Dear Clients and Friends,

One minute tax reform was like a mirage, and the next minute it came rushing into focus as Congress passed a new tax act with roadrunner speed. Fortunately, you don’t have to wait for the dust to settle to start preparing for the year ahead.

A new year with the most sweeping tax reform in three decades calls for a fresh start. That means building the most effective 2018 tax plan from the ground up. Starting with the essentials, we can help you create a customized tax strategy that will put you in the best position possible by year-end. This includes time-tested moves, plus new approaches to respond to the new legislation.

This New Year Letter has been sent to you as a reminder of our commitment to help you minimize taxes. The earlier you start to plan, the more effective your efforts are likely to be. Give us a call if you’d like to develop your 2018 tax strategy, and learn about the tax benefits available to you throughout the year.

Want to avoid a 2018 tax tragedy? Plan NOW

This year marks the first in decades with massive tax law change, creating tremendous uncertainty and potential tax surprises at year-end. Don’t let this happen to you.

Steer away from tragic tax bill surprises by reviewing these important considerations:

Will you itemize in 2018?

Anyone who itemized deductions in 2017 will find they may need to change their strategies in 2018. That’s largely due to the major standard deduction increase, from $6,350 to $12,000 for single filers and $12,700 to $24,000 for married couples filing jointly.

Your ability to itemize may be most affected if in the past you relied heavily on the state and local tax deduction, home equity interest deduction, and miscellaneous itemized deductions. That’s because these deductions have been suspended, eliminated or minimized in 2018.

It’s likely you’ll still itemize deductions if you have a home mortgage and high medical expenses, you donate to charities and/or you’re single and have high property or state income taxes.

Other deductions impacted: In addition to the new world of itemized deductions, other tax changes will materially change your 2018 tax obligation. These include the elimination of exemptions, the suspension of moving expense deductions, and major increases in the Child Tax Credit.

Is charitable giving a priority for you?

The standard deduction increase will likely prompt many taxpayers who will no longer benefit from itemizing to adjust their charitable giving tax plan this year.

The good news is that beneficial tax treatment for donating is still available … it’ll just require a bit more planning. Consider this new bundling approach:

Figure out how close you think you’ll come to your 2018 standard deduction threshold. Account for your typical charitable contributions when you estimate your potential itemized deductions.

Consider moving two years of charitable giving into one year. This may allow you to itemize deductions in the year of maximum giving, while using the tax savings of the higher standard deduction in the other year to help pay for your donations.

Think about donating appreciated stock that you’ve held longer than one year. You can avoid paying capital gains, plus you can deduct the fair market value of the stock as a donation.

Are you depending on a home equity loan interest deduction?

If you’ve deducted interest on a home equity loan you used to buy, build or substantially improve your home, you’re in for some good news: you can still deduct the interest in 2018! On the flipside, if you used the loan to pay off credit card bills or for other debt, you can no longer deduct the interest.

You’ll need to take this into account as you determine what interest you can deduct as an itemized deduction this year. Understanding the impact of this change as a business owner is especially important if you use a home equity loan to fund your business.

Do you know how tax changes affect your retirement accounts?

Now is the time to consider how the modified laws will change your retirement account withdrawal plans. This includes figuring out what new federal income tax bracket you fall into and how your retirement account contributions or withdrawals should be revised to reflect the tax changes.

And if you rely on Roth IRA recharacterizations to avoid getting over-taxed on unprofitable investments, you won’t be able to for 2018.

Give us a call. We’ll be happy to help you create a comprehensive action plan based on the new tax laws so you can save the most tax dollars possible in 2018.

Business taxes: your essential midyear review

With all of the tax code changes, it’s more important than ever that you make a business tax review an integral part of your planning strategy this year. Here are three areas to focus on:

Re-examine your business structure

Whenever corporate tax rates move in a different direction from individual rates, an evaluation of your business entity may make sense. That’s because when your business is an S corporation or a partnership, the income “flows through” to you and is taxed at your individual rate.

What’s new this year is that C corporation tax rates are now lower. They are reduced to 21 percent.


What to do: Given the dramatic reduction in C corporation tax rates, consider an analysis of the tax benefits of changing your business structure versus the long-term costs of doing so. You may save on income taxes in the short term, but if you plan on distributing corporate income or selling the business in the near future, it may not make sense to change your structure.

Calculate your basis

As an S corporation shareholder, knowing your basis is key to determining whether you can deduct current-year losses. The reason: Losses in excess of basis are generally suspended for use in later years when your business has income.

Basis is also important if you plan to take nontaxable distributions. In cases when distributions exceed your investment in the company, the distributions can easily create a taxable event.

What to do: Perform a basis checkup this summer. Take into account income, distributions, deductions, losses, additional investments and loans — all reasons you may need to adjust your basis.

Consider the loss of the domestic production activities deduction (DPAD)

If you relied on the DPAD in the past, you’re going to need to revise your business’s tax plan for 2018 because it’s been repealed. Luckily, the introduction of the new 20 percent business income deduction should offset some of the impact of the lost DPAD tax benefit.

What to do: Determine if you’ll be able to use the full 20 percent business deduction and how that measures up to the savings you had in the past from the DPAD. Keep in mind, the new business deduction is reduced if your income exceeds certain thresholds. It also depends on the type of business you own and whether or not it provides certain services that the tax code treats differently.

Be proactive with your business tax planning this summer. Call today to ensure your business does not create any tax surprises with all the new rule changes.

5 life events that’ll alter your tax bill

While tax code overhauls are bound to change your tax bill, an event in your own life is a much more common reason why you’d need a tax tune-up. Here are a few examples that may require a review:

A raise or promotion: It probably feels pretty good to know that your hard work pays off. But consider that you may pay a higher tax bill because you may be nudged into a new income tax bracket.

A relationship change: A marriage or divorce will change your filing status. Remember that a filing status change in December will still apply to the whole year.

A home sale: Buying and owning a home opens up new doors to deductions and credits, including mortgage interest, home equity loan interest and energy efficiency. It also brings in the often-used capital gain tax exclusion.

A birth: New life, new tax breaks. Having a baby means you may be able to take advantage of credits, like the Child Tax Credit, Family Credit or Earned Income Tax Credit.

A death: While inheritance is often tax-free, there are exceptions. They include IRAs (distributions of which may be taxed), as well as understanding the tax impact of inherited property.

If you’d like more information about how a big life event could change your tax obligations, please call.

Don’t let your nest egg become a hornet’s nest

At some point on your journey to retirement, your focus will likely shift from your own needs to the needs of those you leave behind. Learning the tax treatment of inherited retirement assets is a good first step toward passing them on wisely.

Not all assets are treated equally

A typical estate can have assets with a variety of tax implications for heirs. On one end of the spectrum, life insurance death benefits are almost never taxable to the beneficiary, making it a popular choice among financial planners.

An investment such as a home, corporate stock (in a taxable account) or jewelry might result in taxes to the heir, but not until sold. Even then, the heirs will receive what’s called a “stepped-up basis,” meaning their cost for purposes of calculating capital gains tax will be the fair market value at the time of their loved one’s passing, not the original cost.

What’s more, an heir can qualify for lower long-term capital gain rates if he or she keeps the asset for one year or more. And tax from the sale of a home can be potentially avoided altogether if the heir lives in it for a certain period of time.

Retirement accounts can come with a sting

Inheriting a qualified retirement account, like a 401(k) or IRA, is a different ballgame. Non-spousal recipients can face a sizable tax bill from the moment they receive the account. Not only can this be a financial shock, but it might require the heir to sell some of their inheritance to pay the tax bill.

As an alternative, a Roth IRA or Roth 401(k) will not cause an immediate tax bill for your heirs. This is because the taxes have already been paid during your lifetime. But there are still special rules to follow, like the one preventing withdrawals of investment earnings from an inherited Roth IRA until five years after the account was opened by the person who passed away.

Tax-efficient ideas to consider

So how should you structure your portfolio and income sources to minimize the tax and financial burden on your family? Consider the following ideas:

  • Consider drawing down your regular 401(k) or IRA accounts first, and leave the Roth accounts for your estate, as they have favorable tax status.
  • Use your regular IRA to pay qualified higher education expenses for you, your children or your grandchildren while you are living. This can help avoid an early withdrawal penalty.
  • Make a qualified charitable transfer of up to $100,000 straight from your regular IRA to your favorite charity (if age 70½ or older) to avoid an income tax event.
  • Consider gifting up to $15,000 per year tax-free to each of your family members.

Avoid a hornet’s nest

While thinking about your estate, compile a list of all your investment and bank accounts and make a record of where each account is held and who to contact when you are gone. Also, write down special instructions for the care and ultimate distribution of personal assets that have meaning to you.

Taking these few steps now could pay dividends for those you leave behind and help avoid the sting of potential arguments during an already stressful time.