The Federal Reserve’s decision to cut interest rates 25 basis points for the first time in over a decade marked a dramatic shift in monetary policy.

It will be felt by Americans across the board.

After raising the federal funds rate nine times in three years, with the last move coming in December as financial markets were melting down, concerns about a slowing economy caused the Federal Open Market Committee and Chairman Jerome Powell to reverse course.

Now, interest rates are historically low, which leaves the central bank with little wiggle room in the event of a recession or if the economy stumbles. The current target range for its overnight lending rate is 2% to 2.25%.

For consumers, the so-called Powell Pivot could mean a reprieve in escalating borrowing costs, which can impact your mortgage, home equity loan, credit card, student loan tab and car payment. At the same time, savings account rates may fall.

Here’s a breakdown of what may happen to your loans and savings:

Credit cards: Interest you pay may go down a bit

Savings: Depositors get squeezed

Mortgages: Time to consider a refi

Auto loans: Shoppers have more room to negotiate

Student loans: Some good news for grads with private loans

Article Highlights:

• Income as a Factor
• Filing Status as a Factor
• 85% Maximum Taxable
• Base Amounts
• Deferring Income
• Maximizing IRA Distributions

Whether your Social Security benefits are taxable (and, if so, the amount that is taxed) depends on a number of issues. The following facts will help you understand the tax ability of your Social Security benefits.

• For this discussion, the term “Social Security benefits” refers to the gross amount of benefits you receive (i.e., the amount before reduction due to payments withheld for Medicare premiums). The tax treatment of Social Security benefits is the same whether the benefits are paid due to disability, retirement or reaching the eligibility age. Supplemental Security Income (SSI) benefits are not included in the computation because they are not taxable under any circumstances.
• The amount of your Social Security benefits that are taxable (if any) depends on your total income and marital status.
•  If Social Security is your only source of income, it is generally not taxable.
•  On the other hand, if you have other significant income, as much as 85% of your Social Security benefits can be taxable.
•  If you are married lived with your spouse at any time during the year, and file a separate return from your spouse using the married filing separately status, 85% of your Social Security benefits are taxable regardless of your income. This is to prevent married taxpayers who live together from filing separately, thereby reducing the income on each return and thus reducing the amount of Social Security income subject to tax.
• The following quick computation can be done to determine if some of your benefits are taxable:
  Step 1. First, add one-half of the total Social Security benefits you received to the total of your other income, including any tax-exempt interest and other exclusions from income.

  Step 2. Then, compare this total to the base amount used for your filing status. If the total is more than the base amount, some of your benefits may be taxable.

  The base amounts are:

• $32,000 for married couples filing jointly;
• $25,000 for single persons, heads of household, qualifying widows/widowers with dependent children, and married individuals filing separately who did not live with their spouses at any time during the year; and
• $0 for married persons filing separately who lived together during the year.

Where taxpayers can defer their “other” income from one year to another, such as by taking Individual Retirement Account (IRA) distributions, they may be able to plan their income so as to eliminate or minimize the tax on their Social Security benefits from one year to another. However, the required minimum distribution rules for IRAs and other retirement plans have to be taken into account.

Individuals who have substantial IRAs—and who either aren’t required to make withdrawals or are making their post-age 70.5 required minimum distributions without withdrawing enough to reach the Social Security taxable threshold—may be missing an opportunity for some tax-free withdrawals. Everyone’s circumstances are different, however, and what works for one may not work for another.

If you have questions about how these issues affect your specific situation, or if you wish to do some tax planning, please give us a call.

In the largest possible sense, handling the cash flow for your new business is exactly what it sounds like ‒ you’re trying to get the clearest level of visibility into “money coming in versus money going out” as possible. But managing cash flow is also about a lot more than that, too. It’s about making sure that you not only have the funds on hand to “keep the lights on” and to remain operational, but that you can also capitalize on opportunities as they arise instead of watching them pass you by. It’s about making sure you have access to what you need to not only put your best foot forward today, but to better prepare yourself for challenges that may develop six months or even a year from now, too.

All of that is to say that the importance of gaining a precise understanding of your cash flow cannot be overstated.

Indeed, running out of money is also one of the most common ways that new businesses in particular are forced to close their doors ‒ usually very quickly after their initial launch. But while this is certainly an essential topic, it isn’t necessarily a difficult one. Properly managing the cash flow for your new business is a lot more straightforward than you might be fearing ‒ you just need to keep a few key things in mind.

The “Breakeven” Point

By far, one of the most important metrics for you to understand about your new small business is your “breakeven” point ‒ that is, the point at which your current (or projected) revenues will allow you to meet all of your operating expenses. This is the bare minimum amount of money you need to keep your employees paid, to keep your bills up-to-date and to keep your doors open ‒ and unfortunately, it usually changes on a regular basis.

As your business continues to scale, your revenue should increase ‒ but your expenses will increase, too. Therefore, it is of paramount importance that you don’t make finding your “breakeven” point something you “do once and forget about.” For the best results, you should return to this figure on a regular basis to make sure you: a) understand what it is in the literal sense; and b) understand what actions you need to perform to actually achieve that.

Once you have a handle on your breakeven point, you’ll at the very least be able to remain functioning ‒ which means you can start to devote more of your attention to actually growing into the type of business you want to be running in the first place.

The Importance of Cash Reserves

If you take a look at some of the other reasons why small businesses usually fail, you’ll quickly see that they’re closely related:

• About 79% of businesses fail because they start out with too little money, according to one study.
• 77% run into troubles when they fail to price properly, or don’t include all necessary items when setting prices.
• 73% close because they were either too optimistic about achievable sales, about the money required to generate those sales, or both at the same time.

These types of issues are common with small businesses, and particularly with those controlled by an entrepreneur who may be running their first SMB to begin with. But for as much as all of these ideas ultimately tie directly back into cash flow management, they also underline another very important best practice to that end:

The Value of Maintaining a Cash Reserve

• Absolutely every new business ‒ regardless of its size or the industry it’s in ‒ should expect problems to crop up on a regular basis. Entrepreneurship is very much one of those areas where “Murphy’s Law” rules the day. Working hard to keep a quality cash reserve will not only help lessen the ultimate impact of those problem times, but it can also help reduce stress and distractions, too.
• If you have no cash reserve, every problem becomes a major cash flow problem. But at the very least if you have something to fall back on, you have the clarity you need to learn from the situation and double down with your focus on growing your business moving forward.

Take Control of Those Receivables

Typically, new businesses don’t have a problem with the “money out” side of cash flow management. Even if business leaders do start to spend money too quickly, hopefully, they’re in a position to recognize it so that they can do something about it as soon as possible.

But it’s difficult to “do something about it” if you’re not bringing any money in, which is why taking control over your receivables is so important.

If a client owes you $1,000, but you have no idea when they’re going to pay it, do you really have $1,000? No, not really ‒ which is why you should try to make any invoices “due immediately” if you can. If someone does need some more time to pay, try to make sure the terms give them no longer than a week or two at most. This is the future of your business that we’re talking about, after all.

Depending on your specific clients, you may even want to offer discounts for people who pay early. This can be a great way to incentivize them to get those invoices paid and to get that essential money into YOUR proverbial pocket.

At a bare minimum, you should have someone on staff who is tasked with maintaining visibility into receivables and who can follow up with customers who have yet to pay in a stern-yet-friendly way.

The more money you bring into the business, the more money you can spend on those initiatives that will continue driving your organization forward.

Every Dollar Spent Has a Purpose

Everyone knows that you should really only spend money on essentials, but in the fragile early days of a new business, you need to take that concept one step further.

With every last purchase you make, you need to be able to SEE the verified return on investment that it will bring with it. If you’re buying a new piece of equipment, what does it actually get you? Will it speed up your production, allowing you to more quickly achieve a larger volume of higher quality finished products? In that case, the return on investment absolutely justifies the initial money you need to spend.

However, if you really want that new piece of equipment simply because it’s the “latest and greatest,” that isn’t really the “good idea” you thought it was.

Another example of this would be investing in a new payment solution that allows you to accept payments online. It may not be a “fun” purchase with company money, but if it allows you to expand into a true e-commerce solution and open up new opportunities to make sales over the internet, it therefore becomes an “essential,” and that is a step worth taking.

In absolutely no uncertain terms, you cannot afford to spend money “just for the sake of it.” Figure out what your essentials are and make sure you have the cash on hand to actually support them. Then, go through and eliminate the costs to anything that isn’t essential ‒ at least until your business is in a fully profitable state.

In the end, remember that properly managing your cash flow is something you need to be proactive about. Not only do you have to intimately know where you are today, but you also need visibility into where you’re headed tomorrow, too. When everything is functioning as it should be, your cash flow best practices should be supporting the former while making the latter possible.

If they aren’t, there is a serious issue with your current process that you will need to find and eliminate as quickly as you possibly can.

Article Highlights:

• Home Equity Loan
• Home Equity Interest Deduction
• Alternative Minimum Tax
• Above-the-Line Interest Deduction
• Qualified Expenses

If you are considering borrowing funds to finance your college education or that of your spouse or children, it is important that you understand that the student loan interest deduction is not limited to the interest paid on government student loans. In fact, virtually any loan interest will qualify as long as the loan proceeds are used solely for qualified higher-education expenses (that is, it is a sole-purpose loan).However, the maximum interest that is deductible each year is $2,500. Thus, in addition to government student loans, home equity lines of credit, personal loans from unrelated parties, and even credit cards can be used if they otherwise qualify. Pension plan loans and loans from related parties do not qualify.

If a loan is not subsidized, guaranteed, financed, or otherwise treated as a student loan under a program of the federal, state, or local government or an eligible educational institution, a payee (the lender) must request a certification from the payer (the borrower) that the loan will be used solely to pay for qualified higher-education expenses. Form W-9S, Request for Student’s or Borrower’s Social Security Number and Certification, is provided by the IRS for this purpose.

You can claim a deduction for student loan interest whether you claim the standard deduction or you itemize your deductions since it is an adjustment to income, often referred to as an above-the-line deduction.

To qualify as an eligible loan, the loan must have been taken out solely to pay the costs of attending an eligible educational institution for an individual during a period when the individual is a qualified student. Eligible costs include:

• Tuition
• Fees
• Room and board
• Books and equipment
• Other necessary expenses (including transportation)

The expense must be incurred within a reasonable time before or after the debt is incurred. The regulations provide that a loan is incurred within a reasonable period if:

• The expenses are paid with the proceeds of a loan from a federal post-secondary education loan program; or
• The expenses are related to a particular academic period and the loan proceeds used to pay the expenses are disbursed within a period that begins 90 days prior to the start of, and ends 90 days after the end of, that academic period. A home equity line of credit can be used to meet these requirements by paying education expenses as they become due, provided that the loan is not used for any other purpose.

Such expenses must be reduced by the following:

1. Income excluded from employer-provided educational assistance;
2. Income excluded from U.S. savings bonds used to pay higher-education expenses;
3. Nontaxable distributions from Coverdell ESAs; and
4. Scholarships, allowances, or other payments (such as distributions from Sec. 529 plans) that are excludable from gross income.

Eligible educational institutions – Eligible educational institutions are colleges, universities, and vocational schools eligible to participate in the Department of Education’s student aid programs (in other words, virtually all accredited public and private post-secondary schools). In addition, institutions conducting internship or residency programs leading to degrees or certificates awarded by a higher education institution, a hospital, or a healthcare facility that offers postgraduate training also qualify.

Eligible student – An eligible student is one enrolled in a degree or certificate program who is at least a half-time student. What constitutes half the normal course load will be determined by the definition of the school being attended. Generally, a full-time student is one carrying at least 12 units.

Who Claims the Interest – The above-the-line interest deduction may only be claimed by a person who is legally obligated to make the payments on the qualified educational loan. However, tax regulations allow payments on above-the-line education interest made by someone other than the taxpayer/borrower to be treated as a gift, allowing the interest to be deductible by the taxpayer.

Not Available to Higher-Income Taxpayers – The deduction is ratably phased-out for taxpayers with an AGI (income) of $70,000 to $85,000 ($140,000 to $170,000 for joint returns) and not allowed at all for taxpayers filing as married separate or an individual who is a dependent of another. The amounts shown are for 2019; contact this office for the amounts for other years.

If you are considering borrowing money to pay for higher-education expenses, it may be appropriate to consult with us since there are other limitations.

Article Highlights:

• Qualifications
• Actual Expense Method
• Simplified Method
• Home Office Expenses for Renters vs. Homeowners
• How Moving Affects the Home-Office Deduction
• Other Issues
• Gross Income Limitation

“Home office” is a type of tax deduction that applies to the business use of a home; the space itself may not actually be an office. One of the following must apply to be able to deduct home office expenses. The home office:

• Must be the taxpayer’s main place of business. OR
• Must be a place of business where the taxpayer meets patients, clients or customers. The taxpayer must meet these people in the normal course of business. OR
• Must be in a separate structure that is not attached to the taxpayer’s home. The taxpayer must use this structure in connection with their business. OR
• Must be a place where the taxpayer stores inventory or samples. This place must be the sole, fixed location of their business. OR
• Under certain circumstances, must be where the taxpayer provides day-care services.

Generally, except when used to store inventory, an office area must be used on a regular and continuing basis and be exclusively restricted to the trade or business (i.e., no personal use).

Two Methods – There are actually two methods to determine the amount of a home-office deduction: the actual-expense method and the simplified method.

• Actual-Expense Method – The actual-expense method prorates home expenses based on the portion of the home that qualifies as a home office, which is generally based on square footage. Aside from prorated expenses, 100% of directly related costs, such as painting and repair expenses specific to the office, can be deducted. Unlike the simplified method, the business is not limited to 300 square feet.
• Simplified Method – The simplified method allows for a deduction equal to $5 per square foot of the home used for business, up to a maximum of 300 square feet, resulting in a maximum simplified deduction of $1,500. A taxpayer may elect to take the simplified method or the actual-expense method (also referred to as the regular method) on an annual basis. Thus, a taxpayer may freely switch between the two methods each year.

  Additional office expenses such as utilities, insurance, office maintenance, etc., are not allowed when the simplified method is used. Prorated rent or home interest and taxes are not either, although 100% of home interest and taxes are deductible if the taxpayer itemizes deductions.

  To determine the average square footage when using the simplified method, no more than 300 square feet for any month can ever be used, even if the taxpayer has multiple businesses for which he or she uses space in the home. If there are multiple businesses, a reasonable method to allocate between businesses is used. Zero is used for months when there was no business use or when the business was not operating for a full year. Don’t count any month when the business use was less than 15 days.

  Example: Sandra begins using 400 square feet of her home for business on July 20, 2019 and continues using the space as a home office through the end of the year. Her average monthly allowable square footage for 2019 is 125 square feet (300 x 5 months = 1,500/12 = 125).

Home Office Expenses – There are differences as to which prorated home expenses are deductible by renters and homeowners when computing the actual expense method, as illustrated in the table below.

Note that the principal payments made on a home loan are not eligible expenses. Instead, homeowners claim a deduction for depreciation on the office portion of the home’s basis.

Rent vs. Own: What Happens If You Move or Sell the Home?

Rent – When you pay rent for your home and use part of it for business, move and then use space at the new location as a home office, for the year of the move, you’ll need to figure out the deduction separately for each home office based on the specific expenses and business use area of each home. If you don’t use space at your new living quarters for business purposes, then your home-office deduction for the year of the move will need to factor in just the expenses for the time you lived in the first home.

Own – On the other hand, if you own the home, sell it and had lived in it for two of the five years prior to the sale date, you can exclude up to $250,000 of gain ($500,000 for a married couple). However, you cannot exclude the part of any gain to the extent of depreciation you claimed for the home after May 6, 1997. For exclusion purposes, it makes a difference whether the home office was within the home itself or in a separate structure on the same property. If within the same structure, the exclusion will apply to the entire gain from the home (other than the depreciation component). If the office was within a separate structure, then the sale must be treated as two sales – one for the home and one for the office – and the gain from the office portion cannot be excluded.

Additional Issues That May Apply – As with everything tax, there are always special rules.

• Multiple Businesses – If there are multiple businesses, only one method may be used for the year – either the regular or simplified.
• Mixed-Use Property – A taxpayer who has a qualified business use of a home and a rental use of the same home cannot use the simplified method for the rental use.
• Taxpayers Sharing a Home – Taxpayers sharing a home (for example, roommates or spouses, regardless of filing status), if otherwise eligible, may each use the simplified method but not for a qualified business use of the same portion of the home.

  As an example, a husband and wife, if otherwise eligible and regardless of filing status, may each use the simplified method for a qualified business use of the same home, for up to 300 square feet of different portions of the home.

• Depreciation Rate When Switching Methods – When the simplified method is used and the taxpayer subsequently switches to the actual expense method, there are no special adjustments, and the depreciation is determined in the normal manner.

Final Notes – Even if you qualify for a home-office deduction, your deduction is limited to the business activity’s gross income, which for this purpose is defined as the activity’s gross income, reduced by the home expenses that would be deductible if there were no business use (e.g., mortgage interest, property taxes, certain casualty losses), and the business expenses unrelated to the home’s use. When using the actual expense method, the disallowed amount will be carried over to the next year subject to the same limitations. However, there’s no carryover when using the simplified method.

Business use of the home is deducted on a self-employed individual’s business schedule.

Article Highlights:

• Expiring ITINs
• IRS Currently Accepting Renewal Applications
• Family Renewal Options
• How to Renew
• Common Errors to Avoid

According to the Internal Revenue Service (IRS), just about 2 million Individual Taxpayer Identification Numbers (ITINs) are set to expire at the end of 2019.

ITINs are used by people who have tax filing or payment obligations under U.S. law but who are not eligible for a Social Security number. ITIN holders who have questions can visit the ITIN information page on the IRS website.

ITINs that have not been used on a federal tax return at least once in the last three consecutive years will expire Dec. 31, 2019. In addition, ITINs with middle digits 83, 84, 85, 86 or 87 that have not already been renewed will also expire at the end of the year. ITINs with middle digits of 70 through 82 expired in past years. Taxpayers with these ITIN numbers who haven’t already renewed their ITIN can renew at any time. Note: It is important to understand that ITINs with middle digits 83 through 87 will expire whether or not they were used for filing returns in the last three years.

IRS is currently accepting ITIN renewal applications – Taxpayers whose ITIN is expiring and who need to file a tax return in 2020 must submit a renewal application. Federal returns that are submitted in 2020 with an expired ITIN will be processed. However, exemptions and/or certain tax credits will be disallowed, and the taxpayers will be notified by mail advising them to renew their ITIN. Once the ITIN is renewed, any applicable exemptions and credits will be reinstated, and any applicable refunds issued. Therefore, renewing early will avoid these last-minute hassles and delays in receiving refunds.

Family renewal option – Taxpayers with an ITIN that has middle digits 83, 84, 85, 86 or 87, as well as all previously expired ITINs, have the option to renew ITINs for their entire family at the same time. Those who have received a renewal letter from the IRS can choose to renew the family’s ITINs together, even if family members have an ITIN with middle digits that have not been identified for expiration. Family members include the tax filer, spouse and any dependents claimed on the tax return.

How to renew an ITIN – To renew an ITIN, a taxpayer must complete a Form W-7 and submit all required documentation. Taxpayers submitting a Form W-7 to renew their ITIN are not required to attach a federal tax return. However, taxpayers must still note a reason for needing an ITIN on the Form W-7. See the Form W-7 instructions for detailed information. An application package can be submitted in one of three ways:

1. By mail, along with original identification documents or copies certified by the agency that issued them, to the IRS address listed on the Form W-7 instructions. The IRS will review the identification documents and return them within 60 days.
2. Work with Certified Acceptance Agents (CAAs) authorized by the IRS to help taxpayers apply for an ITIN. CAAs can authenticate all identification documents for primary and secondary taxpayers, verify that an ITIN application is correct before submitting it to the IRS for processing and authenticate the passports and birth certificates for dependents. This saves taxpayers from mailing original documents to the IRS.
3. In advance, call and make an appointment at a designated IRS Taxpayer Assistance Center to have each applicant’s identity authenticated in person instead of mailing original identification documents to the IRS. Each family member applying for an ITIN or renewal must be present at the appointment and must have a completed Form W-7 and required identification documents. See the TAC ITIN authentication page on the IRS web site for more details.

Common errors to avoid – There are several common errors that can slow down ITIN renewal applications:

• Mailing identification documentations without a Form W-7,
• Missing information on the Form W-7, and
• Insufficient supporting documentation, such as U.S. residency documentation or official documentation to support name changes.
• The IRS no longer accepts passports that do not have a date of entry into the U.S. as a stand-alone identification document for dependents from a country other than Canada or Mexico, or dependents of U.S. military personnel overseas. A dependent’s passport must have a date of entry stamp, otherwise the following additional documents to prove U.S. residency are required:

If you have questions or need assistance completing a renewal, please give us a call at 714-522-3337

If you are contemplating selling real estate property, there are a number of issues that could impact the taxes that you might owe, and there are steps you can take to minimize the gain, defer the gain, or spread it over a number of years. The first and possibly most important issue is adjusted basis. When computing the gain or loss from the sale of property, your gain or loss is measured from your adjusted basis in the property. Thus, your gain or loss would be the sales price minus the sales expenses and adjusted basis.

Adjusted Basis – So, what is adjusted basis? Determining adjusted basis can sometimes be complicated, but in a simplified overview, it is a dollar amount that starts with your acquisition value and is then adjusted up for improvements to the property, down for depreciation taken on the property, and down for any casualty losses claimed on the property. The acquisition value could be the price you paid for the property, the fair market value of an inheritance at the date of the decedent’s death, or, in the case of a gift, the donor’s adjusted basis at the time of making the gift.

As you can see, it is extremely important that you keep track of your basis, since it is a key factor in determining gain or loss upon the sale of the property. Failure to keep a record and substantiating documentation could cost you dearly in income tax.

Passive Loss Carryover – If the property was a rental and the rental operated at a loss, there is a chance that the losses were not fully deductible in the year(s) of the loss because of the passive loss limitation rules; in this case, you will have a passive loss carryover that can be used to offset the gain. In addition, current year passive losses and passive loss carryovers you may have from other properties can also be used to offset any gain from selling a rental property.

Next, you have to decide whether you want to take (i.e., report on your tax return) all the income in one year or whether to attempt to spread the income over a period of years with an installment sale (by carrying back a loan) or defer the income into a replacement property through a tax-deferred exchange.

Installment Sale – In an installment sale, the seller acts as the lender to the buyer. That can entail holding the first trust deed or taking back a second trust deed for only a portion of the loan amount. However, second trust deeds are as the name implies: They are second in line to be paid if the buyer defaults on the loan and thus are riskier. When set up as an installment sale, part of the gain is reported for each year that payments are received, generally as capital-gain income. In addition, the interest that the buyer pays the seller is taxable as ordinary income to the seller. Installment sales can be structured as short- or long-term loans, but remember, the buyer can always pay off the loan early or refinance. Either of these actions would make the balance of the profit from the sale taxable at that time.

Tax Deferred Exchange – Another option if the property is held for investment or used in a trade or business is to defer the gain down the road. This is accomplished by using the rules of IRS Code Section 1031, which allows the taxpayer to acquire like-kind property and defer the gain into the replacement property, which also must be used for business or be held for investment. However, the rules for like-kind exchanges are complicated, have strict timing issues, and require advance planning with a professional familiar with Section 1031 rules.

Net Investment Income Tax – Adding complications to the sale-planning issue is the surtax on net investment income. This 3.8% additional tax kicks in when a taxpayer’s modified adjusted gross income (MAGI) exceeds $200,000 ($250,000 for married joint filers and $125,000 for married individuals filing separately). Gain from the realty sale is included in the MAGI and could cause the MAGI threshold to be exceeded, resulting in this surtax applying to some or all of the realty gain. However, it may be minimized, or possibly eliminated, by using an installment sale and spreading the gain over a number of years or deferring down the road with a tax-deferred exchange.

Qualified Opportunity Fund (QOF) – Taxpayers who have a capital gain from selling or exchanging any property to an unrelated party may elect to defer that gain if it is reinvested in a QOF within 180 days of the sale or exchange. One exception is that the gain from the subsequent sale of the QOF cannot be deferred into another QOF. Only one election may be made with respect to a given sale or exchange. If the taxpayer reinvests less than the full amount of the gain in the QOF, the remainder is taxable in the sale year, as usual. Only the gain need be reinvested in a QOF, not the entire proceeds from the sale. This is in sharp contrast to a 1031 exchange where the entire proceeds must be reinvested to defer the gain.

Home Sale Exclusion – If the real estate is your home (primary residence), there are special rules. Generally, if you own and occupy the home in two out of the five years prior to the sale, you will be able to exclude a substantial portion of your gain. The tax-deferred exchange rules do not apply to personal-residence sales. The amount of the home exclusion can be as much $250,000 ($500,000 for married couples filing jointly). There are even special rules that allow a reduced exclusion under certain special circumstances.

As you can see, the result of selling real estate property can include a number of tax issues, and minimizing current taxes requires some careful planning. Please give this office a call for assistance in planning your real estate transactions.

Most retirees should wait longer to access their benefits, researchers find. Some should claim them sooner.

Almost all American retirees claim Social Security at the wrong time, a newreport estimates, which means they will miss out on a collective $3.4 trillion in benefits before they die.

While they can tap their benefits as early as age 62, retirees could boost the size of their checks for every year they wait until age 70, when the maximum benefit accrues. The advantage in waiting is substantial: A person eligible for a $725 monthly check at 62 could get a $1,280 check if they wait to start at age 70.

United Income, a money management firm that provides financial advice to retirees, teamed up with former Social Security officials to simulate retiree decisions on when to claim benefits, along with factors that include income, wealth, taxes, health status and longevity. Their analysis, published Friday, found that 96% of retirees choose the wrong year to tap Social Security.

“People are pretty much doing the opposite of what they should be doing,” said Matt Fellowes, founder and chief executive officer of United Income and co-author of the paper.

When to take Social Security is a key decision for America’s elderly, for whom the program has become a critical safety net. About half of older Americans get most of their income from the program.

Unlike investments and other sources of retirement income, Social Security benefits are guaranteed to keep up with inflation and last for life. That’s important when half of all 65-year-old American women can expect to live past age 86, according to Social Security estimates. The average life expectancy for U.S. men who are currently 65 is age 84.

Continue Reading Here 

You have your 2018 tax return filed, or perhaps on extension, and now it is time to look forward to the changes that will impact your 2019 return when you file it in 2020.

Keeping up with the constantly changing tax laws can help you get the most benefit out of the laws and minimize your taxes. Many tax parameters, such as the standard deduction, contributions to retirement plans, and tax rates, are annually inflation adjusted, while some tax changes are delayed and take effect in future years. On top of all that, we have Congress considering the retroactive extension of some tax provisions that expired after 2017 as well as proposing new tax legislation.

The inflation adjustments shown are not the only items adjusted for inflation. For a full list, see IRS Revenue Procedure 2018-57.

At any rate, here are some changes that might affect your 2019 return:

1. Solar Credit – Although the solar credit remains at 30% for 2019, as a reminder, the credit rate will drop to 26% in 2020. This means that for each $1,000 spent on qualified solar property, the credit will be $40 less in 2020 than if the expense were paid and the credit was claimed in 2019. However, this is a non-refundable credit, meaning it can only offset your tax liability, but the unused credit can carry over to a future tax year as long as the credit is allowed; it is currently scheduled to end after 2021. So, be cautious of overzealous salespeople trying to talk you into an expenditure for which you may not get the full credit.
2. Plug-In Electric Vehicle Credit – Although the credit amounts have not changed, the credit begins to phase-out for each manufacturer after it produces its 200,000th qualifying vehicle. For example, the very popular Tesla vehicle did qualify for the full credit in 2018. However, Tesla has entered the phase-out stage, and for 2019, the credit is only $3,750 for purchases in the first 6 months of the year, then drops to $1,875 for vehicles bought through the rest of 2019, and is zero for post-2019 purchases. If you are contemplating buying a plug-in electric vehicle, check the IRS websitefor the current credit by manufacturer.
3. Penalty for Not Being Insured – The Affordable Care Act required individuals to have health insurance and imposed a “shared responsibility payment” – really a penalty – for those who didn’t comply. The penalty could have been as much as $2,085 for most families. That penalty will no longer apply in 2019 or the foreseeable future.
4. Medical Deductions Further Restricted – Unreimbursed medical expenses are allowed as an itemized deduction to the extent they exceed a percentage of a taxpayer’s adjusted gross income (AGI). As part the Affordable Care Act, Congress increased that percentage from 7.5% to 10%. That increase was temporarily rescinded in the most recent tax form. However, starting with the 2019 returns and for the foreseeable years, the AGI medical floor will be 10% of AGI. This is where the “bunching” strategy may benefit your ability to deduct medical expenses.This means paying as much of your medical expenses as possible in a single year so that the total will exceed the AGI floor and your overall itemized deductions will exceed the standard deduction.

   Example: Your child is having orthodontic work done, which will cost a total of $12,000, and the dentist offers a payment plan. If you pay in installments, you will spread the payments out over several years and may not exceed the medical AGI floor in any given year. However, by paying all at once, you will exceed the floor and get a medical deduction. 

5. New Alimony Rules – For divorces and separation agreements entered into after 2018, the alimony paid is not deductible, and the alimony received is not taxable. In addition, the alimony recipient can no longer make an IRA contribution based on the alimony received.It is important to understand that this treatment of alimony only applies to alimony payments paid under agreements entered into after 2018 or under prior agreements modified after 2018 that include this new provision. For agreements entered into before 2019 that haven’t been modified, the old rules continue to apply: the alimony paid is deductible, and the alimony received is included in income. Also, an IRA deduction can be made based upon the taxable alimony received.
6. Standard Deduction – The standard deduction, which is inflation adjusted annually, is used by taxpayers who do not have enough deductions to itemize. For 2019, the standard deductions have increased as follows:• Single: $12,200 (up from $12,000 in 2018)
   • Married filing jointly: $24,400 (up from $24,000 in 2018)
   • Married filing separately: $12,200 (up from $12,000 in 2018)
   • Head of household: $18,350 (up from $18,000 in 2018)

   Individuals who are blind and/or age 65 or over are allowed standard deduction add-ons. These add-ons are for the taxpayer and spouse but not for dependents. The add-on amounts are $1,300 for those filing jointly (unchanged from 2018) and $1,650 for all others (up from $1,600 in 2018).

7. Increased Retirement Contributions – All IRA and retirement contributions are subject to inflation adjustment, meaning the allowable amounts may be increased each year. This gives you the opportunity to increase your retirement savings in 2019.• Simplified Employee Pension (SEP) Plans – The maximum amount for 2019 is $56,000 (up from $55,000 in 2018).

   • Individual Retirement Accounts (IRAs) – For both traditional and Roth IRAs, the maximum contribution has been increased to $6,000 (up from $5,500 in 2018). This is the first change to IRAs since 2013. The additional amount taxpayers age 50 and over can contribute remains unchanged at $1,000.

   • 401(k) Plans – The maximum employee contribution has been increased to $19,000 (up from $18,500 last year). The additional amount for taxpayers who’ve reached age 50 remains unchanged at $6,000.

   • Simple Plans – The maximum elective contribution is $13,000 (up from $12,500 in 2018). The additional amount for taxpayers age 50 and older remains unchanged at $3,000.

   • Health Savings Accounts (HSAs) – Although meant to be a way for individuals covered by a high-deductible health plan to save money for future medical expenses, these plans can also be used as a supplemental retirement plan. Contributions are deductible, earnings accumulate tax-free, and if distributions are used for qualified medical expenses, they are tax-free. However, when used as a supplemental retirement plan, the distributions would be taxable. The following are the contribution limits for 2019:

   o Self-only coverage: $3,500 (up from $3,450 last year)
   o Family coverage: $7,000 (up from $6,900)
8. Federal Tax Brackets – The tax brackets were inflation adjusted (by approximately 2% over the 2018 brackets), meaning more of your income is taxed at a lower bracket in 2019 than it was in 2018. As an example, here are the brackets for 2019 for taxpayers using the single filing status:• 10%: $9,700 or less
   • 12%: More than $9,700 but not more than $39,475
   • 22%: More than $39,475 but not more than $84,200
   • 24%: More than $84,200 but not more than $160,725
   • 32%: More than $160,725 but not more than $204,100
   • 35%: More than $204,100 but not more than $510,300
   • 37%: Applies to taxable incomes of more than $510,300

   These are the brackets for married taxpayers filing jointly:

   • 10%: $19,400 or less
   • 12%: More than $19,400 but not more than $78,950
   • 22%: More than $78,950 but not more than $168,400
   • 24%: More than $168,400 but not more than $321,450
   • 32%: More than $321,450 but not more than $408,200
   • 35%: More than $408,200 but not more than $612,350
   • 37%: Applies to taxable incomes of more than $612,350

   For other filing statuses, see Revenue Procedure 2018-57.

   Note: These are step functions, so for example, the first $9,700 of taxable income is taxed at 10%, the next $29,775 ($39,475 − $9,700) is taxed at 12%, and so forth.

For further information or to request a 2019 tax planning appointment, please give our office a call at 562-404-7996.

If you are inclined to procrastinate until the end of the year or, even worse, until tax-filing season to worry about your taxes, you may be missing out on opportunities to reduce your tax and avoid certain penalties. The following are some events that can affect your tax return; you may need to take steps to mitigate their impact and avoid unpleasant surprises after it is too late to address them.

• Did you get married, get divorced, or become widowed?
• Did you change jobs or has your spouse started working?
• Did you have a substantial increase or decrease in income?
• Did you have a substantial gain from the sale of stocks or bonds?
• Are you considering an investment in a Qualified Opportunity Fund to defer tax on capital gains?
• Did you buy or sell a rental?
• Did you start, acquire, or sell a business?
• Did you buy or sell a home?
• Did you retire this year?
• Are you on track to withdraw the required amount from your IRA (age 70.5 or older)?
• Are you taking advantage of the IRA-to-charity transfers (age 70.5 or older)?
• Did you refinance your home or take out a second home mortgage this year?
• Were you the beneficiary of an inheritance this year?
• Did you welcome a new child into your family? Time to consider a tax-advantaged educational savings plan!
• Are you taking full advantage of retirement savings plans?
• Have you made any significant equipment purchases for your business?
• Are you planning to purchase a new business vehicle and dispose of the old one?
• Are your cash and non-cash charitable contributions adequately documented?
• If your expenses eligible for itemizing are less than the standard deduction, have you considered bunching charitable contributions so you can itemize this year and then use the standard deduction next year?
• Did you, or are you planning to, make energy-efficiency improvements to your main home or install a solar system for your main or second home this year?
• Are you paying college tuition for yourself, your spouse or dependent(s)?
• Are you keeping up with your estimated tax payments or do they need adjusting?
• Did you purchase your health insurance through a government insurance marketplace and qualify for an insurance premium subsidy? If your income subsequently increased, you may need to be prepared to repay some portion of the subsidy.
• Do you have substantial investment income or gains from the sale of investment assets? If so, you may be hit with the 3.8% surtax on net investment income and need to adjust your advance tax payments.
• Did you make any unplanned withdrawals from an IRA or pension plan?
• If you are a business owner, do you need to change how the business is organized to take full advantage of the 20% of qualified business income deduction?
• If you are an employee that incurs job-related expenses that aren’t deductible for years 2018 through 2025, have you arranged with your employer to participate in an accountable reimbursement plan for these expenses?
• Have you stayed abreast of every new tax law change?

If you anticipate or have already encountered any of the above events or conditions, it may be appropriate to schedule a mid-year tax checkup and consult with this office—preferably before any of the events listed, and definitely before the end of the year.