Monthly Archives: September 2017

Tax Reform Framework Released

Tax reform 2017

JRKsmallersmallerThe Trump Administration, the House Committee on Ways and Means, and the Senate Committee on Finance released a framework for tax reform yesterday that they hope will be enacted by year-end. The framework is intended to become the template on which the tax-writing committees will develop legislation. It is designed to keep the promises President Donald Trump made during his campaign.

A Summary of the Framework

For Individuals

  • Three tax brackets: 12 percent, 25 percent, and 35 percent (currently there are seven brackets, with the lowest one being 10 percent and the top one being 39.6 percent). However, the framework allows congressional tax-writing committees to add a fourth, higher bracket for high-income individuals. The income levels at which the three brackets would apply were not specified.
  • Repeal of the alternative minimum tax.
  • Repeal of the estate tax and the generation-skipping transfer tax.
  • Taxing pass-through income at a maximum rate of 25 percent. (The tax-writing committees would be given the task of developing rules to ensure that high-income taxpayers do not use this provision to avoid the 35 percent bracket.)
  • Increase the standard deduction to $12,000 for individuals and to $24,000 for married couples filing jointly.
  • Increase the child tax credit and provide a $500 credit for care of non-child dependents.
  • Eliminate most itemized deductions, including the deduction for state and local taxes.  They plan to preserve the deductibility of mortgage interest and charitable contributions. The framework directs Congress to maintain tax incentives for higher education, retirement savings, and employment.
  • Repeal of the death tax and generation-skipping transfer tax.

For Businesses

  • Limits the maximum tax rate applied to the business income of small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations to 25 percent.
  • Reduces the corporate tax rate to 20 percent. The committees also may consider methods to reduce the double taxation of corporate earnings.
  • Allow businesses to immediately write off (or “expense”) the cost of new investments in depreciable assets other than structures made after September 27, 2017, for at least five years. This policy represents an unprecedented level of expensing with respect to the duration and scope of eligible assets. The committees may continue to work to enhance unprecedented expensing for business investments, especially to provide relief for small businesses.
  • An end to taxation of U.S. companies’ worldwide income and a move to a territorial system. The tax-writing committees would have discretion to write anti-base-erosion measures.
  • A one-time tax on accumulated offshore earnings, which would be taxed at two unspecified rates: One rate for cash and cash equivalents and a lower rate for other assets.
  • Limit the deductibility of interest by C corporations.  The committees will also consider the tax treatment of interest paid by non-corporate taxpayers.  No further details provided.
  • Eliminate deductions, at the tax-writing committees’ discretion, but the framework calls for the research and low-income housing credits to be retained.

You can read the entire framework here.

If you have questions about how this reform will affect you, contact your tax advisor at Ciuni & Panichi, Inc. or Jim Komos, CPA, Tax Partner, at 216-831-7171 or jkomos@cp-advisors.com.

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The ABCs of the Tax Deduction for Educator Expenses

The ABCs of the Tax Deduction for Educator Expenses

Teachers who buy supplies for their classrooms may be eligible for a tax break.

Back to school compositionAt back-to-school time, much of the focus is on the students returning to the classroom — and on their parents buying them school supplies, backpacks, clothes, etc., for the new school year. But let’s not forget about the teachers. It’s common for teachers to pay for some classroom supplies out of pocket, and the tax code provides a special break that makes it a little easier for these educators to deduct some of their expenses.

The miscellaneous itemized deduction
Generally, your employee expenses are deductible when they are not reimbursed by your employer and ordinary and necessary to your business of being an employee. An expense is ordinary if it is common and accepted in your business. An expense is necessary if it is appropriate and helpful to your business.

These expenses must be claimed as a miscellaneous itemized deduction and are subject to a two percent of the adjusted gross income (AGI) floor. This means you’ll enjoy a tax benefit only if all your deductions subject to the floor, combined, exceed two percent of your AGI. For many taxpayers, including teachers, this can be a difficult threshold to meet.

The educator expense deduction
Congress created the educator expense deduction to allow teachers and other educators to receive a tax benefit from some of their unreimbursed out-of-pocket classroom expenses.

The break was made permanent under the Protecting Americans from Tax Hikes (PATH) Act of 2015.  Since 2016, the deduction has been annually indexed for inflation (though because of low inflation it hasn’t increased yet) and has included professional development expenses.

Qualifying elementary and secondary school teachers and other eligible educators (such as counselors and principals) can deduct up to $250 of qualified expenses. (If you’re married filing jointly and both you and your spouse are educators, you can deduct up to $500 of unreimbursed expenses — but not more than $250 each.)

Qualified expenses include amounts paid or incurred during the tax year for books, supplies, computer equipment (including related software and services), other equipment and supplementary materials that you use in the classroom. For courses in health and physical education, the costs for supplies are qualified expenses only if related to athletics.

An added benefit
The educator expense deduction is an “above-the-line” deduction, which means you don’t have to itemize and it reduces your AGI, which has an added benefit:  Because AGI-based limits affect a variety of tax breaks (such as the previously mentioned miscellaneous itemized deductions), lowering your AGI might help you maximize your tax breaks overall.

The best advice we can offer is “don’t go it alone.” Contact Tax Department Accountant Eden LaLonde, CPA, MAcc, at 216-831-7171 or elalonde@cp-advisors.com for more details about the educator expense deduction or tax breaks available for other work-related expenses.

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Having the Money Talk with Your Children

How much financial knowledge do they have?

Provided by Dane A. Wilson, Wealth Management Advisor

401(k) 403(b) audit SSAESome young adults manage to acquire a fair amount of financial literacy. In the classroom or the workplace, they learn a great deal about financial principles. Others lack such knowledge and learn money lessons by paying, to reference William Blake, “the price of experience.”

Broadly speaking, how much financial literacy do young people have today? At this writing, some of the most recent data appears in U.S. Bank’s 2016 Student and Personal Finance Study. After surveying more than 1,600 American high school and undergraduate students, the bank found that just 15% of students felt knowledgeable about investing. For that matter, just 42% felt knowledgeable about deposit and checking accounts.1

Relatively few students understood the principles of credit. Fifty-four percent thought that having “too many” credit cards would negatively impact their credit score. Forty-four percent believed that they could build or improve their credit rating by using credit or debit cards. Neither perception is accurate.1

Are parents teaching their children well about money? Maybe not. An interesting difference of opinion stood out in the survey results. Forty percent of the parents of the survey respondents said that they had taught their kids specific money management skills, but merely 18% of the teens and young adults reported receiving such instruction.1,2

A young adult should go out into the world with a grasp of certain money truths. For example, high-interest debt should be avoided whenever possible, and when it is unavoidable, it should be the first debt attacked. Most credit cards (and private student loans) carry double-digit interest rates.3

Living independently means abiding by some kind of budget. Budgeting is a great skill for a young adult to master, one that may keep them out of some stressful financial predicaments.

At or before age 26, health insurance must be addressed. Under the Affordable Care Act, most young adults can remain on a parent’s health plan until they are 26. This applies even if they marry, become parents, or live away from mom and dad. But what happens when they turn 26? If they sign up for an HMO, they need to understand how out-of-network costs can creep up on them. They should understand the potentially lower premiums that they could pay if enrolled in a high-deductible health plan (HDHP), but also the tradeoff – they might get hit hard in the wallet if a hospital stay or an involved emergency room visit occurs.3,4

Lastly, this is an ideal time to start saving & investing. Any parent would do well to direct their son or daughter to a financial professional of good standing and significant experience for guidance about building and keeping wealth. If a young adult aspires to retire confidently later in life, this could be the first step. A prospective young investor should know the types of investments available to them as well as the difference between investments and investment vehicles (which many Americans, young and old, confuse).

A money talk does not need to cover all the above subjects at once. You may prefer to dispense financial education in a way that is gradual and more anecdotal than implicitly instructive. Whichever way the knowledge is shared, sooner is better than later – because financially, kids have to grow up fast these days.

Dane A. Wilson may be reached at 216-831-7171 or dwilson@cp-advisors.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
 
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Citations.
1 – stories.usbank.com/dam/september-2016/USBankStudentPersonalFinance.pdf [9/16]
2 – tinyurl.com/yc6ejxjp [10/27/16]
3 – cnbc.com/2017/03/02/parents-need-to-have-real-world-money-talk-with-kids.html [3/2/17]
4 – healthcare.gov/young-adults/children-under-26/ [6/8/17]