Janell A. Israel & Associates

1585 Kapiolani Blvd., Suite 1604, Honolulu, Hawaii 96814 Phone: 808-942-8817

January 2018 Tax Newsletter

Looking Ahead: Tax Reform in 2018

Congress has passed tax reform that will take effect in 2018, ushering in some of the most significant tax changes in three decades. Here are some of the most significant items in the new bill that impact individual taxpayers.

• Reduction of income tax brackets. The bill retains seven brackets, but at reduced rates, with the highest tax bracket dropping to 37 percent from 39.6 percent.

• Double standard deductions. The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filing jointly. To help cover the cost, personal exemptions and most additional standard deductions are suspended.

• Limits itemized deductions. Many itemized deductions are no longer available, or are now limited. Here are some of the major examples:

• Caps state and local tax deductions. State and local tax deductions are limited to $10,000 total for all property, income and sales taxes.
• Caps mortgage interest deductions. For new acquisition indebtedness, mortgage interest will be deductible on indebtedness of no more than $750,000. Existing mortgages are unaffected by the new cap as the new limits go into place for acquisition indebtedness after Dec. 14, 2017. The act also suspends the deductibility of interest on home equity debt.
• Limit on theft and casualty losses. Now only available for federally declared disaster areas.

o No more 2 percent miscellaneous deductions. Most miscellaneous deductions subject to the 2 percent of adjusted gross income threshold are now gone. (Employee Business Expense, Investment Fees, Etc.)

• Cuts some above-the-line deductions. Moving expense deductions get eliminated except for active-duty military personnel, along with alimony deductions beginning in 2019.

• Weakens the alternative minimum tax (AMT). The bill retains the alternative minimum tax but changes the exemption to $109,400 for joint filers and the phaseout threshold to $1 million. The changes mean the AMT will affect far fewer people than before.

• Bumps up child tax credit, adds family tax credit. The child tax credit increases to $2,000 from $1,000, with $1,400 of it being refundable even if no tax is owed. The phaseout threshold increases sharply to $400,000 from $110,000 for joint filers, making it available to more taxpayers. Also, dependents ineligible for the child tax credit can qualify for a new $500-per-person family tax credit.

• Expands use of 529 education savings plans. Qualified distributions from 529 education savings plans, which are not subject to tax, now include tuition payments for students in K-12 private schools.

• Doubles estate tax exemption. Estate taxes will apply to fewer people, with the exemption doubled to $11.2 million ($22.4 million for a married couple).

• Reduces pass-through business taxes. Most owners of pass-through entities such as S corporations, partnerships and sole proprietorships will see their income tax lowered with a new 20 percent income reduction calculation.

Because major tax reform like this happens so seldom, it's worth scheduling a tax-planning consultation early in the year to ensure you reap the most tax savings possible during 2018.

The Best Way to Avoid an Audit: Preparation

Getting audited by the IRS is no fun. Some taxpayers are selected for random audits every year, but the chances of that happening to you are very small. You are much more likely to fall under the IRS's gaze if you make one of several common mistakes.

That means your best chance of avoiding an audit is by doing things right before you file your return this year. Here are some suggestions:

Don't leave anything out. Missing or incomplete information on your return will trigger an audit letter automatically, since the IRS gets copies of the same tax forms (such as W-2s and 1099s) that you do.

Double-check your numbers. Bad math will get you audited. People often make calculation errors when they do their returns, especially if they do them without assistance. In 2016, the IRS sent out more than 1.6 million examination letters correcting math errors. The most frequent errors occurred in people's calculation of their amount of tax due, as well as the number of exemptions and deductions they claimed.

Don't stand out. The IRS takes a closer look at business expenses, charitable donations, and high-value itemized deductions. IRS computers reference statistical data on which amounts of these items are typical for various professions and income levels. If what you are claiming is significantly different from what is typical, it may be flagged for review.

Have your documentation in order. Keep your records in order by being meticulous about your recordkeeping. Items that will support the tax breaks you take include: cancelled checks, receipts, credit card and investment statements, logs for mileage and business meals, and proof of charitable donations. With proper documentation, a correspondence letter from the IRS inquiring about a particular deduction can be quickly resolved before it turns into a full-blown audit.

Remember, the average person has a less than 1 percent chance of being audited. If you prepare now, you can narrow your audit chances even further and rest easy after you've filed.

Common Rental Income Mistakes

If you own rental property there are a number of mistakes you should avoid. Here are some major ones:

1. Forgetting the 14-day rule. As long as you rent out your property for a period of 14 days or less per year, you do not have to report rental income or otherwise treat rental activities as a business for tax purposes. But if you go over that 14-day limit — even for a minute — you will have to pay tax on the rental income. With the popularity of rental services like Airbnb, this mistake is happening more often than not.

2. Mixing personal and rental business assets. If you rent more than 14 days a year, treat your rental activity as a business. Consider owning the property in a limited liability company and create a separate bank account for the rental property to keep your business income and expenses separate from your personal finances. If you don't do this, you're making it harder to report your net rental income every year on Schedule E.

3. Getting fooled by the calendar. Rental payments are taxable in the month they are received, not during the month they are applied to the rental balance. This means that if you receive January 2018 rent in December 2017 that income is taxable in 2017, not 2018.

4. Counting the security deposit. Often a renter will give the landlord a security deposit and a rent payment. The security deposit is not considered income if it is returned to the renter at the end of the lease.

5. Overlooking depreciation rules. You can depreciate residential real estate over 27.5 years, but remember to separate the cost of the land from the property value, as land is not depreciable. Also, depreciation that you could take but didn't for whatever reason is "allowable depreciation." When you sell the property, you must reduce the basis by the amount of the allowable depreciation, which increases your taxable gain.

6. Failing to consider the risks. Owning rental property comes with risk. You may lose a tenant and the property may sit vacant, not earning income. If your lender forecloses on your rental property and the proceeds do not cover the mortgage, they may come after your other assets, including your personal residence!

While renting property can provide a lucrative income stream, there are many complicated rules to follow and mistakes to avoid. Reach out for a consultation to discuss your rental income strategy.

Where Did My Retirement Go?

How to locate lost retirement benefits

For one reason or another, you may find yourself in a situation where you've lost track of a retirement account like a 401(k) or pension.

There are several ways this can happen:

· Job change. People change jobs in today's economy much faster than they did in the past, and that means that retirement accounts like 401(k)s or pensions from a brief job tenure may easily be forgotten.

· A death in the family. Deceased loved ones may have overlooked some retirement assets in their wills, especially if they didn't organize their estate well before they died.

· Lost access. Records or access to retirement accounts may be compromised by accidents, theft or data losses.

Luckily, there are several handy but little-known ways to retrieve retirement account information:

1. Contact employers. Getting in touch with employers who administered a 401(k) or pension plan is one of the easiest ways to retrieve lost retirement benefits. If the account was active from 2009 or later, you can search the Department of Labor's Form 5500 database (www.efast.dol.gov/portal/app/disseminatePublic), which collects the annual information submitted by plan administrators. Often the exact person you would need to get in touch with is listed on the form.

2. Use the National Registry of Unclaimed Retirement Benefits. The registry is created by a nonprofit organization that offers a free service to link up employees with their lost retirement benefits. Visit the National Registry of Unclaimed Retirement Benefits website (www.unclaimedretirementbenefits.com) and enter the Social Security number of the employee. It will locate any unclaimed accounts and then provide information about getting in contact with the employer maintaining them. Note that accounts will only appear as unclaimed if the employee's mailing address is out of date, or if the employee didn't respond to the employer's attempts to pay out the account.

3. Check the Pension Benefit Guarantee Corporation (PBGC). The PBGC is a government agency that insures and tracks company pensions, and it keeps a list of unclaimed pensions on its website (www.pbgc.gov/search/unclaimed-pensions). You can search a person's name or the name of the company. Note that pensions will continue to exist at the PBGC even if the company that provided it no longer exists.

Once you've located a lost retirement account, you can roll it over into an IRA if it's yours, or you can take several approaches if it is an inherited asset. Reach out if you'd like to discuss your options regarding tax-advantaged retirement accounts.

Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. Janell Israel & Associates is not an affiliate company of LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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All information is believed to be from reliable sources, however we make no representation as to its completeness or accuracy. The information contained in this newsletter is provided by Mostad & Christensen, Inc. The information is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in this newsletter, or for assistance with any of your tax, business or financial strategy concerns, contact our office.

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