Check Your Withholding
The 2017 tax overhaul lowered tax rates across the board, but it also scrapped some popular tax breaks. As a result, some taxpayers who were accustomed to receiving a refund ended up owing the IRS when they filed their 2018 tax return.
If you were part of that band of disgruntled taxpayers, you may be able to take steps between now and year-end to avoid another April surprise. Use IRS's Tax Withholding Estimator and Oregon Withholding Calculator as soon as you can to determine where you should file a new W-4 with your employer and increase the amount of tax withheld from your paycheck before the end of the year. You'll need your most recent pay stub and a copy of your 2018 tax return to help estimate your 2019 income.
Pay Bills Now (Including Some for 2020)
Unless your finances have changed significantly, you probably have a pretty good idea whether you'll itemize or claim the standard deduction when you file your 2019 tax return. If you plan to itemize—or you're close to the threshold—now is a good time to prepay deductible expenses, such as mortgage payments and state taxes due in January.
Review your medical bills. If you have enough unreimbursed medical expenses, you may be able to deduct them. In 2019, you can only deduct unreimbursed medical expenses that exceed 10% of your adjusted gross income (in 2018, the threshold was 7.5%). That puts this tax break out of reach for most taxpayers, but if you had extraordinarily high medical expenses this year—due to a major illness, for example—you may qualify.
And there's still time to schedule appointments and procedures that will increase the amount of your deductible expenses. The list of eligible expenses includes dental and vision care, which may not be covered by your insurance.
Prepay tuition. If you're the parent (or grandparent) of a college student, you may be able to lower your 2019 tax bill by prepaying the first quarter tuition bill—and you don't need to itemize to claim this tax break. The American Opportunity Tax Credit, which you can take for students who are in their first four years of undergraduate study, is worth up to $2,500 for each qualifying student. Married couples filing jointly with modified adjusted joint income of up to $160,000 can claim the full credit; those with MAGI of up to $180,000 can claim a partial amount.
Likewise, if you're planning to take a class next year to boost your own career, consider prepaying the January bill before December 31 so you can claim the Lifetime Learning Credit on your 2019 tax return. The credit is worth up to 20% of your out-of-pocket costs for tuition, fees and books, up to a maximum of $2,000. It's not limited to undergraduate expenses, and you don't have to be a full-time student. Married couples filing jointly with MAGI of up to $116,000 can claim the full credit; those with MAGI of up to $136,000 can claim a partial credit.
Look into an ABLE account. If someone in your family has special needs, you can contribute up to $15,000 this year to an ABLE account, which allows people with qualifying disabilities to save money without jeopardizing government benefits (ABLE account beneficiaries can contribute more to their own account). You don't have to invest in your own state's plan, but if you are a resident of one of the states that do offer a tax break for ABLE accounts, you can deduct your contribution. For more information, go to the ABLE National Resource Center's website.
Reap the Tax Harvest
The tax code allows you to sell investments that have fallen below your purchase price and use the resulting loss to offset capital gains in taxable accounts. That's a compelling reason to consider jettisoning your losing positions. Investments that you've held for a year or less are taxed as ordinary income, but investments you've held longer are taxed at the long-term capital gains rate, which ranges from 0% to 23.8%.
After matching short-term losses against short-term gains, and long-term losses against long-term gains, any excess losses can be used to offset the opposite kind of gain. If you still wind up with an overall net capital loss, you can use up to $3,000 of that loss to offset ordinary income and roll the rest over to the following year. Note that once you sell an asset at a loss, you must wait 30 days before reinvesting in it or buying a substantially identical investment.
Single investors with income less than $39,375 ($78,750 for joint filers) pay no capital gains tax on investments held for more than a year. If that's the case, it may make sense to sell winning investments tax-free and reinvest (no need to wait 30 days), effectively resetting the odometer on future gains.
Watch for Capital Gain Distributions
Mutual funds are required to pay out to their shareholders any gains realized from the sale of stocks or bonds during the year. If you own the fund in a taxable account, you must pay taxes on these distributions when you file your tax return, even if you reinvest them.
If you get hit with a distribution, review your portfolio to see if you have any mutual funds, stocks or bonds that have declined in value since you purchased them. Selling them before year-end will provide losses to offset your gains. Mutual funds typically publish an estimate of their capital gains distributions in November or December, along with the date of the distribution. Estimates are on a per-share basis, so if you figure out how many shares you have, you can gauge the size of your distribution.
Interested in buying a fund before the end of the year? Check its website first. If the fund plans to make a capital gains distribution, postpone your purchase until after the distribution date. Otherwise, you'll have to pay taxes on gains racked up before you got on board.
Max Out Your Pre-Tax Retirement Savings
As the year comes to a close, you may be able to squeeze a little more money from each paycheck for your retirement savings. You can contribute up to $19,000 to a 401(k), 403(b) or federal Thrift Savings Plan in 2019, plus $6,000 in catch-up contributions if you're 50 or older.
Pretax contributions will lower your take-home pay and reduce your tax bill. If your employer offers a Roth 401(k), you can make contributions that won't lower your taxable income now but that can be withdrawn tax-free in retirement. If your employer offers both types of plans, you can direct new contributions to the Roth 401(k) rather than the pretax 401(k) at any time.
Contact your 401(k) administrator or your employer's human resources department ASAP to find out how much you're on track to contribute to your 401(k) by the end of the year and to ask about the steps you need to take to boost your contributions. The earlier you make the change, the better: 401(k) contributions are made through payroll deduction. If you're contributing to a traditional or Roth IRA for 2019, you have until April 15, 2020.
If you aren't on track to max out your retirement account for the year, adding money from a year-end bonus can be a great way to boost your contributions without affecting your regular take-home pay. Rules vary, and some plans don't allow participants to contribute their bonus. Also make sure that you don't cross the annual contribution limit. You have until the tax-filing deadline to withdraw any extra contribution and the earnings on it, which will both be taxable. If you don't take it out, the excess contribution will be taxable now and you'll have to pay taxes on it again when you finally withdraw the money.
401(k) and 403(b) retirement plans must be establishes by December 31st 2019. SEP IRA's must be established before your 2019 taxes are filed.
Open a Donor-Advised Fund
Putting your money or other assets, such as stocks or personal property, in a donor-advised fund allows you to deduct the entire contribution in the year you make it and decide later how you want to dole out grants to charities of your choice. You can open a donor-advised fund at financial-services firms such as Fidelity Charitable (minimum investment: $5,000) or Schwab Charitable ($5,000 minimum) or at community foundations. Contributing one lump sum this year may help lift your deductions above the standard deduction amount and allow you to itemize.
Max Out Charitable Donations (and Declutter)
Donating clothes, kitchenware or furniture you no longer need can also boost your deductions while helping a worthy cause. You'll base your deduction on the donated item's "fair market value" (or what it might sell for at a thrift or consignment shop)—you can use online tools such as TurboTax's ItsDeductible tool to estimate this value. You will need a written acknowledgment from the organization if you are claiming a contribution of $250 or more (consider snapping a photo of the donation for your records). For donated items valued at more than $5,000 (art, antiques, etc.), plan on providing a written appraisal.
Transfer IRA Money to Charity
Taxpayers who are 70½ or older can transfer up to $100,000 from a traditional IRA tax-free to charity each year, as long as they transfer the money to the charity directly.
The "qualified charitable distribution" will count as your required minimum distribution without being added to your adjusted gross income, which can be a boon if you were going to take the standard deduction instead of itemizing (you can't deduct charitable transfers). The transfer could also help keep your income below the threshold at which you're subject to the Medicare high-income surcharge as well as hold down the percentage of your Social Security benefits subject to tax. Make a QCD well in advance of New Year's Eve because the money has to be out of the account and the check needs to be cashed by the charity by December 31.
Consider a Roth Conversion
Consider converting some money from a traditional IRA to a Roth IRA this year, up to the top end of your income tax bracket. You'll pay taxes on the conversion (minus any portion that represents nondeductible IRA contributions), but the money will grow tax-free in the Roth after that. Converting your entire traditional IRA balance can bump you up to a higher tax bracket, but you can spread conversions over several years. Be careful about making a large conversion if you're within two years of signing up for Medicare—you'll have to pay extra for Medicare Part B if your adjusted gross income (plus tax-exempt interest income) is more than $85,000 if you're single or $170,000 if you're married filing jointly. Your last tax return on file determines your Medicare premiums, so a 2019 conversion could affect 2021 premiums.
Newly formed Oregon businesses have received a solicitation from OR Certificate Services offering a Certificate of Standing/Existence for $77.25. Many businesses do not need this certificate. Those that do may obtain one directly from the Secretary of State for $10.
This solicitation may appear to be from a government agency, but its not. A copy of the Solicitation can be viewed here.
If you were misled by this solicitation, you may request a refund. To obtain a refund, call OR Certificate Services at 1-855-210-6990 or 1-855-755-3357 between 9 am & 5 pm EST.
Official correspondence from the Oregon Secretary of State Corporation Division always contains the following elements:
To view other types of schemes that spammers and scammers are using, visit the Business Alert page. If you believe you have been a victim of a business scam, please contact the Secretary of State at Corporation.Division@Oregon.gov or 503-986-2200.
To receive a tax deduction for contributions to an Oregon College Savings Plan on your 2019 taxes, contributions will need to be made prior to December 31st, 2019. Starting January 1st, 2020 the Oregon College Savings Plan is moving to a tax credit. If you file an Oregon income tax return, contributions made to your account before the end of 2019 are deductible up to a certain limit. For 2019, the limit individual taxpayers are allowed to deduct is $2,435 or $4,865 if filing jointly. You may also carry forward a balance over the following four years for contributions made before the end of 2019.
Recapture provisions apply. This means that if you withdrew funds for non-qualified expenses from your Oregon College Savings Plan account and you claimed a tax benefit for that year’s contribution, the state of Oregon will recapture any Oregon State income tax benefits that you had accrued on the principal portion of that withdrawal.
Worth noting, any funds that you plan to roll over from another 529 College Savings Plan are considered “new contributions” and will count towards the limit you’re allowed to deduct in a given tax year.
For more information, visit The Oregon College Savings Plan website.
Filling out your 1099-Misc for Vendors in 2018
There a several different types of 1099s that exist in the federal 1099 information reporting series. However, one of the most popular forms that small businesses need to file is the Form 1099-MISC.
What is a Form 1099-MISC?
Form 1099-MISC is essentially an information report that is required to be sent to certain recipients who have been paid during the year in the course of a trade or business. A copy of the Form 1099-MISC is also reported to the Internal Revenue Service (and some states) for their records as well. Failure to file a required 1099 may result in denied expense deductions upon audit and additional penalties and fees (typically $30 to $100 per missed filing for federal purposes).
Form 1099-MISC Filing Requirements
Form 1099-MISC is required to be filed in several instances. However, some of the most common examples are as follows:
1099-MISC Filing Exemptions
There are a few cases when Form 1099-MISC does not need to be filed even though it may have met the aforementioned requirements. A few examples are as follows:
Tax Reporting of 1099-MISC
There is now a question on tax returns which specifically ask if a business was required to issue 1099s and if so, whether they were filed. Therefore, the IRS has implemented extra measures to make sure the 1099s are filed and will likely begin strictly enforcing the rules. It is advised to collect a Form W-9 from all vendors so that 1099s can be issued if needed.
Form 1099-MISC Due Date
Form 1099-MISC is due each year to the recipient by January 31st. New this tax year, Form 1099-MISC is now due to the IRS by the January 31st deadline. The new accelerated deadline will help the IRS improve its efforts to spot errors on returns filed by taxpayers.
New Address: 2330 NW 31st Ave. Portland, OR 97210
We are excited to announce our new location. It's beautiful and we have free parking too. We are just a half mile away from the former office in NW Portland. Find street parking, walk through the fence and up the steps to the main door. From there find us on the call box and we will buzz you in. We are on the first floor, the first door on the right. Let us know if you have trouble finding us. See you soon!
Tax Cuts and Jobs act of 2017
20% Qualified business income deduction—§199A
20% deduction - New §199A provides that an individual taxpayer generally may deduct 20% of qualified business income from a partnership, S corporation, or sole proprietorship, REIT dividends, cooperative dividends, and publicly traded partnerships. The deduction may not exceed 20% of the taxpayer’s taxable income (reduced by net capital gains).
Qualified business income - Qualified business income (QBI) is determined for each qualified trade or business. QBI is the net income of the US business. It does not include any investment income (interest, dividends, capital gains, and losses). Reasonable compensation in the S corporation and guaranteed payments in the partnership reduce QBI. If the net amount of qualified business income from all qualified trades or businesses during the taxable year is a loss, it is carried forward and reduces QBI in the next taxable year. QBI includes both passive and active income.
W-2 limits - Subject to a taxable income threshold, the deductible amount for each qualified trade or business is the lesser of (a) 20% of the taxpayer's qualified business income with respect to the trade or business, or (b) the greater of 50% of the W-2 wages with respect to the trade or business or the sum of 25% of the W-2 wages with respect to the trade or business and 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property.
Phase-in of W-2 wages limitation - The W-2 wage limitation does not apply for a taxpayer with taxable income less than a threshold amount. The “threshold amount” is $315,000 MFJ ($157,500 if single) and is indexed for inflation. For those with income above the threshold amount, the deduction phases out over $100,000 MFJ ($50,000 single)
Specified service trades or businesses - Subject to a taxable income threshold, the deduction is not allowed with respect to “specified service trades or businesses.” Specified service trades or businesses are any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests or commodities, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees. Engineers and architects are omitted from specified service trades or businesses.
Phase-in of specified service business limitation - The exclusion from the definition of a qualified business for specified service trades or businesses does not apply for a taxpayer with taxable income less than a threshold amount. The “threshold amount” is $315,000 MFJ ($157,500 if single) and is indexed for inflation. For those with income above the threshold amount, the deduction phases out over $100,000 MFJ ($50,000 single).
Other items - Deduction does not reduce SE tax or AGI. Trusts may qualify for the deduction on their pass-through income.
Loss limitation rules §461
Loss Limitation - Excess business losses of a taxpayer other than a corporation are not allowed for the taxable year. An excess business loss for the taxable year is the excess of aggregate deductions of the taxpayer attributable to trades or businesses of the taxpayer (determined without regard to the limitation of the provision), over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount. The threshold amount for a taxable year is $500,000 MFJ (250,000 single). Excess business losses not allowed are carried forward and treated as part of the taxpayer’s NOL carryforward. This limit applies at the partner or shareholder level. Each partner’s distributive share and each S corporation shareholder’s pro rata share of items of income, gain, deduction, or loss of the partnership or S corporation are taken into account in applying this limitation. This limitation applies after the passive loss rules.
Cash method of accounting - For taxpayers with less than $25 million in average gross receipts (was $10 million) may use the cash method of accounting regardless of entity structure or industry.
Accounting for inventory - Taxpayers with average gross receipts of less than $25 million (was $10 million) may account for inventories as materials and supplies that are not incidental (or conform to the taxpayer’s financial accounting treatment).
UNICAP §263A - The threshold for the UNICAP rules (§263A) increases from $10 million to $25 million.
All events test - All events occur fixing right to receive income when income can be determined with reasonable accuracy, but no later than when item included in applicable financial statement (AFS) starting in 2018.
Long-term contracts §460 - Generally, the percentage of completion method of accounting is required for long-term contracts. For businesses with less than $25 million in gross receipts (was $10 million), the completed contract method of accounting can be used for construction contracts lasting less than two years.
Self-created Property - Gain or loss from the disposition of self-created property is treated as ordinary income/loss. Self-created property includes patents, inventions, models or designs, and secret formulas. Musical compositions and copyrights are still a capital asset.
Like-kind exchanges - The §1031 like-kind exchange rules are modified to provide that the nonrecognition is limited to real property that is not held primarily for sale. Generally, applies to exchanges completed after 12/31/17. However, an exception is provided for any exchange if the property disposed of by the taxpayer in the exchange is disposed of on or before 12/31/17, or the property received by the taxpayer in the exchange is received on or before such date.
Meals and entertainment - Expenses for entertainment, amusement, and recreation are not deductible. Dues for a club organized for business, pleasure, or social purposes are not deductible. Meals provided for the convenience of the employer at or near the employer’s premises are subject to a 50% limitation until 12/31/2025 and then completely nondeductible beginning in 2026.
Listed property - Home computers and peripheral equipment, including laptops, are no longer listed property.
Luxury auto limits - For luxury autos placed in service after 12/31/17 for which the bonus depreciation is not claimed, depreciation amounts are increased.
Yr. 1 $3,160 $10,000
Yr. 2 $5,100 $16,000
Yr. 3 $3,050 $ 7,600
Yr. 4+ $1,875 $ 5,760
After 5 yrs.: $15,060 $47,120
Transportation fringe benefits - The $20/month fringe benefit provision for bicycling to work is repealed. An employer can no longer deduct parking and commuting benefits paid to an employee, but the benefits remain a tax-free fringe to the employee.
Interest expense - For businesses with more than $25 million of gross receipts, interest expense deductions are limited to interest income + 30% of adjusted taxable income plus interest on floor plan financing. Limitations apply at the partner/shareholder level; any excess is carried forward. Allocated excess business interest reduces basis. If ownership interest is disposed of with excess business interest that reduced basis, reverse the reduction.
§179 amount - The §179 expensing amount is increased to $1 million (was $510,000). The phase-out starts at $2,500,000 (was $2,030,000), both being indexed for inflation, as well as the $25,000 sports utility vehicle limitation.
§179 qualified real property - The definition of qualified real property eligible for §179 expensing is expanded to include any of the following improvements to nonresidential real property placed in service after the date such property was first placed in service: roofs; heating, ventilation, and air-conditioning; fire protection and alarm systems; and security systems.
The definition of §179 property has been expanded to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging.
§168(k) bonus depreciation - Bonus depreciation is increased to 100% (was 50%) of qualifying property placed in service after 9/27/2017 and before 1/1/2023. A phase-out starts 1/1/2023. The requirement that property must be new to qualify for bonus depreciation has been repealed.
Net operating loss - The two-year carryback and the special carryback provisions have been repealed, except for a two-year carryback for farming losses. NOLs may be carried forward indefinitely. The NOL deduction is limited to 80% of taxable income (determined without regard to the deduction) for losses arising in taxable years beginning after Dec. 31, 2017.
§199 deduction - The §199 domestic production activity deduction is repealed.
Farm changes— depreciation and excess farm losses - The seven-year recovery period for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business has been shortened to five years if the original use of which commences with the taxpayer and is placed in service after Dec. 31, 2017. Also repealed is the required use of the 150% declining balance method for property used in a farming business (i.e., for three-, five-, seven-, and ten-year property). Lastly, the excess farm losses limitation has been repealed.
Work opportunity credit - Retained.
Family leave credit - For 2018 and 2019, a new employer credit is available for wages paid under a written plan during family or medical leave when the employer pays at least 50% of normal wages. The credit is 12.5% but increases by 0.25% (but not above 25%) for each 1% where rate of pay exceeds 50%. Limited to 12 weeks.
Rehab of historic structure credits - The 10% credit for pre-1936 buildings is repealed. The 20% credit for qualified rehabilitation expenditures with respect to a certified historic structure is allowable for a taxable year during the five-year period beginning in the taxable year in which the qualified rehabilitated building is placed in service.
Qualified equity grants—§83(i)
Income deferral election, in general - When made within 30 days of exercise of a vested option or upon vesting of shares under an RSU (under the rules of §409A), election allows for a deferral of income for up to a maximum of five years.
Qualified employee - A qualified employee is an employee other than (1) a 1% owner of the corporation, (2) the CEO or CFO, (3) family members of (1) and (2), or (4) any of the four highest-compensated officers of the corporation.
Qualified stock - Election can be applied to RSUs, ISOs, ESPPs, and NQs within 30 days of taxable exercise. When made with respect to stock under a statutory option, the option is no longer treated as a statutory option.
Section 83(i) income tax deferred until earlier of -
1. Five years or
2. Occurrence of a specified event such as (a) stock becoming readily tradable, (b) employee becomes excluded, or (c) §83(i) election revoked.
Section 83(i) eligible corporation (written plan) requirement - A corporation is an eligible corporation with respect to a calendar year if (1) no stock of the employer corporation is readily tradable on an established securities market during any preceding calendar year, and (2) the corporation has a written plan under which, in the calendar year, not less than 80% of all employees who provide services to the corporation are granted stock options, or restricted stock units (RSUs), with the same rights and privileges to receive qualified stock.
This is NOT all-inclusive and is NOT meant for tax advice. This is a summary of the new tax bill and if you need tax advice please contact your tax adviser.
Tax Cuts and Jobs Act of 2017
Effective date: The individual changes are generally effective for tax years beginning after 12/31/17 and before 1/1/2026.
• Thus, the wording is “suspends” rather than “repeals”
Individual tax rates
10%, 12%, 22%, 24%, 32%, 35%, and 37%.
• Highest rate applies at taxable income of $600,000 MFJ and
$500,000 single and HOH.
• Marriage penalty imposed at highest brackets
Trust tax rates 10%, 24%, 35%, and 37%, beginning in 2026.
The unearned income of a child is taxed at trust rates, rather than the tax rates applicable to the parents.
Exemptions Suspends the deduction for exemptions to 2026.
Child tax credit
The child tax credit is increased to $2,000 ($1,400 refundable) for qualifying children under 17. A $500 credit is added for other dependents.
• No credit is allowed unless the SSN of child is provided—ITINs are no longer accepted.
• The phase-out is increased to begin at $400,000 MFJ and
$200,000 single and HOH (was $75,000 and $110,000)—phase-out numbers are not indexed for inflation.
Zero, 15%, and 20%; 25%, and 28% rates are retained.
• The zero rate applies up to taxable income of $77,200 MFJ,
$51,700 HOH, and $38,600 single (2018).
• Basis rules retained (FIFO proposal dropped).
• Retains current rules for §121 home sale exclusion.
Adjustments—moving expense deduction
Suspends the moving expense deduction except for military moves. There is a corresponding provision that makes moving expense reimbursement taxable.
Suspends the alimony paid deduction for agreements executed after Dec. 31, 2018. There is a corresponding repeal of the provisions providing inclusion of alimony in gross income.
Teacher deduction Retains teacher deduction at $250.
Increases standard deduction to $12,000 single, $18,000 for HOH, and $24,000 MFJ.
Itemized deductions Suspends the phase-out of itemized deductions.
Allows medical expenses in excess of 7.5% of AGI for 2017 and 2018. Removes AMT preference between 7.5% and 10% for 2017 and 2018.
State and local taxes
Suspends all Schedule A individual state and local tax, sales tax, and property tax deductions above $10,000.
• Bill specifically prohibits deduction for prepaid 2018 state income taxes.
Reduces acquisition debt from $1,000,000 to $750,000 for debt incurred after 12/15/17.
Suspends (new and old) equity debt interest deduction.
Increases the 50% AGI limitation on cash contributions to public charities and certain private foundations to 60%.
Suspends a charity deduction for amounts paid for college athletic seating rights.
Misc. itemized deductions
Suspends all misc. itemized deductions that are subject to the 2% of AGI limitation, including employee business expenses, tax prep fees, investment advisor fees, legal fees, etc.
Misc. itemized deductions
Suspends personal casualty loss deductions except for presidentially declared casualty losses.
Gambling losses are limited to gambling winnings for professional gamblers.
Retains AMT but increases the exemption amount to $109,400 MFJ,
$70,300 single and HOH. Phase-out of exemption increased to $1,000,000 MFJ and $500,000 single and HOH.
Adoption credit - Retains as in current law.
Earned income credit - Retains as in current law.
Education—§529 Allows a qualified distribution for K–12 school expenses up to $10,000 from a 529 tuition savings plan per student.
Retains student loan interest deduction, US savings bond exclusion, and tuition waiver exclusion.
The beneficiary can contribute up to the lesser of federal poverty level or beneficiary’s earned income.
Retirement—IRA recharacterization Suspends recharacterization rule.
If the taxpayer defaults on a pension plan loan, a deemed distribution occurs. The taxpayer can rollover the deemed distribution amount into an IRA by the extended due date of the return (was 60 days) if the default occurs because of termination of the plan or because of the employee’s severance from employment.
The estate, gift, and generation skipping tax exemption amounts are doubled. Estate tax is not repealed. Step up in basis is retained.
• $11,200,000 (2018).
The individual mandate penalty is reduced to zero after 2018. The 3.8% tax on net investment income (NII) and 0.9% additional Medicare tax are retained.
This is NOT all-inclusive and is NOT meant for tax advice. This is a summary of the new tax bill and if you need tax advice please contact your tax adviser.
By: Sandra Block, Senior Editor
From Kiplinger’s Personal Finance, December 2017
The outlook for tax reform is still uncertain, but this much seems clear: Tax rates are unlikely to go up in 2018, and there’s a good chance that they’ll go down for most taxpayers. That makes some year-end tax strategies even more attractive this year than they’ve been in the past.
For example, many taxpayers make the bulk of their charitable contributions at the end of the year. But you may want to disburse some of next year’s generosity in 2017 because those deductions will be less valuable if you find yourself in a lower tax bracket next year. And even if rates remain flat, you’ll still get the benefit of taking a deduction sooner rather than later.
Don’t limit yourself to cash gifts. Many large charities accept donations of appreciated securities. If you’ve owned a stock or other security for more than a year, you can deduct its value on the day you make the donation. You won’t pay tax on the gain, and the charity won’t either. Another option is to donate appreciated securities to a donor-advised fund, which allows you to take the deduction on your 2017 tax return and distribute the funds later.
Don’t have enough deductions to itemize? If you’re 70½ or older, you can donate up to $100,000 from your IRA directly to charity. The contribution counts toward your required minimum distribution and isn’t included in your adjusted gross income. That could qualify you for tax breaks tied to your AGI and reduce or eliminate taxes on Social Security benefits.
Speed up deductions, defer income. If possible, paying your mortgage and state income taxes due in January by December 31 is another way to beef up your 2017 deductions. And there’s another reason you should pay your 2018 state income tax bill early: The deduction for state and local taxes—particularly valuable to people who live in high-tax states—is in jeopardy. Key Republican lawmakers would like to eliminate or reduce the deduction to offset the cost of lowering income tax rates. One caveat here: If you’re subject to the alternative minimum tax, you can’t deduct state and local taxes, so there’s no benefit to paying those bills early, says Tim Steffen, director of advanced planning for Baird’s private wealth management business.
One final incentive for beefing up your 2017 itemized deductions: If the proposal by Republican leaders to double the size of the standard deduction comes to fruition, this could be the last year that millions of taxpayers benefit from itemizing.
Parents of college students may want to pay tuition bills due in January before December 31 so they can take full advantage of the American Opportunity tax credit. The credit is worth up to 100% of the first $2,000 spent on qualifying expenses and 25% on the next $2,000, up to a maximum of $2,500 for each qualifying student. Married couples filing jointly with modified adjusted gross income of up to $160,000 can claim the full credit; those with MAGI of up to $180,000 can claim a partial amount.
Deferring income until next year is another smart strategy because the income may be taxed at a lower rate then. Self-employed taxpayers can send invoices to customers in late December to defer payments until next year. If you expect to receive a bonus, ask your employer to hold off on paying it until January. Keep in mind, though, that if your employer has already announced that it will pay bonuses in December, it’s taxable income for 2017, even if you wait until next year to cash the check.
Strategies for retirees. With a possible tax cut on the horizon, retirees who are 70½ or older should look at the most tax-efficient way to take their required minimum distributions from retirement accounts. If you turned 70½ this year, for example, you have the option of postponing your first RMD until April 1, 2018. That may make sense. If rates decline in 2018, you’ll pay lower taxes on the distribution, Steffen says. The downside to this strategy is that you’ll have to take two RMDs next year—one for 2017 and one for 2018—and pay taxes on both distributions in the same year.
If you’re older than 70½, you must take your RMD by December 31 to avoid a hefty 50% penalty on the amount you should have withdrawn. But if you’re thinking of taking more money out of your traditional IRA than you’re required to withdraw, postponing that extra withdrawal until January could save you money if your tax rate declines in 2018.
Tax moves for investors. Want to cash in some of your stock market gains in your taxable portfolio? If you’re in the 10% or 15% tax bracket, you can take advantage of the 0% capital gains rate to harvest those profits tax-free. In 2017, married couples filing jointly with taxable income of up to $75,900 are eligible for the 0% rate, and singles with taxable income of up to $37,950 can cash in tax-free. (Remember, taxable income is after subtracting deductions and exemptions.) Retirees who have been living off income from their cash reserves are good candidates for this maneuver because their income may be low enough to fall into the 10% or 15% bracket. Be mindful that the 0% capital gains rate applies only to the extent that your gains don’t push you into the 25% bracket; profit that falls into that bracket is taxed at 15%. Also, your state may still tax your profits, even if the feds give you a pass.
If you don’t qualify for the 0% rate but own stocks or mutual funds that have declined in value, consider selling before year-end. You can use the losses to offset gains from the sale of other investments or capital gain distributions from your mutual funds. If your losses exceed your gains (or you don’t have any gains), you can use your losses to offset up to $3,000 in ordinary income. Unused losses can be carried over to future years.
Another strategy for taxpayers who don’t qualify for the 0% capital gains rate is to give appreciated securities to someone who does qualify, such as an adult child or elderly parent. The recipient can sell the securities tax-free. In 2017, you can give up to $14,000 in cash or other assets per person to as many individuals as you would like without filing a gift tax return.
More ways to save
Contributing to a tax-favored account before year-end is another way to lower your federal or state taxes.
Retirement plans. Contributions to a 401(k), 403(b), 457 or federal Thrift Savings Plan won’t be included in your 2017 taxable income. You can contribute up to $18,000 in your workplace plan, or $24,000 if you’re 50 or older. If you want to boost contributions from your last paychecks of the year, visit your payroll office ASAP. You have until April 17, 2018, to contribute to a traditional or Roth IRA for 2017.
529 college-savings plans. You can’t deduct contributions to these state-sponsored plans on your federal tax return, but 34 states allow write-offs on state returns. For example, a married couple in New York—which has a maximum state income tax rate of 8.8%—can deduct up to $10,000 in contributions annually to the state’s 529 plan. Earnings on your savings are tax-free as long as the money is used for qualified college expenses.
ABLE accounts. These plans, created in 2014, allow parents and others to save for a disabled young person’s future needs, such as assisted living and special wheelchairs. Beneficiaries must have developed a qualifying disability before age 26. You can contribute up to $14,000 to an ABLE plan in 2017. As with 529 plans, there’s no federal tax deduction, but some states allow you to deduct part of your contribution. Michigan, for example, allows married couples to deduct up to $10,000 from their state taxes; singles can deduct up to $5,000. Twenty-seven states and the District of Columbia offer these programs.
How to write off disaster losses
If your home was damaged by a hurricane this year, there’s a good chance you’ll be able to write off losses that aren’t covered by your homeowners insurance on your 2017 return.
Ordinarily, you have to subtract $100 from your total loss and then subtract 10% of your adjusted gross income. But in late September, Congress approved legislation that waives the 10% AGI requirement for victims of Harvey, Irma and Maria. They’ll be allowed to deduct all of their unreimbursed losses after subtracting $500. The bill also allows hurricane victims who don’t itemize to claim the deduction.
Because the Federal Emergency Management Agency designated counties affected by the hurricanes as federally declared disaster areas, you may deduct the loss for 2016 or 2017. Choose the year that saves you the most money. If you decide to claim it for 2016, you’ll need to file an amended return and get a refund from the IRS.
By: The Kiplinger Editors | The Kiplinger Tax Letter
On November 04, 2016
It’s time to review your year-end tax plans. There are many opportunities to save taxes. And there are tax traps you’ll want to avoid. With two months left before 2016 comes to a close, this Letter focuses on actions that you can take between now and Dec. 31 to cut your tax bill.
Let’s start with individual tax planning. Look at the overall impact on 2016 and 2017. The end game is to cut your tax bill over both years.
Most will benefit by accelerating write-offs from 2017 into 2016 while deferring taxable income. But if you expect to be in a higher tax bracket next year, consider the opposite.
Filers who claim itemized deductions have flexibility in shifting write-offs.
State and local income taxes are one of the easiest write-offs to manipulate. Mailing your estimate due in Jan. by year-end lets you claim the deduction in 2016.
Interest. If you make the Jan. 2017 mortgage payment on your residence before the end of the year, you’re able to deduct the interest portion in 2016.
Contributions. You can accelerate donations planned for 2017 into 2016, but you must charge them or mail the checks by Dec. 31 to ensure a 2016 write-off.
Medicals. If your 2016 medical costs have topped the 10%-of-AGI threshold (7.5% for folks age 65 or older) or are close to it, think about getting elective procedures this year and paying for them by Dec. 31. Seniors should carefully consider this tax tip because, as we’ve told you before, beginning with 2017 tax returns due in 2018, the threshold for deducting medical costs jumps to 10% of AGI for people age 65 or up.
Some filers can work the standard deduction. If your 2016 itemizations won’t quite hit the standard deduction amount, you can delay taking some of them so you can itemize in 2017. If your itemizations are just over the standard deduction for this year, accelerate some others to 2016 and take the standard deduction in 2017.
There are some special situations that may affect your tax planning:
A quirk in the way Medicare Parts B and D premiums are figured is one.
Married couples with AGIs exceeding $170,000 and singles with over $85,000 of AGI pay higher premiums for coverage. Premiums for 2018 will be based on 2016 income. Consider whether tax moves you make now could push up or down premiums in 2018.
Watch out for the bite of the cutback in itemizations for upper-incomers.
The alternative minimum tax can throw a monkey wrench into your plans,too. The AMT is owed to the extent it exceeds your regular tax liability. It has two rates: 26% on the first $186,300 of alternative minimum taxable income, and then 28%.
Deductions for many items are not allowed for the AMT: Personal exemptions. The standard deduction. If you itemize, you must add back state and local taxes, some medicals if you are age 65 or older, and most of your miscellaneous write-offs.
Paying the Jan. 2017 state income tax estimate in 2016 won’t work for AMT.Ditto for a real estate tax bill due in early 2017. You get no tax benefit from interest on home equity loans unless you use the proceeds to buy, build or renovate a home.
Your investment portfolio provides plenty of tax saving opportunities. Knowing the tax rules inside and out will help you avoid making a blunder that costs you extra tax. Don’t let the tax impact alone dictate the moves you make with your investments. Your decisions should always make economic sense, too.
If you have capital loss carryforwards, search your portfolio for gains.That’s because your net gains…up to the carryover amount…won’t be taxed at all.
See if you can benefit from the 0% rate on long-term gains and dividends. If your taxable income other than gains or dividends is in the 10% or 15% tax bracket, then dividends and profits on the sales of assets owned more than a year are tax-free until they push you into the 25% bracket. That bracket starts at $37,651 for singles and $75,301 for married couples. But be careful. Zero-percent gains and dividends are included in AGI, which can cause more of your Social Security benefits to be taxable and can squeeze some itemized deductions such as medical expenses. Also, your state income tax bill may rise, as most states tax gains as ordinary income.
Keep the 3.8% Medicare surtax at bay. It applies to net investment income of single filers and heads of household who have modified AGIs above $200,000… $250,000 for couples and $125,000 for marrieds filing separately. The tax is due on the lesser of net investment income or the excess of modified AGI over the thresholds. Investment income includes taxable interest, dividends, annuities, gains, royalties and passive rental income, but not retirement plan payouts or tax-exempt interest.
Among the ways to minimize the sting of the surtax: Buy municipal bonds. Tax-free interest is exempt from the 3.8% surtax and does not affect the owner’s AGI. If selling property, use an installment sale to spread out a large gain. And, if feasible, do a like-kind exchange of investment realty to defer the gain instead of a taxable sale.
Think about selling some poor performers. Capital losses that you incur can offset your capital gains plus up to $3,000 of other income. Any excess losses are then carried over to the next year and can help offset future capital gains. Taking losses to offset gains can also reduce the tax bite of the 3.8% Medicare surtax.
Don’t run afoul of the wash-sale rule, which bars a capital loss write-off if you buy substantially identical securities within 30 days before or after a sale. Instead, any suspended loss is added to the tax basis of the replacement shares. This rule can apply in surprising ways: For example, selling a mutual fund at a loss within 30 days of the date a dividend is reinvested. Or having your IRA buy shares shortly after you sell the same stock at a loss out of your taxable investment account.
Donate appreciated stock or mutual fund shares to a tax-exempt charity. Provided you’ve owned the property for more than a year, you can deduct its full value. And neither you nor the charitable organization has to pay tax on the appreciation.
However, don’t contribute property that’s fallen in value. If you do, the capital loss is wasted. Taxwise, you’re better off selling it, claiming the capital loss on your tax return and then donating the proceeds to the charity of your choice.
Be wary of buying a mutual fund late in the year for your taxable portfolio.If the fund pays a 2016 dividend after you buy it, you owe tax on the payout this year. However, you aren’t any better off financially because the fund’s share price decreases by a corresponding amount. In effect, you’re prepaying tax to IRS. To avoid this trap, buy the stock after the dividend record date. Ask the fund whether it will pay a dividend.
Take advantage of the gift tax exclusion this year. For 2016, you can give up to $14,000 apiece to a child or other person without gift tax consequences. Your spouse can also give $14,000 to the same donee, making the tax-free gift $28,000. Any unused amount is gone forever. You can’t give extra next year to make up for it.
Pay attention to the required distribution rules for traditional IRAs.
Folks age 70½ and older must take withdrawals by year-end or pay a penalty equal to 50% of the shortfall. You start with your IRA balances as of Dec. 31, 2015, and divide each one by the factor for your age, which you can find in IRS Pub. 590-B. A higher factor applies if you are more than 10 years older than your spouse. The sum of these required withdrawal amounts can be taken from any IRAs you pick. (Similar rules apply to payouts from 401(k) plans, except that people owning 5% or less of a company who work past age 70½ can delay taking payouts until they retire, and the minimum required distribution must be taken from each retirement plan.)
If you’ve turned 70½ this year, you can delay 2016’s payout till April 1, 2017. This special rule doesn’t apply for account withdrawals in subsequent tax years, and the payout for 2016 is still based on your total IRA balance as of Dec. 31, 2015. Take care if you decide to defer the payout to 2017. If you choose this option, you’ll be taxed in 2017 on two distributions: The one for 2016 that you opted to defer and your payout for 2017. This doubling up could push you into a higher tax bracket.
Take advantage of a charitable break for IRA owners that’s now permanent. People age 70½ and older can transfer as much as $100,000 annually from their IRAs directly to charity. If married, you and your spouse can give up to $100,000 each from your separate IRAs. The transfers count as part of your required distribution. Unlike other IRA payouts, these direct gifts are not added to your taxable income, so they don’t reduce the value of your itemized deductions or personal exemptions, or trigger a Medicare premium surcharge. Of course, you can’t deduct the donation.
Consider whether it’s the right time to convert a traditional IRA to a Roth IRA. You will have to pay tax on the converted funds, but once the money is in the Roth, future earnings are tax-free. If you think you’ll be in a low tax bracket this year, you may want to convert only a part of your IRA to push your 2016 taxable income to the top of that bracket but not enough to tip you into the next higher bracket.
Be sure to check your health flexible spending account. You must clean it out by Dec. 31 if your employer hasn’t implemented either the 2½-month grace period or the $500 carryover rule. Otherwise, you will forfeit any money left in the account.
Act fast if you’re considering putting energy-efficient windows in your home.
A limited credit is available if you install them by Dec. 31. Last year’s tax law extended through 2016 the credit for energy-saving items added to one’s residence, such as windows, insulation, roofs and doors. The credit is 10% with a $500 maximum, and credits taken in prior years count against the $500. Many items are capped. The same urgency doesn’t apply to the 30% credit for residential solar energy systems. The full credit applies through 2019 and then phases out until it ends after 2021.
If you think you’ll be hit by the 0.9% Medicare surtax on earned income...
You may need to jack up withholding. The levy kicks in for single taxpayers and heads of household with earnings over $200,000…$250,000 for married couples. Employers must begin to withhold the tax from worker paychecks in the pay period when wages first exceed $200,000, regardless of the employee’s marital status. This can lead to underwithholding for a couple if each spouse earns less than $200,000 but their combined wages total more than $250,000. The same goes for an employee with a self-employed spouse if the combined earnings will exceed $250,000.
Boosting tax withholding can also help you avoid an underpayment penalty.You’re off the hook from the fine as long as you prepay at least 90% of 2016’s tax bill or 100% of what you owed for 2015 (110% if your 2015 AGI was more than $150,000). You can have more tax withheld from Nov.-Dec. paychecks or a year-end IRA payout. Tax withheld at any point during the year is treated as if paid evenly over the year.
Now let’s turn to practical ways that you and your business can save taxes.
Business owners can shift income and expenses between 2016 and 2017. Professionals can postpone their year-end billings to collect less revenue in 2016 or they can speed them up if they expect to be in a higher tax bracket next year. Firms can juggle their income by shifting some expenses from one year to another. However, the Service will look askance if there’s too much distortion of earnings.
Note the tax rules on year-end bonuses. It may pay to postpone a bonus. But delaying a bonus for a firm’s majority owner won’t work if the amount is set in 2016 and the company has cash to pay it…the owner has constructive receipt of the bonus. Write-offs of bonuses by accrual method firms are limited. They can’t deduct in 2016 bonuses deferred to 2017 by owners of greater than 50% of regular corporations or by owners of any interest in an S corporation, personal service firm or partnership.
Putting assets into service by Dec. 31 can provide large write-offs:
50% bonus depreciation is one. Companies can deduct half the cost of new assets with useful lives of 20 years or less that are put into use this year, including machinery and equipment, land improvements and some farm structures. Leasehold improvements made to the interiors of commercial realty are eligible, too.
Expensing is also available. For 2016, firms can expense up to $500,000 of new or used business assets in lieu of depreciating them…an even better deal than bonus depreciation. The $500,000 limitation phases out dollar for dollar once more than $2,010,000 of assets are placed in service during this year.
Buying a new heavy SUV by Dec. 31 can generate a slew of tax breaks. Up to $25,000 of the cost of a new SUV with gross vehicle weight over 6,000 pounds can be expensed, the balance gets 50% bonus depreciation, and the remainder may qualify for regular five-year depreciation. Used SUVs don’t get bonus depreciation. Say you buy a new large SUV for $65,000 and use it 100% for business this year. $25,000 can be expensed. Half the remaining cost…$20,000…is bonus depreciation. 20% of the $20,000 balance, $4,000, can also be deducted as regular depreciation.
Purchasing a large pickup truck can lead to an even juicier tax break. The cost of a pickup truck with gross weight over 6,000 pounds can be fully expensed as long as the cargo bed is at least six feet long and is not accessible from the cab.
There’s a twist if too many assets are bought in the last quarter of the year.If over 40% of your 2016 business asset purchases are put in service after Sept., regular depreciation on all assets put in use in 2016 is figured on a quarterly basis. So assets that are put in use in late 2016 are eligible for 1½ months of depreciation instead of six months’ worth. Buildings aren’t affected because depreciation for them depends on the month they’re put in use. And 50% bonus depreciation isn’t reduced if a business puts the bulk of its assets in service at year-end. So in our SUV example, even if the midquarter rule applied, the total write-offs would still exceed $45,000.
Owners of regular corporations should weigh taking dividends in lieu of salary if the corporation is in a low tax bracket and the owner is in a high tax bracket. The owner’s preferential rate on dividends plus the corporation’s payroll tax savings from paying dividends instead of salaries can exceed the firm’s forgone tax benefit from not being able to deduct the dividend. This doesn’t work for S corporations. Or for personal service companies, which pay a flat 35% tax on their income.
By Brent Hunsberger | For The Oregonian/OregonLive
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on January 09, 2016 at 6:01 AM
What has happened in Washington D.C.?
For the first time in a long time, there's been a spasm of bipartisan lawmaking and deal hatching that has averted government shutdowns and global hand wringing.
Last month's tax package is the latest example. It made permanent a number of tax breaks scheduled to expire practically every year, only to be extended at the last minute (or, in one case, after Jan. 1).
This kind of of jerk-chain legislation frustrated taxpayers and tax practitioners. As if the tax code wasn't confusing enough.
But this recent act of true governance stands to benefit all walks of life – teachers, parents, retirees with IRAs. And residents of that state north of the Oregon border that imposes no income tax and shall not yet be named.
It's a great way to kick off tax season. Here's another: Oregonians don't need to pay their state and federal tax bills until Monday, April 18 -- three days later than usual. That's thanks to Emancipation Day, a Washington-D.C.-only-holiday that falls on April 15 because the normal holiday, April 16, hits the calendar on a Saturday this year.
The extension deadline for filing your return also differs. It's Oct. 17 instead of Oct. 15. Still, you need to pay any tax you owe for 2015 by April 18. Otherwise, you face late-payment penalties .
"An extension to file is not an extension to pay," Oregon Department of Revenuespokesman Robert Estabrook said.
As Estabrook's colleagues and the Internal Revenue Service gear up to accept tax returns Jan. 19, let's look at what expiring federal tax breaks were made permanent.
Enhanced child tax credit. This credit provides $1,000 per child under age 17. For many taxpayers, the credit can be refundable, meaning it can produce a refund even when the taxpayer owes no tax. In 2009, Congress expanded the refundable credit by reducing the income threshold at which it could be claimed from $10,000 to $3,000. Now, that lower threshold has been made permanent.
American Opportunity Tax Credit. In 2009, this credit replaced the Hope scholarship credit. But it was slated to expire in two years. Now it's permanent. And no wonder: In 2013, 10.4 million federal taxpayers reaped $9.25 billion from this credit, or about $890 each, IRS data show.
The credit covers the first $2,000 of college tuition and materials and 25% of the next $2,000. That's a maximum of $2,500 for each of the first four years of college. Taxpayers whose modified adjusted gross income is more than $80,000 (or $160,000 for couples filing jointly) receive a reduced credit. Those whose income exceeds $90,000 (or $180,000 for couples) are ineligible.
Part of the credit is refundable for most taxpayers who qualify. By comparison, the Hope credit was smaller, wasn't refundable, phased out at lower income levels and was only available for the first two years of college.
Educators' deduction. Score one for teachers. Congress made permanent the $250 deduction for unreimbursed educator expenses, and also sweetened it a bit.
The deduction amount will now be indexed for inflation (it hadn't changed in years). And starting in 2016, primary and secondary teachers can deduct the cost of professional development courses. Counselors, aides and principals also can claim the deduction, though aides must work at least 900 hours a year.
It's a popular break. In 2013, nearly 33,400 Oregon taxpayers claimed the deduction, averaging $241, according to Oregon Department of Revenue data.
Sales tax deduction. Poor Washingtonians. They can't take itemized deductions for state income taxes like Oregonians can because THEY DON'T PAY INCOME TAX! Instead, Congress had allowed them to deduct sales taxes in lieu of income taxes. In 2013, nearly 850,000 Washington taxpayers deducted a total of $2 billion in sales taxes, IRS stats show.
That break had been scheduled to expire in 2014. It's now been reinstated for 2015 and all years forward. Washingtonians, I'm told, can either tally the actual taxes paid by adding up their receipts. Or they can use a table provided by the IRS. Lucky them.
Transit benefits. Congress finally brought some sanity to employer-provided transit perks. For 2015, employers could have provided workers a pre-tax benefit of up to $250 a month for parking, vanpool and transit passes. That will bump up to $255 in 2016. Had Congress not acted, vanpool and transit pass perks would've dropped to $130 while parking passes would've remained at $250.
Earned income tax credit. This credit provides a big boost for low- and moderate-income workers. It phases out as income increases. It also differs based on the number of children in a household. The credit for families with three or more children (45 percent of earnings up to $13,870) was set to expire in 2017. It's now permanent. So is a higher income phase-out amount for married couples filing jointly. Now, the credit will phase out for couples earning more than $23,630, instead of for those making more than $18,110.
Charitable IRA distributions. Retirees age 70-and-a-half and older can make tax-free donations directly to charities from their IRAs. This effectively reduces their annual required minimum distribution from their traditional IRAs and does not increase their adjusted gross income. This benefit is capped at $100,000 a year. It had expired at the end of 2014, but this move reinstates it for 2015 and makes it permanent going forward. The donation must be made directly from an IRA to the charity to qualify.
It mainly benefits seniors who don't itemize their deductions or who might, by reducing their required minimum distribution, also be able to reduce the amount of their Social Security income subject to tax. Talk to your tax adviser to see if it benefits you.
Temporary extensions: Several expiring breaks were merely extended through 2016, including deductions for higher education expenses and mortgage insurance premiums, certain energy-efficiency tax credits and an exclusion for mortgage debt forgiven during the financial crisis.
A few business tax breaks also were extended, either permanently or through 2019. Business owners should talk with their tax adviser about how those might help.
-- Brent Hunsberger is an investment adviser representative and certified financial planner in Portland.
For important disclosures and information about Hunsberger, visit ORne.ws/aboutbrent. Reach him at 503-683-3098 or firstname.lastname@example.org.
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