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Tax Tips For Individuals and Businesses

Write Offs for Equipment and Improvements in 2018

You can take 100% bonus depreciation on new or used assets placed in service after September 27, 2017.  Previously in 2017, the percentage was 50% and only new assets qualified for bonus depreciation. The big change here is that used property will now qualify for bonus depreciation as long as it is that taxpayer's first use of the property.The 100% deduction will be phased out beginning in 2023 and fully phased out by 2027. 

Property qualifying for the bonus must be new have a useful life of 20 years or less. This means all equipment and computer software, but fight now qualified leasehold improvement property would not qualify for bonus depreciation because Congress forgot to give qualified leashold improvements a 15 year life. We'll have to see if they fix that or if that was intentional.  Bonus depreciation cannot be taken for property acquired from a related party.

Section 179 allows the a taxpayer to elect to expense the cost of an asset without capitalizing it at all. The new section 179 limits have been increased to $1,000,000 for tax years after 2017, with the phase out beginning at $2,500,000 of qualifying assets placed in service that tax year. The big change is that Section 179 expensing now applies to "qualified improvement property". This means that all leasehold improvements made to the interior part of a non-residential building after the building has been placed in service will be eligible for immediate Section 179 expensing.

In addition, the new law makes the following types of building improvements eligible for Section 179 expensing which would not normally fall into the category of "qualified improvement property":

  • Roofs
  • Heating, ventilation, and air conditioners
  • Fire protection and alarm systems
  • Security systems

Note Section 179 retains the $25,000 cap on a deduction claimed for an SUV, but with 100% bonus expensing available, taxpayer's will be able to deduct the full cost of an SUV, making the Section 179 election irrelevant. 

Health Saving Accounts Are A Good Deal

One of the best deals around is the HSA (Health Savings Account). Basically, if you have a high deductible health insurance plan, you can put money into an HSA account. You get an above-the-line deduction on your tax return for the contributions to your HSA. You can withdraw funds from the HSA to pay medical expenses that are not reimbursed by insurance.

Most taxpayers don't get a deduction for unreimbursed medical expenses because, in order to deduct as an itemized deduction, the medical expenses have to exceed 7.5% of their adjusted gross income. So with an HSA you get the deduction for your medical expenses even if you don't itemize! Check the following website to review the current limits on how much you can contribute and the current high deductible requirement for your health insurance. http://hsacenter.com

Should You do a Roth Conversion 

A common question is should I convert my traditional IRA to a Roth IRA. While I can come up with a few scenarios where this may be a good idea, remember why the government makes it easy for taxpayers to convert in the first place. It is to get you to pay taxes earlier than you would otherwise. You are making a decision to pay extra tax today based on assumptions that the tax code will be the same when you retire. That's a risky bet in my opinion. 

Even if the rates stay the same are you necessarily ahead? Assume you are in a 25% tax bracket and convert a $100K traditional IRA to a Roth you will pay $25K tax and that leaves you with $75K. Let's say that doubles over the next ten years to $150K. Compare that to no conversion and the traditional IRA of $100K doubles over the same period to $200K. If you are in the same 25% tax bracket and you withdraw the IRA you pay $50K tax and net the same $150K. 

Admittedly if you are young and in a low bracket now you may save money if your bracket is much higher when you retire. But now you are trying to predict what rates will be in 30-40 years out. I can't tell you with complete certainty what the tax rates will be next year, so to think we can predict what rates will be that far out is ludicrous. 

Here's one rare situation where an individual can use the conversion rules to their advantage. If you are one of those few individuals that has no prior traditional IRAs and cannot make a Roth IRA contribution because your income is too high and you are already covered by a plan, then the following strategy is appropriate. In this case you make a "non-deductible" traditional IRA contribution and convert it to a Roth in the same year. As long as you do not have any traditional IRA or Simple IRA balances, then the conversion will be tax free. Assuming the rules stay the same as today, the earnings from the Roth IRA can be withdrawn tax free when you retire. If you leave it as a non-deductible traditional IRA then only the principle will be tax free when you make the withdrawal. 

I'm not saying that there are no reasons to convert. Just be sure and talk to your tax professional before you make the move.

Beware of IRS Phone Scams

The IRS is warning taxpayers of a phone scam where the caller claims to be from the IRS and demands immediate payment of taxes by debit or credit card. Or they may claim you have a refund then ask for personal information that can lead to identity theft. To avoid becoming a victim of such scams you should know:

 

  • The IRS will contact you by mail if you owe taxes, not by the phone
  • The IRS never asks for immediate payment over the phone
  • The IRS never insists that you use a debit or credit card to pay your tax
  • Scammers will use fake names and fake badge numbers over the phone
  • Scammers may know the last four digits of your social security number
  • Scammers may send bogus emails to support the bogus call
  • Scammers are typically abusive and threaten victims with jail time or revocation of their driver's license.
  • Scammers may use fake caller id to make the victim think the call is real

 

If you get a call from someone alledging to be from the IRS hang up and report the incedent to the Teasury Inspector General for Tax Administration at 800-366-4484. If you do owe back taxes call the IRS at 800-829-1040 and they will help you work out a payment plan.

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