SALT Limitation Workaround

The Treasury and IRS have proposed new regulations that will block high-tax states’ attempts to circumvent the new $10,000 cap on state and local tax (SALT) deductions.

The $10,000 limit on the SALT deduction was part of the Tax Cuts and Jobs Act, an overhaul of the tax code, which was passed last year.

New York, New Jersey and Connecticut — among the states with the highest property taxes — had put legislation in place to help taxpayers bypass the limit on the deduction.

Those plans included permitting municipalities to set up charitable funds and allowing taxpayers to contribute to them. This would allow taxpayers to donate to state-run charitable funds and receive a credit against their state tax bills while also deducting the charitable donation on the Federal income tax return.

However, the Supreme Court has held that a charitable contribution must be a transfer of money or property without adequate consideration. Meaning that there can be no benefit received with these transfers.

Therefore, under the proposed regs, a taxpayer who makes payments or transfers property to an entity eligible to receive tax deductible contributions would have to reduce its charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive. For example, if a state grants a 70% state tax credit and the taxpayer pays $1,000 to an eligible entity, the taxpayer receives a $700 state tax credit. The taxpayer would have to reduce the $1,000 contribution by the $700 state tax credit, leaving an allowable contribution deduction of $300 on the taxpayer’s federal income tax return.

The rule would also not apply for tax credits of no more than 15% of the cash paid to the state. Thus, for example, a taxpayer who makes a $1,000 contribution to an eligible entity would not be required to reduce the $1,000 deduction on the taxpayer’s federal income tax return if the state or local tax credit received or expected to be received was no more than $150.

If you would like to discuss these new regulations in further detail or any other tax planning, please give us a call.

 

ARM is Hiring!

ARM is hiring full-time staff auditors, a summer audit intern and a winter tax intern to join our growing firm! Full-time employment opportunities are available upon completion of successful internships. Check out our job postings on our website at www.armcpa.com/careers.

 ARM will also be attending the upcoming Ohio University 2018 Business Conference on September 6th from 3pm – 6pm. Please be sure to stop by our booth to learn more about our current employment opportunities.

 

Charitable Deduction Strategy

Under the new tax law, many taxpayers find themselves receiving more benefit taking the standard deduction instead of itemizing. This is due to several reasons, but most notably the law has changed the standard deduction available to $24,000 for taxpayers who are married filing joint plus another $1,300 per taxpayer who is over the age of 65. Another important factor is the taxes portion of the itemized deductions (state and local tax payments and real estate taxes) now getting capped at $10,000. Because of these changes, many taxpayers who donate to charity won’t receive tax benefit for their donations because they will still benefit by taking the standard deduction. If you donate to charity every year and still find yourself taking the standard deduction, there may be a great tax planning opportunity for you to take advantage of known as a donor-advised fund.

Example: You’re filing a married filing joint return. Let’s say your state and local tax payments plus your real estate taxes are capped at $10,000 and you have $8,000 of mortgage interest. This puts you at $18,000 of total deductions. Since the standard deduction is now $24,000, you wouldn’t receive tax benefit for the first $6,000 of charitable contributions. In other words, if you gave $6,000 or less every year to charity, you wouldn’t receive any tax benefit for those contributions. This is where the donor-advised fund comes into play. You could, for example, donate five years of contributions (6,000 x 5 = $30,000) into a donor-advised fund all in one year. Doing this, you would receive the $30,000 deduction in the year you donated to the donor-advised fund. Here’s what your deductions would look like:

Not using donor-advised fund:

Year 1 – Year 5: $24,000 per year = $120,000

Total = $120,000

Using donor-advised fund:

Year 1: $18,000 (mortgage and taxes) + $30,000 (contributed to donor-advised fund) = $48,000

Year 2 – Year 5: $24,000 per year (giving $0 to charity) = $96,000

Total = $144,000

Once the contribution to the donor-advised fund is made, the funds now belong to the charity since donor-advised funds are components of a qualified charitable organization. The charity has ultimate control over the distribution, but you can still advise the charity on who to distribute to, how much to distribute, and the timing of the distributions to the ultimate recipient. The charity will generally follow your recommendations and must retain discretion regarding the use of the funds.

If you would like to discuss donor-advised funds in further detail or any other tax planning, please give us a call.

 

Athlete Tax Planning

Under prior tax law an athlete was able to maximize tax savings by strategically planning the payment of unreimbursed employee expenses including items such as agent fees, players association dues, clubhouse dues, etc. Unfortunately, recent tax reform eliminated the deductibility of unreimbursed employee expenses for all individuals. Using retirement plans to reduce the tax on outside endorsement income is a planning strategy that still remains for athletes.

The fact that the athlete may have coverage under a qualified retirement plan with the team does not prevent the athlete from establishing their own retirement plans on any self-employment (SE) income. However, amounts contributed to an athlete’s qualified plan maintained by the team or the league may affect the amounts that can be contributed to a retirement plan related to SE income. The athlete will rarely have any employees, so the choice and administration of a plan can be quite simple. Self-employed individuals without employees can adopt a qualified retirement plan, with or without a salary deferral 401(k) feature, a simplified employee pension (SEP) plan, a salary-reduction incentive match plan (SIMPLE plan), or an individual retirement account (IRA). Under the new tax law the maximum Federal individual income tax rate is 37%, thus this planning strategy can result in significant tax savings!

Sales Tax Holiday

Looking for a way to reduce your tax liability? How about not paying sales tax for a weekend? Ohio’s annual sales tax holiday is just around the corner. The holiday starts on Friday, August 3, 2018 at 12:00 a.m. and ends on Sunday, August 5, 2018 at 11:59 p.m.

During the holiday, the following items are exempt from sales and use tax:

Clothing priced at $75 per item or less;
School supplies priced at $20 per item or less; and
School instructional material priced at $20 per item or less.

Let us know if you have any questions. Happy shopping!

ARM Drives Change and Innovation at Leading Accounting Conference

2018 BKR International Americas Regional Meeting
La Romana, Dominican Republic

ARM was among the more than 50 global accounting firms gathered in the Dominican Republic for BKR International’s Americas Regional Meeting, May 19-22. ARM is an independent member of BKR International, a leading international association of accounting and business advisory firms. For more than 25 years, BKR has connected members and their clients with global experts and resources.

Focused on the theme of “Driving Change and Innovation,” the Americas Conference featured renowned speakers on cutting edge topics and trends, including technology disruption and artificial intelligence, cybersecurity, creating a team culture, and managing multiple generations. Monday kicked off with keynote speaker Tim Kight, a top leadership consultant, who shared what it takes to have a high-performance culture. Jeremy Wortman, PhD, led a workshop on building and implementing practical solutions that create high-functioning, multi-generational teams. On the international front, Economist Fernando Freijedo, from The Economist Intelligence Unit in New York City, provided insights on identifying the best global business environments for clients. The final keynote speaker, Milton Bartley, provided an insider’s view of ransomware and its evolution as one of the most dangerous cyber-crime operations today.

Marketing Director Delene Taylor at BKR member firm DMLO in Louisville, Kentucky, shared successful strategies for firm growth, and IT Expert Donny Shimamoto, with IntrapriseTechKnowlogies LLC in Houston, emphasized ways that human innovation can leverage the broad field of technology available to accounting firms today — and tomorrow. As part of afternoon breakout sessions, life strategies coach and consultant to CPAs, Lisa Tierney, presented strategies to facilitate the promotion of women leaders in accounting firms.

“We attend BKR events not only to keep up with the latest trends in accounting and technology, but to develop and expand relationships with our colleagues,” noted Eric Mulchaey. “Accounting is a people business; we’re continually interacting with our partners and our teams in the office as well as our clients out in the field. Meeting people face-to-face is critical in building strong relationships.”

BKR Americas Chair Karen Brenneman, CPA, MT, and managing partner of Hall, Kistler & Company LLP in Canton, Ohio, noted that meeting venues such as the Dominican Republic demonstrate the breadth of opportunity in the accounting profession. “We build connections across borders that expand our knowledge of technical competence and innovation. We’re part of a profession that is poised to drive change and influence prosperity on a global basis.”

About BKR
BKR International is the sixth largest global association of independent accounting and business advisory firms, representing the expertise of more than 160 firms in over 500 offices and 80 countries. For more information, visit www.bkr.com or follow BKR on LinkedIn.

ARM Presents at FPA

On May 17th, Ary Roepcke Mulchaey tax partner Bill Vasil presented “Not Your Typical Tax Reform Update” to the Financial Planning Association of Southwestern Ohio. This presentation covered the tax law changes related to the recently passed Tax Cuts and Jobs Act. Please contact Bill (wvasil@armcpa.com) with any questions regarding how these changes may impact your personal or business tax filings.

State, Local and Real Estate Tax Deduction Capped in 2018

Beginning with the 2018 tax year, individuals are now limited in their ability to deduct certain non-business taxes.  Before the changes were effective, individuals were permitted to claim the following types of taxes as itemized deductions, even if they were not business related:
(1) state, local, and foreign real property taxes;
(2) state and local personal property taxes; and
(3) state, local, and foreign income, war profits, and excess profits taxes.

Taxpayers could elect to deduct state and local general sales taxes in lieu of the itemized deduction for state and local income taxes.

Tax deduction cuts. For tax years 2018 through 2025, TCJA limits deductions for taxes paid by individual taxpayers in the following ways:

1.  It limits the aggregate deduction for state and local real property taxes; state and local personal property taxes; state and local, and foreign, income, war profits, and excess profits taxes; and general sales taxes (if elected) for any tax year to $10,000 ($5,000 for marrieds filing separately). Important exception: The $10,000 limit doesn’t apply to: (i) foreign income, war profits, excess profits taxes; (ii) state and local, and foreign, real property taxes; and (iii) state and local personal property taxes if those taxes are paid or accrued in carrying on a trade or business or in an activity engaged in for the production of income.

2. It completely eliminates the deduction for foreign real property taxes unless they are paid or accrued in carrying on a trade or business or in an activity engaged in for profit.

To prevent avoidance of the $10,000 deduction limit by prepayment in 2017 of future taxes, the TCJA treats any amount paid in 2017 for a state or local income tax imposed for a tax year beginning in 2018 as paid on the last day of the 2018 tax year. So an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future tax year in order to avoid the $10,000 aggregate limitation.

We hope this information helps you understand these changes. Please call us if you wish to discuss how they or any of the many other changes in the TCJA could affect your particular tax situation, and the planning steps you might consider in response to them.

529 Plan Changes

The Tax Cuts and Jobs Act (TCJA) has made some changes to qualified tuition programs (“QTPs,” also commonly known as “529 plans”) that you might be interested in. These changes take effect for 529 plan distributions after 2017.

As you know, a 529 plan distribution is tax-free if it is used to pay “qualified higher education expenses” of the beneficiary (student). Before the TCJA made these changes, tuition for elementary or secondary schools wasn’t a “qualified higher education expense,” so students/529 beneficiaries who had to pay it couldn’t receive tax-free 529 plan distributions.

The TCJA provides that qualified higher education expenses now include expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school. Thus, tax-free distributions from 529 plans can now be received by beneficiaries who pay these expenses, effective for distributions from 529 plans after 2017.

There is a limit to how much of a distribution can be taken from a 529 plan for these expenses. The amount of cash distributions from all 529 plans per single beneficiary during any tax year can’t, when combined, include more than $10,000 for elementary school and secondary school tuition incurred during the tax year.

As you can see, the new 529 plan rules might be beneficial to you. If you wish to discuss the impact of them on your particular situation, please give us a call.

Alimony Deduction

The Tax Cuts and Jobs Act (TCJA) has made changes to the tax treatment of alimony that you will be interested in. These changes take effect for divorces and legal separations after 2018.

Current rules. Under the current rules, an individual who pays alimony may deduct an amount equal to the alimony or separate maintenance payments paid during the year as an “above-the-line” deduction. (An “above-the-line” deduction, i.e., a deduction that a taxpayer need not itemize deductions to claim, is more valuable for the taxpayer than an itemized deduction.)

And, under current rules, alimony and separate maintenance payments are taxable to the recipient spouse (includible in that spouse’s gross income).

Please note that the tax rules for child support—i.e., that payers of child support don’t get a deduction, and recipients of child support don’t have to pay tax on those amounts—is unchanged.

TCJA rules. Under the TCJA rules, there is no deduction for alimony for the payer. Furthermore, alimony is not gross income to the recipient. So for divorces and legal separations that are executed (i.e., that come into legal existence due to a court order) after 2018, the alimony-paying spouse won’t be able to deduct the payments, and the alimony-receiving spouse doesn’t include them in gross income or pay federal income tax on them.

TCJA rules don’t apply to existing divorces and separations. It’s important to emphasize that the current rules continue to apply to already-existing divorces and separations, as well as divorces and separations that are executed before 2019.

Some taxpayers may want the TCJA rules to apply to their existing divorce or separation. Under a special rule, if taxpayers have an existing (pre-2019) divorce or separation decree, and they have that agreement legally modified, then the new rules don’t apply to that modified decree, unless the modification expressly provides that the TCJA rules are to apply. There may be situations where applying the TCJA rules voluntarily is beneficial for the taxpayers, such as a change in the income levels of the alimony payer or the alimony recipient.

If you wish to discuss the impact of these rules on your particular situation, please give us a call.