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The Joys and Financial Challenges of Parenthood
Children are your greatest responsibility, as well as your most important--and expensive--commitment.
Parenthood can be both wonderfully rewarding and frighteningly challenging. Children give gifts only a parent can understand--from sticky-finger hugs to heartfelt pleas to tag along on Saturday morning errands. You raise them with a clear goal that you secretly dread will actually take place - that someday they will be grown, independent, and ready to move out on their own, and your work will be over.
As your children travel this long and never-dull road from infancy to adulthood, you try to protect them. You want to make sure that they are financially secure, but meeting expenses can be challenging.
Tax Cuts and Jobs Act: 529 Plans Expanded
In December 2017, the Tax Cuts and Jobs Act, a sweeping $1.5 trillion tax-cut package, became law. College students and their parents dodged a major bullet with the legislation, as initial drafts of the bill included the elimination of Coverdell Education Savings Accounts, the Lifetime Learning Credit, and the student loan interest deduction. Also on the table in early drafts of the bill was the taxation of tuition waivers, which are used primarily by graduate students and employees of higher-education institutions. In the end, none of these provisions made it into the final legislation. What did make the final cut was the expanded use of 529 plans.
Which states offer a 529 plan state tax benefit?
A total of 34 states and the District of Columbia offer a full or partial state income tax deduction for contributions to a 529 plan (however, most restrict the deduction to contributions made to the in-state plan only). California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota, New Jersey, North Carolina, and Tennessee do not offer a state income tax deduction; and Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming do not have a state income tax.
Source: The Smart Student Guide to Financial Aid, www.finaid.org, January 14, 2018
Tax Cuts and Jobs Act: Impact on Businesses
The Tax Cuts and Jobs Act, a $1.5 trillion tax cut package, was signed into law on December 22, 2017. The centerpiece of the legislation is a permanent reduction of the corporate income tax rate. The corporate rate change and some of the other major provisions that affect businesses and business income are summarized below. Provisions take effect in tax year 2018 unless otherwise stated.
Virtual Currency Generates Tax Liability in the Real World
Cryptocurrencies can be used entirely within a virtual economy or can be used instead of a government-issued currency to purchase goods and services in the real economy (GAO Report: Virtual Economies and Currencies —Additional IRS Guidance Could Reduce Tax Compliance Risks (GAO-13-516), (June 18, 2013)). Cryptocurrency, also known as virtual currency, is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but is not backed by a government-issued legal tender. A few examples of popular cryptocurrencies are Bitcoin, Ethereum, and Litecoin.
Since virtual currencies don’t have the status of legal tender, the Internal Revenue Service has said it will treat virtual currency as property rather than currency, since it is not regulated by any central banking system (IRS Notice 2014-21). This means that the sale or exchange of a virtual currency that has gained value since they were acquired could trigger a tax liability.
Through certain exchanges, virtual currencies can be digitally traded between users and purchased or exchanged for U.S. dollars, other foreign currencies, or other crypto-currencies. Accordingly, taxpayers can have gain or loss on the exchange of virtual property. The tax treatment of that gain or loss, well, depends on a number of factors. Many of these factors have not been completely defined, as the AICPA points out in its comment letter to the IRS (AICPA Comments on Notice 201421, June 10, 2016).
Generally, convertible virtual currency (e.g., Bitcoin), which has an equivalent value in or acts as a substitute for real currency, is treated as property for federal tax purposes. Transactions using convertible virtual currency are subject to the general tax principles that apply to property transactions. A taxpayer who receives convertible virtual currency as payment for goods or services must include in gross income the currency's fair market value, measured in U.S. dollars, as of the date it was received. If a taxpayer successfully "mines" convertible virtual currency (e.g., uses computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger), the currency's fair market value is includible in gross income as of the date of receipt (IRS Notice 2014-21) (U.S. Master Tax Guide® (2018), 785, Taxation of Miscellaneous or Other Income).
Selling or Exchanging Virtual Currency
Generally, stocks and virtual currencies are taxed the same when held as capital assets by the taxpayer, according to the IRS Notice. The character of gain or loss from an exchange of virtual currency for property depends on whether the virtual currency is a capital asset in the taxpayer’s hands. Thus, if virtual currency is a capital asset in the taxpayer’s hands, the taxpayer realizes capital gain or loss from the exchange of virtual currency for property. If the virtual currency is not a capital asset in the taxpayer’s hands, the taxpayer realizes ordinary gain or loss.
Taxpayers who exchange virtual currency for other property will have gain or loss on the transaction. Like other exchanges of property, the amount of gain or loss is based on the difference between the fair market value of the property received and the adjusted basis of the property given up. Thus, a taxpayer has taxable gain if the fair market value of the property received in exchange for the virtual currency exceeds the taxpayer’s adjusted basis for the virtual currency. A taxpayer has a loss if the fair market value of the property received in exchange for the virtual currency is less than the taxpayer’s adjusted basis for the virtual currency.
Like-kind exchange
Taxpayers who engage in a like-kind exchange of property held for investment or for productive use in a trade or business may defer gain on the transaction. However, like-kind exchanges cannot be used for certain types of property including stocks, bonds, and foreign currencies. It is not clear if cryptocurrency can be disposed of in a like-kind exchange; and, if it can be, what would qualify as like-kind property. The AICPA has requested that the IRS clarify "if there are particular factors that distinguish one virtual currency as likekind to another virtual currency for section 1031 purposes" (AICPA Comments on Notice 201421, June 10, 2016).
Receiving Virtual Currency for Earned Income
Taxpayers have gross income if they receive virtual currency as payment for providing goods or services.
Employers and employees. Individuals who receive virtual currency, such as bitcoin, from their employer as payment for services must include the fair market value of the virtual currency in income. Employers that pay their employees’ wages in virtual currency must withhold tax on the wages. The fair market value of the virtual currency paid is subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax and Federal Unemployment Tax Act (FUTA) tax. Employers must report such amounts on Form W-2, Wage and Tax Statement.
Independent contractors. An individual who receives virtual currency for performing services as an independent contractor has self-employment income equal to the fair market value of the virtual currency measured in U.S. dollars on the date of receipt.
Miners of virtual currency. Individuals will have gross income if they receive virtual currency for successfully mining virtual currency. An example of mining is using computer resources to validate bitcoin transactions and maintain the public bitcoin transaction ledger. When a “miner” successfully mines virtual currency, the miner has gross income equal to the fair market value of the virtual currency on the date of receipt of the currency.
An individual who mines virtual currency as a trade or business and not as an employee is subject to self- employment tax on the income derived from the mining activities. Self-employment tax is applied to the individual’s net earnings from self-employment from the mining activity, which is the gross income derived from the trade or business of mining less allowable deductions.
Gifts or Inheritance
The current IRS guidance on virtual currency transactions does not address the tax treatment of gifts and inheritances involving virtual currency. Since the IRS’s stated taxing principle is to treat virtual currency as property, gifts or inheritances of virtual currency should be treated as gifts or inheritances of other kinds of property.
Regarding Fair Market Value
Fair market value of virtual currency. In order to calculate gross income, gain or loss, or basis for virtual currency transactions, taxpayers must determine the fair market value of the virtual currency. Since virtual currency transactions are reported in U.S. dollars for tax purposes, taxpayers must determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt of the virtual currency.
The fair market value for popular virtual currencies, such as bitcoin, ethereum or litecoin, can easily be determined. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value is determined by converting the virtual currency into U.S. dollars at the exchange rate in a reasonable manner that is consistently applied. If the virtual currency is converted into a different real currency, then that amount must be converted into U.S dollars. Virtual currency converters are widely available on the internet.
Although the fair market value of virtual currency can easily be determined if it is listed on an exchange, the IRS has not provided any guidance on determining the fair market value of the hundreds of virtual currencies that are not listed on an exchange.
Taxpayer Assistance
Taxpayer’s are responsible for maintaining adequate records and documentation to substantiate the accuracy and completeness of their tax return. Also, it’s possible that each virtual currency transaction is reportable in some form on a taxpayer’s tax return. Support of a tax professional who is familiar with the virtual currency environment is recommended to assist with reporting requirements. We are excepting a limited number of new clients this tax season. Contact our office today to schedule a consultation.
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Tax Cuts and Jobs Act: Impact on Individuals
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, a sweeping $1.5 trillion tax-cut package that fundamentally changes the individual and business tax landscape. While many of the provisions in the new legislation are permanent, others (including most of the tax cuts that apply to individuals) will expire in eight years. Some of the major changes included in the legislation that affect individuals are summarized below; unless otherwise noted, the provisions are effective for tax years 2018 through 2025.
Year-End Charitable Giving
With the holiday season upon us and the end of the year approaching, we pause to give thanks for our blessings and the people in our lives. It is also a time when charitable giving often comes to mind. The tax benefits associated with charitable giving could potentially enhance your ability to give and should be considered as part of your year-end tax planning.
Assume you are considering making a charitable gift of $1,000. One way to potentially enhance the gift might be if you increase it by the amount of any income taxes you save with the charitable deduction for the gift. With a 28% tax rate, you might be able to give $1,389 to charity ($1,389 x 28% = $389 taxes saved). On the other hand, with a 35% tax rate, you might be able to give $1,538 to charity ($1,538 x 35% = $538 taxes saved).
A word of caution
Be sure to deal with recognized charities and be wary of charities with similar sounding names. It is common for scam artists to impersonate charities using bogus websites and through contact involving email, telephone, social media, and in-person solicitations. Check out the charity on the IRS website, irs.gov, using the Exempt Organizations Select Check search tool. And don't send cash; contribute by check or credit card.
Understanding Your Paycheck
Congratulations! You've just landed a new job. Here are some important things to be aware of before you receive your first paycheck.
When will I receive my paycheck?
How often will you be paid? Typically, your payday will depend on the company you work for and which state you work in. You might be paid on a weekly, bi-weekly, bi-monthly, or monthly basis. Regardless of your employer's pay period, expect to receive your paycheck on your employer's set payday.
Bear in mind that state law requires your employer to pay you in a timely manner. Employers cannot pay less often than required, but they are allowed to pay more frequently.
Tips on Maintaining Your Financial Records
An important part of managing your personal finances is keeping your financial records organized. Whether it's a utility bill to show proof of residency or a Social Security card for wage reporting purposes, there may be times when you need to locate a financial record or document--and you'll need to locate it relatively quickly.
By taking the time to clear out and organize your financial records, you'll be able to find what you need exactly when you need it.
Deduction Planning
Taxes, like death, are inevitable. But why pay more than you have to? The trick to minimizing your federal income tax liability is to understand the rules and make the most of your tax planning opportunities. Personal deduction planning is one aspect of tax planning. Here, your goals are to use your deductions in the most efficient manner and take all deductions to which you're entitled.
Year-end Tax Planning
As the end of the year approaches, it's time to consider strategies that could help you reduce your tax bill. But most tax tips, suggestions, and strategies are of little practical help without a good understanding of your current tax situation. This is particularly true for year-end planning. You can't know where to go next if you don't know where you are now.
So take a break from the usual fall chores and pull out last year's tax return, along with your current pay stubs and account statements. Doing a few quick projections will help you estimate your present tax situation and identify any glaring issues you'll need to address while there's still time.
What's up with the Proposed Tax Reform Legislation?
On November 2, 2017, House Republicans released their comprehensive tax reform plan, the Tax Cuts and Jobs Act. Then, on November 9, 2017, Senate Republicans released their own plan. The two plans have much in common, but also have significant differences. Some key provisions of these tax proposals are discussed below. Of course, provisions may change as the legislation winds its way through Congress. Most provisions, if enacted, would be effective for 2018. Comparisons below are generally for 2018.
On November 16, 2017, the House passed its version of the Tax Cuts and Jobs Act. On that same day, the Senate Finance Committee approved its version; it can now be considered by the full Senate. If the Senate approves its version, the House and Senate would then need to reconcile the two versions.
Tax Issues for Household Employers
If you pay for household help, you may be liable for the "nanny tax," even if your employee is not a nanny, per se. The nanny tax refers to three federal employment taxes that household employers may have to pay for their domestic workers — Social Security, Medicare, and unemployment taxes. If you hire someone to work in or around your home, you'll need to know what federal income tax issues (if any) apply, and what forms may be required. Although you may have to withhold and pay federal employment taxes in certain cases, you won't have to withhold federal income tax from your household employees' wages (unless you choose to do so).
Introduction to the S Corporation - Distributions
What are S corporation distributions?
Distributions from an S corporation occur when a corporation makes a payment of cash or property to its shareholders based on their stock ownership. Because S corporations serve as conduit (pass-through) entities, distributions from S corporations more closely resemble partnership distributions than C corporation distributions. C corporation distributions, of course, usually take the form of taxable dividends.
To determine the tax consequences of distributions from an S corporation, it is important to know first whether or not the S corporation has accumulated earnings and profit (AE&P). AE&P is important because a distribution from AE&P will result in a taxable dividend to a shareholder. An S corporation does not generate earnings and profit as such and will not have AE&P unless the company existed originally as a C corporation or acquired a C corporation. To simplify matters, this discussion will presume that there is no AE&P. If there is a possibility that your C corporation will make an S election, contact an accountant or tax attorney to learn more about AE&P.
Introduction to the S Corporation - General Rules
What is an S corporation and how is it taxed?
In effect, an S corporation conducts business as a regular corporation but is essentially taxed as a partnership. Unlike a C corporation, the S corporation generally does not pay a corporate tax on income. Rather, the S corporation passes income, losses, deductions, and credits through to its shareholders, who report the items and calculate the tax on their individual returns.
Introduction to the S Corporation - Income or Loss
What is an S corporation?
An S corporation is a small business entity that is treated as a regular corporation for all purposes other than its treatment under tax law. To make a "subchapter S election," a corporation must satisfy a number of requirements:
- All shareholders must consent to the S corporation status
- The number of shareholders is limited to 100 (25 for tax years beginning prior to 2004)
- The corporation can issue only one class of stock
- The S corporation must be a domestic corporation, and its shareholders must be citizens or residents of the United States
- Only individuals, estates, S corporations, and certain trusts can be shareholders of the S corporation
Tuition and fees increased an average of 3+% - College Board Releases 2017-2018 College Cost Data
The College Board has released college cost data for the 2017-2018 school year in its annual Trends in College Pricing report. Here are the highlights:
Public colleges (in-state students):
- Tuition and fees increased an average of 3.1% to $9,970
- Room and board increased an average of 3.1% to $10,800
- *Total average cost for 2017-2018: $25,290 (up from $24,610 in 2016-2017)
Public colleges (out-of-state students):
- Tuition and fees increased an average of 3.2% to $25,620
- Room and board increased an average of 3.1% to $10,800
- *Total average cost for 2017-2018: $40,940 (up from $39,890 in 2016-2017)
Private colleges:
- Tuition and fees increased an average of 3.6% to $34,740
- Room and board increased an average of 3.0% to $12,210
- *Total average cost for 2017-2018: $50,900 (up from $49,320 in 2016-2017)
IRA and Retirement Plan Limits for 2018
The maximum amount you can contribute to a traditional IRA or a Roth IRA in 2018 is $5,500 (or 100% of your earned income, if less), unchanged from 2017. The maximum catch-up contribution for those age 50 or older remains at $1,000. You can contribute to both a traditional IRA and a Roth IRA in 2018, but your total contributions can't exceed these annual limits.
November 1 Begins Open Enrollment for Health Insurance Marketplaces
Beginning on November 1, 2017, individuals (including their families) may apply for new health insurance or switch to a different health-care plan through a Health Insurance Marketplace under the Affordable Care Act (ACA). The open enrollment period for 2018 health coverage ends on December 15, 2017.
If you don't apply for health insurance during the open enrollment period — and don't qualify for special enrollment (presuming you don't have access to employer-provided health insurance) — your options are generally limited to purchasing private, commercial insurance, short-term health insurance, Medicaid, or the Children's Health Insurance Program (CHIP).
Estate Planning and Income Tax Basis
Income tax basis can be important when deciding whether to make gifts now or transfer property at your death.
This discussion contains examples that include references to stock that has increased in value for purposes of explaining basis rules. It is important to understand that any shares of stock can lose some or all of their value over time.
The generation-skipping transfer (GST) tax is a separate tax that generally applies when you transfer property to a person two or more generations younger than you, such as a grandchild. In some circumstances, GST tax can affect basis.