FAN 2018 First Quarter Tax Report

Tax season officially started with the IRS announcing the opening on January 29, 2018. They are expecting more than 155 million individual tax returns for the 2017 tax year. The deadline to file or ask for an extension is April 17 this year, since April 15 falls on a Sunday and Washington D.C. will celebrate Emancipation Day on April 16.

The largest piece of tax reform legislation in more than 30 years was passed in December. Keep in mind, however, that the Tax Cuts & Jobs Act (TCJA) will have little impact on your taxes for 2017.

Tax planning should always be an essential focus when reviewing your personal financial situation. One of our goals as financial professionals is to attempt to point out as many tax savings opportunities and strategies as possible for our clients. This special report reviews some of the broader recent tax law changes along with a wide range of tax reduction strategies. As you read this report, please note each tax strategy that you think could be beneficial to you. Not all ideas are appropriate for all taxpayers.

We always recommend that you address any tax strategy with your tax professional to consider how one tax strategy may affect another and calculate the income tax consequences (both state and federal). Remember, tax strategies and ideas that have worked in the recent past might not even be available under today’s tax laws. Always attempt to understand all the details before making any decisions-it is always easier to avoid a problem than it is to solve one! Remember that you always have the option to do nothing. Again, please discuss any of your ideas with your tax preparer before taking action.

Please note-your state income tax laws could be different from the federal income tax laws. Visit www.tax.findlaw.com for a wide range of tax information and links to tax forms for all 50 states. All examples mentioned in this report are hypothetical and meant for illustrative purposes only.

Tax Law Changes
While there are many changes set to be made for 2018 taxes, there were some that affect 2017 tax filers.

Medical Expense Deduction:
The Tax Cuts and Jobs Act (TCJA) retroactively makes the 7.5% threshold available to any individual taxpayer regardless of age for 2017 and 2018. The 10% threshold amount returns in 2019.

Personal Casualty Losses:
2017 was an unusual year in the United States for natural disasters. The good news is that there is a tax break that is retroactive back to 2016 that was expanded to include losses in any federally declared disaster areas. Personal casualty losses are typically claimed as an itemized deduction but with the new law, taxpayers whose principal residence was located in a federally declared disaster can take the loss if they claim the standard deduction with limitations.

Business Property:
Expensing certain property for your business in the first year (bonus depreciation) has been increased, up to 100%, for any property acquired and placed in service after September 27, 2017. The bill was also expanded to included used items.

State & Local Taxes:
If your state and local taxes and property taxes are usually more than $10,000, be careful not to assume you could prepay these taxes for 2018 in 2017. The new tax bill prohibits prepaying 2018 state and local taxes that were not imposed in 2017.

Contribute to Retirement Accounts
If you haven’t already funded your retirement account for 2017, consider doing so by April 17, 2018. That’s the deadline for contributions to a traditional IRA (deductible or not) and a Roth IRA. However, if you have a Keogh or SEP and you get a filing extension to October 16, 2018, you can wait until then to put 2017 contributions into those accounts. To start tax-free compounding as quickly as possible, however, try not to delay in making contributions. Making a deductible contribution will help you lower your tax bill for 2017 and your contributions will compound tax-deferred.

To qualify for the full annual IRA deduction in 2017, you must either: 1) not be eligible to participate in a company retirement plan, or 2) if you are eligible, there is a phase-out from $62,000 to $72,000 for singles and from $99,000 to $119,000 for married taxpayers filing jointly. If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is fully-deductible as long as your combined gross income does not exceed $186,000. For 2017, the maximum IRA contribution you can make is $5,500 ($6,500 if you are age 50 or older by the end of the calendar year). For self-employed persons, the maximum annual addition to SEPs and Keoghs for 2017 is $54,000.

Although choosing to contribute to a Roth IRA instead of a traditional IRA will not reduce your 2017 tax bill (Roth contributions are not deductible), it could be the better choice because all withdrawals from a Roth can be tax-free in retirement. Withdrawals from a traditional IRA are fully taxable in retirement. To contribute the full $5,500 ($6,500 if you are age 50 or older by the end of 2017) to a Roth IRA, you must earn $118,000 or less a year if you are single or $186,000 if you’re married and file a joint return.

The amount you save from making a contribution will vary. If you are in the 25% tax bracket and make a deductible IRA contribution of $5,500, you will save $1,375 in taxes the first year. Over time, future contributions could save you thousands, depending on your contribution, income tax bracket and the number of years you keep the money invested. If you have any questions on retirement contributions, please call us.

Roth IRA Conversions
A Roth IRA conversion is when you convert part or all of your traditional IRA into a Roth IRA. This is a taxable event. The amount you converted is subject to ordinary income tax. It might also cause your income to increase, thereby subjecting you to the Medicare surtax. Roth IRAs grow tax-free and withdrawals are tax-free in the future, a time when tax rates might be higher.

Whether to convert part or all of your traditional IRA to a Roth IRA depends on your particular situation. It is best to prepare a tax projection and calculate the appropriate amount to convert. Remember-you do not have to convert all of your IRA to a Roth. Roth IRA conversions are not subject to the pre-age 59½ penalty of 10%.

Many 401(k) plan participants can convert the pre-tax money in their 401(k) plan to a Roth 401(k) plan without leaving the job or reaching age 59½. There are a number of pros and cons to making this change. Please call us to see if this makes sense for you.

Inherited IRAs
Be careful if you inherit a retirement account. In many cases, the decedent’s largest asset is a retirement account. If you inherit a retirement account, such as an IRA or other qualified plan, the money is usually taxable upon receipt. There is no step-up in basis on investments within retirement accounts and therefore most distributions are 100% taxable.

Non-spouse beneficiaries usually cannot roll over an inherited IRA to their own IRA, but the solution to this problem can be easy: establish an Inherited IRA, also known as a “stretch” IRA. Non-spouse beneficiaries of any age are allowed to start their required minimum distributions (RMDs) the year following the year the owner died and stretch them out over their own life expectancy. This will reduce your income taxes significantly compared to having all of the IRA taxed in one year. Please note that it is very important to take the RMD from an inherited IRA every year as penalties for not doing so are very severe – 50% of the amount you did not take.

These tax laws are very complicated and you must implement the requirements carefully to avoid any unnecessary income taxes and penalties. Please contact us before receiving any distributions from a retirement account you inherit. Remember-it is easier to avoid a problem than it is to solve one!

Required Minimum Distributions (RMD)
If you turned age 70½ during 2017, you still have until April 1, 2018, to take out your first RMD. This is a one-time opportunity in case you forgot the first time. The deadline for taking out your RMD in the future will be December 31 of each year. If you do not pay out your RMD by this deadline, you may be subject to a 50% penalty on the amount you were supposed to take out. If you have any questions on your Required Minimum Distributions please call us.

Note: you usually do not have to take out an RMD from your current employer’s retirement account as long as you work there and don’t own more than 5% of the company. See your plan administrator if you have any questions.

2017 Tax Rates & Income Brackets
There are still seven federal income tax brackets for 2017. The lowest of the seven tax rates is 10%, while the top tax rate is 39.6%. The income that falls into each is scheduled to be adjusted each year for inflation. For 2017, see the chart in the end of this report to see what bracket you fall into.

For 2017, there is a phase-out of itemized deductions and personal exemptions for taxpayers whose income is greater than $313,800 if married filing jointly or $261,500 if single.

Not sure how to file? Then ask your tax preparer or review IRS Publication 17, Your Federal Income Tax, which is a complete tax resource. It contains helpful information such as whether you need to file a tax return and how to choose your filing status.

2017 Standard Deduction Amounts
Most taxpayers claim the standard deduction. The amounts for each of the filing statuses are adjusted annually for inflation. For taxpayers below the age 65, the standard deduction for married joint filers is double the single amount ($6,350 and $12,700 respectively). Head of household taxpayers get a larger deduction ($9,350) since they are supporting dependents. Older taxpayers and visually impaired filers get bigger standard deduction amounts (additional $1,250 for married and $1,550 for unmarried taxpayers).

Investment Income
People that have enough income to pay taxes at the 39.6% rate will pay 20% in 2017 on their net long-term capital gains and qualified dividends.

Long-term capital gains are taxed at more favorable rates compared to ordinary income. One tax strategy is to review your investments that have unrealized long-term capital gains and sell enough of the appreciated investments in order to generate enough long-term capital gains to push you to the top of your federal income tax bracket. This strategy could be helpful if you are in the 0% capital gains bracket and do not have to pay any federal taxes on this gain. Then, if you want, you can buy back your investment the same day, increasing your cost basis in those investments. If you sell them in the future, the increased cost basis will help reduce long-term capital gains. You do not have to wait 30 days before you buy back this investment-the 30-day rule only applies to losses, not gains.

Note: this non-taxable capital gain for federal income taxes might not apply to your state.

Remember that marginal tax rates on long-term capital gains and dividends can be higher than expected. The 3.8% surtax can raise the effective rate to 18.8% for filers below the 39.6% tax bracket and 23.8% for people in the highest tax bracket.

Calculating Capital Gains & Losses
With all of these different tax rates for different types of gains and losses in your marketable securities portfolio, it’s probably a good idea to familiarize yourself with some of the rules:

• Short-term capital losses must first be used to offset short-term capital gains.
• If there are net short-term losses, they can be used to offset net long-term capital gains.
• Long-term capital losses are similarly first applied against long-term capital gains, with any excess applied against short-term capital gains.
• Net long-term capital losses in any rate category are first applied against the highest tax rate long-term capital gains.
• Capital losses in excess of capital gains can be used to offset up to $3,000 of ordinary income.
• Any remaining unused capital losses can be carried forward and used in the same manner as described above.

Please remember to look at your 2016 income tax return Schedule D (page 2) to see if you have any capital loss carryover for 2017. This is often overlooked, especially if you are changing tax preparers.

Please double-check your capital gains or losses. If you sold an asset outside of a qualified account during 2017, you most likely incurred a capital gain or loss. Sales of securities showing the transaction date and sale price are listed on the 1099 generated by the financial institution. However, your 1099 might not show the correct cost basis or realized gain or loss for each sale. You will need to know the full cost basis for each investment sold outside of your qualified accounts, which is usually what you paid for it, but this is not always the case.

3.8% Medicare Investment Tax
The year 2017 is the fifth year of the net investment income tax of 3.8%. It is also known as the Medicare surtax. If you earn more than $200,000 as a single or head of household taxpayer, $125,000 as married taxpayers filing separately or $250,000 as married joint return filers, then this tax applies to either your modified adjusted gross income or net investment income (including interest, dividends, capital gains, rentals, and royalty income), whichever is lower. This 3.8% tax is in addition to capital gains or any other tax you already pay on investment income.

There is little you can do to reduce this tax for 2017. There was discussion of it being repealed for 2018 and beyond but this tax currently remains intact.

A helpful strategy has been to pay attention to timing, especially if your income fluctuates from year to year or is close to the $200,000 or $250,000 amount. Consider realizing capital gains in years when you are under these limits. The inclusion limits may penalize married couples, so realizing investment gains before you tie the knot may help in some circumstances. This tax makes the use of depreciation, installment sales, and other tax deferment strategies suddenly more attractive.

Medicare Health Insurance Tax on Wages
If you earn more than $200,000 in wages, compensation, and self-employment income ($250,000 if filing jointly, or $125,000 if married and filing separately), the Affordable Care Act levies a special 0.9% tax on your wages and other earned income. You’ll pay this all year as your employer withholds the additional Medicare Tax from your paycheck. If you’re self-employed, be sure to plan for this tax when you calculate your estimated taxes.

If you’re employed, there’s little you can do to reduce the bite of this tax. Requesting non-cash benefits in lieu of wages won’t help-they’re included in the taxable amount. If you’re self-employed, you may want to take special care in timing income and expenses (especially depreciation) to avoid the limit.

Medical Expenses
For 2017 and 2018, you can deduct medical expenses that exceed 7.5% of your adjusted gross income.

There was a temporary exemption from January 1, 2013 to December 31, 2016 for individuals age 65 and older and their spouses. This exemption allowed you to deduct unreimbursed medical care expenses that exceed 7.5% of your adjusted gross income if you or your spouse were over the age of 65. This exemption expired December 31, 2016. However, the Tax Cuts and Jobs Act retroactively makes the 7.5% threshold available to any individual taxpayer regardless of age for 2017 and 2018.

Energy Credits
You can still get an energy efficiency tax credit for qualifying energy-efficient products such as solar hot water heaters, solar electric equipment and wind turbines. The credit is 30% of the cost of the purchase and installation of these alternative energy products. There is no limit to the amount of credit you can take, and you can carry forward any unused credit to future tax years. These credits can be claimed by filing Form 5695, Residential Energy Credits, with your tax return.

Charitable Gifts & Donations
When preparing your list of charitable gifts, remember to review your checkbook register so you don’t leave any out. Everyone remembers to count the monetary gifts they make to their favorite charities, but you should count noncash donations as well. Make it a priority to always get a receipt for every gift. Keep your receipts. If your contribution totals more than $250, you’ll also need an acknowledgement from the charity documenting the support you provided. Remember that you’ll have to itemize to claim this deduction, but when filing, the expenses incurred while doing charitable work often is not included on tax returns.

You can’t deduct the value of your time spent volunteering, but if you buy supplies for a group, the cost of that material is deductible as an itemized charitable donation. You can also claim a charitable deduction for the use of your vehicle for charitable purposes, such as delivering meals to the homebound in your community or taking your child’s Scout troop on an outing. For 2017, the IRS will let you deduct that travel at .14 cents per mile.

Child & Dependent Care Credit
Millions of parents claim the child and dependent care credit each year to help cover the costs of after-school day care while working. Some parents overlook claiming the tax credit for child care costs during the summer. This tax break also applies to summer day camp costs. The key is that for deduction purposes, the camp can only be a day camp, not an overnight camp.

Remember the dual nature of the credit’s name: child and dependent. If you have an adult dependent that needs care so that you can work, those expenses can possibly be claimed under this tax credit. This Child and Dependent Care Credit can be worth from 20% to 35%, depending on your income, of some or all of qualified expenses paid out.

The Health Insurance Mandate
The Patient Protection and Affordable Care Act is still in effect for 2017 taxes. This Act requires that you must carry a minimum level of health insurance for yourself, your spouse and your dependents. If you fail to do so, you could possibly pay a fine. For tax year 2017, the penalty is the greater of 2.5% of your total household adjusted gross income, or $695 per adult and $347.50 per child, to a maximum of $2,085.

Other Overlooked Tax Items & Deductions
Reinvested Dividends – This isn’t a tax deduction, but it is an important calculation that can save investors a bundle. Former IRS commissioner Fred Goldberg told Kiplinger magazine for their annual overlooked deduction article that missing this break costs millions of taxpayers a lot in overpaid taxes.

Many investors have mutual fund dividends that are automatically used to buy extra shares. Remember that each reinvestment increases your tax basis in that fund. That will in turn reduce the taxable capital gain (or increases the tax-saving loss) when you redeem shares. Please keep good records. Forgetting to include reinvested dividends in your basis results in double taxation of the dividends-once in the year when they were paid out and immediately reinvested and later when they’re included in the proceeds of the sale.

Don’t make that costly mistake.

If you’re not sure what your basis is, ask the fund or us for help. Funds often report to investors the tax basis of shares redeemed during the year. Regulators currently require that for the sale of shares purchased, financial institutions must report the basis to investors and to the IRS.

Student-Loan Interest Paid by Parents – Generally, you can deduct interest only if you are legally required to repay the debt. But if parents pay back a child’s student loans, the IRS treats the transactions as if the money were given to the child, who then paid the debt. So as long as the child is no longer claimed as a dependent, the child can deduct up to $2,500 of student-loan interest paid by their parents each year. And he or she doesn’t have to itemize to use this money-saver. (The parents can’t claim the interest deduction even though they actually foot the bill because they are not liable for the debt).

Charitable Gift Directly made from IRA – Individuals at least 70½ years of age can still exclude from gross income qualified charitable distributions from IRAs of up to $100,000 per year. Please remember to double check on what counts as a qualified charity and distribution before using this tax strategy.

Helpful Tax Time Strategies

• Write down or keep all receipts you think are even possibly tax-deductible. Many taxpayers assume that various expenses are not deductible and do not even mention them to their tax preparer. Don’t assume anything-give your tax preparer the chanceto tell you whether something is or is not deductible.
• Be careful not to overpay Social Security taxes. If you received a paycheck from two or more employers, and earned more than $127,200 in 2017 (up from $118,500 in 2016) you may be able to file a claim on your return for the excess Social Security tax withholding.
• Don’t forget deductions carried over from prior years because you exceeded annual limits, such as capital losses, passive losses, charitable contributions and alternative minimum tax credits.
• Check your 2016 tax return to see if there was a refund from 2016 applied to 2017 estimated taxes.
• Calculate your estimated tax payments for 2018 very carefully. Most computer tax programs will automatically assume that your income tax liability for the current year is the same as the prior year. This is done in order to avoid paying penalties for underpayment of estimated income taxes. However, in many cases this is not a correct assumption, especially if 2017 was an unusual income tax year due to the sale of a business, unusual capital gains, exercise of stock options, or even winning the lottery! Also, the tax act may reduce your tax for 2018, so you may be able to reduce your estimated taxes.
• Remember that IRS.gov is a valuable online resource for tax information.
• Always double check your math where possible and remember it is always wise to consult a tax preparer before filing.

Proactive Tax Planning for 2018
With the passage of the Tax Cuts and Jobs Act (TCJA), many tax brackets, thresholds, and rates will change in 2018. We will try to keep our clients updated during the year on potential strategies that could possibly be helpful. For now, please review the 2017 and 2018 tax brackets for single filers and married taxpayers filing jointly and the ten things listed in this report.

Ten Things Taxpayers Should Know to Proactively Tax Plan for 2018

1. New income tax rates – While there are still seven income tax rates, changes were made to the actual brackets (see chart). The new 37 percent top rate will affect single filers with incomes of $500,000 and higher. This top rate kicks in for married taxpayers who file jointly at $600,000 and up.
2. Higher standard deductions for 2018 – Those who are married and filing jointly will have an increased standard deduction of $24,000, up from the $13,000 it would have been under previous law. Single taxpayers and those who are married and file separately now have a $12,000 standard deduction, up from the $6,500 it would have been for this year prior to the reform. For heads of households, the deduction will be $18,000, up from $9,550
3. Personal exemption eliminated – Starting in 2018, the personal exemption has been eliminated.
4. State and local taxes (SALT) limitations – The itemized deduction for this category is limited to $10,000 for the total of state income, sales and property taxes paid during the year. The $10,000 limit applies both for individual filers and for married taxpayers filing jointly.
5. Mortgage interest deduction changes – The deduction for interest is capped at $750,000 for mortgage loan balances taken out after Dec. 15 of last year. The limit is still $1 million for mortgages that were established prior to Dec. 15, 2017.
6. Child tax credit changes – The child tax credit has been raised to $2,000 per qualifying child, those who are under 17, up from $1,000. A $500 credit is available for dependents who do not get the $2,000 credit (non-child dependents).
7. New contribution limits for retirement savings – Employees who participate in certain retirement plans – 401(k), 403(b) and most 457 plans, and the Thrift Savings Plan – can now contribute as much as $18,500 this year, a $500 increase from the $18,000 limit for 2017.mages
8. New IRA contribution limits – Retirement Savers who contribute to individual retirement accounts will have higher income ranges following cost-of-living adjustments. For single taxpayers, the limit will be $63,000 to $73,000. For married couples, the phaseout range will vary depending on whether the IRA contributor is covered by a workplace retirement plan or not. When the spouse who is investing has access to an employer plan, the range is $101,000 to $121,000. For individuals who don’t have a retirement plan but are married to someone who does, the phaseout has been raised to $189,000 to $199,000. The phaseout was not adjusted for married individuals who file a separate return and who are covered by a workplace retirement plan. That range is $0 to $10,000.Please note that the deduction phases out for individuals and their spouses who are covered by workplace retirement plans.
9. Roth IRA changes – For individuals who are single or the heads of their households, the income phaseout has been raised to $120,000 to $135,000. For married couples who file jointly, the range climbs to $189,000 to $199,000.The phaseout was not adjusted for married individuals who file a separate return. That is $0 to $10,000. Also, starting in 2018, Roth IRA conversions can no longer be recharacterized.
10. Estate tax exemption increased – Starting in 2018, the estate exemption doubles to $11.2 million per individual and $22.4 million per couple.

Conclusion
When filing your 2017 taxes, the rules and laws do not vary too much from your 2016 taxes. Filing in the 2018 tax season may prove to be a more interesting time. An essential part of maintaining your overall financial health is attempting to keep your tax liability to a minimum. Managing wealth involves careful planning and keeping updated and informed of any changes that affect investors.

Looking ahead to 2018, taxpayers will need to be aware of the changes the Tax Cuts & Jobs Act will bring and how they may affect their taxes and overall financial picture. One of our primary goals is to keep you informed of the changes that will be affecting investors like you. We believe that taking a proactive approach is better than a reactive approach-especially regarding income tax strategies!

Remember-if you ever have any questions regarding your finances, please be sure to call us first before making any decisions. We pride ourselves in our ability to help clients make decisions! Many times there is a simple solution to your question or concern. Don’t worry about things that you don’t need to worry about.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. ­We suggest that you discuss your specific tax issues with a qualified tax advisor.

Note:  The views stated in this letter are not necessarily the opinion of Financial Advisors Network, Inc. and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein.  Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.  Please note that statements made in this newsletter may be subject to change depending on any revisions to the tax code or any additional changes in government policy. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount is subject to its own five-year holding period. Investors should consult a tax advisor before deciding to do a conversion.

Sources: www.IRS.gov, turbotax.com; Business Insider Contents Provided by The Academy of Preferred Financial Advisors, Inc 2018© All rights reserved. Reviewed by Keebler & Associates.

Financial Advisors Network, Inc. is a registered investment advisory firm.

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