Individual Tax

The federal spending package that was enacted in the waning days of 2019 contains numerous provisions that will impact both businesses and individuals. In addition to repealing three health care taxes and making changes to retirement plan rules, the legislation extends several expired tax provisions. Here is an overview of several of the more important provisions in the Taxpayer Certainty and Disaster Relief Act of 2019.

Deduction for Mortgage Insurance Premiums

Before the Act, mortgage insurance Apremiums paid or accrued before January 1, 2018, were potentially deductible as qualified residence interest, subject to a phase-out based on the taxpayer’s adjusted gross income (AGI). The Act retroactively extends this treatment through 2020.

Reduction in Medical Expense Deduction Floor

For 2017 and 2018, taxpayers were able to claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses were greater than 7.5% of AGI. The AGI threshold was scheduled to increase to 10% of AGI for 2019 and later tax years. Under the Act, the 7.5% of AGI threshold is extended through 2020.

Qualified Tuition and Related Expenses Deduction

The above-the-line deduction for qualified tuition and related expenses for higher education, which expired at the end of 2017, has been extended through 2020. The deduction is capped at $4,000 for a taxpayer whose modified AGI does not exceed $65,000 ($130,000 for those filing jointly) or $2,000 for a taxpayer whose modified AGI is not greater than $80,000 ($160,000 for joint filers). The deduction is not allowed with modified AGI of more than $80,000 ($160,000 if you are a joint filer).

Credit for Energy-Efficient Home Improvements

The 10% credit for certain qualified energy improvements (windows, doors, roofs, skylights) to a principal residence has been extended through 2020, as have the credits for purchases of energy efficient property (furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditions, and circulating fans), subject to a lifetime cap of $500.

Empowerment Zone Tax Incentives

Businesses and individual residents within economically depressed areas that are designated as “Empowerment Zones” are eligible for special tax incentives. Empowerment Zone designations, which expired on December 31, 2017, have been extended through December 31, 2020, under the new tax law.

Employer Tax Credit for Paid Family and Medical Leave

A provision in the tax code permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. This credit has been extended through 2020.

Work Opportunity Tax Credit

Employers who hire individuals who belong to one or more of 10 targeted groups can receive an elective general business credit under the Work Opportunity Tax Credit program. The recent tax law extends this credit through 2020.

For details about these and other tax breaks included in the recent law, please consult your tax advisor.

The recently enacted tax reform law made some significant changes to the system of income tax deductions used by consumers. Here are highlights of the changes.

The standard deduction is increased.

The standard deduction has grown. Because of the significant increases, many taxpayers who formerly itemized their deductions may now benefit from the standard deduction instead.

 

Changes in Standard Deductions
Filing Status	Old Law	New Law
Single	$6,500	$12,000
Married filing jointly	$13,000	$24,000
Head of Household	$9,550	$18,000
Married filing separately	$6,500	$12,000

The deduction for state and local taxes is reduced.

For those who itemize their deductions, the maximum amount permitted for all state and local taxes (SALT) combined is $10,000 per year ($5,000 for married individuals filing separately). How the new limit affects you will depend on your specific situation. If you live in a high-tax state, you may see much of your SALT deduction reduced, and that could mean that itemizing deductions is no longer the better option.

The mortgage interest deduction has a lower cap.

For mortgage debt incurred after December 15, 2017, you may only deduct interest on debt value up to $750,000 ($375,000 for married individuals filing separately). Previously, the limit was $1 million. For home equity debt, the deduction for interest is suspended through 2025, unless the proceeds are used to buy, build, or substantially improve the home that secures the loan.

Casualty and theft losses are not now generally deductible.

Beginning this year, only losses that occur as the result of a federally-declared disaster may be deducted. Formerly, casualty and theft losses had generally been deductible to the extent they exceeded 10% of adjusted gross income (AGI).

Miscellaneous itemized deductions are suspended.

Various miscellaneous expenses, such as unreimbursed employee business expenses and tax preparation expenses, were formerly deductible as an itemized deduction to the extent they totaled more than 2% of the taxpayer’s AGI. The new law suspends the deduction for these expenses.

Charitable contributions are still deductible if you itemize.

Cash contributions will now be allowed up to 60% of the taxpayer’s “contribution base,” up from 50%. A taxpayer’s contribution base is generally equal to AGI exclusive of any net operating loss carryback for the year. This change will affect only those taxpayers who contribute a significant proportion of their income to charity.

Medical expense rules become more generous.

Taxpayers with substantial medical expenses who also itemize can now deduct unreimbursed medical expenses in excess of 7.5% of their AGI, down from the deductibility threshold of 10% previously.

Moving expenses lose their tax advantage.

The deduction for qualified moving expenses, which can be claimed even if a taxpayer doesn’t itemize, has been suspended, except for members of the Armed Forces on active duty (provided certain conditions are met).

The alimony deduction for payers is eliminated.

The tax treatment of alimony payments will change significantly under the new law. Such payments will no longer deductible by the payer (and the recipient will no longer be required to include the alimony in income). The change applies to alimony paid under any divorce or separation agreement executed after December 31, 2018.

Note that some of these provisions are scheduled to sunset in 2019 or 2026 unless Congress acts to extend them.

Send us an e-mail or call us today at 727-544-1120 and ask for Debbie Jackson to discuss your tax planning needs with an experienced Largo CPA.

As just about every investor knows, it’s not what your investments earn, but what they earn after taxes that counts. After factoring in federal income and capital gains taxes, the alternative minimum tax, and any applicable state and local taxes, your investments’ returns in any given year may be reduced by 40% or more.

For example, if you earned an average 6% rate of return annually on an investment taxed at 24%, your after-tax rate of return would be 4.56%. A $50,000 investment earning 8% annually would be worth $89,542 after 10 years; at 4.56%, it would be worth only $78,095. Reducing your tax liability is key to building the value of your assets, especially if you are in one of the higher income tax brackets. Here are five ways to potentially help lower your tax bill.1

Invest in Tax-Deferred and Tax-Free Accounts

Tax-deferred accounts include company-sponsored retirement savings accounts such as traditional 401(k) and 403(b) plans, traditional individual retirement accounts (IRAs), and annuities. Contributions to these accounts may be made on a pretax basis (i.e., the contributions may be tax deductible) or on an after-tax basis (i.e., the contributions are not tax deductible). More important, investment earnings compound tax deferred until withdrawal, typically in retirement, when you may be in a lower tax bracket. Contributions to nonqualified annuities, Roth IRAs, and Roth-style employer-sponsored savings plans are not tax deductible. Earnings that accumulate in Roth accounts can be withdrawn tax free if you have held the account for at least five years and meet the requirements for a qualified distribution.

Pitfalls to avoid: Withdrawals prior to age 59½ from a qualified retirement plan, IRA, Roth IRA, or annuity may be subject not only to ordinary income tax but also to an additional 10% federal tax. In addition, early withdrawals from annuities may be subject to additional penalties charged by the issuing insurance company. Also, if you have significant investments, in addition to money you contribute to your retirement plans, consider your overall portfolio when deciding which investments to select for your tax-deferred accounts. If your effective tax rate — that is, the average percentage of income taxes you pay for the year — is higher than 12%, you’ll want to evaluate whether investments that earn most of their returns in the form of long-term capital gains might be better held outside of a tax-deferred account. That’s because withdrawals from tax-deferred accounts generally will be taxed at your ordinary income tax rate, which may be higher than your long-term capital gains tax rate (see “Income vs. Capital Gains”).

Income vs. Capital Gains

Generally, interest income is taxed as ordinary income in the year received, and qualified dividends are taxed at a top rate of 20%. (Note that an additional 3.8% tax on investment income also may apply to both interest income and qualified (or nonqualified) dividends.) A capital gain or loss — the difference between the cost basis of a security and its current price — is not taxed until the gain or loss is realized. For individual stocks and bonds, you realize the gain or loss when the security is sold. However, with mutual funds, you may have received taxable capital gains distributions on shares you own. Investments you (or the fund manager) have held 12 months or less are considered short term, and those capital gains are taxed at the same rates as ordinary income. For investments held more than 12 months (considered long term), capital gains are taxed at no more than 20%, although an additional 3.8% tax on investment income may apply. The actual rate will depend on your tax bracket and how long you have owned the investment.

Consider Government and Municipal Bonds

Interest on U.S. government issues is subject to federal taxes but is exempt from state taxes. Municipal bond income is generally exempt from federal taxes, and municipal bonds issued in-state may be free of state and local taxes as well. An investor in the 32% federal income tax bracket would have to earn 7.35% on a taxable bond, before state taxes, to equal the tax-exempt return of 5% offered by a municipal bond. Sold prior to maturity or bought through a bond fund, government and municipal bonds are subject to market fluctuations and may be worth less than the original cost upon redemption.

Pitfalls to avoid: If you live in a state with high state income tax rates, be sure to compare the true taxable-equivalent yield of government issues, corporate bonds, and in-state municipal issues. Many calculations of taxable-equivalent yield do not take into account the state tax exemption on government issues. Because interest income (but not capital gains) on municipal bonds is already exempt from federal taxes, there’s generally no need to keep them in tax-deferred accounts. Finally, income derived from certain types of municipal bond issues, known as private activity bonds, may be a tax-preference item subject to the federal alternative minimum tax.

Look for Tax-Efficient Investments

Tax-managed or tax-efficient investment accounts and mutual funds are managed in ways that may help reduce their taxable distributions. Investment managers may employ a combination of tactics, such as minimizing portfolio turnover, investing in stocks that do not pay dividends, and selectively selling stocks that have become less attractive at a loss to counterbalance taxable gains elsewhere in the portfolio. In years when returns on the broader market are flat or negative, investors tend to become more aware of capital gains generated by portfolio turnover, since the resulting tax liability can offset any gain or exacerbate a negative return on the investment.

Pitfalls to avoid: Taxes are an important consideration in selecting investments but should not be the primary concern. A portfolio manager must balance the tax consequences of selling a position that will generate a capital gain versus the relative market opportunity lost by holding a less-than-attractive investment. Some mutual funds that have low turnover also inherently carry an above-average level of undistributed capital gains. When you buy these shares, you effectively buy this undistributed tax liability.

Put Losses to Work

At times, you may be able to use losses in your investment portfolio to help offset realized gains. It’s a good idea to evaluate your holdings periodically to assess whether an investment still offers the long-term potential you anticipated when you purchased it. Your realized capital losses in a given tax year must first be used to offset realized capital gains. If you have “leftover” capital losses, you can offset up to $3,000 against ordinary income. Any remainder can be carried forward to offset gains or income in future years, subject to certain limitations.

Pitfalls to avoid: A few down periods don’t necessarily mean you should sell simply to realize a loss. Stocks in particular are long-term investments subject to ups and downs. However, if your outlook on an investment has changed, you may be able to use a loss to your advantage.

Keep Good Records

Keep records of purchases, sales, distributions, and dividend reinvestments so that you can properly calculate the basis of shares you own and choose the shares you sell in order to minimize your taxable gain or maximize your deductible loss.

Pitfalls to avoid: If you overlook mutual fund dividends and capital gains distributions that you have reinvested, you may accidentally pay the tax twice — once on the distribution and again on any capital gains (or underreported loss) — when you eventually sell the shares.

Keeping an eye on how taxes can affect your investments is one of the easiest ways you can enhance your returns over time. For more information about the tax aspects of investing, consult a qualified tax advisor.

Source/Disclaimer:

¹Example does not include taxes or fees. This information is general in nature and is not meant as tax advice. Always consult a qualified tax advisor for information as to how taxes may affect your particular situation.

Send us an e-mail or call us today at 727-544-1120 and ask for Debbie Jackson to discuss your tax needs with an experienced Largo CPA.