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Mike DiSabatino CPA

A blog by Michael DiSabatino CPA with topics on Tax Savings, Business, Management and more...

January 2018 DiSabatino, CPA Newsletter

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January 2018
In this issue:

  • Tax Reform in 2018: Individual rule changes
  • Best Way to Avoid an Audit: Preparation
  • Where Did My Retirement Go?: How to locate lost benefits
  • New Year's Resolutions Are for Suckers: Do this instead
  • Mileage Rates for 2018

This Month:

  • Jan. 1st: New Year's Day
  • Jan. 15th: Martin Luther King Jr. Day
  • Jan. 16th: 4th Quarter Estimated Payments Due
  • Start tax planning for the new year:
    • Adjust withholdings
    • Organize filing records
    • Schedule tax reform consultation
    • Rebalance investment portfolio

Happy New Year! Now that tax reform has passed, there are many changes to consider. Some of the major ones are summarized in this newsletter. And as you prepare to file your 2017 return, take note of the advice on avoiding audits. Also included are some tips on locating lost retirement benefits, and some unconventional thinking about New Year's resolutions.

Should you wish to review your situation please feel free to call. Also feel free to forward this newsletter to someone who may benefit from this information. Have a happy and productive 2018!

Tax Reform in 2018

Congress has passed tax reform that will take effect in 2018, ushering in some of the most significant tax changes in three decades. Here are some of the most important items in the new bill that impact individual taxpayers.

Point Reduces income tax rates. The bill retains seven brackets, but at reduced rates, with the highest tax bracket dropping to 37 percent from 39.6 percent.
Point Doubles standard deductions. The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filing jointly. To help cover the cost, personal exemptions and the additional standard deduction are suspended.
2018
Point Limits itemized deductions. Many itemized deductions are no longer available, or are now limited. Here are some of the major examples:
  • Caps state and local tax deductions. State and local tax deductions are limited to $10,000 total for all property, income and sales taxes.
  • Caps mortgage interest deductions. Mortgage acquisition indebtedness interest will be deductible for no more than $750,000. Existing homeowners are unaffected by the new cap. The bill also suspends the deductibility of interest on home equity debt.
  • Limits theft and casualty losses. These deductions are now only available for federally declared disaster areas.
  • Removes 2 percent miscellaneous deductions. Most miscellaneous deductions subject to the 2 percent of adjusted gross income threshold are now gone.
Point Cuts some above-the-line deductions. Moving expense deductions get eliminated except for active-duty military personnel, along with alimony deductions beginning in 2019.
Point Weakens the alternative minimum tax (AMT). The bill retains the alternative minimum tax but changes the exemption to $109,400 for joint filers and the phaseout threshold to $1 million. The changes mean the AMT will affect far fewer people than before.
Point Bumps up child tax credit, adds family tax credit. The child tax credit increases to $2,000 from $1,000, with $1,400 of it refundable even if no tax is owed. The phaseout threshold increases sharply to $400,000 from $110,000 for joint filers, making it available to more taxpayers. Also, dependents ineligible for the child tax credit can qualify for a new $500-per-person family tax credit.
Point Expands use of 529 education savings plans. Qualified distributions from 529 education savings plans now include amounts to pay tuition for students in K-12 private schools.
Point Doubles estate tax exemption. Estate taxes will apply to fewer people, with the exemption doubled to $11.2 million ($22.4 million for a married couple).
Point Reduces pass-through business taxes. Most owners of pass-through entities such as S corporations, partnerships and sole proprietorships will see their income tax lowered with a new 20 percent income reduction calculation.

Because major tax reform like this happens so seldom, it's worth scheduling a tax-planning consultation to ensure you reap the most tax savings possible during 2018.

 

Best Way to Avoid an Audit: Preparation

Getting audited by the IRS is no fun. Some taxpayers are selected for random audits every year, but the chances of that happening to you are very small. You are much more likely to fall under the IRS's gaze if you make one of several common mistakes.

That means your best chance of avoiding an audit is by doing things right before you file your return this year. Here are some suggestions:

Check Don't leave anything out. Missing or incomplete information on your return will trigger an audit letter automatically, since the IRS gets copies of the same tax forms (such as W-2s and 1099s) that you do.
Check Double-check your numbers. Bad math will get you audited. People often make calculation errors when they do their returns, especially if they do them without assistance. In 2016, the IRS sent out more than 1.6 million examination letters correcting math errors. The most frequent errors occurred in people's calculation of their amount of tax due, as well as the number of exemptions and deductions they claimed.
Avoid an Audit
Check Don't stand out. The IRS takes a closer look at business expenses, charitable donations, and high-value itemized deductions. IRS computers reference statistical data on which amounts of these items are typical for various professions and income levels. If what you are claiming is significantly different from what is typical, it may be flagged for review.
Check Have your documentation in order. Be meticulous about your record keeping. Items that will support the tax breaks you take include: cancelled checks, receipts, credit card and investment statements, logs for mileage and business meals, and proof of charitable donations. With proper documentation, a correspondence letter from the IRS inquiring about a particular deduction can be quickly resolved before it turns into a full-blown audit.

Remember, the average person has a less than 1 percent chance of being audited. If you prepare now, you can narrow your audit chances even further and rest easy after you've filed.

 

Where Did My Retirement Go?

How to locate lost benefits

For one reason or another, you may find yourself in a situation where you've lost track of a retirement account like a 401(k) or pension.

There are several ways this can happen:

Caution Job change. People change jobs in today's economy much faster than they did in the past, and that means that retirement accounts like 401(k)s or pensions from a brief job tenure may easily be forgotten.
Caution A death in the family. Deceased loved ones may have overlooked some retirement assets in their wills, especially if they didn't organize their estate well before they died.
Caution Lost access. Records or access to retirement accounts may be compromised by accidents, theft or data losses.
Magnifying Glass

Luckily there are several handy but little-known ways to retrieve retirement account information:

Search Contact employers. Getting in touch with employers who administered a 401(k) or pension plan is one of the easiest ways to retrieve lost retirement benefits. If the account was active from 2009 or later, you can search the Department of Labor's Form 5500 database, which collects the annual information submitted by plan administrators. Often the exact person you would need to get in touch with is listed on the form.
Search Use the National Registry of Unclaimed Retirement Benefits. The registry is created by a nonprofit organization that offers a free service to link up employees with their lost retirement benefits. Visit www.unclaimedretirementbenefits.com and enter the Social Security number of the employee. It will locate any unclaimed accounts and then provide information about getting in contact with the employer maintaining them. Note that accounts will only appear as unclaimed if the employee's mailing address is out of date, or if the employee didn't respond to the employer's attempts to pay out the account.
Search Check the Pension Benefit Guarantee Corporation (PBGC). The PBGC is a government agency that insures and tracks company pensions, and it keeps a list of unclaimed pensions online. You can search a person's name or the name of the company. Note that pensions will continue to exist at the PBGC even if the company that provided it no longer exists.

Once you've located a lost retirement account, you can roll it over into an IRA if it's yours, or you can take several approaches if it is an inherited asset. Reach out if you'd like to discuss your options regarding tax-advantaged retirement accounts.

 

New Year's Resolutions Are for Suckers

Do this instead

If you're like most people, you've adopted a set of New Year's resolutions for 2018. Things like losing weight, quitting smoking or drinking, saving a certain amount of money, and finding a new job are among the most common resolutions.

Also, if you're like most people, you won't keep them. Sociological research has shown only about 10 percent of resolutions are maintained more than a few months. Rather than setting resolutions for yourself this year, try this approach instead: adopt new habits.

Here's why habits can be more useful than resolutions:

One Habits get to the heart of the matter.

By focusing on habits, you are encouraged to address the root of a problem and the behaviors that cause it. If you want to lose weight, by focusing on your habits you will inevitably have to address how you eat and how you exercise. Addressing these root causes of weight gain brings you the benefit of better health long after you meet a specific weight goal.

Resolutions, on the other hand, are focused on end points, and encourage short cuts. If all that matters is losing weight, you may try to get to your ideal weight as soon as possible by using drugs or fad diets that are unlikely to work long-term.

New Years Resolutions
Two Habits avoid the feeling of failure.

Resolutions often drift into obscurity because you feel like a failure when the goals are unmet. Any setbacks or backsliding on the way are devastating, because you are that much further away from meeting your goal.

As soon as you practice a habit you feel like a winner. By eating a salad as part of a healthy eating habit, you get a positive feeling of achievement: "I'm doing something that's good for me right now." If you were focused on a weight loss resolution, eating a salad seems like a futile gesture: "I'm still ten pounds from my weight loss goal. How long do I have to keep eating like this?"

Three Habits avoid the letdown of success.

Strange as it may sound, achieving a resolution can be just as harmful as not achieving it. If you're one of the 10 percent of people who achieve a resolution, you might be surprised that you feel let down afterwards. "Is that it? Is that all I've been working for?"

This famously happened to Alexander the Great, who set out to conquer the entire known world of the classical era. When he'd beaten everyone, Alexander supposedly "wept, for there were no more worlds to conquer."

With a focus on habits, you no longer get hung up on the goal line. Why not consider changing a habit or two? Perhaps the true feeling of success is practicing a positive habit over and over again, with no end in sight to the satisfaction it brings.

 

Mileage Rates for 2018

The IRS recently announced mileage rates to be used for travel in 2018. The standard business mileage rate increased by 1 cent to 54.5 cents per mile. The medical and moving mileage rates also increased by 1 cent, to 18 cents per mile. Charitable mileage rates remained unchanged at 14 cents per mile.

2018 Standard Mileage Rates
Mileage Rate/Mile
   
Business Travel 54.5¢
Medical/Moving 18.0¢
Charitable Work 14.0¢
Mileage Rates

Here are 2017 rates for your reference as well.

2017 Standard Mileage Rates
Mileage Rate/Mile
   
Business Travel 53.5¢
Medical/Moving 17.0¢
Charitable Work 14.0¢
Mileage Rates

Remember to properly document your mileage to receive full credit for your miles driven.

 
As always, should you have any questions or concerns regarding your situation please feel free to call.

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