Category Archives: Taxes

New york state taxes and Federal taxes have different rules.  Personal and Business Income Tax Preparation and Planning

 

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.

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.

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.

HOW MUCH DO I HAVE TO PAY?

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).

WHEN ARE ESTIMATED TAX PAYMENTS DUE?

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.

WHAT HAPPENS IF I MISS AN ESTIMATED TAX PAYMENT?

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.**

DISABILITY OR DEATH

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.”

UNREIMBURSED MEDICAL BILLS

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.

HEALTH INSURANCE PREMIUMS

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).

FIRST-TIME HOMEBUYER EXPENSES

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.

HIGHER EDUCATION EXPENSES

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.

EQUAL PAYMENTS

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.

AMERICAN OPPORTUNITY TAX CREDIT

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).

LIFETIME LEARNING CREDIT

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. 

The Home-Sale Gain Tax Exclusion

A Big TAX BREAK
Who doesn’t love a tax break? The reality is that for many taxpayers, there aren’t too many tax breaks they can take. However, if you’re thinking the time is right to put your house on the market and it has appreciated in value, you may be eligible for one of the most valuable tax breaks of all — the home-sale gain tax exclusion.

THE NUTS AND BOLTS
Here’s how it works: If you make a profit when you sell your principal residence, all or part of your gain may be tax free. Eligible individual filers may exclude up to $250,000 of gain from their income; married couples filing jointly may exclude up to $500,000 of gain.

USE AND OWNERSHIP TESTS
In general, this tax break is available only once every two years. To qualify, you generally must have owned and used the home as your principal residence for at least two years (a total of 24 full months or 730 days) during the five-year period ending on the date of the sale. The ownership and use periods don’t necessarily have to coincide.

Only one spouse must pass the ownership test, although neither spouse may have excluded gain from a previous home sale during the two-year period ending on the sale date. As for the use test, both spouses must pass it.

REDUCED EXCLUSION MAY BE AVAILABLE
If you have to sell your home because of a change in employment, you move for health reasons, or there are other qualifying “unforeseen circumstances,” you might qualify for a reduced exclusion. The amount of the reduced exclusion is based on the portion of the two-year use and ownership periods you satisfy.

 

The general information provided in this publication is not intended to be nor should it be treated as tax, legal, investment, accounting, or other professional advice. Before making any decision or taking any action, you should consult a qualified professional advisor who has been provided with all pertinent facts relevant to your particular situation.   Content courtesy of Client Line Newsletter

MANAGING TAXES on Your Retirement Savings

Managing Taxes on Your Retirement Savings

The money you save and invest in your traditional individual retirement account (IRA) or 401(k) plan can compound tax deferred for as long as you keep the money in your retirement account. Unfortunately, however, you’ll have to pay income taxes on withdrawals. How can you manage the taxes on your retirement savings? These strategies could help.

MAINTAIN YOUR TAX DEFERRAL

Cashing out a 401(k) means you may end up owing a 10% early withdrawal penalty as well as income taxes, leaving you with significantly less money to spend or reinvest. Instead, keep the money in the plan or roll it into another employer’s tax-deferred retirement plan or an IRA.

FOCUS ON RMDS

Generally, you are obligated to start taking annual required minimum distributions (RMDs) from your tax-deferred accounts after you reach age 70½. If you fail to make a required withdrawal, you’ll face a penalty of 50% of the amount that should have been withdrawn.

Taking smaller distributions before you are required to spreads the tax bill over a greater number of years, which could keep you in a lower tax bracket. A tax projection can help you see if this strategy might be beneficial.

OPEN A ROTH IRA

With a Roth IRA, contributions are nondeductible but earnings are potentially tax free. Roth IRA owners can qualify for tax-free withdrawals of earnings once they reach age 59½ (or meet other conditions) and have had a Roth IRA for five years. By allocating a portion of your retirement savings to a Roth IRA, you are positioning yourself for tax-free investment growth and withdrawals.*

CONSIDER TAX RATES

If you hold equities in a retirement account, any gains will be taxed at your regular — likely higher — income tax rate upon withdrawal from your account. It’s generally preferable from a tax-reducing standpoint to focus on keeping more highly taxed income-producing securities, such as bonds, in retirement accounts.

* Eligibility for Roth IRA contributions depends on income. There are no income restrictions on converting a traditional IRA to a Roth IRA, but a conversion does result in taxable income.