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2017 Recap of Tax Provisions for Individuals
Many of the tax changes affecting individuals and businesses for 2017 were related to the Protecting Americans from Tax Hikes Act of 2015 (PATH) that modified or made permanent numerous tax breaks (the so-called "tax extenders"). To further complicate matters, some provisions were only extended through 2016 and are set to expire at the end of this year while others were extended through 2019. With that in mind, here's what individuals and families need to know about tax provisions for 2017.
The additional standard deduction for blind people and senior citizens in 2017 is $1,250 for married individuals and $1,550 for singles and heads of household.
Income Tax Rates
Due to inflation, tax-bracket thresholds increased for every filing status. For example, the taxable-income threshold separating the 15 percent bracket from the 25 percent bracket is $75,900 for a married couple filing a joint return.
Estate and Gift Taxes
Alternative Minimum Tax (AMT)
For 2017, exemption amounts are $54,300 for single and head of household filers, $84,500 for married people filing jointly and for qualifying widows or widowers, and $42,250 for married people filing separately.
Marriage Penalty Relief
Pease and PEP (Personal Exemption Phaseout)
Flexible Spending Accounts (FSA)
Specifically, in the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,600 limit for the subsequent plan year.
Further, employers may allow people to carry over into the next calendar year up to $500 in their accounts, but aren't required to do so.
Long Term Capital Gains
Individuals - Tax Credits
Child and Dependent Care Credit
For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.
Child Tax Credit
Earned Income Tax Credit (EITC)
Individuals - Education Expenses
Coverdell Education Savings Account
American Opportunity Tax Credit
Employer-Provided Educational Assistance
Lifetime Learning Credit
Student Loan Interest
Individuals - Retirement
Please call if you need help understanding which deductions and tax credits you are entitled to.
Business Tax Provisions: the Year in Review
Whether you file as a corporation or sole proprietor here's what business owners need to know about tax changes for 2017.
Standard Mileage Rates
Health Care Tax Credit for Small Businesses
In 2017 (as in 2016, 2015, and 2014), the tax credit is worth up to 50 percent of your contribution toward employees' premium costs (up to 35 percent for tax-exempt employers). For tax years 2010 through 2013, the maximum credit was 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities.
Section 179 Expensing and Depreciation
The Section 179 expense deduction was made permanent at $510,000 by the Protecting Americans from Tax Hikes Act of 2015 (PATH). For equipment purchases, the maximum deduction is $500,000 of the first $2.03 million of qualifying equipment placed in service during the current tax year. The deduction is phased out dollar for dollar on amounts exceeding the $2 million threshold amount (indexed for inflation) and eliminated above amounts exceeding $2.5 million. In addition, Section 179 is now indexed to inflation in increments of $10,000 for future tax years.
The 50 percent bonus depreciation has been extended through 2019. Businesses are able to depreciate 50 percent of the cost of equipment acquired and placed in service during 2015, 2016 and 2017. However, the bonus depreciation is reduced to 40 percent in 2018 and 30 percent in 2019. The standard business depreciation amount is 25 cents per mile.
Please call if you have any questions about Section 179 expensing and the bonus depreciation.
Work Opportunity Tax Credit (WOTC)
Extended through 2019, the Work Opportunity Tax Credit has been modified and enhanced for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) and is generally equal to 40 percent of the first $6,000 of wages paid to a new hire. Please call if you have any questions about the Work Opportunity Tax Credit.
SIMPLE IRA Plan Contributions
Please contact the office if you need help understanding which deductions and tax credits you are entitled to.
Five Common Budgeting Errors & How to Avoid Them
When it comes to creating a budget, it's essential to estimate your spending as realistically as possible. Here are five budget-related errors commonly made by small businesses and some tips for avoiding them.
Please call if you need assistance setting up a budget to meet your business financial goals.
Tax Advantages of Health Savings Accounts
While similar to FSAs (Flexible Savings Plans) in that both allow pre-tax contributions, Health Savings Accounts or HSAs offer taxpayers several additional tax benefits such as contributions that roll over from year to year (i.e., no "use it or lose it"), tax-free interest on earnings, and when used for qualified medical expenses, tax-free distributions.
What is a Health Savings Account?
A Health Savings Account is a type of savings account that allows you to set aside money pre-tax to pay for qualified medical expenses. Contributions that you make to a Health Savings Account (HSA) are used to pay current or future medical expenses (including after you've retired) of the account owner, his or her spouse, and any qualified dependent.
Caution: Medical expenses that are reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return are not eligible.
Caution: Insurance premiums for taxpayers younger than age 65 are generally not considered qualified medical expenses unless the premiums are for health care continuation coverage (such as coverage under COBRA), health care coverage while receiving unemployment compensation under federal or state law.
You cannot be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care and you cannot be claimed as a dependent on someone else's tax return. Spouses cannot open joint HSAs. Each spouse who is an eligible individual who wants an HSA must open a separate HSA.
An HSA can be opened through your bank or another financial institution. Contributions to an HSA must be made in cash. Contributions of stock or property are not allowed. As an employee may be able to elect to have money set aside and deposited directly into an HSA account; however, if this option is not offered by your employer, then you must wait until filing a tax return to claim the HSA contributions as a deduction.
High Deductible Health Plans.
A Health Savings Account can only be used if you have a High Deductible Health Plan (HDHP). Typically, high-deductible health plans have lower monthly premiums than plans with lower deductibles, but you pay more health care costs yourself before the insurance company starts to pay its share (your deductible).
A high-deductible plan can be combined with a health savings account, allowing you to pay for certain medical expenses with tax-free money that you have set aside. By using the pre-tax funds in your HSA to pay for qualified medical expenses before you reach your deductible and other out-of-pocket costs such as copayments, you reduce your overall health care costs.
Calendar year 2018. For calendar year 2018, a qualifying HDHP must have a deductible of at least $1,350 for self-only coverage or $2,700 for family coverage. Annual out-of-pocket expenses (e.g., deductibles, copayments, and coinsurance) of the beneficiary are limited to $6,650 for self-only coverage and $13,300 for family coverage. This limit doesn't apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies.
Last month rule. Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers).
You can make contributions to your HSA for 2017 until April 17, 2018. Your employer can make contributions to your HSA between January 1, 2018, and April 17, 2018, that are allocated to 2017. The contribution will be reported on your 2018 Form W-2.
Summary of HSA Tax Advantages
Questions about HSAs? Don't hesitate to call.
Tax Reform Update: The Tax Cuts and Jobs Act
The Tax Cuts and Jobs Bill (H.R. 1) is the first significant tax reform effort undertaken by Congress in more than 30 years. The bill was passed by both the House and the Senate and signed into law by President Trump.
Tax Brackets. The number of tax brackets remains at seven; however, the tax rates and income covered have changed.
For individuals, the following tax rates apply:
For married couples filing jointly, the following rates apply:
Standard Deduction. The standard deduction increases to from $6,350 (2017) to $12,000 for individuals, from $9,300 (2017) to $18,000 for heads of household and from $12,700 (2017) to $24,000 for married couples.
Personal Exemption. The deduction for personal exemptions is repealed through 2025.
Child Tax Credit. The Child Tax Credit increases to $2,000 from the current $1,000. An additional $500 credit is provided for each non-child dependent. Also, Social Security numbers for children are required before claiming the enhanced credit.
Alternative Minimum Tax. The AMT remains but exemption amount increase to $70,300 for individuals and $109,400 for married filing jointly, affecting fewer taxpayers.
Capital Gains and Dividends. The maximum tax rate remains at 23.8% (20% plus the 3.8% Medicare tax for taxpayers with income above $200,000 or $250,000 married filing jointly). The 20% capital gains income threshold increases to $425,800 for other individuals ($479,000 for married taxpayers filing jointly).
Estate Tax. The exemption (currently $5.5 million) immediately doubles to $11.2 million in 2018 and remains at this level for the next six years, after which time the estate tax is is eliminated completely (tax year 2026 and beyond).
Education-Related Tax Credits and Deductions. 529 Savings Plans are expanded to allow some funds (up to $10,000 for certain expenses) to be used for K-12 education. Rollovers to Achieving a Better Life Experience (ABLE) Sec. 529A accounts will be allowed as well. The student loan interest deduction remains.
Mortgage Interest Deduction. Remains but with a few changes such as allowing interest deduction for up to $750,000 (currently $1 million) in mortgage principal on new homes. Existing mortgages are grandfathered in. Homes entered into contract before December 15, 2017, and closed on by April 1, 2018, are able to use the prior limit of $1 million.
Home-equity loans. The home-equity loan interest deduction is repealed through 2025.
State and Local Income Tax Deduction and Real Estate Tax Deduction. Preserved. Deduction allowed for up to $10,000 a year in state and local income or property taxes.
Note: Taxpayers who prepay 2018 state income taxes, a common tax strategy, can only take the prepaid 2018 amount as a deduction on their 2017 tax returns for the amount already assessed. For example, taxpayers can prepay their fourth quarter income taxes (typically due January 15, 2018) before December 31, 2017.
Charitable Contributions. Deductions for charitable donations remain; however, for charitable contributions of cash to public charities the percentage of income limit increases to 60%.
Medical Expense Deductions. The Medical expense deduction (currently 10% of AGI) is temporarily lowered to 7.5% of income for tax years 2017 and 2018.
Miscellaneous Deductions. Many are repealed through 2025 including those relating to tax preparation, alimony payments (after December 31, 2018), and moving expenses with the exception of the moving expense reimbursement for members of the Armed Forces on active duty who move because of a military order.
Adoption Tax Credit. Remains.
Electric Vehicles. The $7,500 tax credit (Sec. 30D) for the purchase of electric vehicles remains.
Individual Healthcare Mandate. Penalty is eliminated for tax years starting after 2018.
Corporate Tax Rate. Starting January 1, 2018, the corporate tax rate is reduced to a flat rate of 21% (down from 35%). The corporate AMT is repealed.
Territorial Taxation. Companies with offshore earnings, currently taxed at a 35% rate, would transition to a territorial tax system. Under the tax reform bill income derived from offshore earnings, if repatriated, would be subject to an effective tax rate of 15.5% for earnings held in liquid assets (i.e. cash) and 8% for illiquid (other) assets.
Business Interest. Small businesses (under $25 million) retain the ability to write off interest on loans subject to limitations.
Business Expensing. Businesses would be allowed to immediately write off the full cost of new equipment at 100% through tax year 2022, after which it would be phased down over a four-year period.
Business Entertainment Expenses Deduction. The deduction for business entertainment expenses is eliminated.
Pass-through Entities. The tax rate on pass-through business entities is reduced to a maximum of 20% for tax years starting January 1, 2018, and ending on December 31, 2025.
Low-income Housing Tax Credit. Remains.
Research & Development Tax Credit. Remains.
Work Opportunity Tax Credit. Remains.
Endowment Assets. A 1.4% excise tax is imposed on investment income derived from endowment funds at private colleges and universities. An exclusion is provided for an institution with less than 500 full-time equivalent students whose endowment (fair market value) is less than $500,000 per student.
Retirement Contributions Limits Announced for 2018
Cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for the tax year 2018 have been announced by the IRS. Here are the highlights:
In general, income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the saver's credit all increased for 2018. In addition, the contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased from $18,000 to $18,500. However, contribution limits for SIMPLE retirement accounts for self-employed persons remains unchanged at $12,500.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions; however, if during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-out amounts of the deduction do not apply. Here are the phase-out ranges for 2018:
The income phase-out range for taxpayers making contributions to a Roth IRA is $120,000 to $135,000 for singles and heads of household, up from $118,000 to $133,000. For married couples filing jointly, the income phase-out range is $189,000 to $199,000, up from $186,000 to $196,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
The income limit for the Saver's Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $63,000 for married couples filing jointly, up from $62,000; $47,250 for heads of household, up from $46,500; and $31,500 for singles and married individuals filing separately, up from $31,000.
Limitations that remain unchanged from 2017
Don't Forget about College Tax Credits for 2017
With another school year in full swing, now is a good time for parents and students to see if they qualify for either of two college tax credits or other education-related tax benefits when they file their 2017 federal income tax returns next year.
American Opportunity Tax Credit or Lifetime Learning Credit. In general, the American Opportunity Tax Credit or Lifetime Learning Credit is available to taxpayers who pay qualifying expenses for an eligible student. Eligible students include the taxpayer, spouse, and dependents. The American Opportunity Tax Credit provides a credit for each eligible student, while the Lifetime Learning Credit provides a maximum credit per tax return.
Though a taxpayer often qualifies for both of these credits, he or she can only claim one of them for a particular student in a particular year. To claim these credits on their tax return, the taxpayer must file Form 1040 or 1040A and complete Form 8863, Education Credits.
The credits apply to eligible students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions. The credits are subject to income limits that could reduce the amount taxpayers can claim on their tax return.
Normally, a student will receive a Form 1098-T from their institution by January 31, 2018. This form shows information about tuition paid or billed along with other information. However, amounts shown on this form may differ from amounts taxpayers are eligible to claim for these tax credits.
Many of those eligible for the American Opportunity Tax Credit qualify for the maximum annual credit of $2,500 per student. Students can claim this credit for qualified education expenses paid during the entire tax year for a certain number of years:
Here are some more key features of the credit:
Lifetime Learning Credit. The Lifetime Learning Credit of up to $2,000 per tax return is available for both graduate and undergraduate students. Unlike the American Opportunity Tax Credit, the limit on the Lifetime Learning Credit applies to each tax return, rather than to each student. Also, the Lifetime Learning Credit does not provide a benefit to people who owe no tax.
Though the half-time student requirement does not apply to the lifetime learning credit, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. Other features of the credit include:
Eligible parents and students can get the benefit of these credits during the year by having less tax taken out of their paychecks. They can do this by filling out a new Form W-4 with their employer to claim additional withholding allowances.
There are a variety of other education-related tax benefits that can help many taxpayers. They include:
Taxpayers with qualifying children who are students up to age 24 may be able to claim a dependent exemption and the Earned Income Tax Credit.
If you have any questions about college tax credits, please contact the office.
Take Retirement Plan Distributions by December 31
Taxpayers born before July 1, 1947, generally must receive payments from their individual retirement arrangements (IRAs) and workplace retirement plans by December 31.
Known as required minimum distributions (RMDs), typically these distributions must be made by the end of the tax year, in this case, 2017. The required distribution rules apply to owners of traditional, Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE) IRAs but not Roth IRAs while the original owner is alive. They also apply to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.
An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount on Form 5498 in Box 12b. For a 2017 RMD, this amount is on the 2016 Form 5498 normally issued to the owner during January 2017.
A special rule allows first-year recipients of these payments, those who reached age 70 1/2 during 2017, to wait until as late as April 1, 2018, to receive their first RMDs. What this means that those born after June 30, 1946, and before July 1, 1947, are eligible. The advantage of this special rule is that although payments made to these taxpayers in early 2018 can be counted toward their 2017 RMD, they are taxable in 2018.
The special April 1 deadline only applies to the RMD for the first year. For all subsequent years, the RMD must be made by December 31. So, for example, a taxpayer who turned 70 1/2 in 2016 (born after June 30, 1945, and before July 1, 1946) and received the first RMD (for 2016) on April 1, 2017, must still receive a second RMD (for 2017) by December 31, 2017.
The RMD for 2017 is based on the taxpayer's life expectancy on December 31, 2017, and their account balance on December 31, 2016. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. For most taxpayers, the RMD is based on Table III (Uniform Lifetime Table) in IRS Publication 590-B. For a taxpayer who turned 72 in 2017, the required distribution would be based on a life expectancy of 25.6 years. A separate table, Table II, applies to a taxpayer whose spouse is more than ten years younger and is the taxpayer's only beneficiary. If you need assistance with this, don't hesitate to call.
Though the RMD rules are mandatory for all owners of traditional, SEP and SIMPLE IRAs and participants in workplace retirement plans, some people in workplace plans can wait longer to receive their RMDs. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions; however, there may be a tax on excess accumulations. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.
For more information on RMDs, please call.
Flexible Spending Accounts (FSAs)
Flexible Spending Accounts or FSAs provide employees a way to use tax-free dollars to pay medical expenses not covered by other health plans. Because eligible employees need to decide how much to contribute through payroll deductions before the plan year begins, now is when many employers are offering employees the option to participate during the 2018 plan year.
Interested employees who wish to contribute to an FSA during the new year must make this choice again for 2018, even if they contributed in 2017. Self-employed individuals are not eligible.
An employee who chooses to participate can contribute up to $2,650 during the 2018 plan year (up from $2,600 in 2017). 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.
Throughout the year, employees can then use funds to pay qualified medical expenses not covered by their health plan, including co-pays, deductibles and a variety of medical products and services ranging from dental and vision care to eyeglasses and hearing aids. Interested employees should check with their employer for details about eligible expenses and claim procedures.
Under the use or lose provision, participating employees must often incur eligible expenses by the end of the plan year, or forfeit any unspent amounts. But under a special rule, employers may, if they choose, offer participating employees more time through either the carryover option or the grace period option.
Under the carryover option, an employee can carry over up to $500 of unused funds to the following plan year--for example, an employee with $500 of unspent funds at the end of 2018 would still have those funds available to use in 2019. Under the grace period option, an employee has until 2 1/2 months after the end of the plan year to incur eligible expenses--for example, March 15, 2019, for a plan year ending on December 31, 2018. Employers can offer either option, but not both, or none at all.
Employers are not required to offer FSAs. Accordingly, interested employees should check with their employer to see if they offer an FSA. Please call if you have any questions about how FSA contributions affect your taxes.
Tips for Taxpayers: Travel Expenses for Charitable Work
Do you plan to donate your time to charity this holiday season? If travel is part of your charitable giving, for example, driving your personal auto to collect donations from local business, you may be able to these travel expenses on your tax return and lower your tax bill. Here are five tax tips you should know if you travel while giving your services to charity.
1. Qualified Charities. To be able to deduct your costs, your volunteer work must be for a qualified charity. Most groups must apply to the IRS to become qualified. Churches and governments are generally qualified and do not need to apply to the IRS. Ask the group about its status before you donate. You can also use the "Exempt Organizations Select Check" search tool on IRS.gov to check a group's status or call the office.
2. Out-of-Pocket Expenses. You can't deduct the value of your services that you give to charity. But you may be able to deduct some out-of-pocket costs you pay to give your services. This can include the cost of travel, but they must be necessary while you are away from home. All out-of-pocket costs must be:
3. Genuine and Substantial Duty. Your charity work has to be real and substantial throughout the trip. You can't deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.
4. Value of Time or Service. You can't deduct the value of your time or services that you give to charity. This includes income lost while you serve as an unpaid volunteer for a qualified charity.
5. Travel You Can Deduct. The types of expenses that you may be able to deduct include Air, rail and bus transportation, car expenses, lodging costs, cost of meals, and taxi or other transportation costs between the airport or station and your hotel.
6. Travel You Can't Deduct. Some types of travel do not qualify for a tax deduction. For example, you can't deduct your costs if a significant part of the trip involves recreation or vacation.
Don't hesitate to call if you have any questions about travel expenses related to charitable work.
Tax Due Dates for December 2017
Employees who work for tips - If you received $20 or more in tips during November, report them to your employer. You can use Form 4070.
Corporations - Deposit the fourth installment of estimated income tax for 2017. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.
Employers Social Security, Medicare, and withheld income tax - If the monthly deposit rule applies, deposit the tax for payments in November.
Employers Nonpayroll withholding - If the monthly deposit rule applies, deposit the tax for payments in November.
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