How Long to Keep Tax Records

Right now in 2018 you should have all the supporting records for tax return years 2014 through 2017. I also advocate that you keep your tax return copies forever. If you discard the supporting records for the older years,  then it should not take up too much space. Other than that here are just some general guidelines:

1. Brokerage statements:Just keep the most recent month.
2. Bank statements: Keep only those that support items on the tax return for the current year and the last 4 years.
3. Closing statements on real estate transactions: Keep until the property is sold and store with the tax return in the year of sale.
4. Credit card statements: Keep only those statements that support items on the tax return for the current year and the last 4 years.
5. Business assets: Keep records of purchase transaction until sold or disposed of and store with the tax return in year of sale or disposal.

The New 20% Deduction Continued- Anti Abuse Rules

The anti abuse rules of the new 20% deduction for pass through businesses don't kick in until your taxable income is over $157,500 single or $315,000 married. So if you have qualified business income and your taxable income is under these amounts, you can take the 20% deduction. One limiting factor is that the deduction is limited to the lesser of 20% of qualified business income or 20% of taxable income less net capital gains. If your taxable income is greater than $157,500 or $315,000 then the anti abuse rules come into play. Specified service businesses such as law, accounting, health, actuarial science, performing arts, consulting, athletics, financial services or any trade or business where the principal asset is the skill of one or more employees have the 20% deduction phased out over the next $100,000 over the $157,500 and $315,000. Note that architecture and engineering companies are not included in this limitation. The government is trying to encourage the building trades. If you are not a specified service business and have taxable income over the thresholds, then your deduction can be limited to the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of the unadjusted basis of tangible depreciable property.

The New 20% Deduction Continued

There is a taxable income limit on the new 20% of qualified business income deduction. If single, your limit is $157,500 and joint is $315,000. The anti abuse rules limiting the 20% deduction only kick in above these amounts. So if your taxable income is under these amounts the full 20% deduction applies to your business net income. Then the rest of your business income including wages is subject to up to a 37% tax rate. I will discuss the anti abuse rules limiting the 20% deduction in my next tax blog.

The new 20% deduction for Qualified Business Income

How can you take advantage of this new rule and what does qualified business income mean? Now is the time to start that side business you always dreamed of when you had the time as the new deduction takes effect in 2018. The new law requires that qualified business income be earned in a qualified trade or business. The IRS defines a trade or business as any activity carried on in the production of income from selling goods or providing services. Section 162 of the Internal Revenue Code requires that the business be regular, continuous, and substantial which is a higher standard. In the absence of further guidance from the IRS and the courts which I'm sure is coming soon, I believe that schedule C profit or loss from business, schedule E page 1 rental income, schedule F farm income, and K-1's from non passive activities all are qualified business income eligible for the 20% deduction. No portfolio income from K-1's such as interest, dividends, or capital gains is eligible however except for qualified cooperative dividends, qualified real estate investment trust dividends, and qualified publicly traded partnership income.

When to take Social Security

When should you take social security? You are eligible when you reach age 62. If you take benefits then, your benefit will be 75% of what you would get at age 66 the full retirement age for the baby boomer generation. However if you wait until age 70 to collect your social security benefit you will get 132% of your benefit at age 66. The benefit increases 8% for each year from age 66 up until age 70 when the increase in benefit ceases. If you are in good health and you don't need social security to make ends meet, then wait and get more for the rest of your life. Cash flow is king in retirement and social security can be a cornerstone of your strategy. Social security will be there for the boomer generation but maybe not in the same form for our children.

Tax Extenders for 2017

The following expiring provisions were extended for 2017 per a law passed this month:

1. The above the line deduction for qualified tuition and related expenses of $4,000 for joint filers with adjusted gross income up to $160,000 was extended.
2. The discharge of qualified principal residence debt was excluded from taxable income.
3. The deduction for mortgage insurance premiums was extended.
4. The $500 lifetime credit for qualified energy efficient improvements to a taxpayer's principal residence came back again.

Meals and Entertainment Expenses Accounting for 2018

If you have a business I suggest that you set up the following accounts:

Meals Expense: To record all client meals and employee business meals including travel meals. These expenses are 50% tax deductible.

Entertainment Expenses: Any cost of client entertaining other than meals. These expenses are not tax deductible anymore.

Employee Relations: To record all costs of company parties or employee meetings where all are included. Costs are 100% tax deductible.

Grocery Expenses: To record costs for coffee, soft drinks, and snacks for employees. These are 100% tax deductible.