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Archives for Tax Tips

Differences between the House and the Senate Tax Bills

The Senate Republicans’ Tax Bill introduced Thursday breaks significantly with the one the House of Representatives introduced earlier.  There are many issues to reconcile and little time before the year-end deadline Congress has set to pay the new Tax Law.

Where the House bill would create four income tax rates (top rate of 39.6%), the Senate bill would employ a seven-bracket system (top rate 38.5%).  The top rates would start for single taxpayers with income exceeding $500 thousand and for married taxpayers with income over $1 million.

The Senate bill would raise the standard deduction as the House bill does to $12,000 for single individuals and $24,000 for married couples.  However, the Senate bill, unlike the House bill, preserves the additional standard deduction for elderly and blind taxpayers.

The Senate bill would allow individuals to deduct 17.4% of “domestic qualified business income” from pass-through entities.  The deduction would not apply to specified service businesses unless taxable income does not exceed $150,000.  The deduction would be limited to 50% of the W-2 wages.  The House bill would tax pass-through entity income at a maximum rate of 25% but would also not allow the 25% for specified service activities (law firms, accounting firms, architects)

The Senate bill would increase the child tax credit to $1,650  (as opposed to the $1,600 House bill).  It would also allow a $500 credit (as opposed to a $300 House bill) for dependents other than children. The Senate bill also retains the adoption credit and the child care credit while the House bill eliminates them.

The Senate bill would eliminate the deduction for state and local taxes entirely. The House bill would allows a deduction for property taxes up to $10,000.

The Senate bill would retain the medical expense deduction for medical expenses exceeding 10% of AGI while the House bill eliminates the deduction.

While the House bill would limit the deductibility of mortgage interest to $500,000 of acquisition indebtedness, the Senate bill would retain the current $1 million mortgage but would eliminate the deduction for home equity indebtedness.

Both the House and the Senate bill would lower the corporate rate to 20% but the Senate bill would delay the lower rate to 2019.

The House bill combines the American Opportunity Credit, the Hope Credit and the Lifetime Learning Credit into one credit that provides 100% tax credit on the first $2,000 and a 25% on the next $2,000 for tax years after 2017.

The House bill would eliminate the deduction for student loan interest where the Senate would retain it.

The House bill provides benefits for expensing capital purchases as well.

There are many differences to reconcile before one Tax Bill can be voted on and time is short.  Since both bills would eliminate state income tax, planning is very important.  We will be happy to offer a consultation for individuals wondering how to plan for this new bill.  Please call our office if you would like more information.

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How To Avoid Tax Traps with Inherited IRAs

An  inherited Individual Retirement Account (IRA) can be a tremendous boon to the beneficiary.  Who can’t use extra money in retirement!  Most inherited IRAs are cashed out within six months of the death of the family member.  If you do cash it out, there is no way for planning tax strategies! Without proper planning, federal and state taxes can take a sizable bite from the proceeds!

Options for Inherited IRAs:

  •  Take a lump sum distribution of the entire balance
  •   Roll the inherited IRA over into a new account and take the distributions over the longer of the life expectancy of the beneficiary or the decedent.

If the account owner died before reaching the date for RMDs (Required Minimum Distributions), the beneficiary has a third option of withdrawing all the funds by the end of the year containing the fifth anniversary of the decedent’s death (The Five Year Rule). In this case, the life expectancy of the beneficiary must be used.

Keep the Beneficiary Designation Up To Date!

Marriage, divorce and the birth of children can change estate plans.  The IRA will pass by beneficiary designation and not the Will.  Please make sure you keep the beneficiary as you want it.

Titling An Inherited IRA:

An inherited IRA must be titled with both the name of the decedent and the beneficiary plus the word “inherited”. For example, one might title an inherited IRA as “Jane Doe, deceased September 30, 2017, F/B/O Jimmy Doe, beneficiary”.  If you just change the name on the IRA, that is a “cash out” so DO NOT just retitle the inherited IRA to the beneficiary. Retitling the account is best done at the brokerage where the decedent held the IRA before the beneficiary rolls it over to his or her own brokerage.

If Decedent Had Turned 70 1/2 Years of Age and Started RMDs:

If the decedent had already turned age 70 1/2 and started taking required minimum distributions, the beneficiary MUST take the required minimum distribution before the end of that year or there is a 50% penalty and you still must take the distribution.

ROTH?

Consider the beneficiary’s age and if there are already ample retirement sources, converting the inherited IRA to a ROTH may be the way to go.

Please call our office BEFORE just cashing out the inherited IRA!

 

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Charitable Giving of your IRA Required Minimum Distribution

If you are age 70 1/2 or more and are required to take an “RMD” (Required Minimum Distribution) from your IRA, are you taking advantage of the option of donating that distribution to your favorite charity? Many of us make charitable contributions during the year.  If you have an IRA and are required to take a distribution because of your age, you can use a QCD (Qualified Charitable Distribution) and eliminate that income.  This QCD option applies only to IRA and not any company plans.  It also applies to inactive SEP and SIMPLE plans.

With a QCD, your Required Minimum distribution can go directly from your IRA to the charity.  This direct transfer takes care of the RMD but it is not included in your taxable income for that year.  There is no charitable deduction since you did not include it the income from the distribution.  Excluding these amounts from income can reduce adjusted gross income (AGI) as well as taxable social security and any itemized deductions that may be limited by that AGI

This QCD option became a permanent part of the Tax Law in 2015. There can be no benefit back to you because of the giving.  If you receive tickets or some small token of appreciation, it could disallow your benefit of the direct transfer so be careful when using this option.  If you have questions or want to learn more on this topic, please call our office.

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