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 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.

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.

Mortgage Interest Deduction

Under the pre-TCJA rules, you could deduct interest on up to a total of $1 million of mortgage debt used to acquire your principal residence and a second home, i.e., acquisition debt. For a married taxpayer filing separately, the limit was $500,000. You could also deduct interest on home equity debt, i.e., debt secured by the qualifying homes. Qualifying home equity debt was limited to the lesser of $100,000 ($50,000 for a married taxpayer filing separately), or the taxpayer’s equity in the home or homes (the excess of the value of the home over the acquisition debt). The funds obtained via a home equity loan did not have to be used to acquire or improve the homes. So you could use home equity debt to pay for education, travel, health care, etc.

Under the TCJA, starting in 2018, the limit on qualifying acquisition debt is reduced to $750,000 ($375,000 for a married taxpayer filing separately). However, for acquisition debt incurred before December 15, 2017, the higher pre-TCJA limit applies. The higher pre-TCJA limit also applies to debt arising from refinancing pre-December 15, 2017 acquisition debt, to the extent the debt resulting from the refinancing does not exceed the original debt amount. This means you can refinance up to $1 million of pre-December 15, 2017 acquisition debt in the future and not be subject to the reduced limitation.

And, importantly, starting in 2018, there is no longer a deduction for interest on home equity debt. This applies regardless of when the home equity debt was incurred. Accordingly, if you are considering incurring home equity debt in the future, you should take this factor into consideration. And if you currently have outstanding home equity debt, be prepared to lose the interest deduction for it, starting in 2018. (You will still be able to deduct it on your 2017 tax return, filed in 2018.)

Lastly, both of these changes last for eight years, through 2025. In the absence of intervening legislation, the pre-TCJA rules come back into effect in 2026. So beginning in 2026, interest on home equity loans will be deductible again, and the limit on qualifying acquisition debt will be raised back to $1 million ($500,000 for married separate filers).

If you would like to discuss how these changes affect your particular situation, and any planning moves you should consider in light of them, please give us a call.

Ohio 529 Deduction Increased to $4,000

Effective Jan. 1, 2018, the state income tax deduction for contributions made to Ohio’s 529 increased to $4,000 for Ohioans. Passed by the Ohio General Assembly, this expanded tax benefit further encourages current and future CollegeAdvantage 529 Plan account owners to save for their children’s future college costs. Other tax advantages for saving for college in Ohio’s 529 Plan include tax-free earnings, so every dollar is yours to use, and tax-free withdrawals when used for qualified higher education.