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Mutual funds: Handle with care at year end

As we approach the end of 2018, it’s a good idea to review the mutual fund holdings in your taxable accounts and take steps to avoid potential tax traps. Here are some tips. Avoid surprise capital gains Unlike with stocks, you can’t avoid capital gains on mutual funds simply by holding on to the shares. Near the end of the year, funds typically distribute all or most of their net realized capital gains to investors. If you hold mutual funds in taxable accounts, these gains will be taxable to you regardless of whether you receive them in cash or reinvest them in the fund. For each fund, find out how large these distributions will be and get a breakdown of long-term vs. short-term gains. If the tax impact will be significant, consider strategies to offset the gain. For example, you could sell other investments at a loss. Buyer beware Avoid buying into a mutual fund shortly before it distributes capital gains and dividends for the year. There’s a common misconception that investing in a mutual fund just before the ex-dividend date (the date by which you must own shares to qualify for a distribution) is like getting free money. In reality, the value of your shares is immediately reduced by the amount of the distribution. So you’ll owe taxes on the gain without actually making a profit. Seller beware If you plan to sell mutual fund shares that have appreciated in value, consider waiting until just after year end so you can defer the gain until 2019 — unless you expect to be subject to a higher rate next year. In that scenario, you’d likely be better off recognizing the gain and paying the tax this year. When you do sell shares, keep in mind that, if you bought them over time, each block will have a different holding period and cost basis. To reduce your tax liability, it’s possible to select shares for sale that have higher cost bases and longer holding periods, thereby minimizing your gain (or maximizing your loss) and avoiding higher-taxed short-term gains. Think beyond just taxes Investment decisions shouldn’t be driven by tax considerations alone. For example, you need to keep in mind your overall financial goals and your risk tolerance. But taxes are still an important factor to consider. Contact us to discuss these and other year-end strategies for minimizing the tax impact of your mutual fund holdings. © 2018

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Reduce insurance costs by encouraging employee wellness

Protecting your company through the purchase of various forms of insurance is a risk-management necessity. But just because you must buy coverage doesn’t mean you can’t manage the cost of doing so. Obviously, the safer your workplace, the less likely you’ll incur costly claims and high workers’ compensation premiums. There are, however, bigger-picture issues that you can confront to also lessen the likelihood of expensive payouts. These issues tend to fall under the broad category of employee wellness. Physical well-being When you read the word “wellness,” your first thought may be of a formal wellness program at your workplace. Indeed, one of these — properly designed and implemented — can help lower or at least control health care coverage costs. Wellness programs typically focus on one or more of three types of services/activities: 1. Health screenings to identify medical risks (with employee consent), 2. Disease management to support people with existing chronic conditions, and 3. Lifestyle management to encourage healthier behavior (for example, diet or smoking cessation). The Affordable Care Act offers incentives to employers that establish qualifying company wellness programs. As mentioned, though, it’s critical to choose the right “size and shape” program to get a worthwhile return on investment. Mental health Beyond promoting physical well-being, your business can also encourage mental health wellness to help you avoid or prevent claims involving: • Discrimination, • Wrongful termination, • Sexual harassment, or • Other toxic workplace issues. If you’ve already invested in employment practices liability insurance, you know that it doesn’t come cheap and premiums can skyrocket after just one or two incidents. But, in today’s highly litigious society, many businesses consider such coverage a must-have. Controlling these costs starts with training. When employees are taught (and reminded) to behave appropriately and understand company policies, they have much less ground to stand on when considering lawsuits. And, on a more positive note, a well-trained workforce should get along better and, thereby, operate in a more upbeat, friendly environment. To take mental health wellness one step further, you could implement an employee assistance program (EAP). This is a voluntary and confidential way to connect employees to outside providers who can help them manage substance abuse and mental health issues. Although it will call for an upfront investment, an EAP can lower insurance costs over the long term by discouraging lifestyle choices that tend to lead to accidents and lawsuits. Hand in hand Happy and healthy — there’s a reason these two words go hand in hand. Create a workforce that’s both and you’ll stand a much better chance of maintaining affordable insurance premiums. We can provide further information on how to reduce potential liability and lower the costs of various forms of business insurance. © 2018

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Year-end tax planning for businesses in the new tax environment

The passage of the Tax Cuts and Jobs Act (TCJA) in late 2017 brought significant changes to the tax landscape. As the first tax season under the law looms on the horizon, new year-end tax planning strategies are emerging. Meanwhile, some of the old tried-and-true strategies have changed and others remain viable. Fresh opportunities The TCJA creates several new avenues of potential tax savings for businesses. Some of these, though, may require tough decisions. For example, the new tax law has prompted some businesses to question whether they should restructure to become a C corporation or a pass-through entity. The former is subject to potential double taxation (at the entity and dividend levels) but now enjoys a corporate tax rate that has fallen from 35% to 21%. The latter faces only an individual tax rate, which can run as high as 37%, but might qualify for a new, full 20% deduction on qualified business income (QBI). With a full QBI deduction, the maximum effective tax rate for pass-through entities comes out to 29.6%. But there are other factors to consider. For example, the TCJA limits the state and local tax deduction for individual pass-through owners but not for corporations. Further, the new corporate rate is permanent, while the QBI deduction is scheduled to sunset after 2025. Ultimately, the optimal entity choice depends on each business’s facts and circumstances. A business that goes the pass-through route, though, has several tactics available to maximize its QBI deduction. The deduction is subject to limits based on W-2 wages paid, the unadjusted basis of a taxpayer’s qualified property, and taxable income. A business, therefore, might increase its wages by converting independent contractors to employees, assuming the benefit isn’t outweighed by higher payroll taxes, employee benefit costs and similar considerations. It could also purchase assets before year end to pump up its unadjusted basis. And individual pass-through owners can maximize their above-the-line and itemized deductions to reduce their taxable income. The TCJA also establishes a business tax credit for paid family and medical leave — a credit that businesses can claim for 2018 as long as they adopt a retroactive policy before the end of the year. Eligible employers may claim the credit if they have a written policy that provides at least two weeks of annual paid family and medical leave to all employees who meet certain requirements, at a pay rate of at least 50% of normal wages. The maximum credit is 25% of wages paid during leave. Shifting strategies Not surprisingly, the TCJA alters several year-end strategies businesses have used in the past to curb liability. It bolsters some strategies, while trimming or ending the advantages of others. For several years, for example, asset acquisitions have offered a smart way to cut taxes through bonus depreciation and Section 179 depreciation deductions. The TCJA expands both types of deductions, potentially making investments in equipment and other assets even more advisable. Businesses could immediately write off 50% bonus depreciation on qualified new property purchased […]

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Is more tax reform on the horizon?

President Trump and Republican lawmakers currently are considering a second round of tax reform legislation as a follow-up to last year’s Tax Cuts and Jobs Act (TCJA). As of this writing, there’s been no actual bill drafted. However, House Ways and Means Committee Chair Kevin Brady (R-TX) just released a broad outline or framework of what the tax package may contain. Proposed framework One of the main themes of the proposed legislation is to make permanent certain provisions in the TCJA, including: Federal income tax rate cuts for individual taxpayers, The doubled child tax credit, and The deduction for up to 20% of qualified business income (QBI) from pass-through entities (sole proprietorships, partnerships, LLCs and S corporations). These pro-taxpayer changes are scheduled to expire at the end of 2025 along with several other TCJA changes, some of which are not taxpayer-friendly. The framework released by Brady also would help Americans save more for retirement. It would create a new Universal Savings Account that would allow tax-free withdrawals for a variety of needs and would expand Section 529 education savings plans to allow tax-free withdrawals to pay for apprenticeship fees to learn a trade, cover the cost of home schooling and help pay off student debt. Contributions to Universal Savings Accounts would be made with after-tax dollars, like contributions to Roth IRAs. The framework also proposes to permit families to access their retirement accounts penalty free after a birth or adoption and allow new businesses to write off more of their start-up costs. President Trump has separately suggested lowering the corporate federal income tax rate from 21% to 20%. The TCJA permanently lowered the corporate rate from a maximum of 35% under prior law to a flat 21% for tax years beginning in 2018 and beyond. Chairman Brady has indicated that indexing capital gains for inflation is also under consideration for Tax Reform 2.0. Indexing would allow taxpayers to increase the tax basis of capital gains assets — such as stocks, mutual fund shares and real estate — to account for inflation. Indexing would result in lower taxable gains when affected assets are sold for a profit. Some observers have argued that indexing could be achieved without the need for legislation by simply issuing IRS regulations that allow indexing. No “extenders” in Tax Reform 2.0 Chairman Brady has indicated that any Tax Reform 2.0 package probably won’t include extensions of a number of tax breaks that Congress habitually allows to expire and then retroactively extends. These so-called “extenders” will likely be addressed by separate legislation. For individual taxpayers, the two important extenders are the deduction for up to $4,000 of qualified higher-education tuition and fees and tax-free treatment for up to $2 million of forgiven home mortgage debt. Both of these breaks expired at the end of 2017. Other extenders that expired at that time include several business depreciation and expensing breaks and energy related breaks. Possible technical corrections legislation Like most major legislation, the TCJA included some errors, oversights and […]

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URGENT MEMO FOR COMPANIES THAT SELL TANGIBLE PROPERTY INTO MULTIPLE STATES

Memo To:        VA Tax Files / VA Clients From:    Peter V. DeGregori, CPA MST CGMA Date:     June 28, 2018 Re:        Change in Sales Tax: Supreme Court Ruling for South Dakota v. Wayfair Summary: On June 21, 2018, the U.S. Supreme court issued a decision in South Dakota v. Wayfair, overturning the physical presence standard explained in Quill v. North Dakota (Sup Ct 1992) 504 U.S. 298, and other related cases. Prior to this ruling, the Quill case was an important case, which required a physical presence standard for a company to be subject to sales tax if they sold tangible property (typically items you can touch).  In general, the “physical presence” standard is a requirement for a company to be subject to sales tax.  This law became a common case / item to review if an out of state company was subject to sales tax in another state. As an example, if you have a company, located only in Florida, then generally that company would only be subject to sales tax in Florida based on sales to Florida consumers.  However, if the company shipped products into other states, then they generally they would not be subject to other states’ sales tax if they didn’t have any physical presence in that other state.   So, the outcome would be products sold outside of Florida didn’t have sales tax applied against them and this is the issue that has soured the change of this law.  If a business wasn’t subject to sales tax, then typically the consumer is responsible to pay use tax to their state.  But most consumers do not pay use tax, so the states want a method to subject out of state businesses to sales tax and this new court case has now removed the hurdle of the Quill doctrine.  States want more sales tax revenue, and they have been trying hard to collect sales tax from out of state businesses for a long time.  Now the law has changed based on this court case and states are going to be able to charge sales tax based on where the consumer resides regardless of “physical presence”. Now, let’s look at what is meant by “physical presence”.  First, this is a generalization, as each state may, unfortunately, have a different set of guidelines, in general, physical presence means that the company had property (fixed assets, inventory, etc.), people, or some other physical connection in a state to subject them to sales tax.  So, this was the concern based on the example above, the company in FL could sell products to every other state and wouldn’t be subject to sales tax in any state other than FL.  This created an unfair playing field with companies in states in which out of state resellers sold into.  So, the US Supreme Court changed the law and now companies are subject to sales tax based on revenue that is generated from a state which is also called “economic nexus”. Now this is a BIG change […]

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Watch out for tax-related identity theft scams all year long

With the filing date for 2017 in the rear-view mirror for most businesses and individuals, the last thing they probably want to think about is income taxes. Unfortunately, though, criminals who commit tax-related identity theft don’t work seasonally — they’re constantly devising and unleashing new schemes. And even though the IRS has taken successful steps to reduce tax-related identity theft in 2017, it cautions taxpayers to stay alert for scams year round and especially right after the tax filing season ends. What is tax-related identity theft? According to the IRS, tax-related identity theft generally occurs when a thief uses a stolen Social Security number (SSN) to file a tax return claiming a fraudulent refund. The victimized taxpayer may not learn of the theft until he or she attempts to file a tax return and finds that a return has already been filed for that SSN. Alternatively, the taxpayer might discover the theft upon receipt of a letter from the IRS saying it has identified a suspicious return that uses the taxpayer’s SSN. Thieves have devised a variety of methods to obtain the information they need to file a tax return under another person’s SSN. During the past several years, the IRS, Federal Trade Commission (FTC) and state tax agencies have issued warnings as new methods come to the forefront. How does tax-related identity theft occur? But filing fraudulent returns isn’t the only way that taxpayers are victimized. Scam artists are using multiple channels to conduct their tax-related identity theft schemes, including: Phone schemes. This past April, less than 10 days after the tax return filing deadline, the IRS highlighted a new phone scam conducted by fraudsters who program their computers to display the phone number of the local IRS Taxpayer Assistance Center (TAC) on the taxpayer’s Caller ID. If the taxpayer questions the legitimacy of the caller’s demand for a tax payment, the caller directs him or her to IRS.gov to verify the local TAC phone number. The perpetrator hangs up, calls back after a short period — again “spoofing” the TAC number — and resumes the demand for money. These scam artists generally require payment on a debit card, which allows them to directly access the victim’s bank account. In another phone scheme, the criminals claim they’re calling from the IRS to verify tax return information. They tell taxpayers that the agency has received their returns and simply needs to confirm a few details to process them. The taxpayers are prompted to provide personal information such as an SSN and bank or credit card numbers. Digital schemes. Emails that appear to be from the IRS are part of phishing schemes intended to trick the recipients into revealing sensitive information that can be used to steal their identities. The emails may seek information related to refunds, filing status, transcript orders or PIN information. The scammers have developed twists on this approach, too. The emails might seem to come from an individual’s tax preparer and request information needed for an IRS […]

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Tax Cuts and Jobs Act offers favorable tax breaks for businesses

The Tax Cuts and Jobs Act (TCJA), which was signed into law on December 22, 2017, contains a treasure trove of tax breaks for businesses. Overall, most companies and business owners will come out ahead under the new tax law, but there are a number of tax breaks that were eliminated or reduced to make room for other beneficial revisions. Here are the most important changes in the new law that will affect businesses and their owners. New 21% corporate tax rate Under pre-TCJA law, C corporations paid graduated federal income tax rates of 15% on taxable income of $0 to $50,000; 25% on taxable income of $50,001 to $75,000; 34% on taxable income of $75,001 to $10 million; and 35% on taxable income over $10 million. Personal service corporations (PSCs) paid a flat 35% rate. For tax years beginning in 2018, the TCJA establishes a flat 21% corporate rate, and that rate also applies to PSCs. Reduced corporate dividends deduction Under pre-TCJA law, C corporations that received dividends from other corporations were entitled to partially deduct those dividends. If the corporation owned at least 20% of the stock of another corporation, an 80% deduction applied. Otherwise, the deduction was 70% of dividends received. For tax years beginning in 2018, the TCJA reduces the 80% deduction to 65% and the 70% deduction to 50%. These reductions are part of the price businesses have to pay for the new 21% corporate rate. Corporate alternative minimum tax repealed Prior to the TCJA, the corporate alternative minimum tax (AMT) was imposed at a 20% rate. However, corporations with average annual gross receipts of less than $7.5 million for the preceding three tax years were exempt. For tax years beginning in 2018, the new law repeals the corporate AMT. For corporations that paid the corporate AMT in earlier years, an AMT credit was allowed under prior law. The new law allows corporations to fully use their AMT credit carryovers in their 2018–2021 tax years. New deduction for pass-through businesses Under prior law, net taxable income from pass-through business entities (such as sole proprietorships, partnerships, S corporations and LLCs that are treated as sole proprietorships or as partnerships for tax purposes) was simply passed through to owners. It was then taxed at the owners’ standard rates. In other words, no special treatment applied to pass-through income recognized by business owners. For tax years beginning in 2018, the TCJA establishes a new deduction based on a noncorporate owner’s qualified business income (QBI). This new tax break is available to individuals, estates and trusts that own interests in pass-through business entities. The deduction generally equals 20% of QBI, subject to restrictions that can apply at higher income levels. QBI is generally defined as the net amount of qualified items of income, gain, deduction and loss from any qualified business of the noncorporate owner. For this purpose, qualified items are income, gain, deduction and loss that are effectively connected with the conduct of a U.S. business. QBI doesn’t […]

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Sending Your Kids To Day Camp May Provide a Tax Break

When school lets out, kids participate in a wide variety of summer activities. If one of the activities your child is involved with is day camp, you might be eligible for a tax credit! Dollar-for-dollar savings Day camp (but not overnight camp) is a qualified expense under the child and dependent care credit, which is worth 20% of qualifying expenses (more if your adjusted gross income is less than $43,000), subject to a cap. For 2018, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more. Remember that tax credits are particularly valuable because they reduce your tax liability dollar-for-dollar — $1 of tax credit saves you $1 of taxes. This differs from deductions, which simply reduce the amount of income subject to tax. For example, if you’re in the 24% tax bracket, $1 of deduction saves you only $0.24 of taxes. So it’s important to take maximum advantage of the tax credits available to you. Qualifying for the credit A qualifying child is generally a dependent under age 13. (There’s no age limit if the dependent child is unable physically or mentally to care for him- or herself.) Special rules apply if the child’s parents are divorced or separated or if the parents live apart. Eligible costs for care must be work-related. This means that the child care is needed so that you can work or, if you’re currently unemployed, look for work. If you participate in an employer-sponsored child and dependent care Flexible Spending Account (FSA), also sometimes referred to as a Dependent Care Assistance Program, you can’t use expenses paid from or reimbursed by the FSA to claim the credit. Determining eligibility Additional rules apply to the child and dependent care credit. If you’re not sure whether you’re eligible, contact us. We can help you determine your eligibility for this credit and other tax breaks for parents. © 2018

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Before Choosing an Annuity, Know the Tax Implications

Guaranteed payments. That’s the allure of many annuities. But “guaranteed” doesn’t mean tax-free. Annuities come in many flavors and can cost a lot to set up. So when figuring out if one is right for you, you have to consider many factors, including the tax implications. The last thing you want is to be surprised by your tax bill when your goal is to have adequate income in retirement. “An annuity is a tool. You have to use it wisely,” said certified financial planner Mari Adam of Adam Financial Associates. Qualified vs. non-qualified annuities Although there are many types, annuities fall into one of two broad categories: qualified or non-qualified. And the payouts are taxed differently. If you fund an annuity with pre-tax money, it’s considered a “qualified” annuity. Payments from qualified annuities are fully subject to income tax because you weren’t taxed on your contributions when they went in or on the growth of your money as it accrued, just like in a 401(k) or traditional IRA. Qualified annuities are usually funded with money from an IRA, 401(k) or other tax-deferred account. If you buy an annuity with after-tax money, that’s considered a non-qualified annuity. You’ll only owe income tax on a portion of your payments, because you’ve already been taxed on the principal you invested. What part of your payments will be taxable is determined by a so-called “exclusion ratio,” said Mark Luscombe, principal federal tax analyst of Wolters Kluwer Tax & Accounting US. The ratio is based on the principal you invested, the earnings on your principal and the length of your annuity. Your investment return may be fixed or variable, depending on which type of annuity you chose. If your non-qualified annuity payments are based on your life expectancy and you happen to live longer than expected, that will affect the taxes you pay, too. Say you start collecting non-qualified annuity payments at 65 and your life expectancy is 85. Your payments from age 65 to 85 will be partially taxable based on your exclusion ratio. But if you end up living to 97, 100% of your payments from years 86 to 97 could be subject to tax, Luscombe noted. There is one instance in which annuity payments could be tax free: if you bought an annuity within a Roth IRA or Roth 401(k). In that case, you use after-tax money to buy your annuity and, because it’s a Roth, the earnings will grow tax free, as opposed to just tax deferred the way they are in most other annuities. “Roths would qualify for a 100% exclusion if the timing and age requirements are met,” Luscombe said. Other tax issues to consider There are plenty of other tax considerations that come into play with annuities. For instance, depending on where you live, your state may tax annuity income somewhat differently than the federal government. “It would probably be safest to check with the law of a particular state to see if annuities are treated in that state […]

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