Archive for October 2018

Donate appreciated stock for twice the tax benefits

A tried-and-true year end tax strategy is to make charitable donations. As long as you itemize and your gift qualifies, you can claim a charitable deduction. But did you know that you can enjoy an additional tax benefit if you donate long-term appreciated stock instead of cash?

2 benefits from 1 gift

Appreciated publicly traded stock you’ve held more than one year is long-term capital gains property. If you donate it to a qualified charity, you may be able to enjoy two tax benefits:

  1. If you itemize deductions, you can claim a charitable deduction equal to the stock’s fair market value, and
  2. You can avoid the capital gains tax you’d pay if you sold the stock.

Donating appreciated stock can be especially beneficial to taxpayers facing the 3.8% net investment income tax (NIIT) or the top 20% long-term capital gains rate this year.

Stock vs. cash

Let’s say you donate $10,000 of stock that you paid $3,000 for, your ordinary-income tax rate is 37% and your long-term capital gains rate is 20%. Let’s also say you itemize deductions.

If you sold the stock, you’d pay $1,400 in tax on the $7,000 gain. If you were also subject to the 3.8% NIIT, you’d pay another $266 in NIIT.

By instead donating the stock to charity, you save $5,366 in federal tax ($1,666 in capital gains tax and NIIT plus $3,700 from the $10,000 income tax deduction). If you donated $10,000 in cash, your federal tax savings would be only $3,700.

Watch your step

First, remember that the Tax Cuts and Jobs Act nearly doubled the standard deduction, to $12,000 for singles and married couples filing separately, $18,000 for heads of households, and $24,000 for married couples filing jointly. The charitable deduction will provide a tax benefit only if your total itemized deductions exceed your standard deduction. Because the standard deduction is so much higher, even if you’ve itemized deductions in the past, you might not benefit from doing so for 2018.

Second, beware that donations of long-term capital gains property are subject to tighter deduction limits — 30% of your adjusted gross income for gifts to public charities, 20% for gifts to nonoperating private foundations (compared to 60% and 30%, respectively, for cash donations).

Finally, don’t donate stock that’s worth less than your basis. Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to charity.

Minimizing tax and maximizing deductions

For charitably inclined taxpayers who own appreciated stock and who’ll have enough itemized deductions to benefit from itemizing on their 2018 tax returns, donating the stock to charity can be an excellent year-end tax planning strategy. This is especially true if the stock is highly appreciated and you’d like to sell it but are worried about the tax liability. Please contact us with any questions you have about minimizing capital gains tax or maximizing charitable deductions.

Business and Individual Tax Tips

Business Tax Tips:

Are entertainment expenses no longer allowed for businesses?

Is it time to reexamine your officers’ payroll?

If you are in business you are asking these questions and more.  I have attached our Small Business Owners Tax Tips to answer some of these questions.

Small Business Owners Tax Tips

Individual Tax Tips:

With the Tax Reform and Jobs Act how is my 2018 and futures returns going to look?  Many taxpayers are concerned with the new tax reform.  Attached is our Winter addition of Tax Tips to help with these questions.

Winter addition of Tax Tips

On each one, if you still are unsure please contact our office to discuss with one of our tax professionals.

Starting slow with a SIMPLE IRA

For certain employers, particularly small businesses, introducing a retirement plan for employees may seem like a daunting task. The company owner may feel that providing a full-blown 401(k) plan is his or her only choice, but that’s far from true.

There are other options to consider that are relatively easier to administer and usually less costly to set up and maintain. One such plan is a SIMPLE IRA.

Requirements and restrictions

The acronym SIMPLE stands for “Savings Incentive Match Plan for Employees.” (And, of course, IRA stands for “individual retirement account.”) The concept behind these plans is to allow employers with 100 or fewer employees to provide a retirement plan without running into the often-confusing complexities of 401(k) plans. A SIMPLE IRA may even be a viable option for self-employed individuals.

Naturally, these plans still have some requirements and restrictions. Although eligible employees may contribute to their accounts themselves — which isn’t the case for pensions, for example — those annual contributions are less than those allowed for 401(k)s. In 2018, an employee can contribute up to $12,500, or up to $15,500 if the employee is 50 or older. (As of this writing, these amounts for 2019 had not yet been announced.)

There’s also a required match from the employer. Generally, you must choose between:

  • Matching contributions of up to 3% of an employee’s compensation, or
  • Nonelective contributions of 2% of an eligible employee’s compensation.

An employer’s contributions are tax-deductible and employee contributions are made on a pretax basis. Thus, the payment of taxes is deferred until distributions begin.

No testing

If you have no plan, you might want to consider a SIMPLE 401(k) plan. These are like SIMPLE IRAs when it comes to contribution limits and employer matching, but participants in a SIMPLE 401(k) may take out loans. Some organizations have employees who really appreciate this feature, though it makes plan administration a little more challenging for the employer.

Under either of the SIMPLE offerings, employers avoid the nondiscrimination tests — a key component of regular 401(k) plans. (These tests, which involve a calculation based on the organization’s employees, may serve to restrict the allowable contributions of higher-earning employees unless there’s a sufficient level of participation by those earning less.)

A critical step

Please note that the deadline for setting up a SIMPLE IRA for 2018 has already passed. But you could begin exploring the idea now with an eye toward establishing this or another retirement plan for your employees for next year. To discuss further, please contact us.

Some of your medical expenses may be tax deductible, but only if you itemize deductions and have enough expenses to exceed the applicable floor for deductibility. With proper planning, you may be able to time controllable medical expenses to your tax advantage. The Tax Cuts and Jobs Act (TCJA) could make bunching such expenses into 2018 beneficial for some taxpayers. At the same time, certain taxpayers who’ve benefited from the deduction in previous years might no longer benefit because of the TCJA’s increase to the standard deduction.

The changes

Various limits apply to most tax deductions, and one type of limit is a “floor,” which means expenses are deductible only to the extent that they exceed that floor (typically a specific percentage of your income). One example is the medical expense deduction.

Because it can be difficult to exceed the floor, a common strategy is to “bunch” deductible medical expenses into a particular year where possible. The TCJA reduced the floor for the medical expense deduction for 2017 and 2018 from 10% to 7.5%. So, it might be beneficial to bunch deductible medical expenses into 2018.

Medical expenses that aren’t reimbursable by insurance or paid through a tax-advantaged account (such as a Health Savings Account or Flexible Spending Account) may be deductible.

However, if your total itemized deductions won’t exceed your standard deduction, bunching medical expenses into 2018 won’t save tax. The TCJA nearly doubled the standard deduction. For 2018, it’s $12,000 for singles and married couples filing separately, $18,000 for heads of households, and $24,000 for married couples filing jointly.

If your total itemized deductions for 2018 will exceed your standard deduction, bunching nonurgent medical procedures and other controllable expenses into 2018 may allow you to exceed the applicable floor and benefit from the medical expense deduction. Controllable expenses might include prescription drugs, eyeglasses and contact lenses, hearing aids, dental work, and elective surgery.

Planning for uncertainty

Keep in mind that legislation could be signed into law that extends the 7.5% threshold for 2019 and even beyond. For help determining whether you could benefit from bunching medical expenses into 2018, please contact us.

You’ve spent years building your company and now are ready to move on to something else, whether launching a new business, taking advantage of another career opportunity or retiring. Whatever your plans, you want to get the return from your business that you’ve earned from all of the time and money you’ve put into it.

That means not only getting a good price, but also minimizing the tax hit on the proceeds. One option that can help you defer tax and perhaps even reduce it is an installment sale.

Tax benefits

With an installment sale, you don’t receive a lump sum payment when the deal closes. Instead, you receive installment payments over a period of time, spreading the gain over a number of years.

This generally defers tax, because you pay most of the tax liability as you receive the payments. Usually tax deferral is beneficial, but it could be especially beneficial if it would allow you to stay under the thresholds for triggering the 3.8% net investment income tax (NIIT) or the 20% long-term capital gains rate.

For 2018, taxpayers with modified adjusted gross income (MAGI) over $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately) will owe NIIT on some or all of their investment income. And the 20% long-term capital gains rate kicks in when 2018 taxable income exceeds $425,800 for singles, $452,400 for heads of households and $479,000 for joint filers (half that for separate filers).

Other benefits

An installment sale also might help you close a deal or get a better price for your business. For instance, an installment sale might appeal to a buyer that lacks sufficient cash to pay the price you’re looking for in a lump sum.

Or a buyer might be concerned about the ongoing success of your business without you at the helm or because of changing market or other economic factors. An installment sale that includes a contingent amount based on the business’s performance might be the solution.

Tax risks

An installment sale isn’t without tax risk for sellers. For example, depreciation recapture must be reported as gain in the year of sale, no matter how much cash you receive. So you could owe tax that year without receiving enough cash proceeds from the sale to pay the tax. If depreciation recapture is an issue, be sure you have cash from another source to pay the tax.

It’s also important to keep in mind that, if tax rates increase, the overall tax could end up being more. With tax rates currently quite low historically, there might be a greater chance that they could rise in the future. Weigh this risk carefully against the potential benefits of an installment sale.

Pluses and minuses

As you can see, installment sales have both pluses and minuses. To determine whether one is right for you and your business — and find out about other tax-smart options — please contact us.

Changes regarding Missouri Withholding Taxes

Because of the Tax Cuts and Jobs Act Tax Reform Missouri had updated their withholding tables in March, 2018.

The Missouri DOR has continued to monitor updates and identified that they needed to make a subsequent adjustment to the withholding tables.

The Missouri DOR is asking all employees to review their MO W-4 to ensure they have the appropriate amount withheld.  If you pay Missouri estimated tax payments you will need to review those as well.

It is not too late to do a withholding checkup for both Federal and State.  But in order for it to take affect you need to do so very soon.

Please contact our office and we will be glad to assist you.