There are only three weeks left to make something great happen with this year”™s tax bill. If you are over 70, save the time you would have spent getting clothes together and boxing them and driving in the holiday traffic to a charity for the tax deduction (this can be done January 3rd), and instead have your investment advisor set up a direct gift from your IRA to the same charity. It still satisfies “RMD”� (minimum IRA withdrawal requirements) but takes that amount completely off your taxable income total!

If you”™re a small business owner that files on a Schedule C , set up your kids to receive payroll from your company and get checks issued and then cashed from your company account before December 31st, if they help out any at all in your company. They don”™t pay FICA, FUTA or SUTA and neither do you on the match, so it”™s cash out of the company pretax dollar for dollar. And, as long as it”™s less than $6,500 for the year, they also won”™t pay federal tax on that income.

The list of tax savings opportunities goes on and on, so the moral of this holiday story is: Call your tax planners and squeeze in a 30 minute phone call, skype or a face to face meeting and let”™s go through our check list of tax reduction strategies that are often overlooked!

We want the New Year to be great for you. Paying less federal income tax is a good way to start!

It’s that time of year again and many businesses with fat bottom lines, or even just with joy in their hearts, are getting ready to rinse and repeat what they have always done; buying tickets and food (perhaps adult beverages also) to celebrate and appreciate their work force. The new rules generally allow the holiday party if it”™s at the office, but the IRS has set new nondeductible guidelines for entertainment. It’s not clear, for instance, if you usually take you entire office to a holiday show, sporting event or concert, whether that part will still be deductible. More time and guidance will shake that all out, but at the moment it”™s possible that it”™s not, so you may want to change your behavior slightly as a business owner to protect yourself better. Anything that is reported as taxable income to the employee at the end of the year as wages or bonus or fringe benefits is still generally ok, since the IRS will collect the tax from them. However, anything the business has not sent on to the employee as income and has simply written off, might not fly under the new rules, so be careful.

Something many business owners have overlooked however is the possibility of renting their home to the business for the holiday party, or even for company trainings, meetings or retreats, as the S or C Corp can deduct rent for those uses. And, here is the important part: The new rules created by the IRS to deal with people offering homes or rooms on Airbnb and the like allow the income to be TAX FREE personally up to a limit of a certain number of days. THAT”™S RIGHT…I, Mr. Business Owner, write a check from my company to me personally, record the deductible transaction properly, and then cash that check and owe NO INCOME TAX on those rent dollars received. Throw that big party, hire the entertainment and get a deduction! The company can still have it catered or buy the food.

Sound complicated? Don’t try to figure this all out yourself when you can hire a tax planner and do the things you want to do all year long and get the deductions, as you learn the new rules from a professional. PS: Invite them to the party also 🙂

People love to vacation. Some do it often, while others hold on all year for that one great week and live day by day until that magical start date on the calendar! A new wave in our digital age is to only take three or four day weekends, but do it more often. However you “vacation”�, they do have one common thread, and that is that they are not free. Furthermore, when you are officially vacationing (which becomes a mind set as well….I am officially on vacation as of right now!) you spend more freely, often with a disregard for cost shopping. “I”™m stopping at Starbucks for the Mocha Frappuccino, not Dunkin, cause I”™m on vacation!”�.

What if next vacation you could upgrade to fly first class, stay at the five star hotel on the best beach and make all your dinner plans with the restaurants on the Food Network, and it didn”™t cost anything extra? How cool would that be? How about if it only cost you two hours of your time to “supersize”� your vacation into the best one you have ever had? Well, that is all possible by taking us up on this simple offer to “tax plan”� before the end of 2018!

It is not uncommon to find a combination of missed deductions and proactive moves that are easy to make that add up to thousands more in our clients”™ pockets, instead of Uncle Sam”™s!

This time it”™s clarification of the home equity mortgage deduction, and as with the business meals issue, it’s not as bad as it had first seemed!  The more the details from the broad rules last February have come out, the more we are liking the news!  When business meals were first named as no longer deductible, we thought it would be changing the landscape of the power lunch.  But, details released later softened the blow and it came to light that what the IRS was actually after was a much more targeted class of meals inside entertainment and around employee cafeterias and the like. Now, the details have come out on another headline item that made people groan when first announced:  The home equity loan was initially reported to be gone…but wait.  It”™s not gone, but it appears that the deduction on the interest of the funds that had been widely used for almost anything from paying off student loans to credit card debt is what the service was after.  They will still allow up to a limit of $750,000 of mortgage and home equity interest to be deductible, as long as the equity removed is used for the home itself.  After reading the rules it seems the sentiment is that if you spent it correctly then the house will retain the mortgaged value or more when paid down.  They just don’t want to make it easy to borrow the value to spend on almost anything, as it was before.

For the nerds who want exact wording to back this up, the new law, at Section 11043, says:

“(i) IN GENERAL. In the case of taxable years beginning after December 31, 2017, and before January 1, 2026
(I) DISALLOWANCE OF HOME EQUITY INDEBTEDNESS INTEREST. Subparagraph (A)(ii) shall not apply.
(II) LIMITATION ON ACQUISITION INDEBTEDNESS. Subparagraph (B)(ii) shall be applied by substituting $750,000…

The wording around this (II) means that “despite newly-enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC) or second mortgage, regardless of how the loan is labeled.”  Specifically, the new law eliminates the deduction for interest paid on home equity loans and lines of credit (through 2026) “unless they are used to buy, build or substantially improve the taxpayer”™s home that secures the loan.”

Example : In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home.  The loan is secured by the main home.  In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home.  The loan is secured by the vacation home.  Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.

 

This is all much better than we had thought.  Want to spend your home equity to pay off student loans?  You still can.  You just need to refi your house as a primary mortgage.  Or, if it”™s a good time for you to downsize anyway, sell it and buy something smaller, and pay off the other debt with the difference.  The art room can be in the garage instead.

Part of giving good tax planning advice is understanding short term emergency needs, but also human nature.  Often, before TCJA (Tax Cuts & Jobs Act) people in a cash crunch or in other emergencies would look to their 401(k) for a loan.   After all, that’s where a great deal, if not all, of their “savings” are accumulated.  However, there are several problems with that thought.  First, a 401(k) isn”™t “savings”, it”™s a “retirement” plan, and the structure of the assets inside are not generally cash, so taking a loan could mean selling an asset and losing growth opportunity that could be critical to the fund”™s objectives.  Secondly, the rules on repayment to the 401(k) account might be fine while you are still an employee, but what if after you took a loan you were fired, or had to quit for some reason before the loan was repaid?  The 401(k) loan would have to be repaid within 60 days, or it would be considered a distribution. Or even worse, if you are under age 59 1/2, an early distribution, which would not only make it taxable income, but would result in a 10% early withdrawal penalty as well.  OUCH!

Example: Bob makes $120k a year as a floor manager for a small manufacturer.  His son is in an Ivy League school and his plan had been to use a savings account for tuition, but unexpected events in the prior year left that account with a very low balance.  He borrowed $40k from his 401(k) and plans to pay the loan back by paycheck deduction over the next year.  He takes the loan in September, then soon after, the owner sells the business, and Bob”™s job now belongs to the new owner”™s son.  He has earned $80k to date, but is now unemployed.  He also receives pep pay (sick and unused vacation) of another $14k.  Under the old rule, he only has until November to repay the loan.  Not daring to repay the loan, from fear of remaining unemployed and running out of cash, he would have the following bad tax outcome:  $94k of taxable income, plus the $40k loan, which when not repaid within 60 days also becomes taxable income, plus a 10% tax penalty on that $40k which will result in  an additional tax due of $4,000.  As additional icing on the cake, his accidental $134k of earned income also puts him in a higher tax bracket.  Because of this potential disastrous outcome, when asked, we would recommend funding emergencies from almost any other means, but never, ever a 401(k) loan!

But now, under TCJA, we are at least giving it new consideration.  We haven’t outright reversed our stance, but the new rules do expand the group of people that we might advise to go ahead with 401(k) loans.  Under the new rules, the time frame has been expanded so that a 401(k) loan can be repaid at any time up to the filing of the individual federal income tax return on April 15th (or later on extension) following the year of unemployment or plan termination.  That creates new headaches for plan administrators, but is a very comfortable period of time for people to move the income into a new tax year, or find footing to repay the loan and have it never become taxable at all.  It doesn’t change the “saving” assets vs “retirement” assets dynamic, but it is still a significant difference, and for many scenarios, may shift the answer to the “should I borrow against my 401(k) plan?”� question to the yes column.