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Act soon to save 2018 taxes on your investments



Do you have investments outside of tax-advantaged retirement plans? If so, you might still have time to shrink your 2018 tax bill by selling some investments ― you just need to carefully select which investments you sell.

Try balancing gains and losses

If you’ve sold investments at a gain this year, consider selling some losing investments to absorb the gains. This is commonly referred to as “harvesting” losses.

If, however, you’ve sold investments at a loss this year, consider selling other investments in your portfolio that have appreciated, to the extent the gains will be absorbed by the losses. If you believe those appreciated investments have peaked in value, essentially you’ll lock in the peak value and avoid tax on your gains.

Review your potential tax rates

At the federal level, long-term capital gains (on investments held more than one year) are taxed at lower rates than short-term capital gains (on investments held one year or less). The Tax Cuts and Jobs Act (TCJA) retains the 0%, 15% and 20% rates on long-term capital gains. But, for 2018 through 2025, these rates have their own brackets, instead of aligning with various ordinary-income brackets.

For example, these are the thresholds for the top long-term gains rate for 2018:

  • Singles: $425,800
  • Heads of households: $452,400
  • Married couples filing jointly: $479,000

But the top ordinary-income rate of 37%, which also applies to short-term capital gains, doesn’t go into effect until income exceeds $500,000 for singles and heads of households or $600,000 for joint filers. The TCJA also retains the 3.8% net investment income tax (NIIT) and its $200,000 and $250,000 thresholds.

Don’t forget the netting rules

Before selling investments, consider the netting rules for gains and losses, which depend on whether gains and losses are long term or short term. To determine your net gain or loss for the year, long-term capital losses offset long-term capital gains before they offset short-term capital gains. In the same way, short-term capital losses offset short-term capital gains before they offset long-term capital gains.

You may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing your adjusted gross income. Any remaining net losses are carried forward to future years.

Time is running out

By reviewing your investment activity year-to-date and selling certain investments by year end, you may be able to substantially reduce your 2018 taxes. But act soon, because time is running out.

Keep in mind that tax considerations shouldn’t drive your investment decisions. You also need to consider other factors, such as your risk tolerance and investment goals.

We can help you determine what makes sense for you. Please contact us.

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6 last-minute tax moves for your business

 

Tax planning is a year-round activity, but there are still some year-end strategies you can use to lower your 2018 tax bill. Here are six last-minute tax moves business owners should consider:

  1. Postpone invoices. If your business uses the cash method of accounting, and it would benefit from deferring income to next year, wait until early 2019 to send invoices. Accrual-basis businesses can defer recognition of certain advance payments for products to be delivered or services to be provided next year.
  2. Prepay expenses. A cash-basis business may be able to reduce its 2018 taxes by prepaying certain expenses — such as lease payments, insurance premiums, utility bills, office supplies and taxes — before the end of the year. Many expenses can be deducted up to 12 months in advance.
  3. Buy equipment. Take advantage of 100% bonus depreciation and Section 179 expensing to deduct the full cost of qualifying equipment or other fixed assets. Under the Tax Cuts and Jobs Act, bonus depreciation, like Sec. 179 expensing, is now available for both new and used assets. Keep in mind that, to deduct the expense on your 2018 return, the assets must be placed in service — not just purchased — by the end of the year.
  4. Use credit cards. What if you’d like to prepay expenses or buy equipment before the end of the year, but you don’t have the cash? Consider using your business credit card. Generally, expenses paid by credit card are deductible when charged, even if you don’t pay the credit card bill until next year.
  5. Contribute to retirement plans. If you’re self-employed or own a pass-through business — such as a partnership, limited liability company or S corporation — one of the best ways to reduce your 2018 tax bill is to increase deductible contributions to retirement plans. Usually, these contributions must be made by year-end. But certain plans — such as SEP IRAs — allow your business to make 2018 contributions up until its tax return due date (including extensions).
  6. Qualify for the pass-through deduction. If your business is a sole proprietorship or pass-through entity, you may qualify for the new pass-through deduction of up to 20% of qualified business income. But if your taxable income exceeds $157,500 ($315,000 for joint filers), certain limitations kick in that can reduce or even eliminate the deduction. One way to avoid these limitations is to reduce your income below the threshold — for example, by having your business increase its retirement plan contributions.

Most of these strategies are subject to various limitations and restrictions beyond what we’ve covered here, so please consult us before you implement them. We can also offer more ideas for reducing your taxes this year and next.

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New Heavy Equipment Rental Excise Tax in Indiana for 2019

Starting January 1, 2019, Indiana will implement a new excise tax on the rental of heavy equipment and construction equipment. The new Indiana excise tax will be assessed on equipment that is rented without an operator and from a location in Indiana, and the tax will be 2.25% of the gross retail rent value.

During the legislative session for 2018, the Indiana General Assembly enacted and the Governor signed into law House Enrolled Act No. 1323. The law imposes an excise tax of 2.25% of the gross retail income received by the retail merchant on heavy equipment rentals starting on January 1, 2019.

Heavy rental equipment is defined as property:

  • owned by a person or business that is in the business of renting heavy equipment, including any attachments;
  • is classified under 532412 of the North American Industry Classification System Manual in effect on January 1, 2018;
  • not subject to registration for use on a public highway; and
  • not intended to be permanently affixed to any real property.

This new Indiana excise tax applies to heavy rental equipment without an operator such as:

  • Bulldozer rental or leasing
  • Construction machinery and equipment rental or leasing
  • Crane rental or leasing
  • Earth moving equipment rental or leasing
  • Forestry machinery and equipment
  • Heavy construction equipment rental
  • Logging equipment rental or leasing
  • Oil field machinery and equipment rental or leasing
  • Oil well drilling machinery and equipment rental or leasing
  • Welding equipment rental or leasing
  • Well drilling machinery and equipment rental or leasing

The Indiana excise tax is not applied if:

  • The equipment is rented for mining purposes or heavy equipment that is eligible for a property tax abatement deduction during the calendar year it is rented
  • The rentee is the US Government, the state of Indiana, a political subdivision or an agency or instrumentality of an aforementioned entity
  • It is a transaction of sub-rent from a rentee to another person and the rentee was liable for the tax imposed

What is Excise Tax?

Excise tax, sometimes referred as “duty,” is a tax on use or consumption of certain products. They can be included in the price of a product, such as gasoline, cigarettes and alcohol, as well as be imposed on some activities, like gambling. Both the federal government and state governments can impose excise tax.

To report excise taxes, businesses will need to file Form 720 quarterly. Form 720 needs to be filed quarterly, and it is due a month after the end of each quarter.

  • Quarter 1 (January 1 – March 31): File by April 30
  • Quarter 2 (April 1 – June 30): File by July 31
  • Quarter 3 (July 1 – September 30): File by October 31
  • Quarter 4 (October 1 – December 31): File by January 31

How is an excise tax different from a sales tax?

There are two main differences between excise tax and sales tax are:

  • There are a few specific goods that have an excise tax, whereas sales tax is applied to just about everything you purchase
  • Excise tax is placed on the production of goods, while sales tax applies to the sale of goods

Where applicable, the manufacturer will pay excise tax because it occurs during the production. On purchases with sales tax, the end user pays the sales tax.

If you are a construction or heavy rental equipment business in Carmel, Westfield or the greater Indianapolis area needing help with your tax preparation, or would like to know more about the new Indiana excise tax, request your free consultation with Watson CPA today!

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How Taxes Change After Major Life Events – Marriage, Divorce, and With Children

Life happens. And since taxes are one of the only things that are certain in life, it’s best to know how to prepare and plan for tax changes after major life events. Some of the biggest changes to your taxes come after marriage, the birth of a child, and after a divorce.

How Does Getting Married Affect Your Taxes?

For Federal tax purposes, if you are married at any point during a given year, you are considered “married” for the entire tax year. Once you’re married, you have two filing statuses to choose from: married filing jointly (MFJ) or married filing separately (MFS). The only exception is if one spouse is a nonresident alien, the couple must file separately.

The Differences between Married Filing Separately vs. Jointly

Married Filing Jointly means that the couple can record their respective incomes, exemptions and deductions on the same tax return. The IRS encourages married couples to file jointly by extending several tax breaks to those who do. The joint report combines the income and deductions, and married couples can file jointly even if one spouse has no income or deduction.

When couples file together, the individuals are held jointly liable for the information reported on the tax return. If one spouse brings tax problems from previous years into the marriage, the new spouse should not be affected.

Married Filing Separately means that a couple chooses to record their respective incomes, exemptions and deductions on separate tax returns. Couples may choose to file separately for a handful of reasons. For example, if it’s suspected that one spouse is not honestly reporting his or her income and deductions, then the other spouse may elect to file separately.

However, separate filers are usually excluded from the special tax breaks that joint filers are eligible for, like the Earned Income Credit. If a married couple files separately but has a child together, only one parent can claim the child as a dependent, even if both equally contribute toward child support. If one individual itemizes deductions, the other cannot claim the standard deduction.

Married Filing Jointly or Separately Tax Brackets

The tax bracket for a married couple depends on if the couple chooses to file jointly or separately. When a couple chooses MFJ, their tax bracket depends on the combined income, which may bump one or both individuals into a higher tax bracket. Tax brackets for MFS are the same as tax brackets for those who file as single.

How Do My Taxes Change When I Have A Child?

To claim a child as a dependent, you’ll have to report the child’s Social Security Number on your tax return; if you have multiple children, you’ll have to report the SSN for each one. You can request a Social Security card for your newborn when applying for a birth certificate at the hospital. Failing to report the SSN for each dependent can result in a $50 fine and slow down your refund. So if this is your first time filing taxes with a child, be sure to register for the SSN right away after he or she is born.

For tax years prior to 2018, claiming your child as a dependent would reduce your taxable your income by the annual dependency exemption. In 2017, the tax deduction for a child was $4,050. But starting in 2018, dependency exemptions are replaced with increased child tax credits that directly lower your tax instead of you taxable income.

With the birth of a new baby comes a $2,000 child tax credit, and you will receive it every year until the child turns 17. You’ll receive the full credit no matter when in the year the child was born. The credit will reduce your tax bill dollar for dollar, so the $2,000 child credit will reduce your tax bill by $2,000.

If you are married with a child, you can still choose to file as MFJ or MFS. If you do file separately, only one parent can claim the child as a dependent. Additionally, when a couple chooses married filing separately, the child tax credit goes to the parent claiming the dependent. Single parents can choose to file as head of the household as long as they claim at least one dependent and the dependent lived with the parent for more than half the year.

How Does Divorce Affect Taxes?

Whatever your marital status is on December 31 is what determines your filing status for that tax year. A married couple undergoing the divorce process must still file as MSF or MSJ until the divorce is final. Ex-spouses filing taxes after the divorce is finalized can file as single or head of the household, considering the circumstances.

If the couple has a child, one may claim the dependent if the child lived with the parent for a longer period of time during the year than with the other parent. The parent who claims the child as a dependent can also claim the child credit.

If there are alimony payments involved, the ex-spouse making those payments may take a tax deduction, even if the deductions are not itemized. The IRS will only consider these payments to be true alimony if they are made in cash and are required by a divorce agreement. The ex-spouse receiving alimony must pay income tax on the amounts that are deducted.

For child support, the ex-spouse receiving these payments does not pay income tax nor does the ex-spouse making these payments get a deduction. If you owe child support and file taxes, the IRS will take your tax refund to cover these arrears, and this money will be given to the appropriate child support agency.

Find Professional Help For Filing Your Tax Return

Whether you’re getting married, filing for divorce or expanding your family, these changes will affect how you file your taxes. Watson CPA is here to handle all your tax preparation questions for any stage of life! Request your free consultation now to get in contact with an experienced CPA today.

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