June 15th: 2nd quarter estimated taxes due
June 15th: 2017 tax deadline for Americans living abroad
June 17th: Father's Day
Summer is the perfect time to schedule a tax planning session. Take a look at the lead article to learn why. Summer is also peak season for buying a home. There are tax breaks discussed in this issue that may make owning a home more affordable for you. Also inside is a review of some often overlooked summer vacation ideas, as well as some classic finance fundamentals everyone should know.
Should you wish to review your situation, please feel free to call. Also feel free to forward this newsletter to someone who may benefit.
Tax Planning Time
Now is the ideal time to schedule a tax planning session. Your 2017 tax return outcome is still fresh, and it's early enough in the year to take advantage of the numerous tax law changes taking place in 2018. Here's a brief overview of some of the new tax issues that you need to plan for now.
- Income. Tax rates for both individuals and small businesses have changed substantially. Income tax deductions have also changed drastically, including a nearly doubling of the standard deduction and elimination of personal exemptions and miscellaneous itemized deductions.
It's important to review your income tax withholding schedule to see where you fall in the new income tax bracket structure. Small adjustments here could save you hundreds.
- Bunching. Because of the changes to the deductions structure, using itemized deductions may now require bunching two or even three years of expenses into one tax year. Things like donations to charity and medical expenses that you may have spread across several years are now better bunched into a single year to maximize your tax savings.
If you typically take care of medical expenses or charitable donations at a regular time every year, hold off this year until you have a new tax-efficient plan.
- SALT (State and local taxes). There's now a $10,000 combined total cap on deductions of state and local income, sales and property taxes, which is going to impact a lot of people, especially in high-tax states. This may be a big factor to account for if you've relied on this deduction in the past.
Get an analysis done to see how much larger your tax bill is going to be because of the cap on SALT taxes. There may not be much you can do about it, other than changing where you live and own property, but you'll need to have a clear picture of how it will impact your tax return in 2018.
- Mortgage interest changes. There are several new rules changing how mortgage interest is deducted. You can no longer deduct the interest on mortgage indebtedness greater than $750,000. And you can no longer deduct interest on mortgage indebtedness that wasn't spent directly on buying, building or substantially improving your home.
If you have previously claimed a home equity loan interest deduction, you'll need to review how this will affect your itemized deductions.
These are just a few examples of things that you'll need to review in the wake of the largest tax law change in more than 30 years. Take some time this summer to make sure you have a plan in place.
Six Home Ownership Tax Benefits
If you own or are considering purchasing a home, you can take advantage of many tax benefits. Here are six of the most commonly used homeowner tax breaks:
- Mortgage interest deduction. You can deduct the interest you pay in your monthly mortgage bill when you itemize deductions on your tax return. This can be a huge benefit, especially in the early years of a mortgage. That's because typically about 80 percent of your mortgage bill in your first year of home ownership on a 30-year mortgage goes toward interest. Principal payments typically don't exceed interest until year 18 of a 30-year mortgage.
Note: This benefit is capped to apply to $750,000 in indebtedness for new loans beginning in 2018 ($1 million for loans taken out in 2017 or earlier).
- Property tax deductions
You can deduct up to $10,000 in combined state and local taxes. Called the SALT deduction, this can be used to deduct local property taxes, state income taxes, and state and local sales taxes.
- Closing cost deductions
You can deduct some of the closing costs of a home purchase in the year you buy it. This includes things like real estate taxes and mortgage discount points you pay up front to lower your interest rate over the life of your loan. Because each point costs 1 percent of your total mortgage amount, the tax deduction on these costs can be substantial.
- Home improvement tax breaks
If you take out a second mortgage or what is commonly called a home equity mortgage and use it to buy, build or substantially improve your home, you can deduct the interest on that loan from your taxes. This feature is now grouped into your total mortgage indebtedness, which is capped at $750,000.
Caution: Interest on home equity loans used for any other means (e.g., to pay down credit card debt or to purchase a car) is no longer deductible.
- Energy-efficiency tax breaks
There are special tax breaks available for renewable energy and energy-efficiency upgrades to your house:
- The cost to buy and install solar, wind and geothermal equipment to your main residence or a second home can be deducted by 30 percent.
- Energy-efficient upgrades can be deducted by 100 percent for items such as central air conditioning, furnaces and water heaters, capped at a total of $500.
- Capital gains exclusion
You have the ability to exclude up to $250,000 of profits (or $500,000 if you are married) from the sale of your home, as long as it's your primary residence and you've lived there at least two years.
Remember, if you're thinking of buying a home, you'll want to make a tax review part of your preparation. Because the tax deductions on mortgage interest and points can be so substantial in the early years of home ownership, they may factor in to how much home you can afford.
Unconventional Summer Vacation Ideas
Summer is often the perfect time for a vacation that provides a mental break and rejuvenates you. The typical idea is to travel somewhere to relax, dine at nice restaurants and see the sights.
While the typical vacation can be fun, why not try something new? Here are some unconventional summer vacation ideas that may be rewarding to you and your family:
There are many full-day or weeklong courses centered around a special theme available during the summer months. If you live by or can travel to a major city, you can often find instruction in interesting subjects such as:
- Creative writing
- Foreign languages
- Martial arts and self-defense
If you're closer to wilderness areas, you can often find courses in things like:
- Camping and outdoor survival
- Scuba diving
- Canoeing and kayaking
- Target shooting and gun safety
- Whitewater rafting
The great thing about an edu-vacation is that it engages your brain and gives you a purpose behind your time off. Not only will your mind be refreshed, you may come away with a new hobby and a memorable experience.
The active stay-cation
Many people live in interesting places that tourists come to visit, but they don't ever take the time to enjoy those things themselves. Why not? Try an active stay-cation where you use the time to look at the place you live with fresh eyes. Here are some things you could do:
- Take a guided tour of your city or a nearby city. Trolley cars and bus tours are geared toward foreign visitors, but you may be surprised how much you can learn about the place you live.
- Visit historical sites, local museums and art galleries.
- Tour the local environs. Take a day trip by car, bicycle, canoe or by foot to explore a nearby area you've never visited.
Active stay-cations are great because they are cheap and they can give you a greater appreciation for the history and culture of the place you live. You'll likely come away with ideas about new things to try out, places to visit and community groups to join.
The project vacation
During a project vacation, you may hardly leave the house! Instead take a week or two off to focus on a creative project. Consider:
- Creating a garden, landscaping or building a deck.
- Creating a work of art, like a sculpture or painting.
- Making or refurbishing a piece of furniture.
- Beginning creation of a novel, memoir or nonfiction book.
- Restoring and updating something you value, like an old car or motorcycle, or redecorating your house.
Project vacations are very meditative because they focus intensely on a hobby or interest, which can be even more refreshing than sitting on a beach.
Enjoy your time off this summer, whether you take a standard vacation or an unconventional one.
Five Great Finance Tips Everyone Should Know
Avoid hard-won experience and costly mistakes by taking advantage of these five personal finance tips.
- Pay yourself first
Paying yourself first means taking a percentage of everything you earn and saving it. Consider it as important as any other bill you pay each month. This is a fundamental rule of personal finance that when used properly can help build an emergency fund and save you from living paycheck to paycheck.
- Calculate compound interest by using the Rule of 72
You can roughly calculate the number of years compound interest will take to double your money using the Rule of 72. Simply divide 72 by the rate of return to rough out how long it takes to double your money. For example, 10 percent compound interest will double a sum in 7.2 years; 8 percent in nine years. It's a concept that helps us understand the power of saving and investment.
- Avoid debt
Unpaid debt is like compound interest, but in reverse. If left unaddressed, it grows exponentially over time as interest and fees add to the original balance due. The result is that you have to work harder and earn more to pay for the items you purchased. Why not save first, then purchase your dream item? When done this way, the purchase price is limited to what you paid for the item, rather than adding the burden of debt over time.
- Understand amortization
When a bank loans you money, it gives you a certain interest rate and a set number of years to pay it back. Each payment you make contains interest as well as a reduction of the amount owed, called principal. Most of the interest payments are front-loaded, while the last few payments are virtually all principal. A smart consumer knows this and tries to make additional primcipal payments at the beginning of the term. This will dramatically reduce the number of payments required to pay back the loan.
- Take advantage of tax deductions, credits and capital gains
Tax laws are complicated and made even more complex when the rules change. There are many tax deductions and credits to take advantage of, as well as strategies to minimize capital gains tax. Why leave money on the table just because you don't know the rules? Ask for help and ask for it early in the year. The power of getting the right tax plan in place every year is definitely something everyone should know about.
Overlooked Business Metrics
Revenue, gross margin, net profit - these are the basic metrics every small business owner watches closely. But there are also some often-overlooked metrics that can deepen your insight into your business and inform your decision-making. Here are a few:
- Customer acquisition cost. Divide the total amount of money you've spent on marketing over a set period by the number of new customers you've gained. The result is your cost per new customer, also known as your customer acquisition cost. To get an even better read, divide your marketing costs into two buckets; one you spend on current customers and one for money spent to acquire new ones. Now your calculation of customer acquisition costs is even more accurate. Compare this figure against prior years to see if you are becoming more efficient. To go a step further, look at how much each new customer spends on average compared with how much it cost to acquire them. Knowing your rate of return for each new customer can help you revise your marketing strategy.
- Lead-to-client conversion rate. For many businesses, generating leads is an integral part of the selling process. If this is true for your business, clearly define each step of the sales funnel from lead to purchase. You can judge how successful your sales efforts are over time by calculating how many qualified leads are converted to sales. Remember to use these measures to refine and improve your selling process. Even a tried-and-true conversion process can get tired, but if you are not measuring it you may not know until it is too late.
- Website traffic. Use tools such as Google Analytics to find out who is visiting your website, from where, and what they spend the most time on while they're there. You can learn a lot about your potential customers and your market by keeping notes on how your website traffic changes over time and how it reacts to new content.
- Seasonality. Understanding and keeping track of the seasonal trends in your business is crucial to managing cash flow and making the most of both busy and slow periods. Examining year-to-date metrics for sales and web traffic can help you prepare inventory and staffing for the busy season. It will also help you time the scheduling of technical upgrades and equipment repairs for expected down periods.
- Cash burn rate. Keeping a close watch on your cash flow statement as well as your income and balance sheet is the key to keeping your business afloat. Not managing cash flow well is one of the most common reasons for new small businesses to fail. Simply subtract how much cash you have at the start of the month from what you have at the end of the month. You can then divide your reserves by your cash burn rate to see how many months you can sustain that rate.
The key to this measurement is maintaining a forward-looking financial forecast for the next 12 months. This will help you take timely actions to avoid a cash crunch, such as cutting costs, improving sales or collecting accounts receivable
New! Small Business Medical Leave Credit
There's a new business tax credit that partially reimburses employers for providing paid family and medical leave for select employees. But small businesses should be informed before they try to use this new Family and Medical Leave Act (FMLA) tax break.
Basics of the new credit
Employers who provide at least two weeks of paid family and medical leave to employees who earn $72,000 a year or less can claim the FMLA credit to offset some of the cost of that paid leave. Some details:
- The credit ranges between 12.5 percent to 25 percent of the cost of the leave, depending on whether it pays 50 percent salary to a full salary.
- At least 50 percent of salary must be paid during the leave for employers to claim the credit.
- Employees must have worked for at least a year.
- Up to 12 weeks of leave are eligible for the credit.
- The $72,000 salary cap in 2018 will rise with inflation every year.
This credit comes as the result of a law requiring companies with 50 or more employees to provide up to 12 weeks of leave every year. The leave is intended to give employees time to address serious health issues, adapt to new additions to their families from births or adoptions, and to handle family military deployments.
However, small businesses with less than 50 employees aren't covered by the FMLA, though they can voluntarily adopt a leave policy as an employee benefit and claim the new credit.
Considerations for small business owners
- The credit currently expires after the 2019 tax year. Congress' intention is to test adoption of the credit and later make it permanent if it's popular with employers.
- It requires administrative setup. You'll have to draft a leave policy separate from your policies for regular vacation, personal, medical and sick time off.
- It may create an employee expectation. If you haven't provided a paid leave benefit before but assess it's worth it due to the credit, it may be a letdown if the credit expires and you no longer offer the benefit to your employees.
Given the uncertain nature of the life of this new credit, if you plan to offer this benefit to your employees, please be prepared to know what you will do if the credit is not extended past next year.
As always, should you have any questions or concerns regarding your situation please feel free to call.
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