Now that 2019 has begun, there isn’t too much you can do to reduce your 2018 income tax liability. But it’s smart to begin preparing for filing your 2018 return. Because the Tax Cuts and Jobs Act (TCJA), which was signed into law at the end of 2017, likely will have a major impact on your 2018 taxes, it’s a good time to review the most significant provisions impacting individual taxpayers.
Rates and exemptions
Generally, taxpayers will be subject to lower tax rates for 2018. But a couple of rates stay the same, and changes to some of the brackets for certain types of filers (individuals and heads of households) could cause them to be subject to higher rates. Some exemptions are eliminated, while others increase. Here are some of the specific changes:
Credits and deductions
Generally, tax breaks are reduced for 2018. However, a few are enhanced. Here’s a closer look:
How are you affected?
As you can see, the TCJA changes for individuals are dramatic. Many rules and limits apply, so contact us to find out exactly how you’re affected. We can also tell you if any other provisions affect you, and help you begin preparing for your 2018 tax return filing and 2019 tax planning.
With the dawn of 2019 on the near horizon, here’s a quick list of tax and financial to-dos you should address before 2018 ends:
Check your FSA balance. If you have a Flexible Spending Account (FSA) for health care expenses, you need to incur qualifying expenses by December 31 to use up these funds or you’ll potentially lose them. (Some plans allow you to carry over up to $500 to the following year or give you a 2-1/2-month grace period to incur qualifying expenses.) Use expiring FSA funds to pay for eyeglasses, dental work or eligible drugs or health products.
Max out tax-advantaged savings. Reduce your 2018 income by contributing to traditional IRAs, employer-sponsored retirement plans or Health Savings Accounts to the extent you’re eligible. (Certain vehicles, including traditional and SEP IRAs, allow you to deduct contributions on your 2018 return if they’re made by April 15, 2019.)
Take RMDs. If you’ve reached age 70-1/2, you generally must take required minimum distributions (RMDs) from IRAs or qualified employer-sponsored retirement plans before the end of the year to avoid a 50% penalty. If you turned 70½ this year, you have until April 1, 2019, to take your first RMD. But keep in mind that, if you defer your first distribution, you’ll have to take two next year.
Consider a QCD. If you’re 70-1/2 or older and charitably inclined, a qualified charitable distribution (QCD) allows you to transfer up to $100,000 tax-free directly from your IRA to a qualified charity and to apply the amount toward your RMD. This is a big advantage if you wouldn’t otherwise qualify for a charitable deduction (because you don’t itemize, for example).
Use it or lose it. Make the most of annual limits that don’t carry over from year to year, even if doing so won’t provide an income tax deduction. For example, if gift and estate taxes are a concern, make annual exclusion gifts up to $15,000 per recipient. If you have a Coverdell Education Savings Account, contribute the maximum amount you’re allowed.
Contribute to a Sec. 529 plan. Sec. 529 prepaid tuition or college savings plans aren’t subject to federal annual contribution limits and don’t provide a federal income tax deduction. But contributions may entitle you to a state income tax deduction (depending on your state and plan).
Review withholding. The IRS cautions that people with more complex tax situations face the possibility of having their income taxes underwithheld due to changes under the Tax Cuts and Jobs Act. Use its withholding calculator (available at irs.gov) to review your situation. If it looks like you could face underpayment penalties, increase withholdings from your or your spouse’s wages for the remainder of the year. (Withholdings, unlike estimated tax payments, are treated as if they were paid evenly over the year.)
For assistance with these and other year-end planning ideas, please contact us.
As the holidays approach and the year draws to a close, many taxpayers make charitable gifts — both in the spirit of the season and as a year-end tax planning strategy. But with the tax law changes that go into effect in 2018 and the many rules that apply to the charitable deduction, it’s a good idea to check deductibility before making any year-end donations.
Confirm you can still benefit from itemizing
Last year’s Tax Cuts and Jobs Act (TCJA) didn’t put new limits on or suspend the charitable deduction, like it did to many other itemized deductions. Nevertheless, it will reduce or eliminate the tax benefits of charitable giving for many taxpayers this year.
Itemizing saves tax only if itemized deductions exceed the standard deduction. For 2018 through 2025, the TCJA significantly increases the standard deduction, to $24,000 for married couples filing jointly, $18,000 for heads of households, and $12,000 for singles and married couples filing separately.
The nearly doubled standard deduction combined with the new limits or suspensions of some common itemized deductions means you may no longer have enough itemized deductions to exceed the standard deduction. And if that’s the case, your donations won’t save you tax.
So before you make any year-end charitable gifts, total up your potential itemized deductions for the year, including the donations you’re considering. If the total is less than your standard deduction, your year-end donations won’t provide a tax benefit.
You might, however, be able to preserve your charitable deduction by “bunching” donations into alternating years. This can allow you to exceed the standard deduction and claim a charitable deduction (and other itemized deductions) every other year.
Meet the delivery deadline
To be deductible on your 2018 return, a charitable gift must be made by Dec. 31, 2018. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” The delivery date depends in part on what you donate and how you donate it. Here are a few examples for common donations:
Check. The date you mail it.
Credit card. The date you make the charge.
Stock certificate. The date you mail the properly endorsed stock certificate to the charity.
Make sure the organization is “qualified”
To be deductible, a donation also must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions.
The IRS’s online search tool, Tax Exempt Organization Search, can help you easily find out whether an organization is eligible to receive tax-deductible charitable contributions. Information about organizations eligible to receive deductible contributions is updated monthly. Remember that political donations aren’t deductible.
Consider other rules
We’ve discussed only some of the rules for the charitable deduction; many others apply. We can answer any questions you have about the deductibility of donations or changes to the standard deduction and itemized deductions.
Prepaying property taxes has been a popular year-end tax-planning strategy. But does it still make sense? For many, particularly those in high-tax states, it doesn’t. The TCJA made two changes that affect this strategy: 1) nearly doubling the standard deduction, so fewer taxpayers will itemize, and 2) putting a $10,000 cap on state and local tax deductions. If you no longer itemize or you’ve already used up your $10,000 limit (on income or sales taxes or on previous property tax installments), prepaying property tax will provide no benefit. Contact us for details.
A strong economy leads some company owners to cut back on marketing. Why spend the money if business is so good? Others see it differently — a robust economy means more sales opportunities, so pouring dollars into marketing is the way to go.
The right approach for your company depends on many factors, but one thing is for sure: Few businesses can afford to cut back drastically on marketing or stop altogether, no matter how well the economy is doing. Yet spending recklessly may be dangerous as well. Here are three ways to creatively get more from your marketing dollars so you can cut back or ramp up as prudent:
1. Do more digitally. There are good reasons to remind yourself of digital marketing’s potential value: the affordable cost, the ability to communicate with customers directly, faster results and better tracking capabilities. Consider or re-evaluate strategies such as:
• Regularly updating your search engine optimization approaches so your website ranks higher in online searches and more prospective customers can find you,
• Refining your use of email, text message and social media to communicate with customers (for instance, using more dynamic messages to introduce new products or announce special offers), and
• Offering “flash sales” and Internet-only deals to test and tweak offers before making them via more expansive (and expensive) media.
2. Search for media deals. During boom times, you may feel at the mercy of high advertising rates. The good news is that there are many more marketing/advertising channels than there used to be and, therefore, much more competition among them. Finding a better deal is often a matter of knowing where to look.
Track your marketing efforts carefully and dedicate time to exploring new options. For example, podcasts remain enormously popular. Could a marketing initiative that exploits their reach pay dividends? Another possibility is shifting to smaller, less expensive ads posted in a wider variety of outlets over one massive campaign.
3. Don’t forget public relations (PR). These days, business owners tend to fear the news. When a company makes headlines, it’s all too often because of an accident, scandal or oversight. But you can turn this scenario on its head by using PR to your advantage.
Specifically, ask your marketing department to craft clear, concise but exciting press releases regarding your newest products or services. Then distribute these press releases via both traditional and online channels to complement your marketing efforts. In this manner, you can make the news, get information out to more people and even improve your search engine rankings — all typically at only the cost of your marketing team’s time.
These are just a few ideas to help ensure your marketing dollars play a winning role in your company’s investment in itself. We can provide further assistance in evaluating your spending in this area, as well as in developing a feasible budget for next year.
Section 529 plans are a popular education-funding tool because of tax and other benefits. Two types are available: 1) prepaid tuition plans, and 2) savings plans. And one of these plans got even better under the Tax Cuts and Jobs Act (TCJA).
Enjoy valuable benefits
529 plans provide a tax-advantaged way to help pay for qualifying education expenses. First and foremost, although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred. In addition, some states offer tax incentives for contributing in the form of deductions or credits.
But that’s not all. 529 plans also usually offer high contribution limits. And there are no income limits for contributing.
Lock in current tuition rates
With a 529 prepaid tuition plan, if your contract is for four years of tuition, tuition is guaranteed regardless of its cost at the time the beneficiary actually attends the school. This can provide substantial savings if you invest when the child is still very young.
One downside is that there’s uncertainty in how benefits will be applied if the beneficiary attends a different school. Another is that the plan doesn’t cover costs other than tuition, such as room and board.
Fund more than just college tuition
A 529 savings plan can be used to pay a student’s expenses at most postsecondary educational institutions. Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, supplies, computer equipment, software, Internet service and, generally, room and board) are income-tax-free for federal purposes and typically for state purposes as well, thus making the tax deferral a permanent savings.
In addition, the Tax Cuts and Jobs Act expands the definition of qualified expenses to generally include elementary and secondary school tuition. However, tax-free distributions used for such tuition are limited to $10,000 per year.
The biggest downside may be that you don’t have direct control over investment decisions; you’re limited to the options the plan offers. Additionally, for funds already in the plan, you can make changes to your investment options only twice during the year or when you change beneficiaries.
But each time you make a contribution to a 529 savings plan, you can select a different option for that contribution, regardless of how many times you contribute throughout the year. And every 12 months you can make a tax-free rollover to a different 529 plan for the same child.
Picking your plan
Both prepaid tuition plans and savings plans offer attractive benefits. We can help you determine which one is a better fit for you or explore other tax-advantaged education-funding options.
Many people choose to pass assets to the next generation during life, whether to reduce the size of their taxable estate, to help out family members or simply to see their loved ones enjoy the gifts. If you’re considering lifetime gifts, be aware that which assets you give can produce substantially different tax consequences.
Multiple types of taxes
Federal gift and estate taxes generally apply at a rate of 40% to transfers in excess of your available gift and estate tax exemption. Under the Tax Cuts and Jobs Act, the exemption has approximately doubled through 2025. For 2018, it’s $11.18 million (twice that for married couples with proper estate planning strategies in place).
Even if your estate isn’t large enough for gift and estate taxes to currently be a concern, there are income tax consequences to consider. Plus, the gift and estate tax exemption is scheduled to drop back to an inflation-adjusted $5 million in 2026.
Minimizing estate tax
If your estate is large enough that estate tax is a concern, consider gifting property with the greatest future appreciation potential. You’ll remove that future appreciation from your taxable estate.
If estate tax isn’t a concern, your family may be better off tax-wise if you hold on to the property and let it appreciate in your hands. At your death, the property’s value for income tax purposes will be “stepped up” to fair market value. This means that, if your heirs sell the property, they won’t have to pay any income tax on the appreciation that occurred during your life.
Even if estate tax is a concern, you should compare the potential estate tax savings from gifting the property now to the potential income tax savings for your heirs if you hold on to the property.
Minimizing your beneficiary’s income tax
You can save income tax for your heirs by gifting property that hasn’t appreciated significantly while you’ve owned it. The beneficiary can sell the property at a minimal income tax cost.
On the other hand, hold on to property that has already appreciated significantly so that your heirs can enjoy the step-up in basis at your death. If they sell the property shortly after your death, before it’s had time to appreciate much more, they’ll owe no or minimal income tax on the sale.
Minimizing your own income tax
Don’t gift property that’s declined in value. A better option is generally to sell the property so you can take the tax loss. You can then gift the sale proceeds.
Capital losses can offset capital gains, and up to $3,000 of losses can offset other types of income, such as from salary, bonuses or retirement plan distributions. Excess losses can be carried forward until death.
No matter your current net worth, it’s important to choose gifts wisely. Please contact us to discuss the gift, estate and income tax consequences of any gifts you’d like to make.
Like many business owners, you probably created a business plan when you launched your company. But, as is also often the case, you may not have looked at it much since then. Now that fall has arrived and year end is coming soon, why not dig it out? Reviewing and revising a business plan can be a great way to plan for the year ahead. 6 sections to scrutinize Comprehensive business plans traditionally are composed of six sections. When revisiting yours, look for insights in each one: 1. Executive summary. This should read like an “elevator pitch” regarding your company’s purpose, its financial position and requirements, its state of competitiveness, and its strategic goals. If your business plan is out of date, the executive summary won’t quite jibe with what you do today. Don’t worry: You can rewrite it after you revise the other five sections. 2. Business description. A company’s key features are described here. These include its name, entity type, number of employees, key assets, core competencies, and product or service menu. Look at whether anything has changed and, if so, what. Maybe your workforce has grown or you’ve added products or services. 3. Industry and marketing analysis. This section analyzes the state of a company’s industry and explicates how the business will market itself. Your industry may have changed since your business plan’s original writing. What are the current challenges? Where do opportunities lie? How will you market your company’s strengths to take advantage of these opportunities? 4. Management team description. The business plan needs to recognize the company’s current leadership. Verify the accuracy of who’s identified as an owner and, if necessary, revise the list of management-level employees, providing brief bios of each. As you look over your management team, ask yourself: Are there gaps or weak links? Is one person handling too much? 5. Operational plan. This section explains how a business functions on a day-to-day basis. Scrutinize your operating cycle — that is, the process by which a product or service is delivered to customers and, in turn, how revenue is brought in and expenses are paid. Is it still accurate? The process of revising this description may reveal inefficiencies or redundancies of which you weren’t even aware. 6. Financials. The last section serves as a reasonable estimate of how your company intends to manage its finances in the near future. So, you should review and revise it annually. Key projections to generate are forecasts of your profits and losses, as well as your cash flow, in the coming year. Many business plans also include a balance sheet summarizing current assets, liabilities and equity. Keep it fresh The precise structure of business plans can vary but, when regularly revisited, they all have one thing in common: a wealth of up-to-date information about the company described. Don’t leave this valuable document somewhere to gather dust — keep it fresh. Our firm can help you review your business plan and generate accurate financials that allow you to take on the coming year with confidence
You’ve no doubt heard the old business cliché “cash is king.” And it’s true: A company in a strong cash position stands a much better chance of obtaining the financing it needs, attracting outside investors or simply executing its own strategic plans. One way to ensure that there’s always a king in the castle, so to speak, is to maintain a cash reserve. Granted, setting aside a substantial amount of dollars isn’t the easiest thing to do — particularly for start-ups and smaller companies. But once your reserve is in place, life can get a lot easier. Common metrics Now you may wonder: What’s the optimal amount of cash to keep in reserve? The right answer is different for every business and may change over time, given fluctuations in the economy or degree of competitiveness in your industry. If you’ve already obtained financing, your bank’s liquidity covenants can give you a good idea of how much of a cash reserve is reasonable and expected of your company. To take it a step further, you can calculate various liquidity metrics and compare them to industry benchmarks. These might include: • Working capital = current assets – current liabilities,• Current ratio = current assets / current liabilities, and• Accounts payable turnover = cost of goods sold / accounts payable. There may be other, more complex metrics that better apply to the nature and size of your business. Financial forecasts Believe it or not, many companies don’t suffer from a lack of cash reserves but rather a surplus. This often occurs because a business owner decides to start hoarding cash following a dip in the local or national economy. What’s the problem? Substantial increases in liquidity — or metrics well above industry norms — can signal an inefficient deployment of capital. To keep your cash reserve from getting too high, create financial forecasts for the next 12 to 18 months. For example, a monthly projected balance sheet might estimate seasonal ebbs and flows in the cash cycle. Or a projection of the worst-case scenario might be used to establish your optimal cash balance. Projections should consider future cash flows, capital expenditures, debt maturities and working capital requirements. Formal financial forecasts provide a coherent method to building up cash reserves, which is infinitely better than relying on rough estimates or gut instinct. Be sure to compare actual performance to your projections regularly and adjust as necessary. More isn’t always better Just as individuals should set aside some money for a rainy day, so should businesses. But, when it comes to your company’s cash reserves, the notion that “more is better” isn’t necessarily correct. You’ve got to find the right balance. Contact us to discuss your reserve and identify your ideal liquidity metrics.
With the Federal tax law changes, states needed to adjust as well and each state is different. MN may need some planning this year and we can help!