Friday, May 18, 2018

Life Check Up

Generally this blog is intended to provide information that is tax specific, but because of the relational nature of this business this blog post will be more about the non-tax aspect of tax work.

There is a commercial that says "life comes at you fast" (see video) and in our office that seems to be the case in particular this week.

The week began with a greatly emotional phone call from a client, calling to inform our office that her adult son had passed away the day before and she would need a referral to an attorney to handle matters for his widow and children (from other relationships). 

Later that same day, a client spouse called requesting copies of the last 5 years tax returns and providing an address in a different state than last in our records.  This raised suspicions for our office as this may indicate 1) an attempt at ID theft for the married couple's records or 2) a need for financial records for an impending divorce situation.  It turned out to be the latter, as our office confirmed additional information and was informed of the couple being separated and divorce beginning.

Hearing from clients that are celebrating children (or grandchildren) graduating from high school and college.  Clients share their excitement at having their children get married, or at the news of becoming grandparents, or becoming empty-nesters.

All of these things illustrate again that "life comes at you fast"!  We all need to stop and take inventory of the truly important things in our life and take steps to leave a legacy.  I want to encourage you to take a moment and review items that could be impacted by a death, divorce, marriage, or even some other life event.  The following are not an extensive list and not intended to replace legal or professional advice but intended to be a catalyst to take action:

- Do you have a trust or will drawn up?  Is it still current or is it outdated?
- Do you have life insurance?  Do you know who the beneficiaries are of the policy?  Is that beneficiary still around (ex-spouse? deceased person?)?
- Do you have retirement plans (401K, IRA, etc.)?  Do you have a beneficiary named on those accounts?  Is that who you want to get the money and incur the tax consequences?

These questions are by no means an exhaustive list but please take some time to review these questions and maybe others will come to mind as you answer these questions. 

Monday, November 6, 2017

Tax Cuts and Jobs Act H.R. 1 - 2017 Tax Proposal

2017 Tax Reform

Last week the House of Representatives released a proposal that was touted as simplifying the U.S. tax code.  This "simplification" was summarized in a document that was 80+ pages, the bill was approximately 420+ pages.

After reading through the summary, I was attempting to summarize the key points of the bill to disseminate to interested parties.  Then I realized that this is just the beginning and in all likelihood this bill is going to have to proceed through the pork barrel process or logrolling before being voted on by the House of Representatives, agreed to and voted on by the Senate and submitted to the President for signing.  So in proceeding in writing about this first attempt by Congress may be an act in futility (much like the bill in it's current state), but I thought it worth pointing out some highlights of the bill as it currently stands.

Reduction of Individual Income Tax Rates - the bill consolidates from the current 7 tax brackets to 4 tax brackets. Those brackets are 12%, 25%, 35% and 39.6%.

Increased Standard Deduction - under current law, taxpayers are eligible to claim the larger of the Standard Deduction or Itemized Deductions.  The proposal looks to increase the Standard Deduction from $12,700 for Married couples in 2017 to $24,400 in 2018 (under the proposal).  The Single amounts are exactly 1/2 of the Married amounts, while eligible Head of Household taxpayers would receive the midpoint between Married and Single amounts.  The thought behind this action is to avoid the complexity of itemizing deductions for the American taxpayer.

Repeal of Personal Exemptions - under current tax law, each taxpayer is generally able to claim a personal exemption (reduction to income) for the taxpayer, spouse, and eligible dependents.  This deduction is being removed and could be an issue for large families or tax households that contain many dependents.  The tax bill attempts to address this by providing enhanced child tax credits and a dependent credit, these credits are written to be applicable for years before 2023 (so from 2018 - 2023).

Education Related Changes - for College, the tax proposal will eliminate the Lifetime Learning Credit but retain the American Opportunity Credit. Currently, the AOC is available for the first 4 years of post-secondary education, the proposal will expand to allow for a 5th year of the credit on a slight reduction from the 4 year credit.

Removal of the following items related to education: Student loan interest deduction, Tuition and Fees deduction, Employer-provided Education assistance (currently an employer can provide $5,250 per year for graduate and post-graduate studies to employees and this assistance is excluded from income, if meeting certain requirements), Qualified Tuition Reductions (educational institutions providing reduced tuition to the institution's employees and family as a benefit of employment).  These items would all be removed and require adjustments to college planning and employer benefit plans.

Itemized Deduction Simplification - the proposal would repeal deductions for state income taxes and sales taxes, medical expenses, unreimbursed employee expenses (out of pocket work expenses) and adjust deductions for real property taxes, mortgage interest and charitable deductions.

Mortgage interest would be deductible for 1 property (currently eligible for up 1st and 2nd home) and would be capped to for debt up to $500,000, down from $1,000,000.  For most taxpayers in Arizona, this will not be a big deal except for those that have a vacation home in the mountains and a primary residence in the Phoenix metro area, for example.  Taxpayers in high cost locations like California, Washington, Oregon or the east coast, may find that decreased debt limit to be an detriment.

Real property tax, or real estate tax, deductions will be capped to $10,000 or less allowed for deduction purposes.  Again in Arizona, this should not be a problem but taxpayers in high property tax states may suffer under this provision.

Charitable deductions would remain as a deduction with some minor adjustments.  Examples include charitable mileage rate would be adjusted for inflation, limitations for charity donations would be increased to 60% of Adjusted Gross Income for public charities.

Other Adjustment/Deductions - Alimony payments would not be deductible by the payor or taxable to the recipient, effective for divorce decrees executed after 2017.

Moving expense deduction would be repealed.  Under current law, if a taxpayer has a change in employment that moves them 50 miles or more (more specifics may need to be met), the expenses for the move could be a tax deduction.  This tax benefit would be removed.  Employer exclusion of moving reimbursement would also be repealed as a tax-free benefit to new employees.

Principal Residence Exclusion Rule Change - under current Federal law, a taxpayer needs to own and live in a home for 2 years and can exclude up to $250,000, if single or $500,000, if married, of gain on the sale of the home.  Under the proposed rules, the ownership and use test would change to 5 years out of the previous 8 years and the exclusion of gain would be phased out if a taxpayer's adjusted gross income exceeds $500,000 (married)/$250,000 (for single filers). The phase out is $1 for every dollar over the AGI amount.  The consideration is to prevent house flippers from making money tax-free, but appears likely to punish homeowners that have lived in an area for decades and may exceed the exclusion amounts due to inflation.

The above items are highlights of just the first 20 pages of the Tax Cuts and Jobs Act proposal summary. There are items in this tax bill that are difficult to accept and I expect the bill to be amended before becoming law. 

If you have any question or comments about the bill, send them my way and I will be glad to dig a little more into the bill to find an answer.

Also please let me know if this was helpful information.

Friday, October 27, 2017

Arizona Military Family Relief Fund Tax Credit

Military Family Relief Fund 2017 Tax Credit

In the continuing explanations of Arizona tax credits leads us to the Military Family Relief Fund Tax Credit.  This credit is administered through the Arizona Department of Veterans' Services and the fund was established to provide financial assistance to families of currently deployed Service Members and post-9/11 Military and Veteran Families.  This fund is authorized to accept $1,000,000 in donations and up to that amount qualify for the credit.  This limit means that unlike the other common AZ credits that allow for donations to be made any time during the year or even up to April 15th, once the DVS receives donations totaling $1,000,000 all excess funds are returned and no credit is available.  Donations are determined on a first come, first served basis.

The credit amount is up to $200 for single taxpayers and $400 for married taxpayers. This donation has to be made via check and the DVS provides a form that contains the required information and can be used when submitting the donation.  The required information is full name, address, and last 4 digits of Social Security Number.  To claim this credit, you must have received a receipt from DVS that shows this information plus the amount donated and confirm that the donation qualifies for the credit.

Here is a copy of a recent receipt:

As of this writing, the donations to the fund were $904,586 which leaves $95K additional donations available to be received.  If you want to donate, please visit the Relief Fund page at the AZ DVS here: MFRF.  You can also find the donation form, available in PDF format there.

This credit is set to expire after the 2018 tax year, unless the AZ legislature extends or renews this program.  So be sure to start planning accordingly and maybe speak with your representative about extending this program/credit.

Wednesday, October 25, 2017

Arizona School Tax Credits - 2017

Arizona Tax Credits related to Schools

Arizona has 5 common tax credits, of which 2 are related to schools.  These 2 credits are:
  • Contributions Made or Fees Paid to Public Schools
  • Contributions to School Tuition Organizations

This post is intended to provide more information about these specific tax credits.

Public School Credit

The Public School Tax Credit is available up to $200 for Single taxpayers, $400 for Married taxpayers.  This credit can be done during the tax year or up until April 15th of the following year in which it will be claimed (so this credit can be made up to April 15th of 2018 and still claimed as an AZ credit on the 2017 tax return).

Individual taxpayers subject to Arizona tax, can claim this credit on their Arizona income tax return for donations or fees paid directly to Arizona schools (public or charter) that are for extracurricular activities, character education programs, standardized testing fees for college credit or readiness, preparation courses and materials for standardized testing (i.e. for SAT or ACT tests), career and technical education industry certification assessment or CPR training pursuant to ARS 15-718.01.

Extracurricular activities are school sponsored activities that may require a fee from enrolled students.  These may include activities such as sports or band participation fees.  Field trips that require a fee paid to the school, like a 5th or 6th grade trips.

If the fees are paid for a specific student, then those amounts will most likely not qualify as Federal charity donation deduction but still would qualify for the AZ tax credit.

Private School Tuition Organization Credit

The Private School Tuition Organization Credit is available up to $1,089 for Single taxpayers, $2,177 for Married taxpayers.  This credit can also be made either during the tax year or until April 15th of the following year and count for the prior year (donations made by April 15th, 2018 can be claimed as 2017 AZ tax credits).

This credit is made to Organizations that provide scholarships for student attending private schools, K-12th grade.  The Department of Revenue provides a list of eligible School Tuition Organizations that can receive these contributions.  That list is located here: List of School Tuition Organizations Certified to Receive Donations for the Individual Income Tax Credit These organizations are required to provide 90% or more towards scholarships for students.

The state prohibits donors from trading credits (I will pay for your kid, if you pay for mine), so avoid promising to do the credit in exchange for someone else to make the credit donation on your child's behalf.

These organizations are 501(c)3 charitable organizations, so your donation may qualify as a Federal charity donation in addition to the AZ tax credit.

Additional Information:

The state of Arizona has a Publication that provides additional information for the School Tax Credits, in more detail than has been provided in this blog post.  That Publication can be found here.

Thanks for visiting the blog.  If you have any questions, please feel free to post a comment.

Friday, October 20, 2017

Arizona Tax Credit Series - 2017 Edition

Common AZ Tax Credits updated for 2017 Limits

At our office, I often get asked about the Arizona tax credits, the donation amounts, who to donate to and have to clear up some misinformation about coordination of the credits.  So each year I undertake to write up about the popular AZ tax credits and inform about the changes and increases to those credits.

For starters, these credits qualify the contributor to a dollar for dollar credit against the AZ state income tax (these credits may qualify for a Federal charity deduction, which may result in a tax savings of anywhere from 15% - 39.6% of the donation amounts).  A tax credit is a great tax savings because of that dollar for dollar application, but only if you have income subject to tax in the state of AZ. (Sorry to our neighbors in California or New Mexico)

The credits that I usually point clients to are the following (Credit Title and maximum donation amount for single/married taxpayers):

  • Arizona Military Family Relief Fund ($200/$400) 
  • Contributions to Qualifying Charitable Organizations ($400/$800) formerly known as the Working Poor Credit - List of organizations here: 2017 Certified Charities
  • Contributions to Qualifying Foster Care Organizations ($500/$1,000) - List of organizations here: 2017 Certified Foster Care Charities
  • Contributions Made or Fees Paid to Public School ($200/$400)
  • Contributions to School Tuition Organization ($1,089/$2,177) - List of organizations here: School Tuition Organization List
The Arizona Military Family Relief Fund, if interested in making that donation, is approaching their cap in donations.  This credit is only allowed to receive up to $1,000,000 in donations each year and must return any excess donations received after reaching that cap, as of 10/19/2017 the fund had received $819,086 in donations.  To make the donation, send a check with the donation form (located here: MFRF 2017 Donation Form.

The other credits I will provide information about in separate blog posting a little later.  

Please consult with a tax advisor (or our office) to see if these tax credits would be beneficial to you and be careful not to do too much in tax credits as these are not refundable (the refund generated from these credits is because of tax withholding or estimated tax payments that have now been offset by these credit donations).

Monday, July 17, 2017

How do I pay my taxes?

So you have prepared your taxes and determined that you have a balance due, what do you do next? A question that we receive a lot in the office is: How can I make the payment for the balance due on my income taxes?  What are the options if I can't make a full payment?

The first recommendation when you have a balance due, to either the IRS or a state agency, is to pay that balance by the due date or as soon as possible after that to either avoid or reduce late payment penalty and interest on the balance. 

What are available payment options for paying in full?

You can pay by remitting a check or money order payable to the United States Treasury for balances due on your Federal taxes or a check payable to the state taxing authority (for AZ that would be Arizona Department of Revenue).  As I joke with some of our clients, paying via check is starting to go the way of the dodo bird, not very common anymore.  

Another alternative is to have the amount debited from your account.  This can be done at the time of filing, if requested when electronically filing the tax return.  Other options to pay via debit include setting up a debit via IRS' Direct Pay or for AZ it can be done at Make A Payment.  After entering information about the payment request, you will be prompted to enter the bank information and schedule the payment date.  If you pay via bank debit through these websites, there is no additional charge by the taxing authority.

You can also pay via Debit or Credit card, plus a fee that is added to the balance to be paid.  To initiate the payment to the IRS, you can go to IRS webpage Pay by credit or debit card.  You can then select the card processor on that webpage.  These same processors accept payments for other tax agencies (state income tax, county real estate taxes, etc.).  The fees have come down in the last year or two but it will cost an extra almost 2% to pay via credit card.  A debit card has a flat fee that is around $3 to process the payment.

If you can't pay the entire balance at one time, there are installment payment options available.  The IRS has an online payment agreement request here: Online Payment Agreement Request or you cna file a request via mail on Form 9465.  If the balance due is below certain limits (for individuals this amount is $10,000), it is almost assured that you will be approved for the payment agreement.  For larger amounts, there may be other documentation, requirements or information to be provided to demonstrate the financial need for the payment plan.  For example, the IRS may require direct debit of the payment amount, require detailed financial information with the installment agreement on Form 433-D, and in some instances the IRS may require that a lien be put in place to secure the interests of the United States.

As with all things, each situation can be unique so please contact the office to discuss how your situation may need to be dealt with.

Did you find this information helpful?  Please leave a comment if you have more questions or need something clarified.

Friday, July 7, 2017

Capital Assets, Investment Losses & Tax Treatment

Right off the bat, let me clarify that this will not be an exhaustive discussion of the topic of the tax treatment of investments in general as there are countless books, websites, radio programs, college classes and other educational opportunities devoted to the vast depth of that topic.  Instead I want to limit this to touching on the topic of capital assets and in particular the tax treatment of capital losses.

You may be asking what is a capital asset?  Almost everything you own is a capital asset as defined by the Internal Revenue Service (see here for more info), that is used for personal or investment purposes. Examples of capital assets include your personal auto, your house, a second home, stocks, bonds, mutual funds.  

Determining the type of asset is important, as there may be tax benefits for selling investment assets at a loss.  Personal items that are sold at a loss do not provide a tax benefit as there was no motive to make money or a profit on the purchase, for example your personal automobile (unlike collectors that sell cars at the Barrett Jackson's auction).

Now we have defined capital asset and let's assume that you sell that asset (stock, mutual fund, real estate), how do you determine if it was a gain or a loss on the sale?  To determine, you must determine your cost basis in the asset, this will generally be the price paid to acquire the item (plus any allowed carrying costs or other expenses that get added as basis).  You subtract that cost basis from the sale price, deduct any expenses for selling the item (commissions, for example) and the net result is either your gain or loss.

If you calculate the result and have a loss, what next?  For tax purposes, you can deduct a capital loss on your tax return up to certain limits, losses are first offset by any capital gains and then any excess is limited to $3,000 per year.  That $3,000 loss can offset any other type of income, so that is nice but what happens if you have a loss of $100,000?  The loss can be taken until used up, subject to the limits just explained (to offset other capital gains and then up to $3,000 per year).  The time expiration to these carryovers is that when you pass away, the losses are die with you.

I had a discussion recently with a colleague/client about his excessive loss carryover (he has enough losses to last a few hundred years) about strategies to use up those losses.  His potential solution was to invest in a mutual fund that has large capital gains distributions, except mutual funds treat short term capital gains as ordinary income (dividends) and not as capital gains.  So in this case, the $3,000 per year limit would still be applicable.  My suggestion was an investment partnership that would report short term and long term capital gains in a way that would allow for the offset against capital loss carryovers.  I am hoping that he can find a investment that would allow for this treatment.

Do you have tax questions about investment income?  Please shoot me any questions or comments.