2018 TAX GUIDE HOLISTIC FINANCIAL PLANNING

Transcription

1 2018 TAX GUIDE HOLISTIC FINANCIAL PLANNING GO TO TO LEARN MORE ABOUT OUR FREE FINANCIAL TOOLS

2 Contents Introduction 03 5 Smart Tax Moves 04 Retirement 05 Education Savings 21 > > Traditional Retirement Accounts > > Roth Retirement Accounts > > Roth Conversions > > RMDs & Taxes > > Tax-Efficient Withdrawal Strategies > > 529 Plans > > Education Tax Credits > > College Loans Health Care 1 1 Housing 25 > > Health Savings: FSAs & HSAs Legacy Planning & Charitable Giving 15 > > Mortgage Interest Deductions > > Capital Gains Tax Exclusion > > State & Local Property Taxes Deductions & Credits 28 > > The Estate Tax > > The Gift Tax > > Trust Taxation > > Appreciated Securities > > State Sales Tax > > Foreign Tax Credits > > Child Care Credit > > Military Reserve Travel Expenses > > Baggage Fees This report is for informational purposes only; we are not in the business of providing tax or legal advice and we generally recommend seeking the advice and counsel of a tax professional before taking any action that may cause a material taxable event.

3 INTRODUCTION Most Americans hate to think about taxes. And the long-term impact of tax planning often receives even less consideration. Tax management can be complex and overwhelming viewed as a necessary evil to deal with once a year. But what if you approached taxes with a different philosophy? Instead of surrendering to your tax bill every April, what if you actively managed your taxes throughout the year? What if you had a longer-term strategy that improved your tax outcomes today and over the years to come? This Personal Capital Tax Guide for Holistic Financial Planning is designed to help you approach taxes within the framework of holistic, long-term financial planning including retirement, health care, legacy planning and more. We encourage you to develop a long-term approach to managing taxes and your estate. Taxes intersect many aspects of our lives. And at each intersection, there is another opportunity to increase the amount of money you ultimately get to take home or pass along. PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p3

4 2018 TAX GUIDE SAVE & SPEND > WHERE SHOULD I SPEND 5 SMART tax moves Max out your retirement accounts If your cash flow allows, you should generally max out your contributions to retirement accounts in order to take advantage of their favorable tax status. Evaluate Roth conversions A Roth IRA can offer significant benefits, including tax-free growth of assets, tax-free distributions, and no required minimum distributions (RMDs) during the original account holder s lifetime. Gift meaningfully Donate appreciated assets for a double tax benefit: a charitable deduction and saving on capital gains taxes. Gifting RMDs to a qualified charity can also save you from paying income tax on distributions while helping satisfy the requirement for a minimum distribution. 529 Use 529 plans for education You can save for a beneficiary s education while lowering your tax bill with a 529 plan. Some states even offer a state tax deduction. Maximize your tax deductions Every dollar counts when it comes to taxes, but with the new tax reform, some of this may have changed for you and your family. Check with a tax professional to learn more.

5 2018 TAX GUIDE SAVE & SPEND > WHERE SHOULD I SPEND Retirement PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p5

6 2018 TAX GUIDE FAST FACTS Retirement Plans: 2018 Annual Limits Elective deferrals for 401k, 403b, 457 and SARSEP accounts Catch-up contribution Defined contribution plan under Section 415(c)(1)(A) Defined benefit plan under Section 415(b)(1)(A) Maximum includible compensation Highly compensated employee Lookback to 2017 Lookback to 2018 Key employee (top-heavy plan) SEP contribution limit Traditional IRA or Roth IRA contribution limit Traditional IRA or Roth IRA catch-up contribution Single Married filing jointly Married filing separately Non-active participant married to active participant $18,500 $6,000 $55,000 $220,000 $275,000 $120,000 $120,000 $120,000 >$175,000 The lesser of 25% of compensation or $55,000 $5,500 $1,000 IRA DEDUCTION PHASEOUT FOR ACTIVE PARTICIPANTS $63,000 $73,000 $101,000 $121,000 $0 $10,000 $189,000 $199,000 It s difficult to talk about retirement accounts without mentioning taxes. When you start saving for retirement, you also need to consider the tax treatments on those accounts. Although there are no tax breaks on the contributions you make to a Roth retirement account, your earnings will grow tax free, and qualified withdrawals are tax free. Contributions to traditional retirement accounts, on the other hand, are tax deductible, but you will owe ordinary income taxes on withdrawals. Regardless, it s generally good to max out your retirement accounts for a simple reason: they are taxadvantaged. And if your employer offers any kind of matching contribution, then you should save at least up to the amount matched. Failing to take advantage of this is the same as tearing up a few paychecks per year. ROTH IRA PHASEOUT Single Married filing jointly $120,000 $135,000 $189,000 $199,000 These numbers are for tax year 2018 and are subject to change. The information here is from a third party. It is deemed reliable, but we cannot guarantee its accuracy. Data is subject to change and should be verified with a tax advisor. Source: College for Financial Planning PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p6

7 2018 TAX GUIDE RETIREMENT Traditional Retirement Accounts Roth Retirement Accounts If you anticipate your tax rate in retirement will be much lower, traditional IRA and 401k accounts are usually better. Traditional retirement accounts generally provide three tax benefits: You reduce current income tax since your taxable income is reduced by the amount you put into the account. You don t pay taxes on investment income and dividends now, thereby lowering your taxable income. Your investments grow tax deferred; you don t pay any taxes until you withdraw funds at retirement, which is why it s a good idea to put income-generating assets in your retirement accounts. Roth accounts can be a great way to save if your tax rate in retirement will be similar or higher than your current tax rate. You don t get a tax deduction when you contribute, but your withdrawals in retirement are tax free. Keep in mind that generally if you are already in the 24% or higher federal tax bracket, you probably can t (and shouldn t) contribute to a Roth. Roth retirement accounts generally provide three tax advantages: Your investments grow tax free. You don t pay tax when you withdraw. There are no required minimum distributions (RMDs). PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p7

8 2018 TAX GUIDE RETIREMENT Roth Conversion A common tax management question is whether to convert a traditional IRA to a Roth IRA also called a Roth conversion. If you anticipate being in a higher tax bracket in retirement, then you may want to investigate this further. (Since 2010, this opportunity is also available to higher earners too, as income limits for IRA conversions expired.) On the surface, a Roth might appear superior since its tax-exempt nature amplifies compounding investment returns over time. Unfortunately, it isn t quite this simple. Several criteria must be met before a Roth conversion makes sense. The most important factor to consider is future tax rates. This is because when you convert to a Roth, you pay ordinary income tax on every investment converted. Remember, Roth IRAs are funded entirely with after-tax dollars. Only growth and withdrawals are tax exempt. If you expect your future tax rate (in retirement) to be lower, which it often is, converting and paying taxes now as opposed to later might not make sense. It s also important to note that a Roth conversion can also generate a large tax bill. Since a Roth enjoys tax-exempt growth, a greater benefit is realized over time with a higher initial balance. Much of this is erased if you pay taxes out of the actual IRA balance. In other words, a Roth conversion is more impactful if you can pay the tax bill with an outside nonretirement account, like an individual or joint account. If you expect your future tax rate to be higher, are able to pay the tax bill with non-retirement assets, and you have a long time horizon, a Roth conversion might make sense, but it s always a good idea to consult with tax and investment professionals before making the decision to convert. In some cases, you may be able to fine-tune your tax planning by converting a portion of your 401k (or IRA) to a Roth IRA. Check with your employer to see if this is a possibility. PERSONAL CAPITAL Strategy Roth Recharacterization When you convert to a Roth IRA, the converted amount of your traditional IRA will be taxed as ordinary income in the conversion year. If you converted to a Roth IRA in 2017, you can recharacterize it back to a traditional IRA until as late as October 15, This gives you time to monitor market conditions and decide to undo the Roth conversion if the account value decreases significantly from the time of conversion, thereby avoiding the recognition of income tax based on the higher value of the account on the date the conversion was made. Keep in mind that conversions are typically a one-way street and come with a tax bill now that you ll need cash to pay for. Before deciding to convert, make sure you have the funds to cover the tax liability you ll incur today. Also, note that as of tax year 2018, the ability to recharacterize a Roth conversion is no longer available. PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p8

9 2018 TAX GUIDE RETIREMENT RMDs & Taxes As with most funds withdrawn from tax-deferred accounts, RMDs are considered taxable income, so withdrawing these funds will increase the income reported on your tax return. Many people fear that RMDs will increase their income, possibly placing them in a higher tax bracket and requiring them to pay higher taxes. The 10%-plus of your retirement balances added to your income in later years seems daunting, but there are actually two factors mitigating the impact of this increase. First, the required annual distributions hinder the growth of the account value, so that it does not balloon over time. By taking your RMD each year, you are decreasing the account balance relative to what it would have been otherwise. The effect is small year-to-year, but compounds significantly over time. Second, and just as important, tax brackets increase with inflation over time. Most people s tax bracket is lower in retirement, and RMDs usually do not change this. As a general rule of thumb, RMDs are not too worrisome until the value of tax-deferred assets is around $1.5 million or more. PERSONAL CAPITAL Strategy Lowering Your RMDs You are required to withdraw RMDs from taxdeferred accounts, but if you don t need to spend the money, it makes a lot of sense to simply transfer these funds to your taxable brokerage account and invest them there. If you believe RMDs will place you in a higher income tax bracket in retirement, then there are ways to lower them if you plan ahead. The main way to do this is to withdraw money from your tax-deferred accounts when you are in a low-income year. Often a sweet spot to do so is between retirement and either age 70 or the year you start taking Social Security benefits. For example, doing a Roth conversion could make sense if it doesn t increase your current tax bracket (the amount you convert is added to your gross income for that tax year), because it would decrease your future tax bracket by decreasing the RMD amount. If you give to charity, you also might want to consider using your RMD distribution to gift. The amount you gift may help lower your tax bracket. It is often a better strategy to use your RMD requirement as a gift vs. giving cash from your after-tax savings. PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p9

10 2018 TAX GUIDE RETIREMENT Tax-Efficient Withdrawal Strategies Tax-efficient withdrawal strategies can help extend the longevity of assets. The greatest benefits occur when there is a good mix between taxable and nontaxable accounts, and you re able to minimize the total taxes paid over your entire retirement lifetime. Contributing to an optimal mix of accounts well ahead of retirement will give you the flexibility to implement a good withdrawal strategy. The best plan will depend on how your assets are spread among different types of accounts. In general, it s better to take money out of taxable accounts so that nontaxable accounts can keep growing over a longer period. Depending on how assets are allocated between your traditional and Roth IRAs, and your particular tax situation, taking money from your traditional IRA first might be more beneficial than taking it from your Roth IRA first, or vice versa. A combination of both may also be a solution. PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p10

11 2018 TAX GUIDE SAVE & SPEND > WHERE SHOULD I SPEND Health Care PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p11

12 2018 TAX GUIDE HEALTH CARE FAST FACTS Health Savings Accounts 2018 Annual Limits Minimum Deductible Amount Single Family Single Family $1,350 $2,700 Maximum Out-of-Pocket Amount Single Family Catch-Up Contributions (Age 55+) $6,650 $13,300 HSA Statutory Contribution Max $3,450 $6,900 $1,000 These numbers are for tax year 2018 and are subject to change. The information here is from a third party. It is deemed reliable, but we cannot guarantee its accuracy. Data is subject to change and should be verified with a tax advisor. You can avoid paying taxes on a predetermined portion of your salary that you spend on medical expenses. In an employer-sponsored health plan, your employer typically covers the majority of the premium costs. The employee is then responsible for paying the remaining coverage. One quick tip: If your benefits are offered through a section 125 cafeteria plan, you can pay your premiums in pre-tax dollars this helps you save on taxes today and pay for your medical benefits. Source: College for Financial Planning PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p12

13 2018 TAX GUIDE HEALTH CARE Health Savings Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) let you use pretax dollars to pay for medical expenses you know you ll have. FLEXIBLE SPENDING ACCOUNTS (FSAs) FSAs let you set aside before-tax dollars to cover qualified expenses. The two most popular types of FSAs cover health care (out-of-pocket expenses such as co-pays, insurance deductibles, and certain over-the-counter medications are considered qualified) and transportation, parking, and related travel expenses (essential to receive eligible care). Each FSA is subject to contribution limits; for healthcare FSAs, the limit is $2,650 per year. Funding of the FSA is done through a salary deferral, which reduces your overall taxable wages. Although you lose any money that you don t use for each contribution year, some employer plans offer you the option to roll over up to $500 to the next year, which can add up when paying for medical expenses in pre-tax dollars. For example, if you were in the 32% tax bracket and spent $1,000 on medical expenses out of pocket, you d have to make $1,320 before tax to cover these expenses. However, if you used your FSA, you can allocate $1,000 before tax thereby receiving an instant tax break. PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p13

14 2018 TAX GUIDE HEALTH CARE HEALTH SAVINGS ACCOUNTS (HSAs) If you re in a high-deductible health plan and you re not enrolled in Medicare, you can qualify to set up an HSA. You contribute to your HSA with pre-tax dollars that you may draw from tax free to pay for qualified medical expenses. HSAs offer two main perks: first, the funds may be invested (and grow tax free), and second, they remain in your account from year to year until you use them. There isn t any use it or lose it rule; any remaining balance can be carried over to the following year. In addition, you (not your employer) own your HSA, which means if you change jobs or relocate to another state, you can take your HSA and its balance with you. It is a long-term asset. You can think of an HSA as comparable to an IRA retirement account you not only set aside the earnings tax free as they accumulate, but some plans will also allow you to invest the funds within the account. The only difference is that you can access those funds whenever you want but only for health care expenses. From a tax savings perspective, that makes an HSA even more attractive than a 401k account. After age 65, distributions taken out of an HSA for non-medical expenses are not subject to a penalty, but will be subject to ordinary income tax. PERSONAL CAPITAL Strategy Funding HSAs The biggest mistake employees make with their HSA is not funding it enough. If you re in a high-deductible health plan, it makes sense to open an account since your money is carried forward and accumulates. Your contributions can be invested and withdrawn when you need them for medical expenses. Speak with your employer to find out when open enrollment takes place to open an account. (If you participate in both a FSA and an HSA, make sure you find out how that limits your benefits.) PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p14

15 2018 TAX GUIDE SAVE & SPEND > WHERE SHOULD I SPEND Legacy Planning & Charitable Giving PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p15

16 2018 TAX GUIDE LEGACY PLANNING & CHARITABLE GIVING Legacy planning is often used as an umbrella term to encompass not only your estate plan, but also charitable giving. All of these require careful planning and strategic foresight to successfully provide for your current and future financial needs. And like with any long-term financial planning, taxes can have a great impact on what you and your beneficiaries are left with at the end of the day. FAST FACTS Estate & Gift Tax 2018 Annual Limits Per Person Annual gift tax exclusion per recipient Estate & gift tax basic exclusion Applicable credit amount $15,000 $11,200,000 (adjusted annually for inflation) $4,425,800 Generation-skipping $11,200,000 tax exemption (adjusted annually for inflation) Maximum estate tax rate 40% These numbers are for tax year 2018 and are subject to change. The information here is from a third party. It is deemed reliable, but we cannot guarantee its accuracy. Data is subject to change and should be verified with a tax advisor. Source: College for Financial Planning PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p16

17 2018 TAX GUIDE LEGACY PLANNING & CHARITABLE GIVING The Estate Tax The U.S. tax system imposes an estate tax, which is levied on property you give to your beneficiaries after you pass away. Currently, the estate tax exemption is $11.2 million per person ($22.4 million per couple), which means that the 40% tax on assets transferred upon death will now only apply to estates larger than these exemption limits. Most people don t have to worry about the estate tax, especially in light of the recent tax reform that doubled the previous exemption fewer than 4,000 estates will have to file every year. In addition, the estate tax marital deduction means there s usually no estate tax on assets passed to a spouse. Even if you have $50 million when you pass away, there will be no estate tax if you leave it all to your spouse; however, once your spouse passes, the estate will likely have a tax bill. Insurance may be used to pay the taxes on your estate so your heirs won t have to sell assets to pay the taxes. You can also set up a life-insurance trust to be the beneficiary of the policy so that the death benefits won t be taxed as part of the estate. Some states, however, have estate tax provisions that kick in earlier, so it pays to know the specific state laws where you live. Most people don t have to worry about the estate tax, but if this is a concern for you, then insurance may be one way to help pay for those taxes. PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p17

18 2018 TAX GUIDE LEGACY PLANNING & CHARITABLE GIVING The Gift Tax The gift tax applies to assets transferred during life. It s intertwined with the estate tax because a taxpayer s credit for the estate tax can be applied to the gift tax. You can give away the total amount protected during your life or when you pass away, but you can t give more than that amount without paying one of the taxes. Each person gets an $11.2 million exclusion over their whole lives. They have the option to chip into it over time if they gift more than $15,000 per recipient in a single year. If you decide to use some of the credit to make big gifts while you re alive, then you re required to disclose the transfer by filing a gift tax return. Taxpayers can take full advantage of another gifting opportunity the annual exclusion. In addition to the estate and gift tax exemption, every taxpayer can give an unlimited number of people a certain amount tax free every year. Currently, you can give $15,000 per recipient for 2018 the highest it s ever been. A married couple generally can give a single person (e.g., their child) up to $30,000 that s $15,000 from each parent annually without triggering the gift tax or filing requirements. Taxpayers can take full advantage of another gifting opportunity the annual exclusion. PERSONAL CAPITAL Strategy Make Substantial Lifetime Gifts The gift tax exemption is indexed for inflation and may be used during your lifetime to make gifts during your life or when you pass away to reduce or eliminate estate taxes. You may consider utilizing a substantial portion (or even all) of your gift tax exemption by making a gift to your family members or others. Such a gift could remove the value of the gifted asset, plus any future appreciation, from your estate. Also, if exemptions later decrease, gifts that were already made might be excluded from estate tax liability calculations. The potential challenge is that if, over your lifetime (or when you pass away), the sum of your lifetime gifts (after taking the $15,000 annual exemption) and your estate is greater than the lifetime exemption, you could potentially pay estate taxes. Remember to inform your tax advisor of all gifts you made during the year so he/ she can prepare a gift tax return if one is required. Keep in mind that your cost basis will transfer to the person(s) receiving the gift. This is important if you have highly appreciated assets. PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p18

19 2018 TAX GUIDE LEGACY PLANNING & CHARITABLE GIVING Trust Taxation A trust is a fiduciary arrangement that allows a third party or trustee to hold, safeguard, and distribute assets on behalf of a beneficiary or beneficiaries. There are many different types of trusts and each is taxed differently depending on how they are structured. Income accumulated from assets within the trust is taxable either to the trust or to a beneficiary (if it s distributed to a beneficiary or beneficiaries). Distributions of the trust s principal typically are not taxable to the beneficiary or beneficiaries. If a beneficiary holds an income interest in the trust, then it is taxable to him or her. From revocable/living trusts to irrevocable and testamentary trusts, trust taxation is highly personal to your own unique situation. Some general rules include: Revocable/Living Trust The grantor is usually also the trustee (the person in charge of the trust) and will include income from the assets in the trust in their annual income tax return and at their marginal tax rates. Irrevocable Testamentary Trust Assets are transferred out of the grantor s estate into a separate entity requiring a separate Tax Identification Number (TIN), the activity of the irrevocable testamentary trust is reported on a separate tax return (not on an individual s personal tax return). Irrevocable Trust Irrevocable trusts are separate legal entities and are typically required to file annual income tax returns. Generally, taxes on taxable income must be paid either by the trust or by the beneficiaries that received distributions during the year. If the trust receives capital gains income, it typically must pay tax at the trust level, and, in most instances, beneficiaries do not receive capital gains distributions, unless specific situations occur. Charitable Trust There are multiple types of charitable trusts, which can be used to significantly reduce your lifetime tax impact. Consult a professional to see if this may be useful in your situation. To learn more about legacy and estate planning, as well as tax-wise charitable giving, read our free Personal Capital Legacy & Estate Planning Guide. PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p19

20 2018 TAX GUIDE LEGACY PLANNING & CHARITABLE GIVING Appreciated Securities If you d like to donate to your favorite charity, consider donating appreciated assets. Not only will you be giving to a worthy cause, you will also receive a double benefit from the donation. First, you won t have to pay income taxes on the capital gains, as you would if you were to sell the securities and donate the cash. Second, you ll receive a tax deduction based on the security s fair market value (the security must be held longer than 12 months). The same goes for gifts; you can avoid paying capital gains on appreciated securities by gifting them. Note that the IRS allows you to make nontaxable gifts of $15,000 per year to any individual without triggering the gift tax. Additionally, you can gift up to $11.2 million over your lifetime (2018 amount adjusted annually for inflation). Further, it can make sense if the recipient is in a lower tax bracket since the recipient gets the original cost basis and could potentially pay less tax on the realized gain (the only time that cost basis is stepped up is when the investments are inherited). If you d like to donate to your favorite charity, consider donating appreciated assets. Not only will you be giving to a worthy cause, you will also receive a double benefit from the donation. PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p20

21 2018 TAX GUIDE SAVE & SPEND > WHERE SHOULD I SPEND Education Savings PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p21

22 2018 TAX GUIDE EDUCATION SAVINGS There are different ways to finance education, all with different benefits and challenges. You should familiarize yourself with the many options, including their impact on your taxes and savings. While education savings are obviously important, you should probably max out any retirement account options such as a 401k or IRA before you fund education savings plans. The tax deduction and long-deferred growth of a retirement account tend to outweigh the tax-free growth in many of the types of education savings accounts for a shorter time period. And remember, your children can always borrow for school; chances are, you won t be able to borrow for retirement. FAST FACTS Education Savings Accounts 2018 Annual Limits EE Bonds (for education) Exclusion Phaseout Single Married filing jointly Coverdell Education Savings Account Single Married filing jointly Single Married filing jointly $79,700 $94,700 $119,550 $149,550 $95,000 $110,000 $119,550 $149,550 Lifetime Learning Credit 20% of Qualified Expenses (up to $10,000) $95,000 $110,000 $119,550 $149,550 American Opportunity Tax Credit ($2,500 limit) 100% up to $2,000 of qualified expenses 25% on next $2,000 phaseout: Single $80,000 $90,000 Married filing jointly $160,000 $180,000 These numbers are for tax year 2018 and are subject to change. The information here is from a third party. It is deemed reliable, but we cannot guarantee its accuracy. Data is subject to change and should be verified with a tax advisor. Source: College for Financial Planning Education Loan Deduction ($2,500 limit) Phaseout Single Married filing jointly $65,000-$80,000 $135,000-$165,000 PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p22

23 2018 TAX GUIDE EDUCATION SAVINGS 529 Plans Since they were first established in 1996, Section 529 college savings plans have become a popular tool used by parents to save for future college expenses. Now with tax reform, 529 plan funds can be used for qualifying elementary or high school expenses, as well as college expenses. One reason 529 plans are so popular is the tax breaks they allow. As long as funds are used to pay for qualified education expenses, earnings within the account grow tax free. Also, many states allow full or partial deductions for 529 plan contributions. The amount invested in a 529 plan grows free of federal income taxes and, depending on where you live and what plan you choose, can provide a state tax write-off too. (Note: there are some states, like California and Massachusetts, that don t offer any benefits.) In exchange for those tax advantages, you have to follow the rules set out for 529 plans, but those rules are more flexible than you might think. Before the tax reform legislation, any 529 plan withdrawals that were not used to pay for qualified college education expenses were subject to ordinary income tax and a 10% tax penalty on the earnings portion of the distribution. Beginning in 2018, up to $10,000 can be withdrawn each year from a 529 plan to help cover primary and secondary private school tuition. If you believe you might want to withdraw funds to help pay for K 12 expenses, you may want to consider opening an additional account within your 529 plan. This will make it easier to keep track of your separate K 12 and college education savings goals and choose the most appropriate investments based on your investment horizon, risk tolerance, and withdrawal schedule. However, keep in mind that if you withdraw 529 plans funds to pay for K 12 expenses, this could impact any college savings plans. Also, some states have not conformed with the federal law that considers K 12 expenses as qualified and the income not subject to taxation. Some states, like Illinois and Iowa, are determining what impact the loss of revenue will have on their potential state tax revenues. If you re eligible for a Roth IRA, contribute to that account before a 529 plan. While the principal contributed to a 529 plan can be withdrawn any time after the minor turns 18, there is a 10% penalty for withdrawal unless it is for qualified education expenses. A Roth IRA offers increased flexibility for people who would like to fund education costs if necessary, but aren t positive they ll need to. PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p23

24 2018 TAX GUIDE EDUCATION SAVINGS Education Tax Credits If you or your dependent(s) are working toward a college degree, you can receive an annual tax credit of up to $2,500 per eligible student for the first four years of higher education through the American Opportunity Tax Credit. Even if you are simply taking a class or two to improve job skills, you may qualify for a credit of up to $2,000 per tax return through the Lifetime Learning Credit. There is no limit on the number of years you can claim the Lifetime Learning Credit, but there s no double dipping. You can only choose one type of education tax credit per year. These credits phase out based on your level of income check with the IRS for the latest information. College Student Loans If you decide to help your child or even your grandchildren pay back their student loans, be aware the IRS views those payments as if you gave money directly to the child who then, in turn, used the funds to pay the loan debt. This is considered a taxable gift under the gift tax rules, and the annual exclusion limits and lifetime exemption amounts would apply. If your child is no longer able to be claimed as a dependent, he or she could potentially deduct up to $2,500 of student loan interest, even if some or all of it is paid by you. Again, any payments made on behalf of your child for student loans are considered a gift to the student; in order for him or her to deduct the student loan interest, he or she must qualify under the income limitations for the deduction. PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p24

25 2018 TAX GUIDE SAVE & SPEND > WHERE SHOULD I SPEND Housing PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p25

26 2018 TAX GUIDE HOUSING Owning property has advantages and disadvantages and many of these are tax related. Whether you own real estate as a primary residence or as investment property, there are deductions and taxes to consider. Given the changes in tax law, many of these numbers have changed, which will impact previous and new homeowners alike. Housing Deductions YOU CAN DEDUCT Prepaid interest deduction fees paid at closing to lower the APR in the year paid Property taxes paid (capped at $10,000) Private mortgage insurance phase out if adjusted gross income is over $100,000 (homes purchased or refinanced after 2007) YOU CANNOT DEDUCT Homeowner insurance payments Losses from the sale of personal property HOA fees PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p26

27 2018 TAX GUIDE HOUSING Mortgage Interest Deductions You can usually deduct the interest you pay on a mortgage if you itemize, which reduces your taxable income by that interest amount. With the new tax law, many homeowners may no longer itemize their deductions, since the standard deduction has increased. If it does make sense to itemize, the limit for deductible mortgage debt is $750,000. This applies to new loans taken out after Dec. 14, If you have a loan from before that date, you are grandfathered in under the former limit of $1 million. You can also deduct the mortgage interest on a second home, subject to the same limits. If you have questions about whether the new tax law applies to you, check with a professional. Capital Gains Tax Exclusion If you sell a property you used as a primary residence for two out of the last five years, then you can take $250,000 (single) or $500,000 (married) of gains without paying capital gains taxes. If you have an investment property and have not lived in it for two out of the last five years, then you are subject to the full long-term or short-term gains if you decide to sell and take the profits. You may also be able to claim depreciation from a rental property to save on taxes. Make sure you have your CPA run the numbers so you are depreciating the right amount. State & Local Property Taxes If you are itemizing deductions on your tax return, then you may deduct property taxes you pay on your primary home as well as any other real estate you may own. Property tax deductions are now limited to $10,000. PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p27

28 2018 TAX GUIDE SAVE & SPEND > WHERE SHOULD I SPEND Deductions & Credits PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p28

29 2018 TAX GUIDE DEDUCTIONS & CREDITS Every dollar counts when it comes to taxes. There are some commonly overlooked ways to save money at tax time. From state sales tax to child care credit, you should make sure you re saving money every chance you get. State Sales Tax Most people who itemize deductions know that they can deduct state income taxes paid. You can actually choose to deduct either the state income tax you paid or the state sales tax you paid. This deduction is particularly important for people living in a state in which there is no state income tax. But, even if you live in a state with an income tax, if you have a large purchase such as a vehicle or a boat, you may want to see which benefits you most. Foreign Tax Credits You can deduct or take a credit (even better) for foreign taxes paid on foreign income. Don t assume that you don t have any foreign income or that you haven t paid foreign taxes. Before you dismiss this credit, make sure you check the 1099 forms you received from any mutual funds you own or investment firms in which you hold mutual funds. Many mutual funds have stocks from foreign and/or multinational companies in their portfolios that may be paying you foreign dividends or capital gains. The mutual fund may also be deducting foreign taxes on your share of these dividends and/or capital gains. You might be surprised to see the amount of foreign taxes you are actually paying. Child & Dependent Care Credit You probably know that you can qualify for a tax credit for 20% 35% of what you pay for childcare while you (and your spouse, if filing jointly) work. The maximum benefit is up to $6,000 for two or more children. Many employers offer a childcare reimbursement account, enabling the employee to pay for childcare with pre-tax dollars (even better yet). However, those plans are capped at $5,000. If you are paying for childcare with pre-tax dollars and exceed the $5,000 cap, you can still claim the credit using up to $1,000 of additional expenses. PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p29

30 2018 TAX GUIDE DEDUCTIONS & CREDITS Military Reserve Travel Expenses If you are a member of the Military Reserve or National Guard, you can deduct expenses associated with travel to training exercises or meetings (provided the travel is more than 100 miles from home and requires an overnight stay). You can also deduct the cost of air or train tickets, lodging, and half the cost of meals. If you drive your own car to get to and from drills, you can deduct miles driven, along with any tolls or parking expenses. This is another deduction you can take even if you don t itemize deductions. Baggage Fees U.S. air carriers are taking in over $3 billion in baggage fees per year. If you are traveling for business and deducting your airline ticket as part of your travel expenses, don t forget to deduct any baggage fees that you are charged. These fees can be deducted just like other travel expenses. PERSONAL CAPITAL HOLISTIC FINANCIAL PLANNING p30

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