Robert A Cowen Certified Public Accountant year end Tax planning for individuals

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1 Robert A Cowen Certified Public Accountant 2017 year end Tax planning for individuals The end of the year is just a month away. It is good time to start to think about year-end planning. If you have been following the news out of Washington you know that significant tax reform is a real possibility. This could have major implications on the taxation of both individual and corporate entities. The details of when these proposals might pass and what years they will affect are still up in the air so we will be watching closely in order to help our clients navigate the changes as much as possible. The proposals still have to pass though Congress so we will avoid paying too much attention to them until they ultimately do. For 2017, the top individual income tax rate of 39.6 percent will apply to incomes over $418,400 (single), $470,700 (married filing jointly and surviving spouse), $235,350 (married filing separately), and $444,550 (heads of households). In addition high-income taxpayers are also subject to the 3.8 percent net investment income tax and/or the.9 percent Medicare surtax. As discussed below, there are several tax breaks which expire this year. If you think you may qualify for any one of them, and would like to discuss any tax options that you might have, as a valued client, please reach out to me with any questions. Retirement plans: Funding your company 401(k) with pre-tax dollars could reduce current year taxes, as well as increase your retirement investment account(s). For 2017, the maximum 401(k) contribution you can make with pre-tax earnings is $18,000. For taxpayers 50 or older, that amount increases to $24,000. If you have a SIMPLE 401(k), the maximum pre-tax contribution for 2017 is $12,500. That amount increases to $15,500 for taxpayers age 50 or older. If certain requirements are met, contributions to an individual retirement account (IRA) may be deductible. For taxpayers under 50, the maximum contribution amount for 2017 is $5,500. For taxpayers 50 or older but less than age 70 1/2, the maximum contribution amount is $6,500. Contributions exceeding the maximum amount are subject to a 6 percent excise tax. Even if you are not eligible to deduct contributions, contributing after-tax money to an IRA may be advantageous because it could allow you to later convert that traditional IRA to a Roth IRA.

2 If you already have a traditional IRA, an evaluation might be appropriate to determine if it might be appropriate to convert it to a Roth IRA this year. Property tax deduction. Before paying your bill early to accelerate this itemized deduction into 2017, review your AMT situation. If you re subject to the AMT this year, the deduction won t save you tax. Mortgage interest deduction. You generally can deduct interest on up to a combined total of $1 million of mortgage debt incurred to purchase, build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible. Home equity debt interest deduction. Interest on home equity debt used for any purpose (debt limit of $100,000) may be deductible. So consider using a home equity loan or line of credit to pay off credit cards or auto loans, for which interest isn t deductible and rates may be higher. Warning: If home equity debt isn t used for home improvements, the interest isn t deductible for AMT purposes. Home sale gain exclusion. When you sell your principal residence, you can exclude up to $250,000 ($500,000 for married couples filing jointly) of gain if you meet certain tests. Warning: Gain that s allocable to a period of nonqualified use generally isn t excludable. Accelerating income into 2017 Depending on your projected income and tax bracket for 2017, you may consider accelerating income into 2017 if you expect 2018 income to be significantly higher. Deferring income into 2018 If it appears that your taxable income might decrease in 2018 and you might be in a lower tax bracket in 2018, you might consider deferring taxable income into Deferring deductions into 2018 If it appears that your taxable income might increase in 2018 with a higher tax bracket, it may be advantageous to push deductions into 2018.

3 Accelerating deductions into 2017 If you expect your taxable income and tax bracket to be lower in 2018 as compared to 2017, you might consider accelerating deductions to Don t let tax considerations get in the way of sound business decisions. For example the negative impact of these strategies on your cash flow might not be worth the potential tax benefit. Alternative minimum tax: The alternative minimum tax (AMT) continues to impact more than just high-income taxpayers; middle-income taxpayers can also be affected. Certain deductions including personal exemptions, state income taxes, property taxes, miscellaneous itemized deductions - cannot be deducted in calculating the AMT. Depending upon current proposed legislation, the AMT might be eliminated. Net investment income tax: A 3.8 percent tax applies to certain net investment income of individuals with income above a threshold amount. The threshold amounts are $250,000 (married filing jointly and qualifying widow(er) with dependent child), $200,000 (single and head of household), and $125,000 (married filing separately). In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, nonqualified annuities, and income from businesses involved in trading of financial instruments or commodities. Thus, while the top tax rate for qualified dividend income is generally 20%, the top rate on such income increases to 23.8% for a taxpayer subject to the net investment income tax..9% percent medicare tax: An additional Medicare tax of 0.9 percent is imposed on wages, compensation, and self-employment income in excess of a threshold amount. The threshold amounts are $250,000 (joint return or surviving spouse), $125,000 (married individual filing a separate return), and $200,000 (all others). However, the threshold amount is reduced (but not below zero) by the amount of the taxpayer's wages. For married couples, employers do not take a spouse's self-employment income or wages into account when calculating Medicare tax withholding for an employee. If you and your spouse will exceed the $250,000 threshold in 2017 and have not made enough tax payments to cover the additional.9 percent tax, you might consider having an additional amount deducted from you paycheck to cover the additional.9 percent tax. Otherwise,

4 underpayment of tax penalties may apply. Qualified tuition and related expenses: This deduction is now expired and Congress has failed to renew it for The Lifetime Learning Credit and American Opportunity Credit are still available. Income-based phase outs apply to these credits / breaks. American Opportunity credit. The tax break covers 100% of the first $2,000 of tuition and related expenses and 25% of the next $2,000 of expenses. The maximum credit, per student, is $2,500 per year for the first four years of postsecondary education. Lifetime Learning credit. If you re paying postsecondary education expenses beyond the first four years, you may benefit from the Lifetime Learning credit (up to $2,000 per tax return) New requirement for claiming educational tax credits: To claim an American Opportunity or lifetime learning credit or a deduction for education-related tuition and fees, you must have received a Form T. The form reports qualified tuition and related expenses that you paid to the educational institution. If you have educational expenses eligible for the credit or deduction, you should receive Form 1098-T from the educational institution by January 31, Foreign bank account reporting: If you have an interest in a foreign bank account, it must be disclosed; failure to do so carries stiff penalties. You must file a Report of Foreign Bank and Financial Accounts (FBAR) if: (1) you are a U.S. resident or a person doing business in the United States; (2) you had one or more aggregated financial accounts exceeding $10,000 any time during the calendar year; (3) the financial account was in a foreign country; and (4) you had a financial interest in the account or signatory or other authority over the foreign financial account. If you are unclear about the requirements or think they could possibly apply to you, please reach out to me. There is a new deadline for filing the FBAR. The new due date has been moved up and it is now due April 15. However, a six-month automatic extension is available. If an individual is living (abroad) out of the country, the due date is automatically extended until June 15, with an additional

5 four-month extension available until October 15. Penalty related to not having health insurance for all 12 months in 2017: Under the Affordable Care Act, known also as Obama Care, there is a potential penalty, known as the "shared responsibility payment," for not having appropriate health insurance coverage. You may be liable for this penalty if you or any of your dependents didn't have health insurance for any month in The penalty is 2.5 percent of your 2017 household income exceeding the filing threshold or $695 per adult, whichever is higher, and $ per uninsured dependent under 18, up to $2,085 total per family. You may be eligible for an exemption from the penalty. Energy-Related Credits: The following energy-related credits expired at the end of 2016 and have not been renewed for 2017: Nonbusiness Energy Property, Residential Energy Efficient Property Credit, and Credits for Certain Motor Vehicles and Vehicle-Related Property. The Solar Energy Credits are still good through 2019, and then are reduced each year through the end of Gifts: Consider making gifts by the end of the year within the gift exclusion tax limits ($14,000 person, $28,000 per couple. Because there is not a step up in tax basis provision related to gifts, careful analysis must be made related to the appropriateness of making gifts. Offsetting capital losses with capital gains: Meet with your investment advisor for appropriate tax loss harvesting. Be careful of the 30 day wash sale rule. HSA: Health Saving Account: If you do not currently have an HSA account, consider setting one up. Also look at the options of fully funding your current year HSA. An employee who chooses to participate can contribute up to $2,650 during the 2018 plan year. 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. During the year, employees can then use the funds to pay qualified medical expenses not covered by their health plan. These expenses can be co-pays,

6 deductibles, medical products, dental and vision care, or eyeglasses and hearing aids. Interested employees should check with their employer for details on eligible expenses and claim procedures. Do you rent your home out? If yes, please reach out to me. There are special tax rules that might apply to you. You might not be required to pay income tax on home rental income that is rented less than 14 days in a calendar year. Do you have a business that is currently structured as a sole proprietorship? If yes, consider forming an S Corporation or a LLC at the beginning of Charitable donations Donations to qualified charities are generally fully deductible for both regular tax and AMT purposes, and they may be the easiest deductible expense to time to your tax advantage. Charitable donations can be limited based upon your income. For large donations appraisals and additional limitations could apply. Considering donating a car? With stricter donation rules from the IRS, it might be financially advantageous to sell your car rather than donate your car. Kiddie tax The kiddie tax generally applies to children under age 19 and to full-time students under age 24 (unless the students provide more than half of their own support from earned income). For children subject to the tax, any unearned income beyond $2,100 (for 2017) is taxed at their parents marginal rate, assuming it s higher. Keep this in mind before transferring ncome-generating assets to them. Child Care Expenses A couple of tax breaks can help you offset child care costs: Tax credit. For children under age 13 or other qualifying dependents, you may be eligible for a credit for a percentage of your dependent care expenses. Eligible expenses are limited to $3,000 for one dependent and $6,000 for two or more. Income-based limits reduce the credit percentage but don t phase it out altogether. 529 College saving plan

7 Consider setting up a 529 college saving plan and increasing / funding your 529 plan or Roth IRA. A 529 plan is a tax advantaged college savings plan operated by states, state agencies, or educational institutions. Coverdell Education Savings Accounts are another option. Will and trust(s) Consider reviewing your current will and trust(s) with your estate and trust attorney. IRA owners that turned 70 1/2 in 2017 You are required to start taking RMD" Required Minimum Distributions from your IRA. Please consult your IRA administrator as to the timing of your RMD s and your required minimum distributions. Life Events and Miscellaneous Other Items Certain life events can also affect your tax situation. If you were married or divorced, had a birth or death in the family, lost or changed jobs, or retired during the year, we need to discuss the tax implications of these events. Please call me as a valued client if you have any questions to discuss any of the above options / items and to determine whether your tax withholdings and / or estimated tax payments are sufficient for your expected 2017 taxable income. IRS Scams There has been a lot of IRS scams and fraud going around and it s something that I think you should be made aware of. Many taxpayers have encountered individuals impersonating IRS Officials in person, over the telephone and via . We want you to understand how and when the IRS contacts taxpayers and help you determine if any contact you may have received is actually from an IRS Employee. The IRS initiates most contacts through regular mail delivered by the United States Postal Service. There are special circumstances in which the IRS will call or come to a home or business. Please go this website to see if it s the IRS calling or knocking on your door.

8 2017 year end Tax planning for businesses Significant tax law changes took effect in 2017 that may affect your business's federal tax filings in Please take some time to go over the below new tax changes and prior existing tax saving ideas, to determine how these items might impact your business. It's also important to look at whether enough 2017 estimated taxes have been paid to avoid any underpayment of estimated tax penalties. As a valued client, please reach out to me with any questions, Business structure There are different options in the type of entity that your business might operate as. Sole proprietorship, C Corporation, S Corporation, partnership, LLC. Please call me to discuss what form of entity might be best for you. Staff lunches Account for staff lunches as staff meetings as opposed to entertainment. Staff lunches are not subject to the 50% limitation. Accelerating Deductions into 2017 If you expect your taxable income and or tax bracket to be lower in 2018 as compared to 2017,you might consider accelerating deductions to Deferring Income into 2018 If you expect your taxable income and or tax bracket to be lower in 2018 as compared to 2017,you might consider deferring income to Don t let tax considerations get in the way of sound business decisions. For example the negative impact of these strategies on your cash flow might not be worth the potential tax benefit. Have your company reimbursement yourself for all business expenses that you paid personally by using cash or personal credit cards by 12/31/17 This also includes potential reimbursements for any business vehicle expenses that you personally paid out of pocket for. Disabled / handicap improvements ADA compliant improvements can qualify for special tax treatment including a credit. Businesses have to have total revenues of $1 million or less in the

9 previous tax year or 30 or fewer full-time employees. Please let me know if you had any ADA compliant improvements in the current tax year. Employment of family members Your spouse and children can only be paid if they work in your business. They can be paid the on going rate for a similar employee. They can also participate in your pension plan. 2% S Corporation health insurance premiums Health and accident insurance premiums paid on behalf of a greater than 2- percent S corporation shareholder-employee are deductible by the S corporation and (required to be) reportable as wages on the shareholderemployee s Form W-2, subject to income tax withholding. If you have any questions please reach to us or your payroll company. It s important that you are in compliance with the Obama Care rules. Please reach out to your health insurance agent / company and / or attorney to make sure you are. S Corporation Electing to be taxed as an S Corporation can potentially save you on paying social security and medicare taxes. Home office Call me to discuss requirements for a home office deduction. Foreign Bank Account If you have an interest in a foreign bank account, it must be disclosed; failure to do so carries stiff penalties. You must file a Report of Foreign Bank and Financial Accounts (FBAR) if: (1) you are a U.S. resident or a person doing business in the United States; (2) you had one or more aggregated financial accounts exceeding $10,000 during the calendar year; (3) the financial account was in a foreign country; and (4) you had a financial interest in the account or signatory or other authority over the foreign financial account. If you are unclear about the requirements or think they could possibly apply to you, please reach out to me. There is a new deadline for filing the FBAR. The new due date has been moved up and it is now due April 15. However, a six-month automatic extension is available. If an individual is living (abroad) out of the country, the due date is automatically extended until June 15, with an additional four-month extension available until October 15.

10 New Filing Deadlines for Forms W-2, W-3, and Form 1099-MISC The filing deadline for 2017 forms W-2 to employees and to the Social Security Administration (SSA) is January 31, The January 31 deadline also applies to Forms W-2AS, W-2GU, W-2VI, W-3 and W-3SS. If you are filing any Forms 1099-MISC and reporting an amount in Box 7, Nonemployee Compensation, the deadline for filing these forms has also been moved up to January 31, If you are not reporting an amount in Box 7, the deadline remains February 28 for paper filings and April 2 for electronic filings. Extensions of time to file Forms W-2 with the SSA are no longer automatic. Increased Penalties for Failure to Timely File Certain Information Returns Increased higher penalties apply for (1) the failure to file correct Forms W-2 by the due date; (2) the intentional disregard of filing requirements; (3) the failure to furnish Forms W-2; and (4) the intentional disregard of payee statement requirements. In addition to applying to Forms W-2, W-3, and 1099-MISC, other common forms subject to these increased penalties include: Schedules K-1 for Forms 1041, 1065, and 1120S. Penalties for the late filing of information returns have also increased. For each information return or payee statement with respect to which a failure occurs the penalty is $260, and the maximum penalty that may be imposed is $3, The per-failure penalty for intentionally disregarding the filing requirements is $530. Change in Tax Return and Extension Due Dates for C Corporations and Partnerships In general, C corporations with tax years ending in 2017 now have an extra month to file their federal income tax returns. Such returns are due by the 15th day of the fourth month following the close of the tax year. A special rule exempts C corporations with fiscal years ending on June 30 from this change until tax years beginning after December 31, Thus, the filing deadline for such corporations remains September 15 until Partnerships with tax years ending in 2017 are now required to file their federal income tax returns by the 15th day of the third month following the close of the tax year, rather than the 15th day of the fourth month following the close of the tax year. Thus, 2017 calendar-year partnership federal income tax returns are due March 15, Along with the changes in tax return deadlines, many of the automatic extension periods have also changed.

11 The filing deadline for S corporation returns remains unchanged, meaning that partnerships and S corporations will now have the same tax return due dates. Section 179 Expense Deduction and Bonus Depreciation Code Sec. 179 expense deduction and bonus depreciation are two large potential deductions for small to medium size businesses. For 2017, the maximum amount of qualifying property that your business can expense is $500,000. That amount is reduced one-for-one to the extent qualifying property purchased exceeds $2,500,000. Special Note: Air conditioners and heating units placed in service in 2017 qualify for the Code Sec. 179 expense deduction. The 50 percent bonus depreciation deduction is again available for 2017 but will phase down in subsequent years. Code Sec. 179 deduction and bonus depreciation can be combined at times to for significant reductions in taxable income. Safe Harbor for Deducting Remodeling Costs Incurred by Retail and Restaurant Businesses The IRS is continuing to provide a safe harbor that allows a restaurant and / or a retail business to deduct 75 percent of the qualified costs associated with a remodeling project on a qualified building. The rules only apply on building and property fixes rather than personal property or land improvements. The business must capitalize the remaining 25 percent of the costs and recover them through depreciation. Prior to 2016, the deductibility of such costs were subject of scrutiny in an IRS audit. There are a number of conditions on using this safe harbor so, if you think you have costs that may qualify for this safe harbor, we should review the requirements that must be met in order to deduct such costs. Increase in De Minimis Repair Amounts That May Be Expensed Under a safe harbor rule in the new repair and capitalization rules that took effect in 2014, certain amounts that a business pays for tangible property acquired or produced during the tax year may be deducted, rather than capitalized, provided certain requirements are met and the cost of the property does not exceed a de minimis amount. Effective for 2017, the IRS de minimis amount that is deductible by such businesses is $2,500. The $2,500 threshold requires substantiation by an invoice for the underlying qualifying purchase(s). If your business does want to take advantage of the increase in the de minimis limitation, an election must be

12 made and the business's accounting procedures may need to be modified. Your business should have a current written accounting policy supporting / defining the de minimis $2,500 threshold. We can assist in creating the appropriate de minimis accounting policy for your company. Research Tax Credit Small businesses may now claim the credit against alternative minimum tax (AMT) liability. This credit can also be utilized by certain qualifying startup businesses against the employer's portion of Social Security Taxes. Section 199 deduction The Section 199 deduction, also called the manufacturers deduction or domestic production activities deduction, is 9% of the lesser of qualified production activitie income or taxable income. The deduction is also limited to 50% of W-2 wages paidby the taxpayer that are allocable to domestic production gross receipts. The deduction is available to traditional manufacturers and to businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing. It isn t allowed in determining net self-employment earnings and generally can t reduce net income below zero. But it can be used against the AMT. Vehicle Deductions Purchasing your vehicle in your business and tax deductions for vehicle business related expenses should be looked at by all businesses. The IRS has strict substantiation requirements necessary for business vehicle deductions. You need to ensure that your business records include the following information with respect to each vehicle used in your business: (1) the amount and date of each separate expense with respect to the vehicle (Cost of purchase or lease and repairs and maintenance); (2) the mileage for each business or investment use / trip and the total miles for each tax period; and (3) the business purpose for each trip / expenditure. The following records can be used to assist in substantiating your business vehicle expenses: (1) records such as a diary, log, statement of expense, or trip sheets; and (2) support such as receipts, cancelled checks, bills, or similar evidence. There are new phone apps that are available to assist a business in tracking / documenting vehicle expenses. Business vehicle mileage and expenses are required to be kept / recorded on a timely basis (near the time of the trip or

13 expense). Accountable Plans An accountable plan, will allow your business to reimburse employees on certain business expenses, such as travel, meals, entertainment and other costs without reporting the reimbursements as taxable compensation. This can possibly reduce employment taxes. In order for an accountable plan to be considered eligible with the IRS reimbursement plan, it must be formally documented (legal document) and satisfy certain requirements. Fringe Benefits Certain fringe benefits paid under a qualified fringe benefit plan are deductible by your business and are not taxable as compensation to the employee, thus avoiding employment taxes that would otherwise be paid on the additional compensation. This could benefit your business and your employees. One fringe benefit is a retirement plan. A potential tax credit is available to small employers for the costs of starting a retirement plan. Adding a defined benefit pension plan can allow larger pension contributions / deductions that a 401K for SEP. Examples of other such benefits are employee discounts, group term-life insurance (up to $50,000 annually per person), parking (up to $255 per month for 2017), mass transit / van pooling (also up to $255), and certain (Has limitations) Employee Achievement Awards per month) and health insurance. S Corporation Salaries For all S corporations, it's important for all shareholders working in your business to be paid an amount that is commensurate with their workload. Distributing profits, in the form of distributions, in lieu of paying wages subject to employment taxes, is a high target item with the IRS. Failing to be in compliance with this requirement can lead to tax deficiencies, penalties and interest. Review of partnership agreements, stockholder buy sell agreements, Trust agreements, Corporate minutes You should be reviewing your applicable legal agreements on an annual basis and touching base with your attorney to make sure that such agreements are current and up to date. Including your annual corporate minutes. Review of all of your insurance coverage / policies

14 Is your liability and property insurance coverage proper and current? Does it cover employees that might get in an automobile accident while driving for your business / office tasks? Reach out and review with your insurance agent / company annually. Secretary of State annual filing For information please visit: If Incorporated in California. Do not forget to file the appropriate Secretary of State return and pay the underlying $25 fee. There is a $250 late filing penalty with the risk of the suspension of your Corporation for noncompliance. California LLC s have a similar reporting and fee requirement. If you are incorporated in another state than California, please review their requirements. Planning for Revised Partnership Audit Procedures Effective for partnership tax years beginning January 1, 2017, the current partnership audit procedures will be replaced with a single centralized audit system. While some small business partnerships may elect out of the new regime, most partnerships will be subject to the new rules. Under the new audit system, the IRS will examine a partnership's items of income, gain, loss, deduction, credit and partners' distributive shares for a particular tax year of the partnership (i.e., the audit year). Any adjustments are now to be taken into account by the partnership, and not the individual partners, in the year that the audit or any judicial review is completed. Thus, it's possible for current year partners to be liable for mistakes or errors committed in prior years when they were not partners. The new rules provide certain exceptions that can allow current year partners to escape such liability, including an election that must be made no later than 45 days after the date of a notice of final partnership adjustment. We recommend that your partnership agreements should be reviewed and revised to take into account the new audit rules, and that is best done sooner rather than later.