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,

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 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

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.

How Can a Captive Insurance Company Benefit Your Business?

Business owners are generally more concerned with day to day business matters and may not realize some of the opportunities that may arise from solving problems. You may be concerned about the loss of key employees, vendors or major clients, legal expenses, or a myriad other concerns.  All of these can result in a catastrophic loss if they occur and are the types of items that can keep you up at night.  When dealing with all of this it isn’t often that a single solution can be found to solve multiple problems facing business owners, but there is such a solution available in the tax law.

One potential solution is known as a Captive Insurance Company (CIC).

The key difference with the insurance to be discussed here and insurance you obtain from your local insurance carrier is you own the insurance company. The Internal Revenue Code Section 831(b) effectively allows a business to claim a deduction of up to $2,200,000 in a calendar year and have that premium go to an insurance company that is owned by the business owner. The added benefit of the self owned insurance company is you do not pay any tax on the receipt of the insurance premium. Yes, you read that correctly, you deduct the premium from one company you own and exclude the income in another company you own.

So how can a Captive Insurance Company help your business?

Specifically, there are risks in your business that are uninsured or under insured. First you will need to determine the risks, the actuarial cost of the risk and determine a premium that an operating company will pay to the Captive Insurance Company. The operating company pays the premium to the Captive Insurance Company to cover those risks that are needed. It is important to note that the risks must be real, as an example you could not insure your local business facility against a tidal wave because no such risk of a tidal wave exists in upstate New York. As long as the annual premium paid to the Captive Insurance Company is under $2,200,000 the CIC will pay no tax on the receipt of the premiums. The Captive Insurance Company has certain obligations and liquidity needs to pay any claims that arise but it is also allowed to invest its assets. The income from its earnings is taxable.

What is this worth to you and your company?

Assume after doing the analysis we determine a premium for the series of risks is $1,000,000. Your company pays and deducts the $1,000,000 business income thereby reducing your taxes. If you had not deducted the $1,000,000 then your business would have an additional $1,000,000 of income. Therefore, you would be in the highest tax bracket for Federal purposes which is 39.6% (not including the effective rate increase from various phase outs) or an effective rate as high as 43.592% after taking into account the effective costs of phaseouts plus New York Taxes of anywhere from 6.85% to even 8.82%. These make an effective combined tax rate with federal and NYS taxes of 50% or greater. That $1,000,000 deduction results in a savings of $500,000. Remember that your CIC does NOT pay tax on the $1,000,000 of revenue as illustrated n the example. At this point you have saved $500,000 or more in tax. Furthermore you have protected yourself against claims and liabilities which, up to this point, have not been covered.

As you fast forward a few years and insure your risks, pay claims from your CIC as claims arise and after a few years the company has sufficient reserves on hand to pay claims. At this point the Captive Insurance Company can distribute the funds as long as it does not jeopardize its reserves. These distributions would be taxable to the individual owners at the long term capital gains rate as a qualifying dividend. Currently the qualifying dividend rate ranges from 0% to 20% plus the 3.8% ACA tax. So the tax cost of receiving the dividend in current law may be 23.8% for a qualifying dividend (exclusive of effective tax costs of phaseouts) or 24.592% with effective costs of phaseouts plus the NYS rate of anywhere from 6.85% to even 8.82%. Therefore the tax paid on receiving the qualifying dividend is approximately 30%. A business can deduct the premium in one year, save taxes at perhaps at rates of 50% or higher and then several years later receive earnings back from the CIC and pay taxes at a rate of closer to 30%. This is a 20 percentage point benefit to the owner.

The CIC needs to be properly structured, designed for risk transfer, and managed as an insurance company to be acceptable. The CIC may be owned by the owners of the operating company or may be owned by others as well. CICs have expenses separate from the current operating company to maintain and operate on an annual basis. It is safe to assume the operating costs of the CIC can be $50,000 to $70,000 annually but if you have saved $500,000 in taxes you are still ahead $430,000, this I argue is an expense well worth having.

Hedley & Co Certified Public Accountants can help you determine if the Captive Insurance Company is right for you and help you protect your business, solve the problems that concern you and even save money.

Estimated Tax Payments

Estimated Tax Payments — AN OVERVIEW

Are you on track for making your estimated tax payments for the 2017 tax year?

Here is what you need to know.


Whether it’s through payroll withholding, quarterly payments, or a combination, the IRS requires taxpayers to pay a certain amount of income tax during the year. The total amount you’re required to pay depends on your adjusted gross income (AGI) for the previous year. For 2017, your “required annual payment” is the smaller of:

  • 90% of the tax that will be shown on your 2017 return or
  • 100% of the tax shown on your 2016 return (110% if your AGI exceeded $150,000 in 2016 or $75,000 if you are married filing separately).


For calendar-year taxpayers paying their estimated taxes in installments, payments are generally due on the 15th of April, June, September, and January of the following year. Each of the four installments generally should equal at least 25% of your required annual payment. If you receive income unevenly (because you have a seasonal business, for example), you may be able to vary your payment amounts and still avoid a penalty by using the “annualized income” method.


If you do not pay your estimated tax by the due date, the IRS may assess a penalty equal to the product of the IRS interest rate on deficiencies times the amount of the underpayment for the period of the underpayment.*

If you discover that you’ve been underestimating your taxes, you may be able to resolve the problem by requesting an increase in withholding from your or your spouse’s paychecks for the remainder of the year. Or, if you are taking taxable distributions from an individual retirement account, 401(k), or other retirement plan, you could increase the withholding from year-end distributions. With either alternative, the IRS will apply the withheld tax pro rata over the tax year to reduce prior underpayments of estimated tax.

* You won’t owe an underpayment penalty if the tax shown on your 2017 return — reduced by withholding taxes paid during the year — is less than $1,000.

Need help?  Contact Hedley & Co for your tax planning needs.

Can You Avoid Early Withdrawal Penalties from your Retirement Account?

How can you avoid Early Withdrawal Penalties?

If you’re saving for retirement in a qualified plan sponsored by your employer, such as a 401(k), or in a traditional individual retirement account (IRA), you need to remember that the IRS generally imposes a 10% penalty on any withdrawals you make before you turn age 59½.* This penalty is in addition to any income taxes due on the withdrawal. However, there are several exceptions that may apply.**


Both qualified retirement plans and IRAs allow penalty-free distributions in cases of disability or death. “Disability” generally means that the individual is unable to engage in any “substantial gainful activity.”


Withdrawals from an IRA or a qualified retirement plan to pay deductible medical expenses that exceed 10% of adjusted gross income may avoid early withdrawal penalties. The withdrawal must occur in the same year the expenses are paid.


You can make penalty-free withdrawals from an IRA to pay health insurance premiums if you have received unemployment compensation for at least 12 weeks (or could have except for being self-employed).


You can withdraw up to a maximum of $10,000 penalty free from your IRA to buy, build, or rebuild a principal residence for an eligible first-time homebuyer. (The buyer can be yourself, your spouse, or any child or grandchild of you or your spouse, provided the buyer and his/her spouse have not owned another principal residence for at least two years.) This is a lifetime limit.


You may make penalty-free withdrawals from your IRA to pay qualified higher education expenses for you, your spouse, or any children or grandchildren of you or your spouse.


Withdrawals from an IRA or qualified retirement plan that are part of a series of substantially equal periodic payments over your lifetime or the lifetimes of you and the designated beneficiary may be penalty free. (Requirements apply.)

* A 10% penalty may also apply to taxable distributions taken from a Roth IRA prior to the owner turning 59½, but a different set of rules applies.

** The list presented is not all-inclusive

tuition tax credits

Tuition Tax Credits

Education Tuition Tax Credits

College expenses are on the rise. The College Board reports that the average cost of a college education, including room and board, has risen faster than the inflation rate in recent years, topping $20,000 for public four-year institutions and $45,000 for private colleges for the 2016-2017 academic year.*

For many Americans, this burden may be alleviated through the use of education tax credits. There are two types — the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). Both require that qualified education expenses be incurred by you, your spouse, or a dependent, and credits may not be combined for any one student for a single tax year.


The AOTC provides a dollar-for-dollar tax reduction of up to $2,500 of the cost of tuition, books, and other required course material for up to four tax years. Specifically, the tuition tax credits is allowed for 100% of the first $2,000 of qualifying expenses, plus 25% of the next $2,000 (for each qualifying student). Should the credit exceed the amount of tax you owe, you may be eligible for a refund of 40% of the credit or $1,000, whichever is less.

You may generally claim the full AOTC if your modified adjusted gross income (MAGI) for the tax year is under $80,000 ($160,000 if married filing jointly). However, the credit starts to phase out once MAGI exceeds those levels and is no longer available once MAGI reaches $90,000 ($180,000 if married filing jointly).


The LLC is a tuition tax credit of up to $2,000 per tax return for tuition and fees, calculated as 20% of the first $10,000 of expenses. In contrast to rules under the AOTC, qualified expenses for the LLC do not include academic supplies, and no portion of the credit is refundable. However, the LLC is available for an unlimited number of years, and it does not require the student to be enrolled in a degree program.

You may receive the full credit if your MAGI is less than $56,000 ($112,000 if filing jointly). The amount of the LLC phases out when MAGI falls between $56,000 and $66,000 ($112,000 and $132,000 if married filing jointly) and is not available when MAGI exceeds these upper limits.

* The College Board, Tuition and Fees and Room and Board Over Time (Public school costs are based on in-state rates.)

We can help you take advantage of the tax credits you are allowed with our tax preparation service. 

CDFA Certified Divorce Financial Analyst

Why Use a CDFA in your Divorce?

A Certified Divorce Financial Analyst (CDFA) Can Help

The process of a divorce can last a year or more. A Certified Divorce Financial Analyst (CDFA) can explain all the financial aspects of your decisions and help you to make smart choices throughout the process.

A CDFA works with you and your attorney to forecast the long-term impact of the divorce settlement. This includes tax liabilities, long term and deferred savings, retirement and college savings plans.

What is the real cost of your divorce?

A CDFA can assist you on planning a budget and help you adjust to the cost of your new living arrangements. Life insurance, health insurance and cost of living increases need to be considered when agreeing on a financial settlement.

There are a lot of misconceptions around the divorce process. A CDFA can help cut through the financial lingo and bring greater understanding to your situation. A CDFA can also help you build a realistic, stable financial budget for both the long and short term

A CDFA will help you take stock of your current financial situation, including:

  • The current balance in all bank accounts
  • The value of any brokerage accounts
  • The value of investments, including any IRAs
  • Your residence(s)
  • Your autos
  • Your valuable antiques, jewelry, luxury items, collections, and furnishings
  • Examine copies of the past two or three years’ tax returns
  • Make sure you know the exact amounts of salary and other income earned by both yourself and your spouse
  • Examine papers relating to insurance-life, health, auto, and homeowner’s-and pension or other retirement benefits
  • List all debts you both owe, separately or jointly. Include auto loans, mortgage, credit card debt, and any other liabilities.

This will help you to make smart decisions regarding how debts incurred during the marriage are to be paid off and obtain preliminary information for the eventual division of property. Assessing the above is critical in planning a secure financial future.

Contact our office – we have the areas only Certified Divorce Financial Analyst who is also a CPA.  A true asset to your post-divorce financial planning process.