Will you be age 50 or older on December 31? Are you still working? Are you already contributing to your 401(k) plan or Savings Incentive Match Plan for Employees (SIMPLE) up to the regular annual limit? Then you may want to make “catch-up” contributions by the end of the year. Increasing your retirement plan contributions can be particularly advantageous if your itemized deductions for 2018 will be smaller than in the past, because of changes under the Tax Cuts and Jobs Act (TCJA).

Catching Up
Catch-up contributions are additional contributions beyond the regular annual limits that can be made to certain retirement accounts. They were designed to help taxpayers who didn’t save much for retirement earlier in their careers to “catch up.” But there’s no rule that limits catch-up contributions to such taxpayers.

So catch-up contributions can be a great option for anyone who is old enough to be eligible, has been maxing out their regular contribution limit and has sufficient earned income to contribute more. The contributions are generally pretax (except in the case of Roth accounts), so they can reduce your taxable income for the year.

More Benefits Now?
This additional reduction to taxable income might be especially beneficial in 2018 if in the past you had significant itemized deductions that now will be reduced or eliminated by the TCJA. For example, the TCJA eliminates miscellaneous itemized deductions subject to the 2% of adjusted gross income floor — such as unreimbursed employee expenses (including home-off expenses) and certain professional and investment fees.

If, say, in 2018 you have $5,000 of expenses that in the past would have qualified as miscellaneous itemized deductions, an additional $5,000 catch-up contribution can make up for the loss of those deductions. Plus, you benefit from adding to your retirement nest egg and potential tax-deferred growth.

Other deductions that are reduced or eliminated include state and local taxes, mortgage and home equity interest expenses, casualty and theft losses, and moving expenses. If these changes affect you, catch-up contributions can help make up for your reduced deductions.

2018 Contribution Limits
Under 2018 401(k) limits, if you’re age 50 or older and you have reached the $18,500 maximum limit for all employees, you can contribute an extra $6,000, for a total of $24,500. If your employer offers a SIMPLE instead, your regular contribution maxes out at $12,500 in 2018. If you’re 50 or older, you’re allowed to contribute an additional $3,000 — or $15,500 in total for the year.

But, check with your employer because, while most 401(k) plans and SIMPLEs offer catch-up contributions, not all do. Also keep in mind that additional rules and limits apply.

Additional Options
Catch-up contributions are also available for IRAs, but the deadline for 2018 contributions is later: April 15, 2019. And whether your traditional IRA contributions will be deductible depends on your income and whether you or your spouse participates in an employer-sponsored retirement plan.

As we approach the end of 2018, it’s a good idea to review the mutual funds holdings in your taxable accounts and take steps to avoid potential tax traps. Here are some tips.

Avoid Surprise Capital Gains
Unlike with stocks, you can’t avoid capital gains on mutual funds simply by holding on to the shares. Near the end of the year, funds typically distribute all or most of their net realized capital gains to investors. If you hold mutual funds in taxable accounts, these gains will be taxable to you regardless of whether you receive them in cash or reinvest them in the fund.

For each fund, find out how large these distributions will be and get a breakdown of long-term vs. short-term gains. If the tax impact will be significant, consider strategies to offset the gain. For example, you could sell other investments at a loss.

Buyer Beware
Avoid buying into a mutual fund shortly before it distributes capital gains and dividends for the year. There’s a common misconception that investing in a mutual fund just before the ex-dividend date (the date by which you must own shares to qualify for a distribution) is like getting free money.

In reality, the value of your shares is immediately reduced by the amount of the distribution. So you’ll owe taxes on the gain without actually making a profit.

Seller Beware
If you plan to sell mutual fund shares that have appreciated in value, consider waiting until just after year end so you can defer the gain until 2019 — unless you expect to be subject to a higher rate next year. In that scenario, you’d likely be better off recognizing the gain and paying the tax this year.

When you do sell shares, keep in mind that, if you bought them over time, each block will have a different holding period and cost basis. To reduce your tax liability, it’s possible to select shares for sale that have higher cost bases and longer holding periods, thereby minimizing your gain (or maximizing your loss) and avoiding higher-taxed short-term gains.

Think Beyond Just Taxes
Investment decisions shouldn’t be driven by tax considerations alone. For example, you need to keep in mind your overall financial goals and your risk tolerance.

But taxes are still an important factor to consider.

Some of your medical expenses may be tax deductible, but only if you itemize deductions and have enough expenses to exceed the applicable floor for deductibility. With proper planning, you may be able to time controllable medical expenses to your tax advantage. The Tax Cuts and Jobs Act (TCJA) could make bunching such expenses into 2018 beneficial for some taxpayers. At the same time, certain taxpayers who’ve benefited from the deduction in previous years might no longer benefit, because of the TCJA’s increase to the standard deduction.

The Changes
Various limits apply to most tax deductions, and one type of limit is a “floor,” which means expenses are deductible only to the extent that they exceed that floor (typically a specific percentage of your income). One example is the medical expense deduction.

Because it can be difficult to exceed the floor, a common strategy is to “bunch” deductible medical expenses into a particular year where possible. The TCJA reduced the floor for the medical expense deduction for 2017 and 2018 from 10% to 7.5%. So, it might be beneficial to bunch deductible medical expenses into 2018.

Medical expenses that aren’t reimbursable by insurance or paid through a tax-advantaged account (such as a Health Savings Account or Flexible Spending Account) may be deductible.

However, if your total itemized deductions won’t exceed your standard deduction, bunching medical expenses into 2018 won’t save tax. The TCJA nearly doubled the standard deduction. For 2018, it’s $12,000 for singles and married couples filing separately, $18,000 for heads of households, and $24,000 for married couples filing jointly.

If your total itemized deductions for 2018 will exceed your standard deduction, bunching nonurgent medical procedures and other controllable expenses into 2018 may allow you to exceed the applicable floor and benefit from the medical expense deduction. Controllable expenses might include prescription drugs, eyeglasses and contact lenses, hearing aids, dental work, and elective surgery.

Planning for Uncertainty
Keep in mind that legislation could be signed into law that extends the 7.5% threshold for 2019 and even beyond.

When teachers are setting up their classrooms for the new school year, it’s common for them to pay for a portion of their classroom supplies out of pocket. A special tax break allows these educators to deduct some of their expenses. This educator expense deduction is especially important now due to some changes under the Tax Cuts and Jobs Act (TCJA).

The Old Miscellaneous Itemized Deduction
Before 2018, employee expenses were potentially deductible if they were unreimbursed by the employer and ordinary and necessary to the “business” of being an employee. A teacher’s out-of-pocket classroom expenses could qualify.

But these expenses had to be claimed as a miscellaneous itemized deduction and were subject to a 2% of adjusted gross income (AGI) floor. This meant employees, including teachers, could enjoy a tax benefit only if they itemized deductions (rather than taking the standard deduction) and all their deductions subject to the floor, combined, exceeded 2% of their AGI.

Now, for 2018 through 2025, the TCJA has suspended miscellaneous itemized deductions subject to the 2% of AGI floor. Fortunately, qualifying educators can still deduct some of their unreimbursed out-of-pocket classroom costs under the educator expense deduction.

The Above-the-Line Educator Expense Deduction
Back in 2002, Congress created the above-the-line educator expense deduction because, for many teachers, the 2% of AGI threshold for the miscellaneous itemized deduction was difficult to meet. An above-the-line deduction is one that’s subtracted from your gross income to determine your AGI.

You don’t have to itemize to claim an above-the-line deduction. This is especially significant with the TCJA’s near doubling of the standard deduction, which means fewer taxpayers will benefit from itemizing.

Qualifying elementary and secondary school teachers and other eligible educators (such as counselors and principals) can deduct up to $250 of qualified expenses. If you’re married filing jointly and both you and your spouse are educators, you can deduct up to $500 of unreimbursed expenses — but not more than $250 each.

Qualified expenses include amounts paid or incurred during the tax year for books, supplies, computer equipment (including related software and services), other equipment and supplementary materials that you use in the classroom. For courses in health and physical education, the costs of supplies are qualified expenses only if related to athletics.

Many Rules, Many Changes
The TCJA has made significant changes to many deductions for individuals. Some additional rules apply to the educator expense deduction.

If you gamble, be sure you understand the tax consequences. Both gambling wins and losses can affect your income tax bill. And changes under the Tax Cuts and Jobs Act (TCJA) could also have an impact.

Wins and Taxable Income
You must report 100% of your winnings as taxable income. The value of complimentary goodies (“comps”) provided by gambling establishments must also be included in taxable income as winnings.

Winnings are subject to your regular federal income tax rate. You might pay a lower rate on winnings this year because of rate reductions under the TCJA.

Amounts you win may be reported to you on IRS Form W-2G (“Certain Gambling Winnings”). In some cases, federal income tax may be withheld, too. Anytime a Form W-2G is issued, the IRS gets a copy. So if you’ve received such a form, remember that the IRS will expect to see the winnings on your tax return.

Losses and Tax Deductions
You can write off losses as a miscellaneous itemized deduction. While miscellaneous deductions subject to the 2% of adjusted gross income floor are not allowed for 2018 through 2025 under the TCJA, the deduction for gambling losses isn’t subject to that floor. So losses are still deductible.

But the TCJA’s near doubling of the standard deduction for 2018 (to $24,000 for married couples filing jointly, $18,000 for heads of households and $12,000 for singles and separate filers) means that, even if you typically itemized deductions in the past, you may no longer benefit from itemizing. Itemizing saves tax only when total itemized deductions exceed the applicable standard deduction.

Also be aware that the deduction for losses is limited to your winnings for the year, and any excess losses cannot be carried forward to future years. Also, out-of-pocket expenses for transportation, meals, lodging and so forth can’t be deducted unless you qualify as a gambling professional.

And, for 2018 through 2025, the TCJA modifies the limit on losses for professional gamblers so that all deductions for expenses incurred in carrying out gambling activities, not just losses, are limited to the extent of winnings.

Tracking Your Activities
To claim a deduction for gambling losses, you must adequately document them, including:

  1. The date and type of gambling activity.
  2. The name and address or location of the gambling establishment.
  3. The names of other persons (if any) present with you at the gambling establishment. (Obviously, this is not possible when the gambling occurs at a public venue such as a casino, race track, or bingo parlor.)
  4. The amount won or lost.

You can document income and losses from gambling on table games by recording the number of the table you played and keeping statements showing casino credit issued to you. For lotteries, you can use winning statements and unredeemed tickets as documentation.

Please contact us if you have questions or want more information about the tax treatment of wins and losses.

Perhaps you wrote a social media policy several years ago when your not-for-profit set up a Facebook page. Since then, not only has your not-for-profit likely changed, but new social media platforms have emerged. At the very least, the sites you use have probably revised their terms of service. That’s why it’s time to revisit your policy.

The Basics
A social media policy helps ensure that staffers, board members and volunteers use online accounts to promote and enhance — not damage — your not-for-profit’s reputation and fundraising efforts. Without a policy, you risk confusing and offending stakeholders, inviting lawsuits and even incurring financial costs.

To prevent negative outcomes, your policy should address:

  • Which sites you’ll use,
  • Who in your organization has access to them,
  • What subjects they’re allowed to discuss, and
  • Whom they can “friend.”

Also specify whether staffers and board members can discuss their work on their personal social media accounts. If so, require them to post a disclaimer saying that their opinions about your organization are their own.

Evaluate Site Use
As you revisit your social media policy, consider the sites your not-for-profit currently uses and whether they still enable you to reach your target audience. Do your staffers post frequently enough to be effective? Is your follower base growing? If not, you may want to shift resources elsewhere.

Another consideration is whether the social media outlets you use have changed their terms of service. In the past couple of years, many sites have expanded their rights to share user account information with third parties. Such changes may raise privacy concerns within your organization.

Other Updates
Also review who has account access. In general, the fewer people with access, the less likely someone will post something damaging. But, if your not-for-profit is struggling to maintain a regular posting schedule, it might make sense to add new, enthusiastic staffers to the account.

Be sure that, whenever you remove a user from an account, you change the password. Social media sites increasingly are being hacked, so your policy should require longer, more difficult passwords.

Another issue that you can’t afford to ignore these days is intellectual property (IP) rights. Contrary to what some believe, not-for-profits aren’t immune from IP infringement lawsuits. Make sure you have permission from IP holders and properly credit them when you post third-party images, videos, music and text.

Fast-moving Target
These are only some of the many issues that may require you to revisit your social media policy. Social media changes quickly. To use it effectively, pay attention to evolving developments.

There was talk of repealing the individual alternative minimum tax (AMT) as part of last year’s tax reform legislation. A repeal wasn’t included in the final version of the Tax Cuts and Jobs Act (TCJA), but the TCJA will reduce the number of taxpayers subject to the AMT.

Now is a good time to familiarize yourself with the changes, assess your AMT risk and see if there are any steps you can take during the last several months of the year to avoid the AMT, or at least minimize any negative impact.

Alternative Minimum Tax vs. Regular Tax
The top AMT rate is 28%, compared to the top regular ordinary-income tax rate of 37%. But the AMT rate typically applies to a higher taxable income base and will result in a larger tax bill if you’re subject to it.

The TCJA reduced the number of taxpayers who’ll likely be subject to the AMT in part by increasing the AMT exemption and the income phaseout ranges for the exemption:

  • For 2018, the exemption is $70,300 for singles and heads of households (up from $54,300 for 2017), and $109,400 for married couples filing jointly (up from $84,500 for 2017).
  • The 2018 phaseout ranges are $500,000–$781,200 for singles and heads of households (up from $120,700–$337,900 for 2017) and $1,000,000–$1,437,600 for joint filers (up from $160,900–$498,900 for 2017).

You’ll be subject to the AMT if your AMT liability is greater than your regular tax liability.

Alternative Minimum Tax Triggers
In the past, common triggers of the AMT were differences between deductions allowed for regular tax purposes and AMT purposes. Some popular deductions aren’t allowed under the AMT.

New limits on some of these deductions for regular tax purposes, such as on state and local income and property tax deductions, mean they’re less likely to trigger the AMT. And certain deductions not allowed for AMT purposes are now not allowed for regular tax purposes either, such as miscellaneous itemized deductions subject to the 2% of adjusted gross income floor.

But deductions aren’t the only things that can trigger the AMT. Some income items might do so, too, such as:

  • Long-term capital gains and dividend income, even though they’re taxed at the same rate for both regular tax and AMT purposes,
  • Accelerated depreciation adjustments and related gain or loss differences when assets are sold,
  • Tax-exempt interest on certain private-activity municipal bonds, and
  • The exercise of incentive stock options.

Alternative Minimum Tax Planning Tips
If it looks like you could be subject to the AMT in 2018, consider accelerating income into this year. Doing so may allow you to benefit from the lower maximum AMT rate. And deferring expenses you can’t deduct for AMT purposes may allow you to preserve those deductions. If you also defer expenses you can deduct for AMT purposes, the deductions may become more valuable because of the higher maximum regular tax rate.

Please contact us if you have questions about whether you could be subject to the AMT this year or about minimizing negative consequences from the AMT.

Once upon a time, some parents and grandparents would attempt to save tax by putting investments in the names of their young children or grandchildren in lower income tax brackets. To discourage such strategies, Congress created the “kiddie” tax back in 1986. Since then, this tax has gradually become more far-reaching. Now, under the Tax Cuts and Jobs Act (TCJA), the kiddie tax has become more dangerous than ever.

A Short History
Years ago, the kiddie tax applied only to children under age 14, which still provided families with ample opportunity to enjoy significant tax savings from income shifting. In 2006, the tax was expanded to children under age 18. And since 2008, the kiddie tax has generally applied to children under age 19 and to full-time students under age 24 (unless the students provide more than half of their own support from earned income).

What about the kiddie tax rate? Before the TCJA, for children subject to the kiddie tax, any unearned income beyond a certain amount ($2,100 for 2017) was taxed at their parents’ marginal rate (assuming it was higher), rather than their own likely low rate.

A Fiercer Kiddie Tax
The TCJA doesn’t further expand who’s subject to the kiddie tax. But it will effectively increase the kiddie tax rate in many cases.

For 2018–2025, a child’s unearned income beyond the threshold ($2,100 again for 2018) will be taxed according to the tax brackets used for trusts and estates. For ordinary income (such as interest and short-term capital gains), trusts and estates are taxed at the highest marginal rate of 37% once 2018 taxable income exceeds $12,500. In contrast, for a married couple filing jointly, the highest rate doesn’t kick in until their 2018 taxable income tops $600,000.

Similarly, the 15% long-term capital gains rate takes effect at $77,201 for joint filers but at only $2,601 for trusts and estates. And the 20% rate kicks in at $479,001 and $12,701, respectively.

In other words, in many cases, children’s unearned income will be taxed at higher rates than their parents’ income. As a result, income shifting to children subject to the kiddie tax will not only not save tax, but it could actually increase a family’s overall tax liability.

The Moral of the Story
To avoid inadvertently increasing your family’s taxes, be sure to consider the big, bad kiddie tax before transferring income-producing or highly appreciated assets to a child or grandchild who’s a minor or college student. If you’d like to shift income and you have adult children or grandchildren who’re no longer subject to the kiddie tax but in a lower tax bracket, consider transferring such assets to them.

Please contact us for more information about the kiddie tax — or other TCJA changes that may affect your family.

A shift in demographics has led to a larger number of millennials living with their parents. A survey conducted by The Pew Research Center found that for the first time on record, the most common living arrangement for young adults is living back at home with 32% of millennials following this trend.

This change comes from a drop in the percentage of young adults settling down romantically before age 35. What used to be the most common living arrangement, 62% in 1960, is now only followed by 31% of millennials. This percentage differs between men and women, with 35% of men living with parents in 2014 and 29% of women.

Employment status and wages earned are a likely cause of young adults living with parents. This is especially true in men, as they are more likely to live at home if unemployed and the percent of men with jobs has fallen to 71% from 84% in 1960. In relation, earnings have decreased steadily since 1970, increasing the amount of young men living with their parents. For women, wages have typically grown since 1960, suggesting economic factors are not the reason for the rise of young females living at home. It is suggested that perhaps the rise in young females living at home is correlated to the rise in young men living at home. Another large factor is educational background. Young adults without a Bachelor’s Degree are most likely to live with parents at 36%, with only 19% of young adults with a Bachelor’s Degree living at home. Among the black and Hispanic communities, 2014 showed record highs for living at home with parents at 36%.

This socioeconomic shift comes with a lot of factors. College graduates are experiencing record levels of student debt and cost of housing has increased exponentially. Most notably, the age in which young adults marry has steadily risen for decades, with many foregoing marriage altogether. The reason this demographic takes the reigns is due to the fact that the percent of young adults living with their parents is higher than the percent living with a spouse or romantic partner for the first time on record.

How does this all play into the ongoing conversation about millennials and their way of life? Are millennials completely different than Gen X and Baby Boomers or are all of these factors intertwined in such a way that affects millennials more than it ever affected those who came before them?

The original research and article by the Pew Research Center can be found here.

 

Jen: This is the PKF Texas Entrepreneur’s Playbook, I’m Jen Lemanski, this week’s guest host and today we’re telling the stories of PKF Texas means to our people. Emily Smikal is a tax manager here and she’s gonna share her story with us Emily, welcome to The Playbook.

Emily: Thanks for having me Jen.

Jen: You know, recruits have told us that our people are really our greatest strength and it allows them to get to know PKF Texas, and kind of prove that we are who we say we are. So you know with that, how did you get to PKF Texas?

Emily: Well I was recruited directly off campus, I came in through the internship program here my last summer before I graduated and then was offered a full-time job so came back in the fall of ’09 and have come up the ranks ever since.

Jen: So what’s your role with PKF Texas?

Emily: I’m a manager on in the tax department.

Jen: Okay, cook, now what made you choose PKF Texas?

Emily: I think a lot of things but one of the big ones is I connected with the people but you’ll hear that a lot and then I was excited about the variety of work that I would get here. I think most importantly was really just that I felt I could really contribute and make a difference. PKF uses its people really well to do a lot of different trainings and recruiting and I knew I could contribute in that area.

Jen: And have you done any of those special kind of things?

Emily: Yes, I’m very involved in training and recruiting and a lot of things we call task forces here to make decisions.

Jen: Oh cool, cool, now so what advice would you give a recruit going through the recruiting process?

Emily: You know I think you should look for a place that you want to have a career and not just a job, you know look for things that will fit for you and not just follow the trends of everyone else and you know you might not be the happiest person on earth every day at work but you want to have joy in doing it. So I think look for those things.

Jen: Perfect, perfect, well thanks so much for being here today, we really appreciate it.

Emily: Thanks for having me.