Tax Reform - Exemptions

Hypothetical 1040, page 2 - the primitive red line is the author's poor mouse handling abilities. 

Another tax season come and gone.  Now, finally, us CPA’s get to digest and discuss the various components of the new tax law that affects 2018.  

I want to start with dependents and the increased standard deduction.  It impacts just about everybody who pays taxes.

Under Old Law  -  If you’re looking at your 2017 form 1040, you want to look at page 2, line 42.

Along with your standard or itemized deductions, there is a concept known as an exemption. In 2017, an exemption was worth $4,050, and it was given for virtually every single person in the country.  A single person got 1 exemption. A married couple had 2 exemptions. A married couple with 2 children had 4 exemptions, because of their 2 dependent children.  There was only one exemption to go around per person, so there were various rules in place for allowing others to claim your exemption. My 3 year old had an exemption, but under the rules, she was my dependent, therefore I was able to use her exemption on my joint return with my wife.  I “claimed my daughter” as the parlance goes. I reduced my income by $4,050 x 3 (me, my wife, my daughter), or $12,150. A nice break for expanding families.

There were various rules on who could claim the exemption.  Parents had to stop claiming their kids when they turned 18, unless they were still in college, in which case we could go up to the age of 24.  After that, the child starts claiming “themselves” on their own returns.
There were phaseouts so that those with high-income didn’t get as much benefit for these deductions.  Sometimes, the parents wouldn’t get any benefit for this deduction due to the AMT, even if their income was low enough to still allow it for regular purposes.

There were other rules that allowed the ability to claim elderly parents or other family members, usually subject to an income and support test.  

Under New Law  -  The exemption goes away completely.  

There will be no reduction of $4,050 per person that is used to reduce your taxable income. This is a pretty big shock to a lot of people. So let’s explain who this impacts (virtually everybody)

1. It probably won’t hurt parents of children who are aged 16 or younger.  There is a newly expanded child tax credit that a lot more parents will be eligible for.  The value of this new credit almost always will make up for the loss of the exemption.  I'll put up another post about the new rules to the child tax credit and its limitations. 

2. It will “hurt” parents who have more than 1 child over the age of 16, comparatively.  However, the “pain” that we’re talking about it all relative. They’ve changed so many other things in the tax law that you may end up paying less tax anyway due to a variety of other factors.  There may be other changes that still cut your taxes. 

3. If you have no kids, and generally took a standard deduction, this should have little/no impact on you. The nearly doubled standard deduction should work out in most cases. 

4. It “hurts” folks who are supporting elderly parents or other family. There is no equivalent of a child tax credit to make up for this.

I know many are asking why Congress would pass this.  Why is this a good thing?  It reduces complexity for a lot of parents with children who are entering the workforce. There are going to be fewer efile rejections about the proper coordination of when a child should or should not have claimed themselves (usually they should not have).  It reduces the complexity of coordinating benefits in the case of unmarried or divorced parents, and the remaining benefits available (child tax credit, head of household status, college write-offs) have clearer tests that determine when the taxpayer is eligible. It makes tax administration a little easier in this area.  

Meanwhile, don’t panic that your taxes are going up just yet - tax rates went down, brackets expanded, eligibility for other benefits became more generous - you may still see a net decrease.  But there are definitely winners and losers in the new tax reform, and how much is the big question for everybody.

If you need to know how tax reform affects you for 2018, be sure to call us and let us help you understand your return. 

How to Pay Taxes Online

Here at Medina Company, our motto has always been to keep things simple (stupid!).  Honestly, we’ve actually tried, used and played with all of these methods. And we'll try them again, in the hopes that they get easier.  But until that day, we’re not the biggest fan. The simple act of writing a check, putting a stamp on an envelope, and putting it in a mailbox is still pretty simple.
Most taxing authorities won’t simply accept the banking “bill-pay” that a lot of banks offer – and some banks won't LET you sign up to pay taxes online through their bill-pay system. You still need to include a lot more information (which is what's included on the paper voucher we give you when using the mail) when making online payments, which is why every authority has come up with their own method. You often need to specify your Taxpayer number, what period it pertains to - this information doesn't show up when you use your bank's online bill pay feature.

If you’re determined anyway to try all this stuff from your PC or Phone (Paul tries to do nearly everything there), then here’s where to go.
_____________________________________________________________________________FEDERAL – INDIVIDUAL - www.irs.gov.payments/
You can pay 2017 taxes owed, extension payments, 2018 estimates, or even payments for a payment plan or respond to a tax notice (which you called us and we helped you understand before you just paid it, right?)
You can choose your payment method:
Direct Pay – Just type in your checking account details and make a payment. It’s free!
OR
Debit/Credit Card – The IRS uses outside payment processors, who offer different payment structures and fees. 
A debit card transaction is typically a flat fee, for somewhere between $2-$4. Using your credit card, a percentage fee ranging 1.8 - 2% will be charged to process your payment.  If you use a debit card, a flat fee, ranging between $2-$4 will be charged.
_____________________________________________________________________________KENTUCKY – https://epayment.ky.gov/EPAY
You can pay 2017 taxes owed, extension payments, 2018 estimates, your Limited Liability Taxes (That pesky $175!) or even payments for a payment plan or respond to a tax notice.
Electronic Check/ACH – Just type in your checking account details and make a payment. It’s free!
OR
Debit/Credit Card – To use a Debit card is a 1.5% fee.  To use a credit card is 2.75%.  However, you can’t use a card to pay estimates, only remaining taxes owed.
_____________________________________________________________________________LOUISVILLE – www.officialpayments.com (jurisdiction code 2702)
E-Check – costs $2.50
Debit Card – 1%
Credit Card – 2.8%
This website doesn't strike us as very clear.  It doesn't appear to have you specify which year your payment refers to, but perhaps it gets addressed later in the process.  If someone tries this, please let us know!
_____________________________________________________________________________IINDIANA - https://dorpay.dor.in.gov/
You can pay individual estimates, extensions, and remaining amounts due.

As is typical, Debit/Credit cards charge a processing fee (we can’t find out how much)Electronic Check or ACH draft does not charge a fee.  

Donate it, or Sell it?

We get this question at least half a dozen times every year.  

“I have this old “thingamajigger” that I need to get rid of.  It still has some value - should I sell it, or donate it?”

So, some advice before you decide:  

1. Be honest - What’s it actually worth to someone else?  You bought a Blu-Ray player 3 years ago for $250 - what’s that machine worth today?  Really?  You could say that it “should” be worth $100, but realistically, how big is the market for a used blu-ray player?  Does selling this on Craigslist, or eBay seem worth it?  What about a consignment store?  How much of your time are you going to invest in trying to sell something that's only worth $35?  Will you have to borrow or rent a truck just to go sell the thing?  Does that make sense?

2. Are you truly interested in being charitable, or are you just trying to maximize the benefit to you?  If you’re interested in being charitable, then sure - donate away.  If you’re trying to maximize the amount of money still in your pocket, then the answer is: Sell, Sell SELL!  Why you ask?
   
   Charitable giving is nearly always worth only a % of what you donated when it comes to tax time. Churches obviously provide you with intangible spiritual benefits, and of course donating to Habitat for Humanity, Goodwill, or the Center for Women and Families will give you the knowledge of the cause that you’re helping.  But as far as financially - if you donate $100 to your church, you will only save a fraction of that in taxes.  Maybe you’re in the 22% bracket for Federal, and 6% for KY - You “might” save $28 dollars in taxes.  
   
   This works the same as when you donate stuff.  You have a bag of clothes worth $100.  You donate the clothes to Goodwill.  The value of that donation to you ultimately? $28.
   
   If you know a buyer who will PAY you $100 for that bag of clothes that’s worth $100 - why aren’t you selling it?  $72 more in your pocket!  

3. What about my old truck?  I always hear commercials about donating your vehicle. Ok - here’s how this works.  When you donate your truck to NPR, or Goodwill, or whatever - that charity is almost always turning around and selling that truck at auction.  These charities don't want the liability of driving around in your old beater. After they sell the truck for $900 at auction, (which is slightly better than the $500 CarMax offered you for the vehicle, because they were going to sell it at auction too) - you still only get to see maybe a fraction of that $900.  If you were in the very top federal tax rate of 37%, and again 6% more in KY - that’s still only 43% of $900, or $387.  You should have taken Carmax up on their offer of $500.  Less paperwork too, because...
   
   You’ll get a form from the charity later telling you that they sold the truck for $900 - this is the value that they’ve reported to the IRS.  The IRS is supposed to match up your donation with this record and make sure that you don’t value a $900 vehicle at $3,000. 

But - what about the charities?  Hey, don’t look at me! You’re the one trying to get the most money back in your pocket!  If you’re being charitable, then be charitable!  Give it away!  Being charitable isn’t about taxes - being charitable is about helping the cause - the tax savings is just a little nudge to make it a little easier, that’s all!  It’s not WHY you donate!

Warning - there’s still a lot more to all of this that we haven't covered - these are generalities.  Call us to talk about what you want to donate, how it could be sold, and whether it’s worth the trouble!  Also - this does NOT cover donating investments or securities - that's a totally different animal, with totally different incentives at work.  

What Can I Throw Away Already?

So it’s January - and now you realize that you’ve got to get ready to meet with your CPA - and before you even know what to look for in 2017, you decide that since you haven’t looked at your 2016 return since we handed it to you last February or March ( you didn’t wait until April last year did you? ), you better check it out again.  

After remembering which drawer you threw this in, you find you’ve got 25 years of tax returns and related documents, in various states of decay, and you cry out to the heavens “How long does Jim want me to hang on to these blasted things?!”

The answer is, as always - “it depends.”

Our general rule is 7-10 years.  We’re about to prepare your 2017 return - meaning you can probably throw away your 2010 return - usually the IRS can’t go after returns more than 3 years old, but 6 years in exceptional circumstances.  So, keep 7 years just to be safe - EXCEPT:

• Don’t throw away W-2’s until you have been to the Social Security website (www.ssa.gov) to check your benefits. Are they missing any years’ earnings records?

• Don’t throw away returns where you claimed a large loss resulting in a carryforward or carryback (NOL’s, Capital losses).  This is one of the favorite things for the IRS to audit if they decide to pick you.  

• If you’re an owner or beneficiary in any entity that generates K-1’s (S Corporations, Partnerships, Trusts) - some day when these entities shut down, or you sell your interest - your CPA may ask you “what’s your cost basis?” and you will look at us with a dumbfounded look as if we just spoke Greek.  This question will be a lot easier to answer if you kept those K-1’s from the beginning of your investment.  

• There are others, but they’re not common enough to worry about here.  

What about all the other stuff?

• Bank statements and credit cards? - if your return is simple, 3 years - if it’s for your business, maybe hold onto for 7 years.

• Investment statements (IRA’s, 401ks, Brokerages) - 7 years

• Vehicle records - until vehicle is sold

• Residence records (purchase, improvements, sale)- keep for 7 years after the home is sold

• Utilitiy bills - 3 years at most - toss if it’s for residence and you never used as a deduction - if you took a home office deduction - ask your CPA if you should. 

There are plenty of guides out there - do what you feel comfortable with. If you have room in the attic, you can afford to be more conservative and hang on to more stuff. But the answer is almost always - "it depends."

Welcome to Medina Company CPA's

New website, new staff, a new year, and new tax laws!  2018 is going to be an exciting year.  A lot of conventional wisdom will likely have to be revised for new conventions.  Meanwhile - we will try our best to keep you informed.  Hence - we have a blog!  

First things first - we welcome Jim's son Paul to the firm.  Paul isn't green to taxes.  The 2018 tax season represents the 14th that Paul has worked.  Having worked full time for various firms throughout the city of Louisville since 2005, Paul has gained extensive knowledge necessary for small businesses and their owners, as well as other types of sophisticated taxpayers, such as those invested in real estate, farms, or more traditional investments.  Check out his Linkedin profile here.  

We all are looking forward to 2018, as well as the future, helping our clients however we can.