Tax Article

Tip: High Bracket. In 1944, the highest federal income tax bracket was 94%. It applied to all income above $200,000 a year and applied to all taxpayers, regardless of filing status. Source: Tax Policy Center, 2017

By any measure, the tax code is huge. According to Commerce Clearing House’s Standard Federal Tax Reporter it’s up to 74,608 pages in length.¹

And each Monday, the Internal Revenue Service publishes a 20- to 50- page bulletin about various aspects of the tax code.²

Fortunately, it’s not necessary to wade through these massive libraries to understand how income taxes work. Understanding a few key concepts may provide a solid foundation.

One of the key concepts is marginal income tax brackets.

Taxpayers pay the tax rate in a given bracket only for that portion of their overall income that falls within that bracket’s range.

Tax Works

Fast Fact: First Brackets. In 1913 — immediately after the 16th Amendment gave Congress the power to levy taxes on income — the government set up a system of seven federal income tax brackets with rates ranging between 1% and 7%. Less than one in 100 people had to pay even the lowest rate. Source: OurDocuments.gov, 2017; IRS, August 6, 2017

Seeing how marginal income tax brackets work is helpful because it shows the progressive nature of income taxes. It also helps you visualize how your total tax rate can be calculated. But remember, this material is not intended as tax or legal advice. Please consult a tax professional for specific information regarding your individual situation.

How Federal Income Tax Brackets Work

Say a married couple, filing jointly, in 2018, had a taxable income of $200,000. Each dollar over $165,000—or $35,000—would fall into the 24% federal income tax bracket. However, the couple’s total federal tax would have been $36,579—just under 20%, of their adjusted gross income.

This is a hypothetical example used for illustrative purposes only. It assumes no tax credits apply.

2018 Federal Income Tax Brackets

Your federal income tax bracket is determined by two factors: your total income and your taxfiling classification.

For the 2018 tax year, there are seven tax brackets for ordinary income — ranging from 10% to 37% — and four classifications: single, married filing jointly, married filing separately, and head of household.

1. Washington Examiner, April 15, 2016. (Lastest data available.)

2. Internal Revenue Service, 2018

Tip: Refund Stats. The average refund during 2017 was about $2,860. Source: Internal Revenue Service, 2018

The Internal Revenue Service estimates that taxpayers and businesses spend 8.1 billion hours a year complying with tax-filing requirements. To put this into perspective, if all this work were done by a single company, it would need about four million full-time employees and be one of the largest industries in the U.S.¹

As complex as the details of taxes can be, the income tax process is fairly straightforward. However, the majority of Americans would rather not understand the process, which explains why more than half hire a tax professional to assist in their annual filing.²

The tax process starts with income, and generally, most income received is taxable. A taxpayer’s gross income includes income from work, investments, interest, pensions, as well as other sources. The income from all these sources is added together to arrive at the taxpayers’ gross income.

What’s not considered income? Child support payments, gifts, inheritances, workers’ compensation benefits, welfare benefits, or cash rebates from a dealer or manufacturer.³

From gross income, adjustments are subtracted. These adjustments may include alimony, retirement plan contributions, half of self-employment, and moving expenses, among other items.

The result is the adjusted gross income.

From adjusted gross income, deductions are subtracted. With deductions, taxpayers have two choices: the standard deduction or itemized deductions, whichever is greater. The standard deduction amount varies based on filing status, as shown on this chart:

Itemized deductions can include state and local taxes, charitable contributions, the interest on a home mortgage, certain unreimbursed job expenses, and even the cost of having your taxes prepared, among other things.⁴

Once deductions have been subtracted, the result is taxable income. Taxable income leads to gross tax liability.

Fast Fact: No Pencil and Paper. The IRS reports that about 40% of taxpayers use tax preparation software. Source: IRS, 2017

But it’s not over yet.

Any tax credits are then subtracted from the gross tax liability. Taxpayers may receive credits for a variety of items, including energy-saving improvements.

The result is the taxpayer’s net tax.

Understanding how the tax process works is one thing. Doing the work is quite another. Remember, this material is not intended as tax or legal advice. Please consult a tax professional for specific information regarding your individual situation.

1. National Taxpayer’s Union, April 16, 2018

2. IRS.gov, 2018

3. The tax code allows an individual to gift up to $15,000 per person in 2018 without triggering any gift or estate taxes. An individual can give away up to $11,200,000 without owing any federal tax. Couples can leave up to $22,400,000 without owing any federal tax. Also, keep in mind that some states may have their own estate tax regulations.

4. The Tax Cuts and Jobs Act of 2017 limits mortgage interest deduction to the first $750,000 of the loan. Taxpayers may deduct up to $10,000 in state and local taxes

Tip: Mid May. If the government had raised taxes enough to cover federal borrowing, we would have had to work until May 6 just to cover the tax bill. Source: Tax Foundation, 2018.

Taxes are one of the biggest budget items for most taxpayers, yet many have no idea what they’re getting for their money.

In 2017, as in recent years, Americans spent more on taxes than on groceries, clothing, and shelter combined. In fact, we worked until late April just to earn enough money to pay our taxes. So what do all those weeks of work get us?1

Fast Fact: In the Hole. In fiscal 2018, the federal government will spend $804 billion more than it collects in revenue. The government borrows the funds it needs to cover this shortfall by selling Treasury securities and savings bonds. Source: Congressional Budget Office, 2018

The accompanying chart breaks down the $3.95 trillion in federal spending for 2017 into major categories. By far, the biggest category is Social Security, which consumes one-fourth of the budget. Income security, which includes food assistance and unemployment compensation, takes another 13%. Defense and related items take 15% of the budget, and 28% goes to Medicare and health programs.2

Are taxes one of your biggest budget items? Take steps to make sure you’re managing your overall tax bill. Please consult a tax professional for specific information regarding your individual situation.

Pieces of the Federal Pie

More than 60% of 2017 federal spending was used for Social Security, Medicare, defense, and related programs.

1. Tax Foundation, 2018

2. Pew Research Center, 2018

Tip: The chance of being audited rises with income level. In 2016, only 0.6% of those with incomes between $100,000 and $200,000 were audited; 2.1% of those with incomes between $500,000 and $1 million were audited; and 18.8% of those with incomes over $10 million were audited. Source: Internal Revenue Service, 2017 (Latest data available.)

“Audit” is a word that can strike fear into the hearts of taxpayers.

However, the chances of an Internal Revenue Service audit aren’t that high. In 2017, the IRS audited 0.5% of all individual tax returns.¹

And being audited does not necessarily imply that the IRS suspects wrongdoing.

The IRS says an audit is just a formal review of a tax return to ensure information is being reported according to current tax law and to verify that the information itself is accurate. The IRS selects returns for audit using three main methods.²

  • Random Selection. Some returns are chosen at random based on the results of a statistical formula.
  • Information Matching. The IRS compares reports from payers — W2 forms from employers, 1099 forms from banks and brokerages, and others — to the returns filed by taxpayers. Those that don’t match may be examined further.
  • Related Examinations. Some returns are selected for an audit because they involve issues or transactions with other taxpayers whose returns have been selected for examination.

There are a number of sound tax practices that may reduce the chances of an audit.

Fast Fact: Generally, the IRS audits returns within three years of their being filed. If it identifies substantial errors, it can go back further. Even then, the IRS will generally not go back further than six years. Source: Internal Revenue Service, 2017

  • Provide Complete Information. Among the most commonly overlooked information is missing Social Security numbers — including those for any dependent children and exspouses.
  • Avoid Math Errors. When the IRS receives a return that contains math errors, it assesses the error and sends a notice without following its normal deficiency procedures.
  • Match Your Statements. The numbers on any W-2 and 1099 forms must match the returns to which they are tied. Those that don’t match may be flagged for an audit.
  • Don’t Repeat Mistakes. The IRS remembers those returns it has audited. It may check to make sure past errors aren’t repeated.
  • Keep Complete Records. This won’t reduce the chance of an audit, but it potentially may make it much easier to comply with IRS requests for documentation.

Remember, the information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

Audits Have Changed

Most audits don’t involve face-to-face meetings with IRS agents or representatives. In 2016, the latest year for which data is available, 71% were actually conducted through the mail; only 29% involved face-to-face meetings.

1. Internal Revenue Service, 2017

2. Internal Revenue Service, 2018

Tip: Long-Term Coverage. 1035 exchanges can be used to exchange a life insurance policy, modified endowment contract, or an annuity contract for a long-term care policy. That means that an old life insurance policy may provide coverage for long-term care. Consult a tax professional before considering an exchange.

Source: American Association for Long-Term Care Insurance, 2018.

According to the most recent information available, Americans have individual life insurance with a total face value of $12 trillion.1

Due to a variety of factors, these individuals may find themselves in circumstances where the specific life insurance policy or annuity contract they own does not suit their needs.2 They may want to exchange products without incurring a taxable event.

That’s where Section 1035 of the Internal Revenue Code comes in. A 1035 exchange provides a means for exchanging an annuity contract or life insurance policy without being treated as if it had been surrendered or sold. Keep in mind that a 1035 exchange can be used only when it involves the same contract or policyholder and the same type of product.

Trading In an Older Policy

A 1035 exchange, provided certain requirements are met, gives policy or contract holders the flexibility to “trade-in” an older contract or policy for a newer contract or policy. A newer policy or contract may have lower costs, a higher death benefit, or more investment choices.

1035 exchanges involve a complex set of tax rules and regulations. Before moving forward with a 1035 exchange, consider working with a tax professional who is familiar with the rules and regulations.

Partial Exchanges

Fast Fact: Surrender Charge Caution. If you own an annuity contract that is still in the surrender charge period, you may be required to pay the surrender charge when undertaking a 1035 exchange. And your new annuity contract may be subject to its own surrender charge period—which may be longer than the remaining period on the old contract.

Source: Securities and Exchange Commission, 2018

Also, individuals can do a partial 1035 exchange for a portion of the total contract. A tax professional should be consulted for a partial exchange because any gain may be subject to ordinary income tax when withdrawn.

Several factors will affect the cost and availability of life insurance, including age, health and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies). The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities are not guaranteed by the FDIC or any other government agency. The earnings component of an annuity withdrawal is taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Annuities have fees and charges associated with the contract, and a surrender charge also may apply if the contract owner elects to give up the annuity before certain time-period conditions are satisfied.

Variable annuities are sold by prospectus, which contains detailed information about investment objectives and risks, as well as charges and expenses. You are encouraged to read the prospectus carefully before you invest or send money to buy a variable annuity contract. The prospectus is available from the insurance company or from your financial professional. Variable annuity subaccounts will fluctuate in value based on market conditions and may be worth more or less than the original amount invested if the annuity is surrendered.

1. American Council of Life Insurers, 2017

2. Endowment contracts and qualified long-term care contracts also may be eligible for a 1035 exchange. A tax professional should be consulted before considering an exchange.

 

American educational reformer Horace Mann called education “the great equalizer.”¹ In football, it’s been said that turnovers are the great equalizer. And anyone who’s ever watched CBS’s “The Amazing Race,” knows airport delays are the great equalizer in a race around the world.

In taxes, there’s also an equalizer of sorts; it’s called the alternative minimum tax, or AMT. Instituted in 1969, it was intended to ensure that the very rich didn’t pay a lower effective tax rate than everyone else.²

In recent years, however, the “very rich” weren’t the only ones who needed to be concerned about the AMT. Because the AMT was not indexed for inflation until 2013, millions of middleclass Americans were being forced to pay it. Thanks to the Tax Cuts and Jobs Act of 2017, that number is once again falling. Only 200,000 taxpayers are expected to pay the AMT in 2018.³

What Is The AMT, Exactly?

It may be easiest to think of the AMT as a separate tax system with a unique set of rules for deductions, which are more restrictive than those in the traditional tax system.

The only way to know for sure if you qualify for the AMT is to fill out Form 6251 from the Internal Revenue Service. It may be worth doing just to be sure, especially if you are a high income earner who can claim sizable tax breaks. Of course, under the 2017 tax law, many traditional tax breaks are limited, including personal exemptions and the state and local tax deduction.

If you should have paid the AMT and the IRS discovers that you didn’t, you may owe back taxes and could also have to pay interest and/or penalties.

The AMT Language

Fast Fact: Only 19,000 people owed the AMT in 1970, but millions paid it last year. Source: Finance.Yahoo.com, March 15, 2017

Because the AMT system has complicated rules and provisions, it’s a good idea to consider consulting legal or tax professionals for specific information regarding your individual situation. And remember, the information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties.

If you want to avoid any potential surprises at tax time, it may make sense to know where you stand when it comes to the AMT. The time and energy you spend today may be worth the investment.

Where Does All That Money Go?

Here’s a breakdown of how the federal government spends its revenues.

1. Brainyquote.com, 2017

2. Congress enacted the first Alternative Minimum Tax in 1969. The law was repealed and replaced by the Tax Equity and Fiscal Responsibility Act of 1982.

3. CNNMoney.com, January 18, 2018

By April 20, 2018, 138 million taxpayers had dutifully filed their federal income tax returns.¹ And all of them made decisions about deductions and credits—whether they knew it or not.

When you take the time to learn more about how it works, you may be able to put the tax code to work for you. A good place to start is with two important tax concepts: credits and deductions.²

Credits

As tax credits are usually subtracted dollar for dollar from the actual tax liability, they potentially have greater leverage in reducing your tax burden than deductions. Tax credits typically have phase-out limits, so consider consulting a legal or tax professional for specific information regarding your individual situation.

Here are a few tax credits that you may be eligible for:

  • The Child Tax Credit is a federal tax credit for families with dependent children under age 17. The maximum credit is $2,000 per qualifying child.³
  • The American Opportunity Credit provides a tax credit of up to $2,500 per eligible student for tuition costs for four years of post-high-school education.⁴
  • Those who have to pay someone to care for a child (under 13) or other dependent may be able to claim a tax credit for those qualifying expenses. The Child and Dependent Care Credit provides up to $3,000 for one qualifying individual, or up to $6,000 for two or more qualifying individuals.⁵

Fast Fact: In 2017, the mortgage interest deduction was seventh in terms of its cost to federal coffers. At $64 billion, it stood behind the exclusion for work-based health insurance, the reduced tax rate on capital gains and dividends, the earned-income tax credit, deductions for retirement plan contributions and earnings, and deductions for state and local taxes. Source: PewResearch.org, October 6, 2017

Deductions

Deductions are subtracted from your income before your taxes are calculated, and thus may reduce the amount of money on which you are taxed and, by extension, your eventual tax liability. Like tax credits, deductions typically have phase-out limits, so consider consulting a legal or tax professionals for specific information regarding your individual situation.

Here are a few examples of deductions.

  • Under certain limitations, contributions made to qualifying charitable organizations are deductible. In addition to cash contributions, you potentially can deduct the fair market value of any property you donate. And you may be able to write off out-of-pocket costs incurred while doing work for a charity.⁶
  • If certain qualifications are met, you may be able to deduct the mortgage interest you pay on a loan secured for your primary or secondary residence.⁷
  • Amounts set aside for retirement through a qualified retirement plan, such as an Individual Retirement Account, may be deducted. The contribution limit is $5,500, and if you are age 50 or older, the limit is $6,500.⁸
  • You may be able to deduct the amount of your medical and dental expenses that exceeds 10 percent of your adjusted gross income.⁹

Understanding credits and deductions is a critical building block to making the tax code work for you. But remember, the information in this article is not intended as tax or legal advice. And it may not be used for the purpose of avoiding any federal tax penalties.

1. Internal Revenue Statistics, 2018.

2. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

3. Internal Revenue Service, 2018

4. Internal Revenue Service, 2018 5. Internal Revenue Service, 2018 6. Internal Revenue Service, 2018

7. Internal Revenue Service, 2018. The Tax Cuts and Jobs Act of 2017 allows individuals who are married filing jointly to deduct interest on up to $750,000 of mortgage debt incurred to buy or improve a first or second home. Single filers can deduct up to $375,000.

8. Withdrawals from traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.

9. Internal Revenue Service, 2018

While Americans are entitled to take every legitimate deduction to manage their taxes, the Internal Revenue Service (IRS) places limits on your creativity. Here are some examples of deductions from the IRS that were permitted and some that were, well, too creative.¹

Creative Deductions that Passed Muster

Usually a child’s school-related costs are not deductible. However, one taxpayer was allowed to deduct the cost of travel, room, and board as a medical expense for sending a child with respiratory problems to a school in Arizona.

Pet food typically doesn’t qualify as a write-off, except in the case where a business owner successfully argued that it was a legitimate expense to feed a cat protecting their inventory from vermin.

Does your child have an overbite? If so, you may find that the IRS is okay with a medical deduction for the cost of a clarinet (and lessons) to correct it.

A deduction for a swimming pool won’t float with the IRS, except if you have emphysema and are under doctor’s orders to improve breathing capacity through exercise. The deduction, however, was limited to the cost that exceeded the increase in property value. And yes, ongoing maintenance costs are deductible as medical expenses.

Deductions that Were Too Creative

The cost of a mink coat that a business owner bought for his wife to wear to dinner for entertaining clients was denied even though he claimed it was an integral part of dinner conversation and provided entertainment value.

Despite having dry skin, one taxpayer was denied a deduction for bath oil as a medical expense.

Losses associated with theft may be deductible, but one taxpayer went too far in deducting the loss of memories when her photos and other life souvenirs were discarded by her landlord.

One business owner reported an insurance payment as income, but then deducted the cost of the arsonist as a “consulting fee.”

Don’t expect taxpayers to pay for enhancements to self-image. Just ask the ballerina who tried to deduct a tummy tuck or the woman who tried to write off her Botox expenses.

Creativity is not something that the IRS typically rewards, so you should be careful testing the limits of its understanding. Seek the counsel of an experienced tax or legal professional for specific information regarding your situation.

1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

The varied reasons to donate art include a personal affinity for a museum, the desire to create a legacy, and the tax consideration that may come with the donation.

The tax rules surrounding the tax deduction of art are complex and confusing.¹

When donating art, donors can generally claim a federal tax deduction of up to 30% of their adjusted gross income each year. If the value of the donation exceeds this 30% limit, the excess can be deducted in subsequent years—up to five years—subject to the 30% limit in each year.²

Where It Becomes Complicated

The deduction may be based on the appraised value of the donated artwork if the recipient qualifies as a public tax-exempt organization, which is generally defined as an institution that receives at least a third of its financial support from the public. Museums, schools, hospitals, and churches are examples of a public tax-exempt organization.

If you are donating art to a private tax-exempt organization, e.g., a private foundation, your deduction will be based on the price you paid for the donated art.

Even if you are donating art to a public tax-exempt organization, a deduction based on the appraised value requires that the donation be related to the recipient’s mission—a requirement not likely met by organizations other than museums. A failure to meet that test results in a deduction based on the purchase price.

Look Before You Leap

Even if your donation passes the test, potential land mines remain.

If the recipient sells the donated art within three years, the allowable deduction will revert to the purchase price instead of the appraised value, leaving you with a potential exposure to back taxes. Since you are able to negotiate the terms of your gift, you may want to secure a promise not to sell the art within three years of its donation.

The Internal Revenue Service may choose to challenge your appraisal with its own to ensure against inflated appraisals. Penalties can be stiff, so you should make sure your appraiser has facts, such as comparable sales, to back up his or her appraisal.

1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

2. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific art donation.

No one wants to see an Internal Revenue Service (IRS) auditor show up at his or her door. The IRS can’t audit every American’s tax return, so it relies on guidelines to select the ones most deserving of its attention.

Here are six flags that may make your tax return prime for an IRS audit.¹

The Chance of an Audit Rises with Income

According to the IRS, less than 1% of all individual taxpayer returns are audited. However, the percent of audits rises to over 2% for those with incomes between $500,000 and $1 million, and is over 4% for those making between $1 million and $5 million.²

Deviations from the Mean

The IRS has a scoring system it calls the Discriminant Information Function that is based on the deduction, credit, and exemption norms for taxpayers in each of the income brackets. The IRS does not disclose its formula for identifying aberrations that trigger an audit, but it helps if your return is within the range of others with similar income.

When a Business is Really a Hobby

Taxpayers who repeatedly report business losses increase their audit risk. In order for the IRS not to consider your business as a hobby, it needs to have earned a profit in three of the last five years.

Non-Reporting of Income

The IRS receives income information from employers and financial institutions. Individuals who overlook reported income are easily identified and may provoke greater scrutiny.

Discrepancies Between Exes

When divorced spouses prepare individual tax returns, the IRS compares the separate submissions to identify instances where alimony payments are reported on one return but alimony income goes unreported on the contra party’s return.

Claiming Rental Losses

Passive loss rules prevent deductions of losses on rental real estate, except in the event when an individual is actively participating in the property’s management (deduction is limited and phased out), or with real estate professionals who devote greater than 50% of their working hours to this activity. This is a deduction to which the IRS pays keen attention.

1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

2. IRS, 2017

Every year the Internal Revenue Service (IRS) releases its list of tax scams, spotlighting the myriad ways that people try to separate you from your money.¹

The 2016 “Dirty Dozen”

Identity Theft

Using your personal information, an identity thief can file a fraudulent tax return and claim a refund. If you’ve been a victim of stolen personal information, you can contact the IRS so the agency can protect your tax account.

Phishing

Be wary of fake emails or websites looking to steal your personal information. If you receive a request for information that appears to be from the IRS, contact the IRS directly to verify the request.

Telephone Scams

Scammers will contact you pretending to be from the IRS. They may say that you are due a large refund or owe money (even threatening arrest or revocation of your driver’s license). If you receive such a call, call the IRS and contact the Federal Trade Commission using their “FTC Complaint Assistant” at FTC.gov.

Promises of “Free Money”

Posing as tax preparers, scam artists may promise large tax refunds and charge big fees, while filing false returns with big refunds payable to them. Individuals may never know a tax filing was ever made in their name.

Return Preparer Fraud

Dishonest preparers may use tax preparation as an excuse to steal your personal information, so only use a preparer who signs the return and has an IRS Preparer Tax Identification Number.

Hiding Income Offshore

The IRS has strengthened its ability to identify offshore holdings, and the failure to report them will be costly.

Impersonation of Charitable Organizations

Fraudulent charities raise money or obtain private information from individuals looking to help. Donate only to recognized charities, and beware of charities whose names sound similar to the well-known ones.

False Income, Expenses or Exemptions

Falsifying your tax return is a high risk, low reward exercise, especially in this age of Big Data.

Frivolous Arguments

Ignore promoters of frivolous arguments that promise you tax relief. Not only are they expected to fail, but you may be subjected to penalties and possible jail time.

Falsely Padding Deductions or Returns

Dishonestly reporting deductions to reduce tax bills or inflate refunds may open you up to penalties and prosecution.

Abusive Tax Structures

If someone is proposing to eliminate or substantially reduce your taxes through complex tax structures, walk away—they may be offering nothing more than illegal tax evasion.

Excessive Claims for Business Tax Credits

This happens when taxpayers or their tax preparers improperly claim the research credit or the fuel tax credit, which is generally limited to off-highway uses, such as farming.

1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

Between 30 percent and 60 percent of taxable property has an inflated assessment, which may lead to higher property tax bills. Moreover, typically fewer than 5 percent of taxpayers dispute their assessment.¹

For homeowners who think their local government may have assessed their property’s value too high, there are ways to appeal and potentially win a lower assessment, which may save hundreds or even thousands of dollars annually in future taxes.²

The procedures and requirements for challenging the assessed value of your property will differ by state, but you should consider a number of general factors.

Determine Whether an Appeal Is Justified

Your opinion of the fairness and accuracy of your property assessment is not enough. You will need to gather facts to support your claim. One way to do that is to see how your home compares to similar homes in your neighborhood.

Check to see if there are any obvious errors (e.g., is the square footage incorrect?). If you have found an outright error, you may be able to simply bring it to the assessor’s attention and get it corrected.

Consider the Cost-Benefit Ratio

Appealing your assessment may cost you money, depending on the complexity of the process and whether you choose to use professional resources. You are the ultimate judge of weighing the costs related to some uncertain financial reward, but know the cost-benefit before you start. For instance, you may not want to spend $1,000 to save $200 per year.

Use an Independent Appraiser

Your appeal will have less credence if the market evaluation is made by a local real estate agent. A comparative appraisal will carry considerably more weight when it is performed by a credible, third-party expert.

Follow All the Rules

Appeals have precise deadlines and procedures. You need to meet them; otherwise you run the risk of losing out on the opportunity to have your appeal heard for another year. Call your local officials or visit the relevant website to familiarize yourself with the appeal process requirements.

1. National Taxpayers Union Foundation, 2018

2. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

Who among us wants to pay the IRS more taxes than we have to?¹

While few may raise their hands, Americans regularly overpay because they fail to take tax deductions for which they are eligible. Let’s take a quick look at the six most overlooked opportunities to manage your tax bill.

  1. Reinvested Dividends: When your mutual fund pays you a dividend or capital gains distribution, that income is a taxable event (unless the fund is held in a tax-deferred account, like an IRA). If you’re like most fund owners, you reinvest these payments in additional shares of the fund. The tax trap lurks when you sell your mutual fund. If you fail to add the reinvested amounts back into the investment’s cost basis, it can result in double taxation of those dividends.² Mutual funds are sold only by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.
  2. Job Hunting Costs: A tough job market may mean you are looking far and wide for employment. The costs of that search—transportation, food and lodging for overnight stays, cab fares, personal car use, and even printing resumes—may be considered taxdeductible expenses, provided the search is not for your first job.
  3. Out-of-Pocket Charity: It’s not just cash donations that are deductible. If you donate goods or use your personal car for charitable work, these are potential tax deductions. Just be sure to get a receipt for any amount over $250.
  4. State Taxes: Did you owe state taxes when you filed your previous year’s tax returns? If you did, don’t forget to include this payment as a tax deduction on your current year’s tax return. The Tax Cuts and Jobs Act of 2017 placed a $10,000 cap on the state and local tax deduction.
  5. Medicare Premiums: If you are self-employed (and not covered by an employer plan or your spouse’s plan), you may be eligible to deduct premiums paid for Medicare Parts B and D, Medigap insurance, and Medicare Advantage Plan. This deduction is available regardless of whether you itemize deductions or not.
  6. Income in Respect of a Decedent: If you’ve inherited an IRA or pension, you may be able to deduct any estate tax paid by the IRA owner from the taxes due on the withdrawals you take from the inherited account.³

1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

2. Withdrawals from traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.

3. Withdrawals from traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.

You may have to make estimated tax payments if you earn income that is not subject to withholding, such as income from self-employment, interest, dividends, alimony, rent, realized investment gains, prizes, and awards.

You also may have to pay estimated taxes if your income tax withholding on salary, pension, or other income is not enough, or if you had a tax liability for the prior year. Please consult a professional with tax expertise regarding your individual situation.¹

How to Pay Estimated Taxes

If you are filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual and expect to owe tax of $1,000 or more when you file a return, you should use Form 1040-ES, Estimated Tax for Individuals, to calculate and pay your estimated tax. You may pay estimated taxes either online, by phone, or through the mail.²

How to Figure Estimated Tax

To calculate your estimated tax, you must include your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. Consider using your prior year’s federal tax return as a guide.

When to Pay Estimated Taxes

For estimated tax purposes, the year is divided into four payment periods, each with a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty, even if you are due a refund when you file your income tax return.

Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in taxes after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.³

1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties.

2. IRS.gov, 2018

3. IRS.gov, 2018

As parents, we encourage our children to work so they can learn important values about work and independence. At what point, if at all, do children need to file an income tax return for the money they earn?

The IRS does not exempt anyone from the requirement to file a tax return based on age, even if your child is declared as a dependent on your tax return.¹

Your dependent children must file a tax return when they earn above a certain amount of income.

Dependent children with earned income in excess of $6,300 must file an income tax return.² This threshold may change in 2017 and years after, so please consult a professional with tax expertise regarding your individual situation.

Even if your child earns less than the threshold amount, filing a tax return may be worthwhile if your child is eligible for a tax refund. The standard deduction for a child is different from that of an adult: It is the greater of $1,050 or earned income plus $350, with the maximum equal to the regular standard deduction.³

The rules change for unearned income, such as interest and dividend payments. When the annual total of unearned income exceeds $1,050, then a return must be filed for your child. If your child’s unearned income only consists of interest and dividends, then you can elect to include it on your own return and combine it with your income, though it may result in higher income tax to you.

If you decide to prepare a separate return for your child, the same reduced standard deduction rules detailed above will apply.

1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties.

2. IRS.gov, for tax year 2016

3. IRS.gov, for tax year 2016

How the gains from the sale of a primary residence are taxed has changed in recent years. If you have recently sold your home, or are considering doing so, you may want to be aware of these new rules.

Home Sale

If you owned and lived in your home for two of the last five years before the sale, then up to $250,000 of profit may be exempt from federal income taxes. If you are married and file a joint return, then it doubles to $500,000.¹

To qualify for this exemption, you cannot have excluded the gain on the sale of another home within two years to this sale. Please consult a professional with tax expertise regarding your individual situation.²

This profit would be excluded from your taxable income. In fact, the sale may not need to be reported unless you receive a Form 1099-S or do not meet the above requirements.

If you sold your home at a loss, unfortunately, you can’t deduct the loss.

There Are Exceptions

Even if you do not meet the above requirements, you may qualify for this exclusion:

  • If you receive the house in a divorce settlement
  • If you are able to count short-term absences as time lived in the house
  • If a surviving spouse who has not remarried can count the time that the deceased spouse lived in the house.

The five-year test period can also be suspended for up to ten years in cases where any spouse has served on “qualified official extended duty” as a member of the military, foreign service, or federal intelligence agencies.

Even if you don’t pass the five-year rule test, a reduced exclusion may be available if you have a change in employment or health, or because of unforeseen circumstances, such as divorce or multiple births from a single pregnancy. Please speak with a professional with tax expertise regarding your situation.

1. IRS.gov, 2018

2. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties.

The federal government is an equal-opportunity tax assessor. Even the dead can’t escape taxes.

The final accounting required of the deceased is not limited to an estate tax filing, but a federal income tax return must also be filed for the year in which the taxpayer passes. Please consult a professional with tax expertise if you find yourself in this situation.¹

Filing for the Deceased

Of course, the deceased can’t file his or her own return, so that responsibility usually falls to the estate’s executor or administrator. Here are the highlights of how a tax return is filed in the name of a deceased individual.

  • The form used is the same as the one that would have been used if the taxpayer were still alive, but “deceased” is written after the taxpayer’s name.
  • The filing deadline is April 15 of the year following the taxpayer’s death.
  • Some income that might appear to belong on the decedent’s final return may in fact be taxable to the estate or to the beneficiary who receives it. Otherwise known as “income in respect of a decedent,” this is income that the decedent was entitled to receive at the time of death, but is not reported on the final income tax return.
  • Deductible expenses paid before death can be utilized on the final return. The cost of a final illness can be deducted on the deceased’s return even if the bills were paid after the date of death.
  • If the taxpayer was married, the widow or widower may file a joint return. The executor usually files a joint return, but the surviving spouse can file it if no executor or administrator has been appointed.
  • When an executor or administrator is involved, he or she must sign the return for the decedent. For a joint return, the spouse must also sign.
  • If a refund is due, you should also complete and file a copy of Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer.²

1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties.

2. IRS.gov, 2018

The enactment of the Tax Cuts and Jobs Act represents “the most sweeping overhaul of the U.S. tax code in more than 30 years.”1

For millions of Americans and businesses it means an altered financial and investment landscape with new opportunities and challenges in the years ahead. Keep in mind, however, that the information in this material is not intended as tax advice, and may not be used for the purpose of avoiding any federal tax penalties.

Business Takes Center Stage

Businesses may begin benefiting from a number of changes, including

  • Reduction in the top tax bracket from 35 percent to 21 percent;  Full and immediate expensing of capital investments (phased out after five years);
  • Implementation of a territorial tax system that taxes only income earned within the U.S.;
  • Special one-time tax on repatriation of foreign earnings;
  • Repeal of corporate Alternative Minimum Tax; and
  • A 20 percent deduction of qualified business income from certain pass-through entities. Service industries (e.g., health, law, professional services) are generally excluded, except where income is below $315,000 for joint filers and $157,500 for other filers.

Business owners should consider meeting with a tax professional to understand the impact of these changes on employee benefits, business investment, and corporate structure. Keep in mind the information in this material is not intended as tax advice, and may not be used for the purpose of avoiding any federal tax penalties.

Shifting Landscape

The changes in tax law may affect companies differently, which could shift where future investment opportunities may be found.

For instance, the lower tax rate may be more meaningful to higher-taxed industries, which can include certain retail, healthcare and telecom firms. Real estate investment trust companies also may benefit from the new pass-through deductions and exclusion from the new limit on interest deductibility of 30 percent of net income.

Conversely, with the changes made to individual taxation (see below), there may be a negative impact on home builders and realtors, while highly leveraged businesses potentially may burdened by the new cap on interest deductibility.

Overall, the tax cut is projected to increase corporate profits, with many Wall Street analysts lifting their 2018 earnings forecasts anywhere from seven to 10 percent.2 This may not only justify current stock valuations, but may influence prices going forward.

Past performance does not guarantee future results. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.

Changes for Individuals

The Tax Policy Center projects that taxes will fall for all income groups and result in an increase of 2.2 percent in after-tax income. The Tax Policy Center also cautions, however, that some individuals and households may see a higher tax bill.3

Highlighted below are some of the major changes:

  • Reduction in most marginal income tax brackets;
  • Near doubling of the standard deduction;
  • Elimination of personal exemption;
  • A $10,000 cap on the state and local tax deduction;
  • An increase in the child tax credit and the expansion of eligible families;
  • Mortgage interest deductibility limited to mortgages up to $750,000 (reduced from $1 million);
  • Medical expenses deductibility will kick in at 7.5 percent of income, down from 10 percent;
  • 529 plans may now be used to fund elementary and secondary education; 4
  • Alternative Minimum Tax is curtailed;
  • 401(k) borrowers will have more time to repay plan loans when leaving an employer; 5,6 and
  • Elimination of the ability to “undo” a Roth conversion. 7

These tax changes may have wide ranging impact on the financial choices you make. For example, you may want to consider the best use for your additional after-tax income. Keep in mind the information in this material is not intended as tax advice, and may not be used for the purpose of avoiding any federal tax penalties.

Estate Taxes

The estate tax exemption was raised to $11.2 million, a doubling of the $5.6 million that previously existed. As such, individuals benefiting from this change may want to re-evaluate the strategies they have in place to address the tax and liquidity issues that may no longer exist.

Tax Cuts and Jobs Act

The nature and shape of the nation’s tax system inevitably influences the everyday decisions made by individuals and businesses alike. After the implementation of one of the most comprehensive reforms in over a generation, it is essential to review certain financial and investment strategies.

1. The Wall Street Journal, December 20, 2017

2. Reuters.com, December 19, 2017

3. Tax Policy Center of the Urban Institute & Brookings Institution, 2017

4. The tax implications of 529 College Savings Plans can vary significantly from state to state, and some plans may provide advantages and benefits exclusively for their residents. Please consult legal or tax professionals for specific information regarding your individual situation. Withdrawals from tax-advantaged education savings programs that are not used for education are subject to ordinary income taxes and may be subject to penalties.

5. Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.

6. A 401(k) loan not paid is deemed a distribution, subject to income taxes and a 10% tax penalty if the account owner is under 59½. Under the Tax Cuts and Jobs Act, if the account owner switches jobs or gets laid off, the 401(k) loan is eligible for a rollover within 60 days, essentially providing the person more time to repay the loan or manage the tax consequences of non-repayment.

7. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawal also can be taken under certain other circumstances, such as a result of the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals. The Tax Cuts and Jobs Act repeals the rules permitting the recharacterization of Roth conversions, effective starting in 2018

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The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Some of this material was developed and produced by Advisor Launchpad to provide information on a topic that may be of interest. Advisor Launchpad is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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