The new tax act means big changes for taxpayers

Big tax law changes mean even bigger opportunities for taxpayers. Take a look at some of the changes to come out of the Tax Cuts and Jobs Act and consider how they could affect you.

The Tax Cuts and Jobs Act was passed at the end of December 2017 with some of the most sweeping changes taxpayers have seen in 30 years. Here are a few big changes to come out of the new act — and what you can do about it.

1. The medical expense deduction threshold was lowered to 7.5 percent.

The tax reform bill retroactively lowers the threshold to deduct medical expenses in 2017 to 7.5 percent of adjusted gross income. The previous threshold was 10 percent. This new 7.5 percent threshold remains in place for 2018, but reverts back to 10 percent in the following years.

What this means: You may want to consider using the medical expense deduction this year. If there are any qualified medical expenses you can make (drug purchases, medical equipment, etc.) to push you over the new, lower threshold, consider doing so in 2018.

2. The healthcare individual mandate penalty stays in place until 2019.

The shared responsibility penalty (also known as the individual mandate) in the Affordable Care Act is effectively repealed by the tax reform legislation, but not right away. The penalty is set to zero in 2019, but remains in place for 2018.

What this means: You still need to retain your Forms 1095 this year in order to provide evidence of your healthcare coverage. Without proof of coverage, you may have to pay the higher of $695 or 2.5 percent of your income. Unless there are further changes coming, 2018 may be the last year you’ll need to worry about the individual mandate penalty.

More changes to consider for 2018 tax planning

We’re experiencing some of most significant tax law changes since the 1980s. There will be a lot of things to consider for tax planning this year. Here are some of the most significant:

  • Reduced income tax rates
  • Doubled standard deductions
  • Suspension of personal exemptions
  • New limits on itemized deductions, including:
    • Combined state and local income, property and sales tax deduction limited to $10,000
    • Casualty losses limited to federally declared disaster areas
    • Elimination of miscellaneous deductions subject to the 2 percent of adjusted gross income threshold
  • Boosts to:
    • The child tax credit ($2,000 in 2018)
    • A new $500 family tax credit
    • 529 education savings plan expansion for K-12 private school education
    • The estate tax exemption (doubled)

Stay tuned

There will surely be more details on the tax reform changes and how they are implemented by the IRS in the weeks to come. In the meantime, contact us if you have urgent questions regarding your situation.

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Time to go through your tax records? Consider this

You’re probably getting ready to go through last year’s records and prepare for this year. But what should you keep and what can you throw away? Here are some things to keep in mind as you sort through your records.

Chances are you’re a little confused about what to keep and what to throw when it comes to tax and financial records. No worries. It’s time to sort through what you’ve got and keep only the important stuff. Here’s what to keep in mind:

  • Keep records that directly support income and expense items on your tax return. For income, this includes W-2s, 1099s and K-1s. Also keep records of any other income you might have received from other sources. It’s also a good idea to save your bank statements and investment statements from brokers.
  • The IRS can audit you within three years after you file your return. But in cases where income is underreported, they can audit for up to six years. To be safe, keep your tax records for seven years.
  • Retain certain records even longer. These include records relating to your house purchase and any improvements you make. Also keep records of investment purchases, dividends reinvested and any major gifts you make or receive.
  • Hold on to copies. Keep copies of all your tax returns and W-2s in case you ever need to prove your earnings for Social Security purposes.

Please call our office if you have questions.

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Why walking away from sunk costs is the best option

Business owners and managers can let emotions dominate the decision-making process. Instead, move past sunk costs with grace and confidence knowing it’s the smartest business decision to make.

Emotions make us human. They can also cause us to make rash decisions. Business owners and managers often let emotions dominate the decision-making process. This is especially true when choices are based on “sunk costs.”

Why sunk costs can lead to trouble

Broadly defined, sunk costs are past expenses that are irrelevant to current decisions. For example, many firms hire consultants who sell and install software. In some cases, a company is left waiting for years for a functional and error-free system. Meanwhile, costs continue to escalate. But are those costs relevant?

Managers, especially those who initially procured the software and contractor, may reason that pulling the plug on a failed contract would be wasting all the money spent. Not true. That money is “sunk.”

Other examples of sunk costs may be found in the areas of product research, advertising, inventory, equipment, investments and other types of business expenses. In each of these areas, companies spend money that can’t be recovered — dollars that become irrelevant for current decision-making.

Sunk costs are a waste of time — move on

Truth be told, the only relevant costs are those that influence the company’s current and future operations. Throwing good money after bad won’t salvage a poor business investment — or a poor business decision.

Deciding to continue with a non-performing contract or a money-losing idea instead of staunching the flow of cash and changing course is irrational. It may be difficult to admit that a mistake was made. It may bruise the ego of the decision maker. But abandoning the sunk costs is often the wisest decision.

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