Money

4 Ways to Withdraw Cash from a Corporation

Business, Money / By

Owners of closely held corporations often want or need to withdraw cash from the business. The simplest way, of course, is to distribute the money as a dividend. However, a dividend distribution isn’t tax-efficient because it’s taxable to the owner to the extent of the corporation’s earnings and profits. It also isn’t deductible by the corporation. Here are four alternative strategies to consider:

1. Capital repayments. To the extent that you’ve capitalized the corporation with debt, including amounts that you’ve advanced to the business, the corporation can repay the debt without the repayment being treated as a dividend. Additionally, interest paid on the debt can be deducted by the corporation.

This assumes that the debt has been properly documented with terms that characterize debt and that the corporation doesn’t have an excessively high debt-to-equity ratio. If there isn’t proper documentation or the debt-to-equity ratio is too high, the “debt” repayment may be taxed as a dividend. If you make future cash contributions to the corporation, consider structuring them as debt to facilitate later withdrawals on a tax-advantaged basis.

2. Compensation. Reasonable compensation that you, or family members, receive for services rendered to the corporation is deductible by the business. However, it’s also taxable to the recipient(s). This same rule applies to any compensation (in the form of rent) that you receive from the corporation for the use of property.

In both cases, the compensation amount must be reasonable in terms of the services rendered or the value of the property provided. If it’s considered excessive, the excess will be a nondeductible corporate distribution (and taxable to the recipient as a dividend).

3. Property sales. You can withdraw cash from the corporation by selling property to it. However, certain sales should be avoided. For example, you shouldn’t sell property to a more than 50%-owned corporation at a loss, since the loss will be disallowed. And you shouldn’t sell depreciable property to a more than 50%-owned corporation at a gain, since the gain will be treated as ordinary income, rather than capital gain.

A sale should be on terms that are comparable to those in which an unrelated third party would purchase the property. You may need to obtain an independent appraisal to establish the property’s value.

4. Loans. You can withdraw cash tax-free from the corporation by borrowing money from it. However, to prevent having the loan characterized as a corporate distribution, it should be properly documented in a loan agreement or note. It should also be made on terms that are comparable to those in which an unrelated third party would lend money to you, including a provision for interest (at least equal to the applicable federal rate) and principal. Also, consider what the corporation’s receipt of interest income will mean.

These are just a few ideas. If you’re interested in discussing these or other possible ways to withdraw cash from a closely held corporation, contact us. We can help you identify the optimal approach at the lowest tax cost.

Handle Mutual Funds Carefully at Year End

Money, Personal Finance, Retirement, Taxes / By

As we approach the end of the year, now is a good time to review any mutual fund holdings in your taxable accounts and take steps to avoid potential tax traps. Here are some tips.

Avoid Surprises

Unlike with stocks, you can’t avoid capital gains on mutual funds simply by holding on to the shares. Near the end of the year, funds typically distribute all or most of their net realized capital gains to investors. If you hold mutual funds in taxable accounts, these gains will be taxable to you regardless of whether you receive them in cash or reinvest them in the fund.

For each fund, determine how large these distributions will be and get a breakdown of long-term vs. short-term gains. If the tax impact will be significant, consider strategies to offset the gain. For example, you could sell other investments at a loss.

Buyer Beware

Avoid buying into a mutual fund shortly before it distributes capital gains and dividends for the year. There’s a common misconception that investing in a mutual fund just before the ex-dividend date (the date by which you must own shares to qualify for a distribution) is like getting free money.

In reality, the value of your shares is immediately reduced by the amount of the distribution, so you’ll owe taxes on the gain without actually achieving an economic benefit.

Seller Beware, Too

If you plan to sell mutual fund shares that have appreciated in value, consider waiting until just after year end so you can defer the gain until next year — unless you think you’ll be subject to a higher rate next year. In that scenario, you’d likely be better off recognizing the gain and paying the tax this year.

When you do sell shares, keep in mind that, if you bought them over time, each block will have a different holding period and cost basis. To reduce your tax liability, it’s possible to select shares for sale that have higher cost bases and longer holding periods (known as the specific identification method), thereby minimizing your gain (or maximizing your loss) and avoiding higher-taxed short-term gains.

Think Beyond Taxes

Investment decisions shouldn’t be driven by tax considerations alone. You also need to know your risk tolerance and keep an eye on your overall financial goals. Nonetheless, taxes are still an important factor. Contact Maggart to discuss these and other year-end strategies for minimizing the tax impact of your mutual fund holdings.

Catching Up on Retirement Catch-up Contributions

Estate Planning, Money, Personal Finance, Retirement / By

When it comes to retirement planning, many people tend to focus on two things: opening a retirement savings account and then eventually drawing funds from it. However, there are other important aspects to truly doing everything you can to grow your nest egg.

One of them is celebrating your 50th birthday. This is because those age 50 or older on December 31 of any given year can start making “catch-up” contributions to their employer-sponsored retirement plans that year (assuming the plan allows them). These are additional contributions to certain accounts beyond the regular annual limits.

Maybe you haven’t yet saved as much for retirement as you’d like to. Or perhaps you’d just like to make the most of tax-advantaged savings opportunities. Whatever the case may be, now is a good time to get caught up on the 2020 catch-up contribution amounts because you might be able to increase your contributions for the year.

401(k)s & SIMPLEs

Under 401(k) limits for 2020, if you’re age 50 or older, you can contribute an extra $6,500 after you’ve reached the $19,500 maximum limit for all employees. That’s a total of $26,000.

If your employer offers a Savings Incentive Match Plan for Employees (SIMPLE) instead, your regular contribution maxes out at $13,500 in 2020. If you’re 50 or older, you’re allowed to contribute an additional $3,000 — or $16,500 in total for the year.

But be sure to check with your employer because, while most 401(k) plans and SIMPLEs offer catch-up contributions, not all do.

Self-Employed Plans

If you’re self-employed, retirement plans such as an individual 401(k) — or solo 401(k) — also allow catch-up contributions. A solo 401(k) is a plan for those with no other employees. You can defer 100% of your self-employment income or compensation, up to the regular 2020 aggregate deferral limit of $19,500, plus a $6,500 catch-up contribution in 2020. But that’s just the employee salary deferral portion of the contribution.

You can also make an “employer” contribution of up to 20% of self-employment income or 25% of compensation. The total combined employee-employer contribution is limited to $57,000, plus the $6,500 catch-up contribution.

IRAs, too

Catch-up contributions to non-Roth accounts not only can enlarge your retirement nest egg, but also can reduce your 2020 tax liability, generally if made by Dec. 31, 2020.

Keep in mind that catch-up contributions are available for IRAs, too. The deadline for 2020 IRA contributions isn’t until April 15, 2021, but deductible contributions may be limited or unavailable based on your income and whether you (or your spouse) is covered by a retirement plan at work. Please contact Maggart for more information.

Charitable Giving in a Time of Crisis

Money, Personal Finance, Taxes / By

The novel coronavirus pandemic has created much financial stress, but the crisis has also generated an intense need for charitable action. If you’re able to continue donating during this difficult period, the Coronavirus Aid, Relief, and Economic Security (CARES) Act may make it a little easier for you to do so, whether you’re a small or large donor.

Tax Benefits

From an income tax perspective, the CARES Act has expanded charitable contribution deductions. Individual taxpayers who don’t itemize can take advantage of a new above-the-line $300 deduction for cash contributions to qualified charities in 2020. “Above-the-line” means the deduction reduces adjusted gross income (AGI). You can take this in addition to your standard deduction.

For larger donors, the CARES Act has eased the limitation on charitable deductions for cash contributions made to public charities in 2020, boosting it from 60% to 100% of AGI. There’s no requirement that your contributions be related to COVID-19.

Careful Steps

To be able to claim a donation deduction, whatever the size, you need to ensure you’re giving to a qualified charity. You can check a charity’s eligibility to receive tax-deductible contributions by visiting the IRS’s Tax-Exempt Organization Search.

If you’re making a large gift, it’s a good idea to do additional research on the charities you’re considering so you can make sure they use their funds efficiently and effectively. The IRS tool provides access to detailed financial information about charitable organizations, such as Form 990 information returns and IRS determination letters.

Even if a charity is financially sound when you make a gift, there’s no guarantee it won’t suffer financial distress, file for bankruptcy protection or even cease operations down the road. The last thing you likely want is for a charity to use your gifts to pay off its creditors or for a purpose unrelated to the mission that inspired you to give in the first place.

One way to manage these risks is to restrict the use of your gift. For example, you might limit the use to assisting a specific constituency or funding medical research. These restrictions can be documented in a written gift or endowment fund agreement.

Generous Impact

Indeed, charitable giving is more important than ever. Contact Maggart for help allocating funds for a donation and understanding the tax impact of your generosity.

Protecting Yourself from Opportunistic Fraud

Money, Personal Finance / By

The coronavirus (COVID-19) crisis has spurred much confusion and unprecedented economic challenges. It has also created ample opportunities for dishonest individuals and criminal organizations to prey on the anxieties of many Americans.

As the year rolls along, fraud schemes related to the crisis will continue as well, potentially becoming even more sophisticated. Here are some protective actions you can take.

Look Out for Phony Charities

When a catastrophe like COVID-19 strikes, the charitably minded want to donate cash and other assets to help relieve the suffering. Before donating anything, beware that opportunistic scammers may set up fake charitable organizations to exploit your generosity.

Fake charities often use names that are similar to legitimate organizations. So, before contributing, do your homework and verify the validity of any recipient. Remember, if you are scammed, not only will you lose your money or assets, but those who would benefit from your charitable action will also lose out.

Don’t Get Hooked by Phishers

In a “phishing” scheme, victims are enticed to respond to a deceptive email or other online communication. In COVID-19-related phishing scams, the perpetrator may impersonate a representative from a health agency, such as the World Health Organization (WHO) or the Centers for Disease Control and Prevention (CDC). They may ask for personal information, such as your Social Security or bank account number, or instruct you to click on a link to a survey or website.

If you receive a suspicious email, don’t respond or click on any links. The scammer might use ill-gotten data to gain access to your financial accounts or open new accounts in your name. In some cases, clicking a link might download malware to your computer. For updates on the COVID-19 crisis, go directly to the official websites of the WHO or CDC.

The IRS reports that its Criminal Investigation Division has seen a wave of new and evolving phishing schemes against taxpayers — and among the primary targets are retirees.

Shop Carefully

In many parts of the United States, and indeed around the world, certain consumer goods have become scarce. Examples have included hand sanitizer, antibacterial wipes, masks and toilet paper. Scammers are exploiting these shortages by posing as retailers or direct-to-consumer suppliers to obtain buyers’ personal information.

Con artists may, for instance, claim to have the goods that you need and ask for your credit card number to complete a transaction. Then they use the card number to run up charges while you never receive anything in return.

Buy from only known legitimate businesses. If a supplier offers a deal out of the blue that seems too good to be true, it probably is. Also watch out for price gouging on limited items. If an item is selling online for many times more than the usual price, you probably want to avoid buying it.

Hang Up on Robocalls

You may have noticed an increase in “robocalls” — automated phone calls offering phony services or demanding sensitive information — since the COVID-19 crisis began. For instance, callers may offer COVID-19-related items at reduced rates. Then they’ll ask for your credit card number to “secure” your purchase.

Reputable companies, charities, and government agencies (such as the IRS) won’t try to contact you this way. If you receive an unsolicited call from a phone number that’s blocked or that you don’t recognize, hang up or ignore it.

In addition, don’t buy into special offers for items such as COVID-19 treatments, vaccinations or home test kits. You’ll likely end up paying for something that at best doesn’t exist and at worst could harm you.

Tarnish Their Gold

For fraudsters, this year’s worldwide crisis is a golden opportunity. Don’t let them take advantage of you or your loved ones. Report them when possible.

New Break Temporarily Makes Retirement Plan Withdrawals Less Taxing

Money, Personal Finance, Retirement, Taxes / By

A key provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act is intended to help alleviate some of the economic hardship many Americans are experiencing as a result of the novel coronavirus (COVID-19) pandemic. It allows tax-favored treatment for distributions from retirement accounts in certain situations.

The Penalty Waiver & More

Under the CARES Act, IRA owners who are adversely affected by the COVID-19 pandemic are eligible to take tax-favored “coronavirus-related” distributions (CVDs) of up to $100,000 from their IRAs. If you’re under age 59½, the early withdrawal penalty that normally would apply is waived. Any eligible IRA owner can recontribute (repay) a CVD back into their IRA within three years of the withdrawal date and treat the withdrawal and later recontribution as a tax-free rollover. There are no limitations on what you can use CVD funds for during that three-year period.

The CARES Act also may allow you to take tax-favored CVDs from your employer’s qualified retirement plan, such as a 401(k) or profit-sharing plan, if the plan allows it. If allowed, the tax rules for CVDs taken from qualified plans are similar to those for CVDs taken from IRAs. As of this writing, a lot of details still need to be figured out about how CVDs taken from qualified plans will work. Contact the appropriate person with your employer for more information.

The 7 Basic Rules

There are seven basic rules for taking CVDs from IRAs:

  1. You can take one or more CVDs up to the $100,000 limit.
  2. CVDs can come from different IRAs.
  3. The three-year recontribution period for each CVD begins on the day after you receive it.
  4. You can make your recontributions in a lump sum or through multiple recontributions.
  5. You can recontribute to one or several IRAs, and they don’t have to be the same accounts you took the CVDs from.
  6. As long as you recontribute the entire CVD amount within the three-year window, the whole transaction or series of transactions are treated as tax-free IRA rollovers.
  7. If you’re under 59½, the 10% penalty tax that usually applies to early IRA withdrawals is waived for CVDs, even if you don’t recontribute.

If your spouse owns one or more IRAs in his or her own name, he or she may be eligible for the same distribution privilege.

Who’s Eligible?

CVDs can be taken from January 1, 2020, through December 30, 2020, by an eligible individual. That means an individual:

  • Who’s diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention,
  • Whose spouse or dependent (generally a qualifying child or relative who receives more than half of his or her support from you) is diagnosed with COVID-19 by such a test,
  • Who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off or having work hours reduced due to COVID-19,
  • Who’s unable to work because of lack of childcare due to COVID-19 and experiences adverse financial consequences as a result,
  • Who owns or operates a business that has closed or has had operating hours reduced due to COVID-19 and has experienced adverse financial consequences as a result, or
  • Who has experienced adverse financial consequences due to other COVID-19-related factors.

As of this writing, IRS guidance on how to interpret the last two factors is needed. Check in with us for the latest developments.

When Taxes Are Due

You’ll be taxed on any CVD amount that you don’t recontribute within the three-year window. But you won’t have to worry about owing the 10% early withdrawal penalty if you’re under 59½.

You can choose to spread the taxable amount equally over three years, apparently starting with 2020. But here it gets tricky, because the three-year window won’t close until sometime in 2023. Until then, it won’t be clear that you failed to take advantage of the tax-free CVD rollover deal. So, you may have to amend a prior-year return to report some additional taxable income from the CVD. As of this writing, the IRS is expected to issue guidance to clarify this issue. Again, check in with us for the latest information.

You also have the option of simply reporting the taxable income from the CVD on your 2020 individual income tax return Form 1040. Again, you won’t owe the 10% early withdrawal penalty if you’re under 59½.

Getting Through the Crisis

CVDs can be a helpful, flexible tax-favored financial tool for eligible taxpayers during the pandemic. But it’s just one of several financial relief measures available under the CARES Act that include tax relief, and other relief legislation may be forthcoming. Our team at Maggart can help you take advantage of relief measures that will help you get through the COVID-19 crisis.

COVID-19 Relief: Overview of the CARES Act

Business, Employment, Estate Planning, Money, Personal Finance, Retirement, Taxes / By

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. In addition to funding the health care fight against the novel coronavirus (COVID-19), the roughly $2 trillion legislation provides much-needed financial relief to individuals, businesses, not-for-profit organizations, and state and local governments during the pandemic. Here are some of the key provisions for individuals and businesses.

Economic Impact Payments

The CARES Act provides one-time direct Economic Impact Payments of up to $1,200 for single filers or heads of households; married couples filing jointly can receive up to $2,400. An additional payment of up to $500 is available for each qualifying child under age 17.

Economic Impact Payments are subject to phaseout thresholds based on adjusted gross income (AGI). The phaseouts begin at $75,000 for singles, $112,500 for heads of household and $150,000 for married couples.

The payments are phased out by $5 for every $100 of AGI above the thresholds. For example, the payment for a married couple with no children is completely phased out when AGI exceeds $198,000. The payment for a head of household with one child is completely phased out when AGI exceeds $146,500. And, for a single filer, it’s completely phased out when AGI exceeds $99,000.

Employee Retention Credit

The CARES Act creates a new payroll tax credit for employers that pay wages when:

  • Their operations are partially or fully suspended because of certain government orders related to the COVID-19 pandemic, or
  • Their gross receipts have declined by more than 50% compared to the same quarter in the prior year.

Eligible employers may claim a 50% refundable payroll tax credit on wages paid (including health insurance benefits) of up to $10,000 that are paid or incurred from March 13, 2020, through December 31, 2020.

For employers who had an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible, regardless of whether the employee is furloughed. For employers who had a larger average number of full-time employees in 2019, only the wages of employees who are furloughed or face reduced hours as a result of their employers’ closure or reduced gross receipts are eligible for the credit.

Be aware that additional rules and restrictions apply.

Paycheck Protection Program (PPP)

This $349 billion loan program — administered by the Small Business Administration (SBA) — is intended to help U.S. employers keep workers on their payrolls. To potentially qualify, you must have fewer than 500 full- or part-time employees. PPP loans can be as large as $10 million. But most organizations will receive smaller amounts — generally a maximum of 2.5 times their average monthly payroll costs.

If you receive a loan through the program, proceeds may be used only for paying certain expenses, generally:

  • Payroll (including benefits),
  • Mortgage interest,
  • Rent, and
  • Utilities.

Perhaps the most reassuring aspect of PPP loans is that they can be forgiven — so long as you follow the rules. And many rules and limits apply. Because of the limited funds available, if you could qualify, you should apply as soon as possible.

The CARES Act expands business access to capital in additional ways. Many of the other loan programs are also being administered by the Small Business Administration (SBA).

Modifications of TCJA Provisions

The CARES Act rolls back several revenue-generating provisions of the Tax Cuts and Jobs Act (TCJA). This will help free up cash for some individuals and businesses during the COVID-19 crisis.

The new law temporarily scales back TCJA deduction limitations on:

  • Net operating losses (NOLs),
  • Business tax losses sustained by individuals,
  • Business interest expense, and
  • Certain itemized charitable deductions by individuals and charitable deductions for corporations.

The new law also accelerates the recovery of credits for prior-year corporate alternative minimum tax (AMT) liability.

Significant for the hard-hit restaurant and retail sectors, the CARES Act also fixes a TCJA drafting error for real estate qualified improvement property (QIP). Congress originally intended to permanently install a 15-year depreciation period for QIP, making it eligible for first-year bonus depreciation in tax years after the TCJA took effect. Unfortunately, due to a drafting glitch, QIP wasn’t added to the list of property with a 15-year depreciation period — instead, it was left subject to a 39-year depreciation period. The CARES Act retroactively corrects this mistake and allows you to choose between first-year bonus depreciation and 15-year depreciation for QIP expenditures.

So Much More

The financial relief package under the CARES Act also includes provisions to:

  • Significantly expand unemployment benefits for workers,
  • Allow IRA owners and qualified retirement plan participants under age 59 ½ who suffer certain adverse effects due to the COVID-19 pandemic to withdraw in 2020 up to $100,000 and then recontribute the withdrawn amount within three years with no federal income tax consequences,
  • Waive required minimum distributions (RMDs) from IRAs and retirement plans that would otherwise have to be taken in 2020 to avoid an expensive penalty,
  • Provide an above-the-line charitable deduction of up to $300, generally for 2020 cash contributions to qualified charities, and
  • Exclude from an employee’s taxable income up to $5,250 of employer payments made on the employee’s student loans from the date of the CARES Act’s enactment through December 31, 2020.

The CARES Act also allows employers to defer their portion of payments of Social Security payroll taxes through the end of 2020 (with similar relief provided to self-employed individuals).

Need Help?

Keep in mind that additional guidance could be released, or legislation signed into law, that could affect these CARES Act provisions. And more relief measures could be forthcoming.

The COVID-19 pandemic has affected every household and business in some way. If you have suffered financial losses, contact Maggart to discuss resources that may be available to help you weather this unprecedented storm.

The 2019 Gift Tax Return Deadline is Almost Here, Too

Money, Personal Finance, Taxes / By

Most people have April 15 “tattooed on the brain” as the deadline for filing their federal income tax returns. What you may forget is that the gift tax return deadline is on the very same date. So, if you made large gifts to family members or heirs last year, it’s important to determine whether you’re required to file.

Filing Requirements

Generally, you must file a gift tax return for 2019 if, during the tax year, you made gifts that exceeded the $15,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse) or that you wish to split with your spouse to take advantage of your combined $30,000 annual exclusion.

You also need to file if you made gifts to a Section 529 college savings plan and wish to accelerate up to five years’ worth of annual exclusions ($75,000) into 2019. Other reasons to file include making gifts:

  • That exceeded the $155,000 annual exclusion for gifts to a noncitizen spouse, or
  • Of future interests (such as remainder interests in a trust) regardless of the amount, or
  • Of jointly held or community property.

Keep in mind that you’ll owe gift tax only to the extent an exclusion doesn’t apply and you’ve used up your lifetime gift and estate tax exemption ($11.4 million for 2019). As you can see, some transfers require a return even if you don’t owe tax.

No Return Required

No gift tax return is required if your gifts for the year consist solely of gifts that are tax-free because they qualify as annual exclusion gifts, present interest gifts to a U.S. citizen spouse, educational or medical expenses paid directly to a school or health care provider, or political or charitable contributions.

But if you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

Be Ready

If you owe gift tax, the payment deadline is indeed April 15 — regardless of whether you file for an extension (in which case you have until October 15 to file). If you’re unsure whether you must (or should) file a 2019 gift tax return, contact our team.

The TCJA Effect: Qualified Residence Interest

Money, Personal Finance, Taxes / By

The Tax Cuts and Jobs Act (TCJA) made a significant impact — both directly and indirectly — on the deductibility of various types of interest expense for individuals. One area affected is qualified residence interest.

Two Ways About It

The TCJA affects interest on residential loans in two ways. First, by nearly doubling the standard deduction and placing a $10,000 cap on deductions of state and local taxes, the act substantially reduces the number of taxpayers who itemize. This means that fewer taxpayers will benefit from mortgage and home equity interest deductions. Second, from 2018 through 2025, the act places new limits on the amount of qualified residence interest you can deduct.

Previously, taxpayers could deduct interest on up to $1 million in acquisition indebtedness ($500,000 for married taxpayers filing separately) and up to $100,000 in home equity indebtedness ($50,000 for married taxpayers filing separately).

Acquisition indebtedness is debt that’s incurred to acquire, build or substantially improve a qualified residence, and is secured by that residence. Home equity indebtedness is debt that’s incurred for any other purpose (such as buying a boat or paying off credit cards) and is secured by a qualified residence. A single mortgage could be treated as both acquisition and home equity indebtedness, allowing taxpayers to deduct interest on debt up to $1.1 million.

The TCJA reduced the deduction limit for acquisition indebtedness to interest on up to $750,000 in debt and eliminated the deduction for home equity indebtedness altogether, through 2025. The new limit on acquisition indebtedness doesn’t apply to debt incurred on or before December 15, 2017, subject to an exception for mortgages that were incurred on or before April 1, 2018, in certain circumstances. Specifically, it involves debt incurred pursuant to a written binding contract to purchase a qualified residence executed before December 15, 2017, and scheduled to close before January 1, 2018 (so long as the purchase, as it turned out, was completed before April 1, 2018). And it doesn’t apply to existing mortgages that are refinanced after December 15, 2017, provided the resulting debt doesn’t exceed the refinanced debt.

The elimination of interest deductions for home equity indebtedness, however, applies to existing debt. So, if you were previously deducting interest on up to $100,000 of home equity debt, that interest is no longer deductible. The same holds true for the $100,000 home equity portion of $1.1 million in mortgage debt. Note, however, that interest on a home equity loan used to substantially improve a qualified residence is deductible as acquisition indebtedness (subject to applicable limits).

Review Your Expenses

In light of the TCJA’s changes, you may want to make changes such as paying off home equity loans because interest is no longer deductible. Contact Maggart for help.

Investment Interest Is Also Affected

The Tax Cuts and Jobs Act (TCJA) also affects investment interest. This is interest on debt borrowed to buy taxable investments (margin loans, for example). Like qualified residence interest, investment interest is an itemized deduction, which is lost if you no longer itemize.

Deductions of investment interest cannot exceed your net investment income, which generally includes interest income and ordinary dividend income, but not lower-taxed capital gains, qualified dividends or tax-free investment earnings. For many people, net investment income is now higher because the TCJA eliminated miscellaneous itemized deductions for such expenses.

Pump the Brakes Before Donating Your Vehicle to Charity

Money, Personal Finance, Taxes / By

Many people might consider donating their vehicles to charity at year end to start the new year. Why not get a fresh ride and a tax deduction, eh? Pump the brakes — this strategy doesn’t always work out as intended.

Donating an old car to a qualified charity may seem like a hassle-free way to dispose of an unneeded vehicle, satisfy your philanthropic desires, and enjoy a tax deduction (provided you itemize). But in most cases, it’s not the most tax-efficient strategy. Generally, your deduction is limited to the actual price the charity receives when it sells the car.

You can deduct the vehicle’s fair market value (FMV) only if the charity:

  1. uses the vehicle for a significant charitable purpose, such as delivering meals to homebound seniors;
  2. makes material improvements to the vehicle that go beyond cleaning and painting; or
  3. disposes of the vehicle for less than FMV for a charitable purpose, such as selling it at a below-market price to a needy person.

If you decide to donate a car, be sure to comply with IRS substantiation and acknowledgment requirements. And watch out for disreputable car donation organizations that distribute only a fraction of what they take in to charity and, in some cases, aren’t even eligible to receive charitable gifts. Maggart’s CPAs can help you double-check the idea before going through with it.