​Educators can deduct up to $250 ($500 if married filing jointly and both spouses are eligible educators, but not more than $250 each) of unreimbursed business expenses. The educator expense deduction, claimed on either Form 1040 Line 23 or Form 1040A Line 16, is available even if an educator doesn’t itemize their deductions. To do so, the taxpayer must be a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide for at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law.
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Those who qualify can deduct costs like books, supplies, computer equipment and software, classroom equipment and supplementary materials used in the classroom. Expenses for participation in professional development courses are also deductible. Athletic supplies qualify if used for courses in health or physical education.

​Often educators have qualifying classroom and professional development expenses that exceed the $250 limit. In that case, they can claim these excess expenses as a miscellaneous deduction on Schedule A (Form 1040 or Form 1040NR). In addition, educators can claim other work-related expenses, such as the cost of subscriptions to professional journals, professional licenses, and union dues. Transportation expenses may also be deductible in situations such as, for example, where an educator assigned to teach at two different schools needs to drive from one school to the other on the same day. Miscellaneous deductions of this kind are subject to a two-percent limit. This means that a taxpayer must subtract two percent of their adjusted gross income from the total qualifying miscellaneous deduction amount.

Educators should keep detailed records of qualifying expenses, noting the date, amount, and purpose of each purchase. This will help prevent a missed deduction at tax time.

Taxpayers should also keep a copy of their tax return for at least three years. Copies of tax returns may be needed for many reasons. If applying for college financial aid, a tax transcript may be all that is needed. A tax transcript summarizes return information and includes adjusted gross income.

​It seems like there’s a tax statute that touches on nearly every aspect of our lives. But that’s not all. Tax laws also include the lives of our furry friends. That’s right, even your pets can show up in your tax return in surprising ways.

You can actually deduct the cost of your pet as a medical expense in the tax code. Dogs in particular are frequently used to provide medical services as guides for the blind, hearing impaired or otherwise physically disabled. The cost of buying, training and maintaining a service animal is deductible. This includes the cost of food, grooming and visits to the vet.
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What’s not a deductible medical expense: therapy animals. Dogs and other furry creatures are commonly used in hospitals and other care facilities to lift the spirits of patients. But there’s no tax deduction yet for the service they provide.

You can also deduct the cost of a dog or other pet if you use it in your business. This could be a dog used to guard a location, or even a cat if it is used to control pests like mice and rats. Farmers who use herding dogs can also deduct their animals, and so can animal breeders.
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However, when you deduct animals as part of your business they are actually treated like capital equipment. That means you would depreciate the cost of the animal, generally over seven years, just as you would office furniture or other business equipment.

If you make any money on your pet as part of a hobby, you may be able to deduct the cost of buying, training and maintaining your pet. This could be the case if, for example, you win prize money in a dog show. Your pet costs could be a miscellaneous itemized deduction as long as your total miscellaneous costs add up to at least 2 percent of your adjusted gross income.
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Unlike with a business, you can’t deduct losses from your hobby expenses. That means you can only deduct as much as you earn (from pet contests or other activities).

​In a recent court ruling, the CEO of Match.com won his case against the New York tax agency in part because he proved his primary home was where he kept his dog. New York was trying to tax him as a resident because of his New York apartment. He was able to prove that he had moved to Texas because, among other reasons, that’s where his dog was. The move of items “near and dear tend to demonstrate a person’s intention,” the court ruled.

If you operate a business out of your home, you may be able to deduct a wide variety of expenses. These may include part of your rent or mortgage costs, insurance, utilities, repairs, maintenance, and cleaning costs related to the space you use.

It is a tricky area of the tax code that's full of pitfalls for the unwary. Here are some of the top mistakes people make:

1. Not taking it. This is probably the biggest mistake those with home offices make. Some believe the deduction is too complicated, while others believe taking a home office deduction increases your chance of being audited. While the rules can be complicated, there are now simple home office deduction methods available to every business.
2. Not exclusive or regular. Your home office must be used exclusively and regularly for your business. Exclusively: If you use a spare bedroom as a business office, it can't double as a guest room, a playroom for the kids, or a place to store your hockey gear. Any kind of non-business use can invalidate your deduction. Regularly: Your office should be the primary place you conduct your regular business activities. That doesn't mean that you have to use it every day nor does it stop you from doing work outside the office, but it should be the primary place for business activities such as record keeping, billing, making appointments, ordering equipment, or storing supplies.
3. Mixing use with other work. If you are an employee for someone else in addition to running your own business, be careful in using your home office to do work for your employer. Generally, IRS rules state you can use a home office deduction as an employee only if your employer doesn't provide you with a local office. Unfortunately, this means if you run a side business out of your home office, you cannot also bring work home from your employer and do it in your home office. That could invalidate your use of the home office deduction.
4. The recapture problem. If you have been using your home office deduction, including depreciating part of your home, you could be in for a future tax surprise. When you later sell your home you will need to account for this depreciation. The depreciation recapture rules create a possible tax liability for many unsuspecting home office users.
5. Not getting help. There are special rules that apply to your use of the home office deduction if:
   • You are an employee of someone else.
   • You are running a daycare or assisted living facility out of your home.
   • You have a business renting out your primary residence or a vacation home.

​The home office deduction can be tricky, so ask for help, especially if you fall under one of these cases.

​​There's a simple "safe harbor" home office deduction. You take the square footage of your office, up to 300 square feet, and multiply it by $5. This gives you a potential $1,500 deduction under the simplified option. However, your savings could be much greater than $1,500, so it's often worth getting help to calculate your full deduction using the standard rules.