Category: Tax Credits

20 Nov 2018
Tax Credits, Tax Law Pearson & Co, PC 0 comment

2018 TAX PLANNING FOR THE FIRST YEAR UNDER THE NEW TAX CODE

Business & Individual Tax Rates, Deductions, Exemptions & Credits

Top of Mind Communications - Tax Planning Article

Once again, the season for tax planning is upon us … and this year with a number of challenges for both businesses and individuals. The primary driver is the changes brought about by the passage of the Tax Cuts and Jobs Act (TCJA).

On balance, most taxpayers, both businesses and individuals, will enjoy tax savings under the new regulations. Nevertheless, end of year planning is critical to maximize your benefits and minimize your tax bite.

End of year tax planning for businesses will include the need to factor in … reduced tax rates for C corporations; elimination of the corporate alternative minimum tax; allowance for a 20% deduction for individual owners of certain proprietorships, partnerships and S corporations; and accelerated up-front write-off for an ever-expanding group of business assets.

Among the changes affecting individual taxpayers include doubling the standard deduction, elimination of personal exemptions, and numerous itemized deductions reduced or eliminated.

Let’s take a closer look.

Our objective is to summarize the revised tax law provisions and prompt you to seek guidance from your tax advisor to determine the specifics as it pertains to your unique circumstances. Certainly, that may be a prudent step on your part as the tax code adjustments likely will affect your strategies to maximize benefits under the new law for you and your family.
This article is intended only as a review of the new law’s highlights. The details are beyond the scope of this piece so seeking advice from a professional tax expert is advised.
Now, as promised, let’s examine the tax rates, tax deductions, exemptions and tax credits provided for in the Tax Cuts and Jobs Act for both individual taxpayers and businesses.

Business Tax Planning Richmond VA

BUSINESSES

Income Taxes

  • Corporate tax rate lowered from 35 percent to 21 percent
  • Alternative Minimum Tax eliminated

Business Deductions

  • Pass-through business deductions – up to 20 percent of business related income; applies to partnerships, S corporations and sole proprietorships with some limits and exceptions. Deduction phases out for certain professional service individuals – starts at $315,000 for joint return filers and $157,000 for all other taxpayers.
  • Section 179 deductions for depreciable personal property permitted in one year rather than amortizing over several; maximum amount increased to $1 million per year.
  • Bonus depreciation now available on both new and used property.
  • Vehicle depreciation cap is increased and indexed for inflation; new limits are $10,000 (year 1); $16,000 (year 2); $9,600 (year 3); $5760 per year thereafter until cost is recovered.
  • Entertainment expenses – 50 percent deduction of business-related food and beverage expenses retained; no deduction for entertainment and membership dues.
  • Corporate interest expense deductions limited to 30 percent of income.

INDIVIDUAL TAXPAYERS

Tips for Individual Tax Payers from Top of Mind CommunicationsNote: Most individual changes are effective January 1, 2018 and will expire at the end of 2025.  Unless Congress passes another law prior to then, the old tax code provisions will be reinstated.

Individual Income Taxes

The Act retains the seven income tax brackets of the previous tax code, but with reduced tax rates for individuals in all brackets but one. The net effect of these reductions were realized by most employees as employer payroll withholding was reduced … resulting in increased take-home pay beginning with their February 2018 paychecks.

Comparison of New Tax Rates vs. Old
Icome Tax RatesNote: Capital gains rates remain unchanged under the new law.

Individual Deductions

  • Standard deduction doubled from $6,350 for single filers to $12,000; married and joint filers increased from $12,700 to $24,000. This, coupled with the changes to itemized deductions, is likely to lead to more taxpayers taking a simplified approach to filing, i.e. electing the standard deduction.
  • Mortgage interest deduction limited to the first $750,000 of the loan; permitted on first or second home; interest on loans up to $1 million initiated prior to December 15, 2017 grandfathered
  • Home equity loan interest eliminated unless used to buy, build or substantially improve the taxpayer’s home that secures the loan.
  • State and local income tax, sales tax and real property tax deductions limited to $10,000 in the aggregate
  • Miscellaneous itemized deductions eliminated; includes employee business expenses and investment advisor fees
  • Charitable contributions deductions are retained for those taxpayers able to itemize deductions
  • Deduction for medical expenses increased to 7.5 percent or more of income in 2017; 10% in 2019.
  • Alimony payments no longer deductible for new divorces beginning in 2019
  • Casualty losses to personal property no longer deductible unless covered by specific federal disaster declarations

Individual Exemptions

  • Personal exemptions of $4,150 eliminated
  • Estate tax exemption doubled to $11.2 million for singles and $22.4 million for couples
  • Alternative minimum tax exemption increased from $54,300 to $70,300 for singles; from $84,500 to $109,400 for joint filers

Individual Tax Credits

When compared to tax deductions, tax credits yield the better tax savings. Tax deductions reduce the amount of your income subject to tax. Tax credits directly reduce the tax itself.

For example, assume you or your business spends $5,000 that results in a tax deduction. That will reduce your taxable income by $5,000. In a 25% tax bracket, you would save $1,250 in taxes.

Now compare that with a $5,000 tax credit. That amount is subtracted from the amount of tax owed as opposed to an offset to income … as is the case with a tax deduction. Result: Your tax bill is reduced by the full $5,000 tax credit!

  • Child tax credit increased to $2,000 from $1,000
  • American Opportunity Credit and Lifetime Learning Credit remain unchanged
  • Credit of $500 for each non-child dependent.
  • 529 savings plans permitted for tuition at private and religious K-12 schools

Obamacare tax on those without health insurance repealed beginning in 2019

Summary

Again, the tax code revisions likely will affect your strategies to maximize benefits under the new law for you and your family. Our objective is to summarize the new provisions and prompt you to seek guidance from your tax advisor to determine the specifics as it pertains to your unique circumstances.

Alternatively, a time-saving and less stressful approach is to give us a call or drop an email to schedule a time to review the specifics of your unique situation and develop an optimum tax strategy that benefits you and your family.

With the new tax code as the frame of reference, we stand ready to help you with traditional end-of-year tax strategies that include deferring income to a later year and accelerating deductions into the current year. The TCJA may deliver on a number of additional benefits to you, your family and/or your business.

 

31 Jul 2018
Estate Planning, Tax Credits, Tax Law Pearson & Co, PC 0 comment

VACATION RENTAL HOME BENEFITS & TAX BREAKS

VACATION RENTAL HOME BENEFITS & TAX BREAKS
Personal Use and As a Rental Unit

Well here we are half way through the summer and many of us have taken a vacation … maybe at a pricey resort or just day trips to the beach, lakes or the mountains. In this article, we’ll take a look at a vacation destination that could deliver more than just rest and relaxation, i.e.:

  • Less cost;
  • Added revenue stream;
  • Tax breaks; plus
  • Potential for capital appreciation.

That briefly outlines the advantages of a second home when employed as a vacation rental. So if you own a second home, or the boost in the economy prompts you to consider a purchase, then this article is for you.

OK, so let’s get a few basic definitions out of the way and examine tax treatment based on the mix of personal and rental use of a property.

Vacation Rental Home Benefits & Tax Breaks

A Vacation Rental Home … Not Necessarily a House

When it comes to vacation rental homes, the Internal Revenue Service makes the distinction that the property is used as a residence as opposed to a property used for businesses, such as an office building or retail center. Perhaps surprisingly, the IRS considers a “dwelling unit” to be a home, apartment, condo, mobile home, boat, or any other structure containing sleeping space, toilet, and cooking facilities. So that expands your potential investment choices in vacation rentals.

Note: If the property is used on a transient basis, as a hotel room would be, the IRS does not recognize it as a dwelling unit.

Personal Use vs. Rental – Effect on Tax Benefits

Pearson & Co. CPAs Blog Post - July 2018There are limits on the type and amount of expenses that you can deduct depending on how often you use the property for personal use and how often you rent it to others.

In general, there are two types of expenses associated with a vacation home – trade or business (or production of income) expenses and deductible personal expenses. Deductible personal expenses are items that are deductible in their entirety, regardless of whether the vacation home is personal use or rental property. Expenses in this category include casualty losses, state and local property taxes, and interest.

The first limitation on the deductibility of expenses is that the expenses related to a trade or business or the production of income (rental expenses) are only deductible to the extent you do not use the home for personal use. Basically, that is the number of days the unit is rented divided by its use for any other purpose during the taxable year – excluding days for repairs and maintenance. The resulting number is the amount of expenses tentatively deductible as rental expenses. There is more to the story, but these are the basics.

A second limitation also applies if your personal use is so extensive that the dwelling unit is treated as your “residence” for tax purposes. If the number of personal use days exceeds the greater of (1) 14 days or (2) 10% of the number of days the unit was rented at fair rental value, then the dwelling unit is a “residence” and you may not deduct any rental expenses that exceed the gross rental income from the property. Any deductible personal expenses not deducted because of the gross income limitation are allowed as itemized deductions.

In a few cases you must treat someone else’s use as your own. These include any day in which the home was used by a(n):

  • Member of your family,
  • Co-owner,
  • Member of a co-owner’s family,
  • Individual who is renting for less than fair rental value, or
  • Individual who is using your house under a “switching arrangement” that enables you to use another dwelling unit (such as switching a beach house and a mountain cabin).

It is important to note that family members’ use counts as your personal use even if they are paying fair rental value (unless they use the home for their primary residence). This is also true for the switching arrangement.

 

Rental Income and Tax Deductible Offsets

 

As previously mentioned, rental income generates an added revenue stream. Of course, that added income must be appropriately reported at tax time along with rent-related expense deductions.

Rent-related expenses may include such items as utilities, maintenance, upkeep, mortgage interest, real estate taxes and insurance. Additionally, the landlord may claim a depreciation deduction that relates to rental use. Interestingly, and often overlooked, is a deduction for the owner’s costs to travel to the vacation home on business connected to the rental.

Note: The Tax Cuts and Jobs Act include provisions that limit deductibility for acquisition debt and deductions for state and local taxes. There may be additional tax issues that could affect your unique tax status.

Takeaways

This article provides a basic overview of the definition of a dwelling unit and rules regarding vacation home rental expenses. There are other details to be considered. That said, if you own a second home and are thinking about using it as a rental property, or contemplating becoming a second home vacation rental landlord, I encourage you to call me to discuss your situation in more depth.

Pearson & Co. stands ready to help. Call or email … we’ll respond promptly!

 

 

25 Feb 2018
Tax Credits
Tax Credits Pearson & Co, PC 0 comment

THREE TAX CREDITS FOR 2017

INDIVIDUAL TAXPAYERS
Be Sure to See If You Qualify for Three Tax Credits

Three Tax Credits Blog 1

Taxpayers!

You may qualify for one or more of three often overlooked tax credits that may put more money in your pocket.

  • Earned Income Tax Credit (EITC)
  • Child Tax Credit (CTC)
  • American Opportunity Credit (AOC)

If you qualify, tax credits will reduce the amount of tax you will pay. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. Here’s a brief rundown on each to determine your qualifications and potential tax-savings payoffs.

Note: Even if you are not required to file a tax return, consider doing so. If you qualify, you must file a 2017 tax return to claim your tax credit. You may end up paying less federal tax, pay no tax or even get a tax refund.

Three Tax Credits Blog 2

Earned Income Tax Credit (EITC)

Note: Four of five eligible workers qualify – If not you, maybe someone you know.

Millions of taxpayers are likely missing out on this significant tax credit. That means larger refunds are being forfeited due to lack of awareness of this benefit.

If you know friends or loved ones who you think may have earned around $54,000 or less last year, you may do them a favor to learn about EITC eligibility and use the EITC Assistant to find out if they qualify.

Alternatively, we’ll be happy to help. Consider these potential benefits:

  • Eligible families with three or more qualifying children could get a maximum credit of up to $6,318.
  • People without children may receive an additional tax refund of $506.
  • Some may qualify even if they owe no tax in 2017.

Here’s more detail from the Internal Revenue Service to determine your qualifications and potential tax-savings payoffs.

2017 EITC Income Limits, Maximum Credit Amounts and Tax Law Updates

Earned Income and AGI Limits

Earned income and adjusted gross income (AGI) must each be less than:

Three Tax Credits Table 1

Investment Income Limit
Investment income must be $3,450 or less for the year.

Maximum Credit Amounts
The maximum amount of credit for Tax Year 2017 is:

  • $6,318 with three or more qualifying children
  • $5,616 with two qualifying children
  • $3,400 with one qualifying child
  • $510 with no qualifying children

A last word on qualifying taxpayers … you may qualify as a taxpayer with disabilities, parents of children with disabilities or a grandparent who works and are also raising grandchildren.

Certainly worth asking the question, “Do I qualify?” Give us a call. We will deliver your answer.

Three Tax Credits Blog 3

Child Tax Credit (CTC)

You may be eligible to claim a tax credit that will reduce your tax by as much as $1,000 per qualifying child. Additionally, if you do not qualify for the full amount, you may be able to take the refundable additional child tax credit. The basic criteria to determine a child’s qualifications are:

  • Is your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them (for example, your grandchild, niece, or nephew);
  • Was under age 17 at the end of 2017;
  • Did not provide over half of his or her own support for 2017;
  • Lived with you for more than half of 2017;
  • Is claimed as a dependent on your return;
  • Does not file a joint return for the year; and
  • Was a U.S. citizen, a U.S. national, or a resident of the United States. If the child was adopted, see Adopted child.

Note: If you have at least one child that qualifies for the CTC, you may also be eligible for the Additional Child Tax Credit if you get less than the full amount of the CTC.

Clearly, this may be a complicated series of qualifications to decipher. If you even think you may qualify, give us a call to discuss and determine what you may expect in tax credits.

By law, the IRS is required to hold EITC and Additional Child Tax Credit refunds until mid-February — even the portion not associated with the EITC or ACTC.  The IRS expects the earliest of these refunds to be available in taxpayer bank accounts or debit cards starting February 27, 2018, if these taxpayers choose direct deposit and there are no other issues with their tax return.

Three Tax Credits Blog 4

American Opportunity Credit (AOC)

You may be able to claim a credit of up to $2,500 for education expenses you paid for each student who qualifies for the AOC. The basic qualifying requirements are:

  • The student is yourself, your spouse or a person claimed as a dependent on your return.
  • You pay the education expenses for a student enrolled in qualified, higher education.

Forty percent of the American opportunity credit may be refundable. So if the refundable portion of your credit is more than your tax, the excess will be refunded to you.

There are limitations on the amount of your income and the amount of your tax owed. Here’s an overview of those requirements and others.

Table 2-1.Overview of the American Opportunity Credit for 2017

Three Tax Credits Table 2

Click Here for the IRS details. Better yet, give us a call and we’ll quickly help you determine if you qualify and for how much.

Summary

You may qualify for one or more of three often overlooked tax credits that may end up with you paying less federal tax, pay no tax or even get a tax refund. Millions of taxpayers are missing out on this significant tax credit. That means larger refunds are being forfeited due to lack of awareness of this benefit.

Even if you are not required to file a tax return, consider doing so. If you qualify, you must file a 2017 tax return to claim your tax credit.

18 Dec 2017
Tax Credits Pearson & Co, PC 0 comment

AGING AND VIRGINIA TAX CREDITS

Are You Aging or Responsible for Someone Who Is?
There is Tax Relief from the Commonwealth of Virginia

Aging and Virginia Tax Credits - Pearson & Co. CPAs

There’s no question about it … we have an increasingly aging population in the U.S. and Virginia residents are no exception. More than 40 million Americans are now age 65+, nearly 15% of the population … which will reach 20% by 2030 when the last Baby Boomers turn 65.

Virginians over the age of 60 will register more than 25 percent of the Commonwealth’s population by the year 2025. For these seniors, their families and friends, the focus on accessible housing is increasingly important.

Notably, according to the MetLife Mature Marketing Institute, ninety-one percent of folks age 50 – 65 responded that they want to live in their own homes in retirement. That statistic is mirrored by the American Association of Retired Persons (AARP) which reports that nearly ninety percent of seniors want to stay in their own homes as they age, often referred to as “aging in place.”

Living under one’s own rules is a key reason seniors cite for aging in place. To facilitate that objective, seniors have identified housing features that are especially important in their later years as they begin to experience impaired eyesight, imbalance, reduced flexibility and diminished mobility. According to the AARP those “senior living assists” and their relative importance include:

  • Safety features such as non-slip floor surfaces (80 percent)
  • Bathroom aides such as grab bars (79 percent)
  • A personal alert system that allows people to call for help in emergencies (79 percent)
  • Entrance without steps (77 percent)
  • Wider doorways (65 percent)
  • Lever-handled doorknobs (54 percent)
  • Higher electrical outlets (46 percent)
  • Lower electrical switches (38 percent)

Most of these features do not currently exist in most seniors’ homes … and are expensive to install or upgrade. Fortunately, there is tax relief available to help Virginians.

Discuss Virginia Tax Credits with Pearson & Co. CPAs

Virginia Livable Homes Tax Credit (LHTC)

The Commonwealth of Virginia has initiated and supports the Livable Homes Tax Credit (LHTC) designed to improve accessibility and universal visitability in Virginia’s residential units. The objective is to financially assist seniors to install or improve housing features to help them age in place as health issues become more restrictive.

So let’s start with a brief lesson on “What are tax credits?”  The best way to describe tax credits is in contrast to what most taxpayers understand … tax deductions. Tax deductions reduce the amount of your income subject to tax. Tax credits directly reduce the tax itself.

For example, assume you or your business spends $5,000 that results in a tax deduction. That will reduce your taxable income by $5,000. In a 25% tax bracket, you would save $1,250 in taxes.

Now compare that with a $5,000 tax credit. That amount is subtracted from the amount of tax owed as opposed to an offset to income … as is the case with a tax deduction. Result: Your tax bill is reduced by the full $5,000 tax credit!

Taxpayers, businesses and individuals, find tax credits trump tax deductions every time in saving tax dollars as an offset to your Virginia tax liability.

Discuss the Livable Homes Tax Credit with Pearson & Co. CPAs

Livable Homes Tax Credit (LHTC)

The LHTC provides state tax credits for the purchase of new units or the retrofitting of existing housing units. Tax credits are available for up to $5,000 for the purchase/construction of a new accessible residence and up to 50 percent for the cost of retrofitting existing units, not to exceed $5,000.

Credits that exceed eligible individuals’ or licensed contractor’s tax liability may be carried forward for up to seven years.

Yes, there are other conditions and requirements. Click Click here to research.

Summary

As the foregoing illustrates, there is much to be gained by Virginia taxpayers who qualify for the LHTC. Likewise, there is much to know and do to meet the requirements.

The above presentation is meant as an overview only. Your best bet … give us a call and we’ll quickly help you determine if you qualify and for how much.

 

© 2023 Pearson & Co, PC. All rights reserved • Website by Jonas Marketing