Tax Law Reminders & LowTax Tips Rev 1-21-19 The most frequently encountered missing information that delays our tax preparation is the cost basis for securities that have been sold. Please check with your financial advisor in early February and ask if they have the cost basis for all the securities sold. If the number of sales are significant please ask them to send us a good quality PDF file for attachment to your tax return. There are substantial penalties that may be imposed by the IRS on both of us for aggressive positions taken on your tax return. We must be certain any tax positions have substantial authority behind them to avoid penalties. Or we may take a position, in consultation with you that has a reasonable basis in law if we disclose the position and our rationale in the tax return. We will let you know if this issue pertains to you before we complete your tax returns. By law all charitable contributions claimed as a deduction on your tax return must be substantiated by keeping a written record of the contribution. Acceptable written records used to substantiate each contribution include a cancelled check, credit card or bank record that supports the donation, or a written receipt or similar statement that includes (1) the name of the donee organization and (2) the date and amount of the contribution and (3) if any goods or services were received in exchange for the contribution. Contributions of $250 or more require a statement from the charitable organization. If the resulting returns are examined by the IRS, requests may be made for the written record of the contribution. Cash contributions that have no receipt are not deductible. We recommend you retain the written records for at least seven years. The substantiation rules for noncash contributions require accurate determination of the donated property's fair market value (FMV). FMV is the depreciated, or used, value of the donated property. It is not the purchase price of a similar "new" item. The following methods can be used to determine FMV: - Valuation guides available from organizations such as the Salvation Army or Goodwill. Many guides include a value range that can be used to determine FMV based upon location and condition of the property. Keep any guides used to determine FMV with your tax records. - Compare prices at area thrift stores for items in comparable condition. Visit a few stores to determine price and demand for the property. - Search online auctions or classified ads for comparable items. Keep printouts of such listings used to determine FMV of the donated property. 1
- For donated items with a FMV of more than $5,000, valuation by a qualified appraiser will be required in most cases (except marketable securities listed on an exchange). Keep the appraiser's report with your tax documents. - We recommend keeping any acknowledgment letters, receipts, or similar statements from the organization in your annual tax file. We also recommend taking pictures of the donated item(s) and saving them digitally. See IRS Publication 561, Determining the Value of Donated Property for further information. Low Tax Tip 1 Individual Retirement Accounts (IRA) and Roth IRAs. Fund these by April 15 each year as early in the year as possible. The Roth IRA or Roth 401(k) is the most powerful tax advantaged type of account you may own. There are various limits so please call if you, your children, spouse or others may be eligible to see if there is a way to fund them. The Roth account is incredibly valuable for younger folks. New laws effective for 2018: The estate tax lifetime exclusion was doubled to $11.18M ($11.4M in 2019) per taxpayer with unused amounts by one spouse picked up by the other spouse. High earners who are savers may want to plan now to keep their taxable estates under $23M. The standard deduction is increased to $24,000 for married filing joint, $18,000 for head of household and $12,000 for single or married filing separate taxpayers. Personal exemptions have been eliminated. But a $500 credit is available for each dependent. Now available for higher income taxpayers, child tax credits are increased to $2,000. Tax rates have dropped, and the brackets broadened. Most taxpayers will see some tax reduction unless they have significant amounts of advisory fees, unreimbursed employee expenses, tax deductions or other areas targeted by the new law. The AMT exemptions are increased and the limit on the AMT exemption has increased to $1M. IRC 1202 exclusion of gain on Small Business Stock is no longer a preference item. Most taxpayers will no longer be subject to the AMT tax. Personal, but not business, tax deductions for state and local income & property taxes (real estate) generally have been limited to $10,000. Mortgage interest on a principal and second home is subject to limitation on acquisition debt of $750,000. Mortgages in existence on or before December 15, 2017 are grandfathered and allowed under the old limits. 2
If you borrow against the equity in your home, you won t be able to deduct the interest paid for personal expenses like paying off a student loan. But the interest will be deductible if spent for renovations or improvement to your personal residence. Existing lines of credit are not grandfathered and are subject to this limitation. Miscellaneous Itemized Deductions are no longer deductible. These include employee business expenses, investment advisory fees, dues, etc. Moving expenses are generally non-deductible, except for military. Entertainment expenses are no longer deductible. Travel and meals expenses remain deductible but only for a business and require a higher level of documentation. Please make sure to keep all records supporting your claimed deductions and annotate your receipts to show who was there, their relationship to the business & the business purpose of the expense. The receipt should show the amount, when and where so you then have the who, what, where, when and how covered. Health Insurance - If you and your entire household were not covered by health insurance for the entire year please tell us that in the Questionnaire. If any one of your household has an exemption, please provide the exemption letter. If you, your spouse or anyone you can claim as a dependent does not have health insurance and does not have an exemption please contact our office as soon as possible. Exemptions have been liberalized in 2018 and penalties have been dropped in 2019. Education credits are available for higher income taxpayers. Qualified higher education expenses paid with distributions from 529 plans now include elementary or secondary public, private or religious school tuition limited to $10,000 a year. Tax free exchanges (IRC 1031) now only apply to real estate. Business Items (Schedule C, rental or farm): Low Tax Tip 2: The IRS has issued new rules in the recent past regarding what expenses must be capitalized and depreciated and what expenses may be expensed outright. There is a De Minimis Safe Harbor election that must be adopted in writing and applied to your accounting at the beginning of the year so do it now if you did not adopt it last year. 1. You have accounting procedures treating either of the following as an expense for nontax purposes of: a. Amounts paid for property costing less than a specified dollar amount; or b. Amounts paid for property with an economic useful life of 12 months or less. 2. You treat the amount paid for the property as an expense on your books and records in accordance with these accounting procedures; and 3
a. The amount paid for the property does not exceed $2,500 per invoice (or per item as substantiated by the invoice) The standard mileage rate for business travel is 54.5 cents per mile in 2018 (58 cents a mile in 2019). There is a 20% deduction for Qualified Business Income (QBI) under IRC 199A for business income from a Schedule C or E and pass through entity business income from Partnerships, S corporations and Trusts. Most rental activity qualifies as well. We will calculate this for you automatically. (The Domestic Production Deduction under IRC 199 is eliminated.) Low Tax Tip 3: Because of the change to IRC 1031 if you have an older vehicle used in your business and you did not expense part or all of it you may want to trade it in and reap a tax deduction. Call us for details. Low Tax Tip 4: Normal Wear and Tear and Damage Standard The Regulations indicate you can generally expense repairs that do not improve the property to a condition better than what it was at when you purchased the property or when you last replaced that item. The test is comparing the condition of the property immediately after the expenditure with the condition of the property immediately prior to the circumstances necessitating the expenditure. If an expenditure is made to correct the effects of normal wear and tear it may be expensed. The rules have an unusual concept of Unit of Property that we need to analyze to advise you properly. Depreciation deductions have been increased except for an error in the new law regarding leasehold improvement, restaurant and retail property. Bonus depreciation is 100% on new and used property. Limits for IRC 179 expensing raised to $1M. Low Tax Tip 5 - Routine Maintenance Safe Harbor for Rentals The recurring activities that you expect to perform to keep the building & its systems in ordinarily efficient operating condition are fully deductible if you make this election. Examples include the inspection, cleaning, and testing of the building structure or each building system, and the replacement of damaged or worn parts with comparable and commercially available replacement parts (not better or more efficient parts generally). Activities are routine only if you reasonably expect to perform the activities more than once during the 10-year period beginning at the time the building structure or the building system under repair is placed-in-service. Low Tax Tip 6 Small Improvement Election for Rentals You may elect not to capitalize improvements to a building for a taxable year if each of the following 3 requirements is met: 1. The total amount paid during the taxable year for repairs, maintenance, improvements, and similar activities performed on the building unit of property owned or leased by you does not exceed the lesser of: a. 2 percent of the unadjusted basis of the building, or 4
b. $10,000. c. But be aware if the amounts are later determined to be over $10,000 you will get zero. 2. Your average gross receipts for the three preceding taxable years are not more than $10,000,000; AND 3. The unadjusted basis of the building is not more than $1,000,000. 5