The IRS recently announced that interest rates will remain the same for the calendar quarter beginning Jan. 1, 2018. The rates will be:
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• four (4) percent for overpayments [three (3) percent in the case of a corporation]
• 1 and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000
• four (4) percent for underpayments
• six (6) percent for large corporate underpayments

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Under the Internal Revenue Code, the interest rates are determined on a quarterly basis. For individual taxpayers, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.

Donations charged to a credit card before the end of 2017 count for the 2017 tax year, even if the bill isn’t paid until 2018. Checks to a charity count for 2017 if they are mailed by the last day of the year.

​Taxpayers who are over age 70 ½ are generally required to receive payments from their individual retirement accounts and workplace retirement plans by the end of 2017, though a special rule allows those who reached 70 ½ in 2017 to wait until April 1, 2018, to receive them.

​Most workplace retirement account contributions should be made by the end of the year, but taxpayers can make 2017 IRA contributions until April 17, 2018. For 2018, the limit for a 401(k) is $18,500. For traditional and Roth IRAs, the limit is $6,500 if age 50 or older and up to $15,500 for a Simple IRA for age 50 or older. Check irs.gov for more information about cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2018.

Taxpayers should be careful not to count on getting a refund by a certain date, especially when making major purchases or paying other financial obligations. Taxpayers can take steps now to make sure the IRS can process their return next year.

Taxpayers who have moved should tell the US Postal Service, employers, and the IRS. To notify the IRS, mail IRS Form 8822, Change of Address, to the address listed on the form’s instructions. For taxpayers who buy health insurance through the Health Insurance Marketplace, they should also notify the Marketplace when they move out of the area covered by their current Marketplace plan.
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For name changes due to marriage or divorce, notify the Social Security Administration so the new name will match IRS and SSA records. Also notify the SSA if a dependent’s name changed. A mismatch between the name shown on your tax return and the SSA records can cause problems in the processing of a return and may even delay a refund.

​Some Individual Taxpayer Identification Numbers must be renewed. Any Individual Taxpayer Identification Number not used on a tax return at least once in the past three years will expire on December 31, 2017. Additionally, all ITINs issued before 2013 with middle digits of 70, 71, 72 or 80 (Example: 9XX-70-XXXX) will also expire at the end of the year. As a reminder, ITINs with middle digits 78 and 79 that expired in 2016 can also be renewed. Only taxpayers who need to file a U.S. federal tax return or are claiming a refund in 2018 must renew their expired ITINs. Affected ITIN holders can avoid delays by starting the renewal process now.
 
Those who fail to renew before filing a return could face a delayed refund and may be ineligible for some important tax credits. More information about ITINs, including answers to frequently asked questions is available on the IRS website.

​Keeping copies of tax returns is important. Taxpayers may need a copy of their 2016 tax return to make it easier to fill out a 2017 tax return. Some taxpayers using a software product for the first time may need to provide their 2016 Adjusted Gross Income, or AGI, to e-file their 2017 tax return.

Taxpayers who do not have a copy of their 2016 return and are existing users can log in to their online IRS account if they need their AGI. Otherwise the IRS will mail a Tax Return Transcript if requested online or by calling 800-908-9946. Plan ahead. Allow five to 10 days for delivery.

​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.

​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.

​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.

​Yes, 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.

​Not 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.

If you don’t want to charge interest, you don’t have to IF:
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• The money is a gift. You and your spouse can each give up to $14,000 to an individual each year (this maximum rises to $15,000 in 2018).

OR:

• The loan is less than $10,000 and is not used to purchase income-producing property.

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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.

If 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.
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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.

​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.

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.

An 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.
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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.

​With 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.

Related 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:

• Spouses
• Children
• Grandchildren
• Siblings
• Parents
• A partnership or corporation in which you have a controlling interest
• An estate or trust you’re connected to

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.

As the year comes to an end, there are several tax-saving ideas you should take into consideration. Use this checklist to ensure you don't miss an opportunity before the year is over.
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• Retirement distributions and contributions. Make final contributions to your qualified retirement plan, and take any required minimum distributions from your retirement accounts. The penalty for not taking minimum distributions can be high.​
• Investment management. Rebalance your investment portfolio, and take any final investment gains and losses. You can use capital losses to net against your capital gains. You can also take up to $3,000 of capital losses in excess of capital gains each year and use it to lower your taxable ordinary income.
• Last-minute charitable giving. Make a late-year charitable donation. Even better, make the donation with appreciated stock you've owned more than a year. You frequently can make a larger donation and get a bigger deduction without paying capital gains taxes.
• Noncash donation opportunity. Gather up noncash items for donation, document the items, and give those in good condition to your favorite charity. Make certain you obtain a receipt from the charity, and take a photo of the items donated.
• Gifts to dependents and others. You may give gifts to an individual of up to $14,000 per year in total. Remember that all gifts given (birthdays, holidays, etc.) count toward the annual total.
• Organize records now. Start collecting and organizing your end-of-year tax records. Estimate your tax liability and make any required estimated tax payments.

While every retirement plan has similar early withdrawal penalty exemptions, they are not all the same. Being aware of these slight differences within 401(k) plans can help you get around a 10 percent tax penalty if you withdraw funds from the plan before reaching age 59 1/2. This is the case because a basic rollover of funds into a Traditional IRA is a readily available option to avoid the penalty. You should consider rolling over your 401(k) into an IRA prior to early distribution when:
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• Using Retirement Funds for Qualified Higher Education Expenses. Want to use retirement funds to pay for college? Make sure you pull the funds out of an IRA and not another retirement account type or you could be subject to an added 10 percent early withdrawal penalty. After rolling the funds into an IRA, the funds can be used penalty-free if they are for qualified educational expenses at a qualified school.
• Using Retirement Funds to Buy, Build, or Rebuild a First Home. You may use up to $10,000 of your IRA per person to buy a first home and avoid paying the 10 percent early withdrawal penalty. If these same funds are pulled out of a 401(k) plan you could be subject to an added federal tax of up to $1,000. Roll the funds to a Traditional IRA first, and save the tax.
• Using Retirement Funds to Pay for Medical Insurance. There is also a provision for an unemployed individual to use IRA funds to pay for medical insurance. This provision does not exist in 401(k)s, so to avoid the early withdrawal penalties, roll the money from your 401(k) into an IRA before using the funds to pay for your insurance premiums.

​Remember, by rolling the funds prior to pulling the funds for pre-retirement distribution you are avoiding the early withdrawal penalties, but you must still pay the applicable income tax.

Two other quirks in the retirement tax code to be aware of:
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1. Early Distributions from a SIMPLE IRA Could Trigger a 25 Percent Penalty. The early distribution penalty of 10 percent increases to 25 percent for those in SIMPLE IRAs, if the withdrawal occurs during a two-year period starting from your initial enrollment date in the SIMPLE plan. You may not roll your funds into another retirement plan type during this two-year period to try to avoid the increased early withdrawal penalty.
2. Minimum Distributions Are Required from ROTH 401(K)S but Not ROTH IRAs. In an unusual quirk in the tax code, if you have a ROTH 401(k) you are required to make minimum required distributions from this account like other 401(k)s and IRAs when you reach age 70 1/2. If, however, you roll the ROTH 401(k) funds into a ROTH IRA you are no longer subject to the minimum distribution rule requirements.

​The IRS recently announced important figures for 2018, using figures based on the Consumer Price Index published by the Department of Labor. Use these early figures to start developing your tax strategies for next year.

Tax Brackets: There are currently seven tax brackets ranging from 0 percent to 39.6 percent. Each of the income brackets rose between 1.9 and 2.1 percent.

Personal Exemption: $4,150 in 2018 (up $100 from 2017)