Home Equity Loans May Still Be Deductible

Contrary to early reports, the Tax Cuts and Jobs Act of 2017 allows taxpayers who buy, build, or substantially improve their homes using either a home equity loan, home equity lines of credit (HELOC) or second mortgages to deduct interest on the loans. However, if you take out the loan to pay for personal living expenses, such as credit card debt, you cannot deduct the interest from your taxes.
The IRS gave this guidance in response to many questions from taxpayers, as well as tax professionals. The agency explained that, as older rules had specified, the loan must be secured by your main home or second home, known in IRS parlance as qualified residences, and must not exceed the cost of the home.
There is a lower dollar limit on mortgages qualifying for the home mortgage deduction: you may deduct interest on only $750,000 of qualified residence loans. The maximum is $375,000 if you are married and filing a separate return, which is also down from prior limits. These limits apply to the combined amount of loans used to buy, build, or substantially improve your main or second home.
The IRS gave three examples to help clarify its thinking:

  1. If you buy a home with a fair market value of $800,000 with a $500,000 mortgage in January and then, the very next month, you decide to take out a $250,000 home equity loan to put an addition onto that home, all the interest on the loans are deductible. Why? The loans are secured by the main home and do not exceed the cost of the home. At the same time, the amount of both loans does not exceed $750,000.
  2. You buy a main home with a $500,000 mortgage and then, the next month, you take out a $250,000 loan for a vacation home. The amount of both mortgages does not exceed $750,000, so all the interest is deductible. However, if you take the $250,000 home equity loan on the main home to buy a vacation home, you are out of luck. No deducting the interest.
  3. You take out a $500,000 mortgage to purchase a main home. Your loan is secured by the main home. The next month, you take out a $500,000 loan to purchase a vacation home. This loan is secured by the vacation home, but, as you have figured out, the mortgages exceed the $750,000 limit, and not all the interest paid on the mortgages is deductible. You get to deduct a percentage of the total interest paid.

The key takeaway is the rules are subtle but complicated, and an error can cost you thousands of dollars. Before making assumptions about the tax implications of any mortgage product, call us to discuss how the new rules may impact you.

What Every Employer Should Know About State Unemployment Tax

Most employers in the United States must pay state unemployment tax, the collection of which is authorized by the State Unemployment Tax Act (SUTA). Although most wages are subject to SUTA tax, certain wages may be exempt. In New York, for example, wages paid to babysitters under 18 years of age, church employees, and certain family members are exempt from SUTA tax. Therefore, it is essential to check with your state unemployment agency to determine which wages are related to SUTA.
Every employer should be aware of two components of SUTA: annual wage base and SUTA tax rate:
Annual Wage Base: The annual wage base represents the maximum amount of wages subject to SUTA tax per employee for the year. For 2018, employers in California and Florida pay SUTA tax on the first $7,000 paid to each employee. Alaska, however, imposes SUTA tax on the first $39,500 paid to each worker. Once the annual wage base has been satisfied for an employee, the employer does not owe any more SUTA tax for that employee for the year.
SUTA Tax Rate: These tax rates are based on varying factors, with the most common being whether the business is new, the employer’s industry (such as construction versus nonconstruction), and the amount of benefits claimed on the employer’s account. Generally, the more benefits claimed on the employer’s account, the higher the SUTA tax rate, which is why it is crucial that you keep turnover at a minimum.
Not Always Only an Employer-Paid Tax
In most states, SUTA is an employer-paid tax. Three states — Pennsylvania, New Jersey, and Alaska — require withholding as well. If you have employees in any of these three states, you must withhold state unemployment tax from their wages at the state-mandated withholding rate and up to the maximum amount of wages allowed for the year.
Impact on FUTA Rate
In addition to paying and withholding applicable state unemployment tax, employers also must file wage reports with the state unemployment agency, usually on a quarterly basis. How you handle these requirements can influence your federal unemployment tax rate.
The Federal Unemployment Tax Act (FUTA) authorizes the IRS to collect federal unemployment tax, which is used to help fund state unemployment programs. Since July 2011, the FUTA tax rate has stayed at 6 percent; and since 1983, the annual wage base has held steady at $7,000. You can take a maximum credit of 5.4 percent against your FUTA tax if:
+ you paid all your state unemployment tax on time,
+ the wages you paid SUTA tax on are also subject to FUTA tax, and
+ your state does not owe the federal government for funds that it borrowed to pay unemployment benefits.
Taking this maximum credit will lower your FUTA tax rate to 0.6 percent.
Call us to learn about the details of SUTA and FUTA.

Scott T. Wallace, CPA | FASB New Lease Accounting | Guidance | Planning

On May 18, 2018, Scott T. Wallace, CPA presented to the Accounting & Financial Women’s Alliance (AFWA) on new lease accounting and revenue recognition standards. Scott provided details about upcoming changes and offered guidance for planning.
According to the Financial Accounting Standards Board (FASB), the new standard will require organizations that lease assets, referred to as “lessees,” to recognize on the balance sheet assets and liabilities for the rights and obligations created by those leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new Accounting Standards Update (ASU) requires both types of leases to be recognized on the balance sheet.
WHO WILL BE AFFECTED BY THE NEW GUIDANCE?
Leasing is an important activity for many organizations, including public and private companies, along with non-profits. Leasing creates access to assets, assists in financing, and reduces an organization’s exposure to risks of full ownership of the underlying asset.
ASU affects all companies and other organizations that lease assets such as real estate, airplanes, ships, and construction and manufacturing equipment.
WHEN WILL THE FINAL ACCOUNTING STANDARDS UPDATE BE EFFECTIVE?
For public companies, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Thus, for a calendar year company, it would be effective January 1, 2019.
For all other organizations, the ASU is effective for fiscal years beginning after December 15, 2019 and for interim periods within fiscal years beginning after December 15, 2020.
For additional details, visit FASB. Contact us for guidance and planning.

Charity as a Part of Your Legacy

How do you effectively make charity a part of your legacy? You want to donate with your head as well as your heart, making sure a charity is legitimate, well-run and aligns with your values.
Before contributing money, volunteering time, or opening mail from another charity, you should clarify your values. For example:

  • What is important to you? Your neighborhood? Region? The nation? The globe?
  • Do you support a large or small charity, a new or old one?

Your next step is to evaluate charities that meet your criteria.
Charity Legitimacy
Follow these steps to determine a charity’s legitimacy:

  • If it is a nonprofit, does the IRS recognize the organization as tax exempt? Ask to see a letter of determination.
  • If it is faith-based, ask to see its official listing in a directory for its denomination.
  • Get hard facts. A reputable organization will define its mission and programs clearly, have measurable goals, and set concrete criteria to describe achievements.
  • Compare charities that do the same kind of work, especially when delving into their finances. The work affects operating costs.
  • Avoid charities that will not share information or try to pressure you. Reputable nonprofits will discuss their programs and finances. They should be willing to send you literature about their work or direct you to a website.
  • Trust your instincts. Do not contribute if you have doubts.

Taxes
Now the hard part. Can you deduct your giving for next year’s taxes? The tax overhaul makes the standard deduction much larger; meaning, fewer filers will choose to itemize, eliminating one incentive for deductions. Itemized deductions will have to be greater than the new standard deduction to benefit from listing deductions separately. For a tax break from your charitable donations, you can:

  • Bunch donations every few years to surmount the higher standard deduction. You will itemize every other year, claiming the standard deduction in years you do not donate.
  • Consider so-called donor-advised funds that enables you to bunch smaller gifts into one large amount and take a deduction in the year you are gifting. You can designate charities as recipients later. The assets can be invested and grow tax-free, but the accounts have fees.
  • If you are 70 1/2 or older, you can benefit from contributing up to $100,000 of IRA assets directly to one or more charities.

Smart Research
There are rating sites that show how much a given charity spends on overhead and highlights red flags of possible mismanagement. However, these sites do not state how much a charity accomplishes with donations.
One of the best sites to help with evaluating donations is Charity Navigator, which rates more than 9,000 charities, giving them scores on accountability and transparency. You can find out how much a charity spends on actual good works, as opposed to administration and fundraising. Does the charity have a conflict-of-interest policy? Audited financial statements? A formal process of determining CEO compensation? These items are listed on Charity Navigator.
Your legacy, now and after you are gone, is important. When it comes to charity, choose wisely. Contact us for additional guidance.

Did You Receive an Audit Notification?

Did you receive an audit notification? Every audit notification may not be legitimate and it is important to make sure it is official. The Internal Revenue Service (IRS) will notify you either by letter or phone. The IRS does not notify taxpayers about audits through email. If you do get an email stating you have been selected for an audit, it is probably fraudulent. If you determine that you are definitely getting audited, your next step is to learn what is involved.
What is an Audit?
According to the IRS, an audit is “a review/examination of an organization’s or individual’s accounts and financial information to ensure information is being reported correctly, according to the tax laws, to verify the amount of tax reported is substantially correct.”
It is an audit — not an arrest or trial — so do not panic. Contrary to popular belief, an audit does not automatically mean you made a mistake. However, an inconsistency can trigger an audit if there is a discrepancy between what is on a tax form and what was reported. The IRS may choose to audit a taxpayer based on random selection or statistical formula. Also, an audit may be less intrusive than you feared. For example, it may be entirely through the mail. Although in some cases, it may be at an office, taxpayer’s home, or place of business.
Both businesses and individuals may be audited, even sole proprietorships, and there may be some differences in how they are handled. One thing that all audits have in common is access to records. Did you deduct business expenses or make some substantial charitable contributions? Be prepared to show the IRS receipts. The good news is that in many cases the IRS accepts electronic records.
What Happens Next?
There is no typical length of time for an IRS audit, but if you have your records handy and cooperate fully and quickly, you increase your chances it will be as brief and painless as possible. Ultimately, the IRS may determine that you owe more money. At this point, you can pay it or appeal. The audit does not have to be the end of the road. There is a substantial appeal process and a long, expensive court trial may not be necessary.
The important thing to remember is that you do not have to go it alone! Our professionals can work with you throughout the audit process, including any appeals. The key factor is to call us as soon as you receive the notification about your audit. We are ready to work through the details and help you gather any records you may need.

Fraud Alert | Synthetic Identities

The most common identify theft is synthetic. By combining some factual stolen information with completely fake information, thieves convince banks and credit monitoring companies that a fake identity is real. The “bad guy” is not pretending to be the person whose information was stolen or acquired; rather, the data is being used to create a brand-new identity. Thus, synthetic identity theft is born.
How do these scams work?
Synthetic Identity Theft Method No. 1
Fraudsters specializing in synthetic identity theft focus on stealing Social Security numbers by looking for underused SSNs, such as those belonging to children, seniors, or incarcerated individuals. Once a number is found, it is added to a new identity, and the thief applies for a credit card or loan. Though the application may be rejected, it generates an inquiry with a credit rating institution. Once that exists, it is easier to legitimize the synthetic identity.
Now, when a new application for a credit card or loan is submitted, it is more likely to succeed. Thieves can then open small accounts designed for people with little or no credit history and work on building a positive credit profile. Once that positive history is there, the fraudster can draw increasingly larger lines of credit.
Eventually, the real owner of the SSN gets messages about accounts that are not being paid. You never knew that your SSN was stolen since the credit checks did not initially appear on your credit reports.
Synthetic Identity Theft Method No. 2
Credit Profile Numbers (CPN), nine-digit numbers that look like SSNs, are created by credit repair companies. They are at the core of this scam. The object is to defraud financial institutions by creating a new persona and using it to apply for credit cards or loans rather than having to use an SSN that is attached to a poor credit history. It is illegal to use a CPN in place of an official SSN. Who is selling these CPNs? The illegitimate credit repair companies are selling the CPNs and creating trouble for their clients.
How can you protect yourself from synthetic identity theft?
With current technology, it is almost impossible to prevent synthetic identity theft. It is extremely difficult to track down and verify that the information is stolen until after the damage has been done. There are ways to minimize the risk and check whether you have been a victim.

  1. Regularly acquire copies of your credit reports. You are looking for a fragmented file — a sub-account within your credit report. This would reveal any accounts opened with your SSN under a different name.
  2. Do not throw private information in the trash. Avoid throwing in the garbage anything with SSNs or other personal identifying data. Make sure to shred documents and mix the shreds so they cannot be pieced back together.
  3. Do not click on unknown or strange links online. Do not enter information into unsecured websites. Some hackers use links that take you to fake websites. Make sure you see “HTTPS” in the web address. If you do not, it is not secure. Only secured, verified websites receive high-level HTTPS TLS/SSL certificates from official certificate-granting authorities.
  4. Create strong passwords and change them every six months. Strong passwords combine letters, numbers, and symbols. Also avoid using the same password for all your accounts.
  5. Do not carry your Social Security card with you. Put the card somewhere in your home where it is secure.

If identity theft happens to you or someone you know, many public and private entities exist to help identity theft victims recover from fraud. The federal government provides resources to help you understand your rights and responsibilities. You can start with the Federal Trade Commission.

Managing 529 Plans in 2018

For families trying to save for their children’s college education, 529 college savings plans, named for a section of the tax code, has been the best option.
The benefits include:

  • Families invest through these accounts without earnings being taxed as long as the funds are used to pay for college expenses.
  • Earnings have been typically free from federal and state taxes.
  • Grandparents, aunts, uncles and anyone else who cares can contribute to the account.
  • Those that operate like a 401(k) retirement plan invest in stocks, bonds or money market funds.

How does the new tax law affect 529 college savings plans? In fact, the new tax law may make them more attractive from a tax perspective.
You cannot deduct 529 contributions on your federal tax return. With state income taxes no longer deductible over $10,000 on federal tax returns, you want to take advantage of other deductions. Many states allow residents a limited deduction or credit against state income taxes for contributions to state-run 529 plans.
Even if you do not qualify for a state income tax deduction, a 529 plan is a great way to save for college:

  • All growth of investments inside the plan is withdrawn tax-free for approved college expenses, which applies to any accredited school in any state, no matter which state plan used to invest.
  • The money can be transferred between members of the same family. If a sibling gets a full-ride scholarship, it is possible that another family member can use the 529 account.
  • Assets in a 529 plan count far less against the family in the financial aid formulas than student assets.
  • Plans held by grandparents do not count at all. However, you need to be shrewd about withdrawals.

Typically, a 529 plan offers a limited number of mutual funds and the eventual results depend on market performance and investment choices. Most plans offer age-based funds that promise to become more conservative as your child gets closer to needing the money for college.
The best ways to start investigating 529 plans is at www.SavingforCollege.com, where you can compare various plans for performance and fees. You can link directly from the site to application forms for various plans. It is worth comparing your state’s plan to those offered by other states since fees can be challenging over the long run of the investment.

WP+D Official Spelling Bee | March 30, 2018

On March 30, 2018, WP+D held its first official Spelling Bee at both offices in Chandler and Scottsdale. In Chandler, participants included Allison Dozbaba, Christina Henning; Christy Kaiser; Jake Klein, Julie Lahm; Hannah Oglesby; Priscilla Sanchez; Loren Pruzin; and Dawn Westing. In Scottsdale, participants included Lindsey Erickson, Danielle Jennings, Pat Rae, Jacqueline Wingler; and Jordan Zwick. Brendan Higgins facilitated in Chandler and Corey Ng in Scottsdale. The top spellers and champions were Christina Henning and Danielle Jennings.

Estimated Taxes

When you are an employee, your employer withholds taxes from every paycheck and sends the money to the IRS. When self-employed or earning income other than a salary, you need to pay estimated taxes each quarter. Income subject to quarterly payments include:
+ Interest income.
+ Dividends.
+ Gains from the sales of stock or other assets.
+ Earnings from a business.
+ Alimony.
At filing time, if you have not paid enough income taxes through withholding or quarterly estimated payments, there may be a penalty for underpayment.
When are estimated taxes due?
The IRS does not break the tax year into four three-month quarters. The first quarter is January 1 to March 31. The second quarter is only two months long from April 1 to May 31. The third quarter is three months from June 1 to August 31 and fourth quarter is the final four months of the year.
Installment payments are due on April 15, June 15, September 15, and January 15 of the following year, with adjustments made for weekends and official holidays.
See below to determine if you need to make quarterly estimated taxes.

  • Do you owe less than $1,000 in taxes for the tax year after subtracting federal income tax withholding from the total amount of tax you expect to owe this year? If yes, you are safe. There is no need to make estimated tax payments.
  • Do you expect federal income tax withholding, plus any estimated taxes paid on time, to amount to at least 90 percent of the tax that you will owe for this tax year? If yes, you are clear and do not need to make estimated tax payments.
  • Do you expect your income tax withholding to be at least 100 percent of the tax on your previous year’s return? If yes, you do not need to make estimated tax payments.

If none of these is the case, then you must make estimated tax payments. To avoid a penalty, your total tax payments, estimated plus withholding, during the year must satisfy one of the requirements just covered. These are general guidelines and there may be other reasons that allow you to avoid estimated payments or require you to file them.
The safest option to avoid underpayment penalties is to aim for 100 percent of your previous year’s taxes; meaning 110 percent of your previous year’s taxes to satisfy the safe-harbor requirement. If you do this, you are likely not to have to pay an estimated tax penalty, no matter how much tax you owe with your return. This may be the case for those with high incomes.
If you expect your income this year to be less than last year’s and believe you will owe at year-end, you can choose to pay 90 percent of your estimated current year’s tax bill.
How do you pay your estimated taxes? Should you pay in equal amounts? Usually it is in four equal installments. However, you might end up with unequal payments if:
+ You had your previous year’s overpayment credited to your current year’s estimated tax payments.
+ If you do not figure your estimated payments until after April, when the first one is due.
+ If you unexpectantly make a lot of money in one quarter.
Basically, there are no good reasons to pay penalties. Follow the rules. Your best bet is to contact us to make sure you are paying the right amounts at the right times.

International Tax Provisions | Tax Cuts and Jobs Act of 2017

All U.S. owners, who own 10% or more of a foreign company, must include their pro-rata share of the accumulated earnings of the foreign company as income in 2017. This is effectively requiring the U.S. owner to pay a transition tax on the untaxed foreign earnings.
Deemed Repatriation for 2017
All U.S. owners, who own 10% or more of a foreign company, must include their pro-rata share of the accumulated earnings of the foreign company as income in 2017. This is effectively requiring the U.S. owner to pay a transition tax on the untaxed foreign earnings.
This deemed repatriation regime applies to all types of U.S. owners, with varying impacts. The income is taxed at a reduced rate. However, an election can be made to pay the tax in installments. The installment payments for years one through five is 8%; year six is 15%; year 7 is 20%; and year eight is 25%. The initial payment is due April 17, 2018.
Special Rule for S Corporations
S corporation owners can elect to defer paying the tax indefinitely until a triggering event occurs. The decision should be analyzed on a case-by-case basis.
All taxpayers owning 10% or more of a foreign company(ies) need to include additional information and disclosures with their 2017 tax return, even if no tax is due.