money growth

Tax Harvesting

No one likes to lose money, but the good news is that certain investment losses may be tax-deductible, so this is a good time of year to get an idea about how your investments are performing.

KNOW THE DIFFERENCE

Not all investment losses qualify for a federal tax deduction. First, you realize a capital gain or loss only by selling the investment. A paper loss on an investment that you continue to hold is not considered a loss for tax purposes, just as a paper gain isn’t a taxable event until you realize gains by selling the investment.

When you realize investment losses, offset them with investment gains. For example, let’s say you sell some investment losers for a $5,000 loss in 2018. You know this by subtracting what you sold the investment for from what you paid for it, called the basis. Then you sell a few winning investments that give you $4,000 in taxable gains. Subtract your loss from your gain, and you get a total loss, in this case, of $1,000.

CAP GAINS LIMIT

Not all capital gains and losses are treated the same. Long-term capital gains are on investments you hold for at least a year, while short-term investment results are realized when you sell an investment you owned for a shorter time period.

You also need to be aware of the annual $3,000 capital loss deduction limit. Losses over this amount may be carried forward to the next year’s tax return.

BE CAREFUL

Work with your accounting professional to make sure you can take advantage of tax-loss harvesting, as well as any other tax break the IRS offers. Also, some investments that are temporary losers may become long-term winners, so keep your long-term investing goals in mind before deciding whether to sell any investment.

originally printed in Client Line Newsletter

more income tax changes

More About Tax Changes

Income Tax Changes 2018 and Beyond

While most taxpayers are now aware of lower federal tax brackets and other changes in the Tax Cuts and Jobs Act of 2017, some may be unaware of less publicized provisions of the new law. These tax changes feature a little goods news, and a bit of bad news.

BAD NEWS

Bad news first. Previously, you could deduct a variety of miscellaneous itemized expenses if they were more than 2% of your adjusted gross income. This provision is gone, which is bad news for people who spend significant money on uniforms, professional development and anything else job-related that employers don’t reimburse. Teachers, though, at least get to keep a $250 deduction for classroom and development expenses.

Other deductions that are gone include advisory fees, tax preparation costs and job search expenses. Also significant for homeowners in high-tax states is how much they may deduct annually for state, local, sales and real estate taxes. The limit is $10,000.

GOOD NEWS

If you still itemize, one piece of good news is that starting in 2018, there are no longer income limitations as to who can itemize. Those taxpayers who want to give more of their income to qualified charities are in luck. The cap on charitable contributions as a percentage of adjusted gross income increased from 50% to 60%.

The Alternative Minimum Tax exemption increased from $84,500 to $109,400 for married taxpayers filing jointly and from $54,300 to $70,300 for single taxpayers. The exemptions also phase out at much higher numbers than before.

MORE GOOD NEWS

One final huge plus for those with significant assets is the doubling of the federal estate tax exemption to $22.4 million for couples and $11.2 million for individuals. While on the subject of estates, also remember that the annual gift tax exemption per person rose from $14,000 in 2017 to $15,000 this year, indexed for inflation. Talk to your tax professional to learn more.

 

Original article published in Client line

pass through income.

What is Pass-Through Income Tax

One of the highlights of the Tax Cuts and Jobs Act of 2017 is the new treatment of pass through income.

What is Pass Through Income Tax?

Pass-through income is business income that is “passed through” and taxed at a taxpayer’s individual income tax rate. This contrasts with the treatment of a business structured as a C corporation, whose income is taxed at a corporate tax rate.

WHAT’S NEW?

New federal law now allows taxpayers to deduct a portion of pass-through business income on their tax returns. Joint filers with income up to $315,000 (and single filers up to $157,500) can deduct 20% of this type of taxable income starting in 2018. The deduction is more complicated for tax filers above that threshold, because it’s limited to the greater of 50% of the business’s W-2 wages or another calculation that includes the cost of acquired property — or 20% of their business income, if that’s less. The deduction phases out between $315,000 and $415,000.

WHO GETS IT?

Any sole entrepreneurship or business structured as a limited liability company (LLC), partnership or S corporation.

BY THE WAY

The tax savings this pass-through provision offers taxpayers won’t necessarily apply to state taxes, which may continue to use different formulas to determine your state tax liability.

Talk to your tax professional to learn more.

Valuing Your Business

Valuing Your Business -How much is your business worth?

How do you determine the value of your business?

If you had to sell your business today, would you know how much it is worth? Would you know how much your business is worth if you needed a loan? How about the value of your business so you can take on a partner?

Talk to the Experts

Understanding the dollar value of a company is crucial to business owners, who may have an outsized portion of total wealth tied up in their companies. But the process can seem daunting to the uninitiated.  Begin by talking to a tax professional who is experienced in this area, or consider hiring a valuation expert with credentials from the American Society of Appraisers, the Institute of Business Appraisers or the National Association of Certified Valuators and Analysts.

Tangibly Speaking

While there are a variety of valuation approaches, they all quantify tangible assets. This is basically a company’s net worth, which includes ownership of physical assets such as machinery, equipment and work space. As with personal net worth, you would also subtract liabilities, including outstanding loan balances and depreciation.

Intangible Assets

While calculating the value of tangible assets is relatively straightforward, determining the value of intangible assets might take more doing. Intangible assets include things like copyrights, patents, licensing, franchise agreements, and goodwill and are important when valuing your business.

Goodwill

Ultimately, reputation can make or break a company’s long-term prospects, and goodwill includes the components that affect that reputation. Goodwill includes your company’s standing among customers and peer firms. It can include the quality and experience of your workforce and relationships with suppliers.

Establishing Value

Add both tangible and intangible assets to your firm’s balance sheet, which lenders, partners and future buyers may use to determine its value. It can show you areas like inventory purchases where you can increase value, or it can identify areas such as liquidity ratios that might detract from value. Talk to us to learn more.

Client Line Newsletter Original Article is here

Seminars on the New Federal Tax Law

New Federal Tax LawGot Tax Questions?

The new federal tax law changes have a lot of people and business owners asking, “How will this impact me?”  To answer those questions and more, Hedley & Co is hosting two in person seminars to cover the changes in the Federal Tax Law.  Please join us at one of the events listed.  You can register by filling out the form below.  If you are an existing client, there is no charge for the event, otherwise there is a $30 fee.

Session 1:

  • When: Tuesday, February 6th 4:00 PM
  • Where: Franklin Plaza, Four 4th Street, Troy, NY 12180

Session 2:

  • When: Wednesday, February 14th 8:00 AM (SOLD OUT)
  • Where: Community Room, Saratoga National Bank, 386 Clifton Park Center Road, Clifton Park, NY 12065

 

2018 The Year of the Divorce

2018 Setting Up to be the Year of the Divorce

The Tax Cut and Jobs Act of 2017 will likely make 2018 the Year of the Divorce.

Anyone who has been contemplating divorce may be pushed to carry it out because of the
incentive created in the latest tax reform act.

For 75 years, the tax law allowed alimony (spousal maintenance) payments to be
deducted from the payor’s taxable income. However, the new tax law will no longer
allow the payor to deduct alimony payments nor require the payee to include alimony
received as taxable income. This change will be effective for divorce agreements
executed or modified after December 31, 2018.

Impact on Alimony

Unfortunately, alimony currently is a great tool in negotiating the final details of a
divorce and without the tax incentive, many divorce experts fear negotiations will be
more difficult and the payee spouse will receive less money because more will be going
to taxes.

As an example, assume alimony is set at $36,000/year and the payor spouse is in a higher
33% tax bracket and the payee spouse is in a lower 15% tax bracket. The payor would
have a tax deduction of $11,880 and the payor would pay tax of just $5,400 on the same
income. Between the two spouses, they save $6,480 in taxes and the payor spouse
received a tax benefit to make the payments more affordable and the payee spouse, who
actually received the money, would pay taxes on it. With the new tax law, the higher-
income spouse will have to not only pay $36,000 to the other spouse but, will have to pay
taxes of $11,880 on the $36,000 as well. Or, if the payor is only willing to pay the after-
tax equivalent the payment will be $24,120 while the payee spouse would expect the
same after-tax payment under the prior law of $30,600 per year.

Impact on Child Support

In addition, some states like New York, take alimony into effect when calculating child
support. Child support calculations currently take into account the combined net incomes
of both parties. Since the alimony payor’s net income will go down and the payee’s net
income will go up, the amount of child support received will go down if states do not
modify their formulas for child support.

Also, current prenuptial agreements may have assumed a tax deduction for alimony
payments which may have unintended consequences if not modified before December 31,
2018.

We have all heard of the marriage tax penalty but after 2018 there will certainly be a
divorce tax penalty as well.

If you are in the process of a divorce or contemplating one, let us help. Visit
http://www.hedleycpa.com/individual-services/divorce- financial-planning/ for more
information on how we can help.

A Bucket Strategy To Go With Your Bucket List

A Bucket Strategy To go with Your Bucket List

The baby boomers have re-defined everything they’ve touched, from music to marriage to parenting and, more lately, to what “old” means—60 is the new 50! Longer, healthier living, however, can put greater stress on the sustainability of retirement assets.

There is no easy answer to this challenge, but let’s begin by discussing one idea—a bucket approach to building your retirement income plan.

The Bucket Strategy can take two forms.

The Expenses Bucket Strategy

With this approach, you segment your retirement expenses into three buckets:

  • Basic Living Expenses—food, rent, utilities, etc.
  • Discretionary Expenses—vacations, dining out, etc.
  • Legacy Expenses—assets for heirs and charities

This strategy pairs appropriate investments to each bucket. For instance, Social Security might be assigned to the Basic Living Expenses bucket. If this source of income falls short, you might consider whether a fixed annuity can help fill the gap. With this approach, you are attempting to match income sources to essential expenses.

The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).

For the Discretionary Expenses bucket, you might consider investing in top-rated bonds and large-cap stocks that offer the potential for growth and have a long-term history of paying a steady dividend.¹,² Finally, if you have assets you expect to pass on, you might position some of them in more aggressive investments, such as small-cap stocks and international equity.³

International investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risk unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share price volatility.

The Timeframe Bucket Strategy

This approach creates buckets based on different timeframes and assigns investments to each. For example:

  • 1-5 Years: This bucket funds your near-term expenses. It may be filled with cash and cash alternatives, such as money market accounts. Money market funds are considered low-risk securities but they are not backed by any government institution, so it’s possible to lose money. Money held in money market funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Money market funds seek to preserve the value of your investment at $1.00 a share. However, it is possible to lose money by investing in a money market fund. Money market mutual funds are sold by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.
  • 6-10 Years: This bucket is designed to help replenish the funds in the 1-5 Years bucket. Investments might include a diversified, intermediate, top-rated bond portfolio. Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline.
  • 11-20 Years: This bucket may be filled with investments such as large-cap stocks that offer the potential for growth.²
  • 21+ Years: This bucket might include longer-term investments such as small-cap and international stocks.²

Each bucket is set up to be replenished by the next longer-term bucket. This approach can offer flexibility to provide replenishment at more opportune times. For example, if stock prices move higher, you might consider replenishing the 6-10 Years bucket even though it’s not quite time.

A bucket approach to pursue your income needs is not the only way to build an income strategy. But it’s one strategy to consider as you prepare for retirement.

  1. The market value of a bond will fluctuate with changes in interest rates. As rates rise, the value of existing bonds typically falls. If an investor sells a bond before maturity, it may be worth more or less that the initial purchase price. By holding a bond to maturity an investor will receive the interest payments due plus his or her original principal, barring default by the issuer. Investments seeking to achieve higher yields also involve a higher degree of risk.
  2. Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. Dividends on common stock are not fixed and can be decreased or eliminated on short notice.
  3. Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

Steps to Take If the IRS Sends a Letter - by Hedley & Co CPAs Saratoga

Steps to Take If the IRS Sends a Letter

What to do you do if the IRS send you a letter?

When the IRS needs to communicate with taxpayers about details with their taxes, it will most commonly send a letter in the mail. If you receive a letter from the IRS, you do not need to panic. Instead, here are some steps to take: 

Read everything thoroughly: Your letter will probably contain specific details and necessary actions. So be sure to read the whole letter.

Reply only if requested: You typically do not need to respond to a letter unless the IRS asks you to provide information or make a payment. Further, avoid calling the IRS. Instead, follow the preferred outreach as detailed in the letter.

Store the letter: Save any letters or notices that the IRS sends you along with your tax files for the year specified.

Respond with discrepancies: Contact the IRS if you believe that the details in the letter are incorrect. To do so, mail the IRS a letter detailing the discrepancy.
Other details may apply, and you can find more information on the IRS website.

* This information is not intended to be a substitute for specific individualized tax advice. We suggest you discuss your specific tax issues with a qualified tax advisor.

Tip courtesy of IRS.gov

Edit from Hedley & Co CPA’s – Call us!  Call our office if you receive a communication from the IRS that you are uncomfortable or confused about.  We will walk you through whatever process is needed.