Hurricane Michael Relief

I find myself having to write and advise on disaster area casualty losses all too often over the past 12 months. Hurricane Michael has devastated large parts of the Florida panhandle and has caused significant damage inland through Georgia and beyond. The IRS has issued various reliefs to those residing in the effected areas including additional areas of North Carolina, South Carolina and Virginia. Individuals, residents and businesses in the following counties may be eligible for tax relief from the IRS: 

Florida counties: Bay, Calhoun, Franklin, Gadsden, Gulf, Hamilton, Holmes, Jackson, Jefferson, Leon, Liberty, Madison, Suwannee, Taylor,  Wakulla and Washington

Georgia counties: Baker, Bleckley, Burke, Calhoun, Colquitt, Crisp, Decatur, Dodge, Dooly, Dougherty, Early, Emanuel, Grady, Houston, Jefferson, Jenkins, Johnson, Laurens, Lee, Macon, Miller, Mitchell, Pulaski, Seminole, Sumter, Terrell, Thomas, Treutlen, Turner, Wilcox, and Worth

As a reminder, the below is just a summary and many situations present unique circumstances. Please read the releases thoroughly or contact a tax professional to help you navigate the best course of action for your situation. Also, as a reminder, all of the below only applies to areas declared by FEMA as eligible disaster zones. If you are not within those zones, other relief may be available. 

1. Don't stress about the extension filing deadline for 2017 personal returns that were due on October 15th, 2018. The deadline has been extended to February 29th, 2019. However, tax payments due for 2017 do not receive an extension as they should have been paid by April 17, 2018.  Various other tax filings and tax payments that were to be made in the period commencing October 7th, 20178 are being granted relief and have also been extended to Feb 29, 2019. A comprehensive list of which filings and payments are and are not extended can be found in the IRS press release link at the end of this article. 
    

2. Casualty losses can generate significant, and fairly immediate, tax refunds and/or savings. A casualty loss is a deductible property loss that you can claim on your tax return. There was a lot of discussion about casualty loss claims when the new tax bill went into effect in 2018, however, the change for casualty losses in declared disaster areas went mostly unchanged. Casualty losses occur when property is damaged, destroyed or lost due to a disaster AND you suffer a net financial loss. To potentially generate quick-ish cash flow, you are allowed to amend 2017 returns and have refunds issued against previously paid tax by claiming casualty losses on the amended returns. If you haven’t yet filed your 2017 return, you can claim the loss on that return when it is initially filed. If you are not in a rush, you can also claim casualty losses on your 2018 return when you file it. You don't have to amend 2017 returns to take advantage of casualty losses. This is a fairly complicated topic so please read the linked piece and then contact a tax professional, the IRS or FEMA if you need guidance.
   
   I go into more detail about casualty losses in the below link that was written for Hurricane Harvey victims. There is little difference in how casualty losses are treated between the two disasters. This is still a pretty surface level overview but will give you a good idea as to if you qualify, how to proceed and some useful links.
   
   LINK TO POST BREAKING DOWN CASUALTY LOSSES
    

3. The IRS will provide, free of charge and in an expeditious manner, copies of previous years tax returns. Taxpayers should put the assigned Disaster Designation “Florida, Hurricane Michael” in red ink at the top of Form 4506 (Request for Copy of Tax Return) or Form 4506-T (Request for Transcript of Tax Return), as appropriate, and submit it to the IRS.
    

4. The IRS has not yet issued guidance as to if they will allow usage of your 401(k) and similar employer-sponsored retirement plans, without penalty, for various hardships (rebuilding, food, shelter, etc.) if you are in the FEMA-declared zones. I do not know if they will eventually include this as an option, but if they do, I will provide an update. It is an option that has been provided in disaster situations in the past.

The IRS may continue to issue additional relief provisions in the coming days and weeks. If they issue any relevant additional guidance, I will provide an update. Remember, FEMA and the IRS will provide free guidance via phone and at certain locations where available. Taxpayers may download forms and publications from the official IRS website, irs.gov, or order them by calling 800-829-3676. The IRS toll-free number for general tax questions is 800-829-1040. Tax professionals should be able to assist with all available tax reliefs as well. 

If you have any questions about the IRS relief, require additional guidance or have any comments on the content, please contact me at adam@ditskystrategic.com.

As always, the information contained within is not to be used as advice. Please contact your tax advisor before making any decisions.

Important Links:

Link to IRS release for Florida Hurricane Michael Relief

Link to IRS release for Georgia Hurricane Michael Relief

Author:

Adam Ditsky, CPA

President, Ditsky Strategic

adam@ditskystrategic.com

www.ditskystrategic.com

Tax-free child care? Sure!

New 529 plan rules allow usage for K-12 education

The recently enacted Tax Cut and Jobs Act (TCJA) contains a lot of changes, some of which were highly touted as helping alleviate the tax burden of many Americans. One of the items that received a lot of press is the ability to use 529 savings plans to pay for up to $10k per year of K-12 education. Prior to the TCJA, 529 accounts could only be used to pay for college and post-college education. In theory, the TCJA would allow a deposit into the 529 account for $10k and then the funds could be withdrawn a few days later (depending on the plans deposit/withdrawal time rules). This would generate the allowable tax credit for the contribution thereby reducing the tax burden of the contributor and making the private school tuition payment cost less, from a cash flow perspective. You could, of course, plan further ahead and also allow the growth of the $$$ in the 529 to be tax free.

What they forgot to tell us (so kind of them!)

What we weren't told: while this TCJA allows for the 529 plan to be used for K-12 education, the actually regulations for this must occur on the state level because the 529 plans are managed by the states. Many states, New York being an example, have not changed their 529 plan rules and you CANNOT use the 529 plan to pay for K-12 education. We do not know if or when various states will change their plan regulations. So, if this was your plan or if this 529 option was your silver lining to a tax bill that you otherwise weren’t a fan of…sorry…better luck next time.

You have options!

You could ask ‘is there any other way I can save some taxes while paying for K-12 education’. Well, yes…yes, there is. How? It’s actually not so difficult. It does depend on your employer and benefits provider so this is not something that is universally available but it is widely available. I’m sure the suspense is killing you. Before you swipe to the next article in disgust, here’s the answer…dependent care flex spending accounts (DCFSA).

Flex spending accounts must be available via your employer in order for you to take advantage of this option and can only be used for children under 13 years of age (unless it is for a relative that lives with you that is physically or mentally incapable of self care). You can use this to pay for preschool, after school care, tuition and summer camp among other things. You are allowed to contribute up to $5000 of pretax money per year to these accounts. If you are in a 25% tax bracket, a $5000 pre tax contribution to a DCFSA equates to tax savings of approximately $1632 (income tax plus payroll taxes). That’s a pretty sweet deal!

A couple of cautions here. First, if you don’t use it, you lose it. Make sure you only contribute what you know you can use or you are out of luck. Second, you cannot use the expenses paid for from the DCFSA account towards the child tax credit on your tax return. Essentially, you can't double dip. Therefore, for lower earners, it might be more beneficial to use the child care credit as opposed to the DCFSA. For some other folks, if you have a tuition expense of $15K per year, you can use $5000 from the DCFSA account and still put the balance paid out of pocket of $10k towards the child care credit (you’ll quickly max out on the credit)…just no double dipping.

Hopefully the DCFSA removes some of the disappointment for those of us not able to use the new 529 plan rules to our advantage. If Ditsky Strategic can be of any assistance in navigating your options, feel free to reach out!

Author:

Adam Ditsky, CPA

President, Ditsky Strategic

Phone: (646) 380-6651

Email: adam@ditskystrategic.com

www.ditskystrategic.com

The topics contained within this article are for discussion purposes only. You should not construe anything contained above as professional advice. Please contact your CPA or financial advisor for questions specific to your financial situations.

Ditsky Strategic Provides Financial Advisory Services for Matthew Wallack in Negotiations for his New Position as President & CEO of W Talent Group, LLC

Press Releases »2018 » Financial Advisory Services                                                                   

New York, NY (May 22, 2018) – Ditsky Strategic today announced that it provided the financial advisory and strategic planning services to Matthew Wallack in his negotiations to become President and CEO of the newly formed W Talent Group, LLC. W Talent Group, a provider of recruitment services specializing in the accounting and business management fields, is located in midtown Manhattan.

Ditsky Strategic advised Matthew Wallack, a recruiting executive with over 10 years of experience, on various components of the deal to become President & CEO of W Talent Group. Advising included components such as financial structure, compensation, equity, tax advantageous strategy and valuation. Ditsky Strategic continues to provide financial strategy and tax optimization services to Matthew Wallack as he serves in his new role.

“Matthew Wallack brings significant industry experience dealing with both career seekers and clients to a new firm allowing him to use his expertise to enhance the job search for career seekers and provide top notch professionals for his clients,” said Adam Ditsky, founder of Ditsky Strategic. “Ditsky Strategic is excited to assist Matthew Wallack in his endeavor as he provides a much-needed service to an industry with more open jobs than job seekers”.

Ditsky Strategic

Ditsky Strategic provides business advisory, tax strategy and optimization, business management, tax preparation and accounting solution services to a wide array of industries. Ditsky Strategic works closely with its clients and plays a hands-on role developing and implementing financial and tax strategies for their businesses and their families. Business clients range from pre-start-up phase through multi-state presence. Personal clients include w2 wage earners, independent contractors and those with closely-held businesses. Ditsky strives to give equal attention and expertise to each client irrespective of size and understands that each client presents a unique set of circumstances.

W Talent Group, LLC

W Talent Group, LLC is a recruitment firm that specializes in the accounting and business management fields. W Talent boasts decades of combined experience in these fields and understands the concerns and processes of both the career seeker and the hiring company. Career seekers use W Talent because they recognize the challenges of finding a new position, making the most of every stage of the interview process and adjusting to a new boss, new colleagues and new responsibilities. Companies use W Talent because of their ability to locate and provide exceptional, well qualified career seekers who are excited to engage in new, long term employment. W Talent spends time understanding the culture of the client firm allowing the introduction of career seekers whom do more than just check skill set boxes.    

Contact:
Mr. Adam Ditsky
Ditsky Strategic
1140 Avenue of the Americas, 9th Floor
New York, NY 10036
(646) 380-6651
www.ditskystrategic.com
Inquiries: inquiries@ditskystrategic.com

High Tax States and the New Tax Bill - Will You be Rescued?

Much has been made of the effect that the new tax bill is having on taxpayers that live in high tax states, and rightfully so. Residents of NY, CA, NJ, IL and other high tax states face significant losses of itemized deductions specifically due to the new $10k SALT (state and local tax) cap. Will states come up with creative solutions to combat some of these changes? They might or they might not, but they are certainly trying!

SALT - Remind me what that is again?!

First, just to make sure we're all on the same page, I'll quickly explain the new SALT cap. In years prior to 2017, individual taxpayers (individual meaning non-business) could deduct their state and local taxes on their federal return as itemized deductions. These taxes included anything withheld from your paycheck for your state or locality as well as any local or state taxes you paid in as estimates, with your extensions or when your return was due. There was no limit on the amount of these taxes that could be included as itemized deductions. Additionally, you could deduct real estate taxes as an itemized deduction. There was no cap for this either. However, effective January 1, 2018 as part of the TCJA (Tax Cuts and Jobs Act), these state and local income taxes as well as real estate taxes are subject to a combined $10k limit. This limit lasts for the next 7 years or until a new tax bill is written (I know you can't wait for that!). As an example, if your state taxes plus local taxes plus real estate taxes total $25k, you can only deduct $10k. In high tax states, many taxpayers will take a big hit because of this new rule.

Potential Solutions

In New York, Governor Cuomo is working on a some maneuvers that would help alleviate the tax blow many of his constituents will feel over the next several years. Other high tax states, such as California and Illinois, are using some of these ideas as a guide and developing some of their own. There does seem to be good communication between many of the high tax states allowing for idea sharing. The ability for some of these ideas to both pass IRS muster and be broadly implemented is being debated and will continue to be the biggest hurdles in the states' quests to provide some relief to their residents.

Real Estate Taxes as Charitable Contributions?

As many of you are probably aware, there was a mad dash for folks to pre-pay their real estate taxes before the TCJA went into effect. The IRS has issued guidance that prepayments cannot be deducted in 2017, however, the definition of prepayment is not as straightforward as you would think. That, however, is not something I am going to elaborate on here. The ability to prepay was an effort that Cuomo got involved in and he tried to get municipalities to issue tax bills early to allow for prepayment. For 2018 and beyond, Cuomo is considering a plan which would essentially switch real estate tax payments to mandatory payments to a 'charitable fund'. Instead of paying your real estate taxes to your locality, you would make a payment to that locality's charitable fund and the locality would then use those funds for various public services. An interesting approach to say the least and one that is successfully used in a couple of places throughout the country. The usage in other, much smaller, places is why proponents think it might pass muster. However, when a state like NY really thrusts this onto the radar, the IRS may take a much harder look and conclude that it is not allowed. That is what many experts believe will happen. An essential question is 'would this set-up be adequate to convince the IRS that these 'charitable donations' aren't simply real estate taxes by another name'. If the IRS did go along with it, implementation would no doubt be a bear. The devil will certainly be in the details if this approach has any chance of succeeding. 

More Payroll Tax, Less Withholding Tax?

Wait...what does that even mean? As it stands now, when you receive a paycheck, you have a slew of items deducted from your gross pay to arrive at your net check. Among those are federal withholding tax, FICA and FICA MED (payroll taxes) and state/local withholdings. As discussed at the outset, state and local taxes plus real estate taxes are now capped at a maximum deduction of $10k per year. However, payroll taxes are still fully deductible for employers. Cuomo has proposed that employers restructure their pay scales and pay a new 'payroll tax' to NYS instead of withholding state and/or local taxes from employees. This would allow the employers to deduct the expense and the employees would no longer have a deduction to lose on their personal returns. This would be very difficult for employers to institute as it would require significant pay scale restructuring to keep both employees and employers on even footing with where they were in 2017. However, it would be a very viable option for smaller businesses and for high earners within certain larger companies (assuming that there would be no restriction preventing this from only being implemented for certain employees). A small business, especially one in which the owner was the only employee, could easily maneuver to implement such a change, potentially resulting in a much higher post-tax tax home $$$. There is less consensus amongst experts on this approach as far as the IRS stance is concerned. The ability of employers to implement this new structure would likely be the biggest roadblock to success.

Conclusion

I know...you're thinking 'I just read all that but will any of it really happen?' The answer is 'I have no idea'. What we do know is states such as NY, CA and other high tax states are trying to develop some workarounds to help their residents. Even if they do develop plans that are reasonable and pass muster with the necessary taxing authorities, it is unlikely we will see anything implemented in 2018 as we are quickly approaching the midpoint of the year (of course, the TCJA got rammed through with handwritten notes in the margins and no time for implementation, so anything is possible).

It is important that the states develop some kind of relief as the high tax rates are driving residents, and businesses, to move to other states where living is more affordable. NY, and others, needs to entice its residents to stay put. These ideas, and others still being worked on behind closed doors, are potential paths to resident retention and strong state economies.

Author:

Adam Ditsky, CPA

President, Ditsky Strategic

adam@ditskystrategic.com

www.ditskystrategic.com

Budgeting & the Cumulative Effect of Small Expenditures

Regardless of what anyone tells you, we all live within budgetary parameters, both in our businesses and at home. Some have much more leeway than others but even the wealthiest among us consider budgets and cash flow when making decisions. However, this piece will address issues more common to you and I as opposed to whatever Bezos, Buffett and Bloomberg are discussing with their financial teams (billionaire alliteration…who knew?!).  

We have completed the first 4 months of 2018 and many of my current appointments revolve around reviewing the first quarter and tracking YTD budgets. Am I on track? Did anticipated income come to fruition? Were expenses in line with our budgetary goals? Did we correctly predict the timing of payables and receivables? These, and many more questions, allow us to analyze the budgets we've set and see if we deserve a pat on the back, need to adjust or should curl up in the corner and shed a tear (I kid...don't do that…as you’ll read, we can always adjust!).

When dealing with budgets with both small business and on the home front I find that folks often overlook the extent to which small changes can be impactful. This is where the phrase 'the cumulative effect of small expenditures' comes into play. If you're a small business and you want to generate an extra $10k or $15k per year to increase your take home $$$, to reinvest in the company, to give a great employee a raise, to offset a necessary increase in some other expense category, etc., you have options. If you're an individual or a family and you want to decrease your overhead by $2000 per year to set aside more retirement savings or to go on vacation, you too have options.

Businesses

As a business, options for a higher bottom line include tax strategies, generating increased revenue and implementing/honing operating efficiencies. Another option, however, is to analyze your expense categories and see what small adjustments can be made to generate a greater cumulative effect. For example, do you need the internet bandwidth you’re paying for and can you reduce the cost of that monthly bill? Do you use all of the features of your software and is there a package you can switch to which would be less expensive but still include everything you need? Can you buy cheaper coffee for the breakroom? As opposed to bottled water for clients, can you add a filter to the sink and use a pitcher and reusable glasses (you can save the environment at the same time...win-win!)? These are all expense categories often overlooked but some quick research and a call to your current service providers could provide some savings.

Individuals and Families

For individuals and families, it is not always an option to develop an additional revenue stream especially if you are a salaried wage earner. If saving an extra $2000 per year is your goal, it's more achievable than you might think. Again, the cumulative effect of small expenditures can get you to close to your goal. For example, let's take your caffeine habit. (Before we go any further, I promise I won't ask you to give up caffeine. I have young kids...I have always understood the caffeine necessity but now more so than ever). If you go to Starbucks 5 days per week and get a cup of whatever they're hawking, you're spending an average of $4/day.  When's the last time you did the quick math to see what that really costs you? In the event that you haven't used an addition device since the demise of the abacus, I'll do some PEMA for you.  That coffee is running approx. $1040 per year. If you make your coffee at home, even after the initial purchase of a coffee maker of some kind, you can save half of your Starbucks cost in year one and closer to 3/4 subsequent years...that’s $500 to $750 per year. Another good example is cable/internet. How often do you watch all 4 premium channels in your package? Perhaps you only really need HBO. If you drop the premium package and buy one of the HBO apps, you can potentially save another couple of hundred bucks per year.  Even another example, and perhaps the biggest potential savings category, is dining out/delivery. If you're eating out 3 or 4 times per week, eliminating one of those could save significant $$$. Let's take the example of a single person in NYC. If this individual eliminates one meal out per week at a cost of $20 and substitutes that with a meal that costs $5 to prep at home, the net weekly savings of $15 per week equates to an annual savings of $780. If you change that to a family of 4, it is easy to see how the annual savings could easily approach a couple of thousand dollars per year. 

It is important to remember that saving some $$$ by considering the cumulative effect of small expenditures usually has a minimal impact on daily lifestyle. What we're discussing here are adjustments, not eliminations. These adjustments can put some extra $$$ into a kitty to use for whatever purpose you see fit. 

Budgets can be difficult but adjustments and implementation can be simple. There's always a light at the end of the tunnel if you structure your finances correctly. If you need to set up a new budget or adjust an existing budget to allow for better cash flow management no matter how simple of complex, feel free to contact me for a consultation.

Author:

Adam Ditsky, CPA

President, Ditsky Strategic

adam@ditskystrategic.com

www.ditskystrategic.com

The New Tax Bill: Highlights, Myths Dispelled and the Flow Through Business Deduction

First and foremost, I want to take this opportunity to brag about the 8 hours I spent this past Friday in a seminar about the new tax bill and the countless hours I have spent reading both said bill and the recently released 640 page Bipartisan Budget Act of 2018. All this and we still expect thousands of pages of literature on the mechanics of how all of this will work. Take a moment and let go of that jealousy...deep breaths, maybe some downward dog if that's what it takes. I don't want your invidiousness (nice SAT word!) to prevent you from absorbing the info below, much of which could be quite relevant to your tax situation moving forward.

Before we dive in, some basics of interest contained in the new tax bill effective as of January 1, 2018:

• The standard deduction has nearly doubled. For single (and married separate) filers, the deduction has gone from $6500 to $12,000 and for married joint filers the standard deduction has gone from $13,000 to $24,000
• Personal exemptions have been eliminated. In 2017, you received a $4050 for each dependant claimed on your return. Therefore, if you filed a married joint return and had 2 dependant children in 2017, you were getting a $16,150 exemption. Wave goodbye. Gone. Sayonara. 
• The deduction for state and local taxes, including real estate taxes, is now capped at $10,000 per year. Not ideal for many people living in high tax states, especially those in high real estate tax districts in and around major metropolitan areas
• Mortgage interest has a new cap. You can now only deduct mortgage interest on the first $750k of mortgage principle (this is effective December 15th, 2017 NOT Jan 1, 2018). However, if you're mortgage originated before the new tax bill came into effect, the old $1M cap is grandfathered in...your ability to deduct mortgage interest is generally unchanged (there are exceptions to this rule for equity lines as I'll describe later on). There are also some exceptions for those who entered into purchase agreement in the final few weeks of 2017 so if you purchased a home or entered into contract to do so in December of '17, you should contact your tax advisor to see what your deductibility limits are.   
• The child care credit has been increased to $2000 per child and the income phase out to get the credit has increased significantly to $400,000 of adjusted gross income for married joint filers ($200,000 for single filers)
• 529 plans can now be used to fund up to $10,000 per year of a student's education at public, private or religious elementary or secondary school. It's not just for college anymore! (States with lifetime limits on 529 contributions have not yet issued changes to the funding limits to allow additional contributions enabling you to fully cover the cost of college education after pre-college usage). 

Now that we've gotten some of the straightforward basics out of the way, let's start to dig in by explaining away a myth that many clients I speak with have read about...the elimination of the meals and entertainment deduction. The myth is this: starting in 2018 businesses can no longer deduct meals and entertainment. This is not all myth but certainly not all true. The truth relates to the 'entertainment' part of the rule. In general, the following are no longer deductible as business expenses as of January 1, 2018 even if they are directly related to your trade or business:

1) Any activity generally considered to be entertainment, amusement or recreation (think sporting event tickets, concert tickets, theater tickets, etc) 

2) Membership dues with respect to any club organized for business, pleasure, recreation or other social purpose

3) A facility or portion thereof used in connection with any of the above items.         

The myth relates to the meals part of the regulation. Businesses, including those that file using a Schedule C on the personal return, are still generally allowed to deduct 50% of food and beverage expenses associated with their business. This HAS NOT CHANGED from recent years. However, an interesting change of note is that taking an employee out to a meal is no longer deductible. There have been some other changes involving employer provided meals but I will not get into that here. You can always email or call for more detail! 

Next, let's tackle home equity lines of credit (equity lines). The general myth being circulated is that home equity lines of credit are no longer deductible. Again, part true and part false, the devil being in the details. If you took out a home equity line of credit and it was used for the purpose of substantial improvements to your home, then it is STILL DEDUCTIBLE. If it was used for any other purpose, it is no longer deductible. The asterisk here is that the caps have changed even for loans that existed prior to the tax bill. If you meet the above condition, you can still deduct interest on $100k of equity line principle, however, if your loan existed prior to the new tax bill, you can now only take $1M combined between your primary and secondary loans (previously you could take the interest on a combined $1.1M of principle). If you have purchased a home since the tax bill was enacted, the total cap for your primary loan and equity line combined is the new limit, $750k. 

For now, I will dive into one more topic, the new 20% deduction for flow through businesses. This is an area of much confusion, even for tax professionals. To clarify, for the purposes of this deduction, flow through businesses include sole proprietors, partnerships/LLCs/LLPs/etc, S-corps and trusts and estates. The 2 most common questions I field about this new deduction are are 'what the heck is this' and 'how do I qualify'. Both totally legit questions! What I am about to explain is both a bit confusing and a bit general but I will do my best to break it down to somewhat understandable terms. Each business really needs to be looked at individually, the ability to use this deduction resting on the company's individual merits.  

A fairly simplistic answer to 'what the heck is this'...a noncorporate tax payer (read: you as an individual or married couple) who has qualified business income from a flow through entity is allowed a 20% deduction on their personal tax return. However, there are many restrictions, including profession type and income level. The easy part is this...if you have qualified business income (QBI) from one of the aforementioned business entity types and you have personal taxable income on your personal return of LESS THAN $315,000 if filing married joint ($157,500 if single), there are no limitations as to profession type placed on your ability to take this 20% deduction. You get the deduction. (Woohoo!!) Essentially, you get a deduction equivalent to 20% of your business income on your personal return. For example, if you had $150k of business income and you meet the personal taxable income limit mentioned above you get a deduction of $30k before your total tax is calculated. Seriously...just for getting out of bed, they will give you this 20% deduction. Better yet, even if you decide to stay in bed, you still get the deduction. That example is admittedly an extreme simplification, but it sets forth the general idea. 

However, as personal taxable income levels rise about $315k, the ability to take the deduction becomes much more restrictive. First and foremost, any trade or business involved in the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services or brokerage services DOES NOT GET the deduction once the $315k ($157k if single) income threshold is crossed (there is a small phase out range so that the deduction doesn't go from 20% to 0% immediately). Additionally, any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees does not get the deduction once the $315k threshold is hit. Good luck explaining that clause as no one knows what that means...we all just have our guesses. We are assuming additional guidance will be provided further defining what this means. if guidance is not provided, the application of this rule will result in chaos. 

If you're lucky enough, from a tax perspective, to not be in one of the listed 'service' professions and if you don't fall into that poorly written and ill-defined final clause, you are still eligible for the 20% deduction but with restrictions including w2 wage limits as well as some other limits that involve fancy calculations. And we were told that they were simplifying the tax code...amusing. If you are involved in a profession, such as manufacturing, which is perhaps still eligible for the 20% deduction above the $315k income threshold, contact me or your CPA to further discuss to what extent you might be able to capture the deduction. 

That's a lot of information so I will wrap this up. Sadly, we have barely scratched the surface on the changes that we are fitting into planning for this year and the years ahead.

Please contact Adam Ditsky at adam@ditskystrategic.com to discuss the topics covered here or any other personal tax planning and small business advisory needs. 

As a reminder, the content contained within is not meant to act as a substitute for direct advice from a CPA or tax professional. Every situation is different and should be treated as such. Nothing contained within should be construed as advice on your situation.

Author:

Adam Ditsky, CPA

President, Ditsky Strategic

adam@ditskystrategic.com

www.ditskystrategic.com

The New US Tax Plan - How should I start thinking about it?

As you may have heard, a tax bill has been produced via the reconciliation process between the House and the Senate. With only 11 business days left in 2017, there are some moves that should be on your radar and that you should be prepared to make IF the tax bill passes.

That brings me to a VERY IMPORTANT point...we still don't know if a tax bill will pass but all indications are that we will have a vote prior to year end. The point of this literary masterpiece (that you are now fully immersed in and can't look away from) is not to debate the merits of the plan but rather to make sure you have thought about items that may affect you and about what moves could benefit you if made prior to December 31, 2017.  

That's it...i'm done. Suspenseful, right? Make an appointment and I'll tell you some more.

I kid...maybe.

A few big items for which to prepare said trigger if the bill passes:

1)  The proposed bill caps real estate tax and state and local income tax deductions at a combined $10,000 per year starting in 2018. If you are going to lose any of this deduction in future years, you should consider paying your first quarter 2018 real estate taxes now if you are able to do so. 

2)   A continuation of #1, you can make an estimated state tax payment in 2017. If you wait and make the payment in 2018, assuming you need to make one, you might lose the ability to deduct some or all of the payment depending on how much state tax you pay and how high your real estate taxes are. Remember, if the bill passes, the state and local tax COMBINED with real estate taxes is capped at $10,000.

3) The standard deduction will nearly double for married couples to $24,000 in 2018 if the tax plan passes. If you will not exceed $24,000 in itemized deductions next year but will be itemizing in 2017 and you own a home with a mortgage, you can make your January mortgage payment in December to get the extra interest deduction this year. 

There is no shortage of change from our current tax code in the new bill. Contact your CPA to discuss what options you should be ready to take if the bill passes this year. If you prepare ahead for varying circumstances, executing some payments prior to year end will be easier and smoother.

Author:

Adam Ditsky, CPA

President, Ditsky Strategic

adam@ditskystrategic.com

www.ditskystrategic.com

The New US Tax Plan - What to do now?

This past Friday, a furious day of adjusting, altering and hand writing tax legislation was followed by a late night/early morning vote. As you surely know, the Senate passed its version of tax reform at the end of a long day intra-party negotiating. 

One of the obvious questions you might ask is 'what does this tax plan mean for me'? Good question! Anyone who can give you a definitive answer is lying and you should stop your conversation with them immediately. For starters, the tax reform bill passed by the Senate is not the same bill that was passed by the House. 'What does that mean'? Pat yourself on the back...that's another very good question! While I didn't graduate with a degree in political science and don't specialize in the minutiae of legislative branch process, I can tell you what I know.

When the House and Senate pass a different bill on the same topic, the bill the Senate passed can do a couple of things:

1) It can be sent back to the House as is and the House can vote on it. If it gets a majority vote in the House, it goes to the President for signature.

2) If the House doesn't think it will have the votes to pass the Senate bill or it wants to find middle ground on various issues, a process called 'reconciliation' occurs. In this process the House and Senate negotiate on the differences between their 2 bills and find some common ground. This revised bill then has to go through both the House and the Senate and receive majority votes in each to go to the President for signature. Option 2 is what is going on right now. However, if the process takes too long and particularly if the special election in Alabama starts getting closer, the legislative leaders can switch course, send the bill passed by the Senate to the House for a vote and try and get it passed (in other words, they can scrap Option 2 at any point and attempt Option 1). 

Now that we have that out of the way (I wanted to provide some sarcastic 'you're welcome' here but I've yet to come up with an overly entertaining remark), let's get back to your first really good question...'what does this tax plan mean for me'. When the House passed it's bill a few weeks back, I wrote that there was nothing to do yet as the bill would likely change significantly before it finally, if ever, passed into law. I couldn't be happier that I saved you some time and anguish with that advice...you're welcome (perhaps this attempt at humor is a bit more successful than the previous).  Even though the picture of what this final bill will look like is becoming a bit clearer, we still don't really know what it will entail when all is said and done. There are several big ticket items on which the House and Senate bills do not agree. I will summarize some of those below, but my advice in the here and now is this: don't bang your head against the wall trying to figure this all out and certainly don't make any major decisions based upon what the Senate has passed; it will likely change again. Your friendly tax professional should be doing some of the head banging for you as they start to sift through the various items on which the 2 bills do agree. If you ask, perhaps they'll even share their Spotify metal playlist with you. 

One major item which will effect those in high tax states who also live in high real estate tax zones is the elimination of the SALT deduction. SALT is the acronym for state and local tax. This is a deduction that anyone who itemizes takes advantage of and allows you to deduct any state and local tax, including real estate tax, on your federal return, There is currently no cap as to what you can deduct...if you paid it, you can deduct it. That will change. The House and Senate bills agree that this will be eliminated, however, they will still allow a deduction for real estate taxes of up to $10k. This is an item that many folks in the NY-metro area, including NJ and CT, as well as high tax districts in California and elsewhere will need to pay particular attention to. It will likely require adjusting family budgets making sure the loss of these deductions are accounted for in overall cash flow. If a bill does pass, this will be in it. It is highly unlikely that this will change since both bills are in sync on this issue. 

In this environment, year end planning meetings become increasingly important as adjustments will need to be made for 2018 once a final bill is passed. If your year end planning occurs before a final bill is passed, you should follow-up with your business advisor and tax professional early in 2018 to make whatever strategic maneuvers are necessary. 

As promised, some of the items on which the House and Senate bills do not agree:

1) The Senate has 7 new tax brackets. The House has 4. So, we have no idea what tax rate anyone will have.   

2) The House bill eliminates the deduction for student loan interest AND taxes tuition waivers for students and for those who receive reduced tuition due to family employment at the school. The Senate bill does not change the current rules. 

3) The House eliminates the teacher classroom expense deduction. The Senate doubles the current $250 deduction max to $500. Good on ya, Senate! 

4) The House and Senate both increase the child tax credit but the bills don't agree on how much, when and who the new version of the credit effects.

5) The House bill changed the current mortgage interest deduction from interest on $1 million of principle to $500k . The Senate keeps the $1M mark but does remove the ability to deduct an additional $100k of principle interest from an equity line as is currently allowed in the current tax code.

6) The Senate bill keeps AMT in the tax code but modifies it. The House eliminates AMT altogether. 

7) For pass through entities (LLCs, S-corps), the House and the Senate do not agree on the new tax rates for pass through income, however, both plans do provide a reduction in tax for most businesses versus the current tax code. However, professional service providers, such as attorneys and accountants, will face limitations to the new tax rates. 

8) The timing of the implementation of the new 20% corporate tax rate differs by 1 year between the 2 plans.

There are many other differences between the 2 bills. This partial list gives you an idea of what reconciliation will entail. There are differences, some major, and there are many special interests pushing their cause. I do not believe there are any items that will provide blockage to ultimate passing of the bill. As the future of the provisions in the tax reform bill become clearer, I will add new posts really digging into the code changes.  

Author:

Adam Ditsky, CPA

President, Ditsky Strategic

adam@ditskystrategic.com

www.ditskystrategic.com

What the GOP tax plan means for you (Hint: Nothing yet)

Ever since the tax plan was released earlier today, I have been teetering between a full dissection (high school bio fetal pig style) and a more cursory, surface review. I was reminded by a longtime industry colleague that tearing this plan down to it's nuts and bolts is probably a waste of time.

Why a waste of time? The plan revealed today likely looks nothing like what will be passed. It's not worth the time or effort to break it down until we know what it will actually contain. There are certainly some items in the proposal that should get tax professionals thinking so that they are, at a minimum, mentally prepared for various scenarios when the final plan hits.

To be clear, there is a chance that a tax bill of some kind is signed into law around Christmas. If that happens, the proverbial shit will hit the fan in the mad dash to squeeze enormous amounts of planning, governed by new laws, into the final week of the year (if the new rules take effect Jan 1, 2018 which I'd say is unlikely but far from impossible) . Therefore, make sure all of your financials and planning items are up to date and ready to rock as there might be a lot of last minute moves that should be made in the final week of the year.

If you need help making sure all of your ducks are lined up in a row, feel free to reach out. Call, Email, or just fill out my contact form at the bottom of the homepage 

Author:

Adam Ditsky, CPA

President, Ditsky Strategic

adam@ditskystrategic.com

www.ditskystrategic.com

California Wildfire IRS Relief

The wildfires have decimated parts of California. The IRS has issued various reliefs to those residing in the effected areas and to firefighters and relief workers providing emergency services. Individuals, residents and emergency service providers in the following 7 counties may be eligible for tax relief from the IRS: Butte, Lake, Mendocino, Napa, Nevada, Sonoma, and Yuba.

As a reminder, the below is just a summary and many situations present unique circumstances. Please read the releases thoroughly or contact a tax professional to help you navigate the best course of action for your situation. Also, as a reminder, all of the below only applies to areas declared by FEMA as eligible disaster zones. If you are not within those zones, other relief may be available. 

1. Don't stress about the extension filing deadline for 2016 personal returns that were due on October 16th, 2017. The deadline has been extended to January 31st, 2018. However, tax payments due for 2016 do not receive an extension as they should have been paid by April 18, 2017.  Various other tax filings and tax payments that were to be made in the period commencing October 8th, 2017 are being granted relief and have also been extended to Jan 31, 2018. A comprehensive list of which filings and payments are and are not extended can be found in the IRS press release link at the end of this article. 
    
2. Casualty losses can generate significant, and fairly immediate, tax refunds and/or savings. A casualty loss is a deductible property loss that you can claim on your tax return. Casualty losses occur when property is damaged, destroyed or lost due to a disaster AND you suffer a net financial loss. To potentially generate quick-ish cash flow, you are allowed to amend 2016 returns and have refunds issued against previously paid tax by claiming casualty losses on the amended returns. If you are not in a rush, you can also claim casualty losses on your 2017 return when you file it. You don't have to amend 2016 returns to take advantage of casualty losses. This is a fairly complicated topic so please read the linked piece and then contact a tax professional, the IRS or FEMA if you need guidance. IMPORTANT NOTE: You can claim casualty losses even if you do not live in a declared disaster zone. However, you must live in a declared area to use the provision allowing you to take the loss on your 2016 return. Anyone outside of a declared disaster area who may have had a loss can only claim the loss on 2017 returns or beyond.
   
   I go into more detail about casualty losses in the below link that was written for Hurricane Harvey victims. There is no difference in how casualty losses are treated between the two disasters. This is still a pretty surface level overview but will give you a good idea as to if you qualify, how to proceed and some useful links.
   
   LINK TO POST BREAKING DOWN CASUALTY LOSSES
    
3. The IRS will provide, free of charge and in an expeditious manner, copies of previous years tax returns. Taxpayers should put the assigned Disaster Designation “California, Wildfires” in red ink at the top of Form 4506 (Request for Copy of Tax Return) or Form 4506-T (Request for Transcript of Tax Return), as appropriate, and submit it to the IRS.
    
4. The IRS has not yet issued guidance as to if they will allow usage of your 401(k) and similar employer-sponsored retirement plans, without penalty, for various hardships (rebuilding, food, shelter,etc) if you are in the FEMA-declared zones. I do not know if they will eventually include this as an option, but if they do, I will provide an update.

The IRS may continue to issue additional relief provisions in the coming days and weeks. If they issue any relevant additional guidance, I will provide an update. Remember, FEMA and the IRS will provide free guidance via phone and at certain locations where available. Taxpayers may download forms and publications from the official IRS website, irs.gov, or order them by calling 800-829-3676. The IRS toll-free number for general tax questions is 800-829-1040. Tax professionals should be able to assist with all available tax reliefs as well. 

If you have any questions about the IRS relief, require additional guidance or have any comments on the content, please contact me at adamditsky@gmail.com

Important Links:

Link to IRS Release for California Wildfire Relief

Author:

Adam Ditsky, CPA

President, Ditsky Strategic

adam@ditskystrategic.com

www.ditskystrategic.com