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A New Bundle of Tax Strategies – BABY EDITION!

I had a wonderful phone call last week with two very awesome clients of mine. We were getting ready to discuss some business strategies when they decided to share some “news” with me. I curiously asked what the news was since I good tell that it was good. “We’re pregnant with twins!” was the reply.

This was not something that had come easily for this couple, so beyond just the normal excitement around the announcement, there was an extra bit of happiness that rang through to me. I wished that I could have been present in person, as I would have liked to give them both a big hug! After we talked a bit about the baby, they asked a familiar question—“Is there any tax planning that we should be thinking about for the babies?”

I chuckled and asked if I could defer the answer for a week and write an article about the topic. They were kind enough to allow me to defer, and so to keep my commitment, below is a “bundle” of tax strategies for new parents!

Medical Expenses Associated with Pregnancy, Delivery, and Postpartum Care

Without a doubt, you will probably have some medical expenses throughout the pregnancy, at the time of delivery, and afterward. The great news is that most of these expenses are probably tax deductible. The key questions are what expenses are deductible and how should you deduct them.

What Does and Does Not Qualify as a Medical Deduction Related to Pregnancy and Birth?

A very important rule in determining whether or not a medical expense is deductible is that you need to pay for it. If the deductions are reimbursed through an employee health reimbursement plan (HRA) at work or through health insurance, or paid with money from a health savings account (HSA), they are typically not deductible. But if you come out of pocket for the expense, KEEP THAT RECEIPT and GOOD RECORDS!!

Deductible medical costs are typically paid out of pocket with post-tax money. Items that qualify for a deduction generally include costs for doctor’s and dental visits, costs for lab work and tests, ultrasounds, and even the mileage to travel to and from your appointments. Check out IRS Publication 502 for a good list on items that may be deductible on your tax returns.

During pregnancy and after birth, you will likely incur many other “necessary” expenses that unfortunately are excluded as medical deductions. These include maternity clothes, diapers, formula, most over-the-counter medicine, and subscriptions to video streaming services during late nights in which your little one mixes up his or her days and nights (let the fun begin!).

The next important item is how to deduct these medical costs. Generally speaking, you only really benefit from deducting medical costs if (1) you are itemizing and (2) only to the extent that your costs exceed 10% of your adjusted gross income (AGI) for the tax year. If your AGI is $100,000, you must (1) itemize and (2) only deduct dollars in excess of $10,000 (10% of AGI). In other words, you would receive a $1 deduction for spending $10,001 since you only exceeded the 10% “floor” by the $1. This isn’t really a great situation, but it’s where most Americans find themselves.

At Kohler & Eyre CPA’s, we want to maximize your medical deductions so you can take advantage of all of the costs you incur. This may be possible depending on your tax situation. We encourage you to explore some of these ways of maximizing your medical deductions. You can start by visiting Mark’s blog here and reading up on some ways that you can save THOUSANDS of dollars by simply changing how you pay for your medical care. They include utilizing HSAs, HRAs, starting a small business, etc.

Health Insurance Premiums

Lets not forget health insurance and odds are that you probably have some form of health insurance. Health insurance premiums that can be deductible in your business or at least as an itemized deduction on Schedule A or on the front page of your tax return (if you have a small-business) unless they are paid with pre-tax money. Check out partner Mark Kohler’s video on Deducting Health Insurance:

Keep in mind that you may want to consider alternatives to health insurance depending on your situation. A popular option that continues to grow in light of rising health care premiums is that of healthcare sharing ministries and healthcare co-ops. Please do your research before looking at any of these options. Many of these monthly costs (like those for healthcare ministries) may not be deductible as it is not true health insurance.

Consider Adjusting Your Withholdings

Since you will be claiming an extra dependent, reducing your overall tax bill, you may be able to reduce income tax withholdings from your paychecks. Talk to your human resources representatives and consider filing a new W-4 form with your employer to claim an additional withholding “allowance.” This can help put more money in your pocket throughout the year. Ask your trusted tax advisor for help in determining your withholdings amounts if necessary.

Personal Exemption and Filing Status

Once your little one arrives, you may be entitled to claim a personal exemption for him or her. This is basically an extra reduction to your federal taxable income of $4,050 for 2017. Most states also allow for an exemption for your state taxable income. One word of caution—high AGI levels or being subject to alternative minimum taxes (AMT) can reduce or eliminate the exemption.

If you are single parent and have traditionally filed as “Single”, your child will further improve our tax situation by allowing you to claim “Head of Household”. You may also qualify for the earned income tax credit. These adjustments further reduce your overall tax bill and can allow for you to claim additional tax credits (many of which are described below).

Child Tax Credits

In addition to the extra exemption, you may also be claim a tax credit for your new child. The credit is worth up to $1,000 and may be a refundable tax credit. Remember that tax credits provide a dollar for dollar reduction in your overall tax bill. The best part is that you can continue to claim it year after year until your child reaches the age of 17. If your income is greater than $110,000 on a married filing jointly return or $75,000 for single or head of household, you may see this credit begin to phase out.

Dependent Care Tax Credit and Flex Plans

If you pay for child care with the goal of allowing you to go to work and if you generate income that is taxable during the year, you may be eligible for the dependent care tax credit. This credit can vary depending on how much you pay for your child’s care as well as how much income you earn during the year. The cool part about this credit is that even those that earn higher amounts of income can still get some benefit from it. Overall it can vary between $600 – $1,050 for one child and $1,200 – $2,100 for two or more children depending on income and the price of the child care.

If your place of employment provides for it, you should definitely ask about flexible spending (or child care reimbursement) accounts to help subsidize your child’s daily care costs. They can allow for up to $5,000 to be allocated into a flex spending account that can then be used to pay for child care so you and/or your spouse can go to work. The one caution here is that these accounts may be “use it or lose it” accounts where in you would need to spend the money before the end of the period. The benefit is that this money is pre-tax, so you would not need to pay any income taxes on it.

Nanny Taxes

This is a HUGE area where a lot of clients get things mixed up, as it is very unfamiliar to a lot of people. Mark has written an entire article on this topic, which I would encourage you to read. The moral of the story is that if you hire a nanny or caregiver and you control not only what work needs to be done but how the work is done, you may be considered an employer for federal and/or state tax purposes. This may mean that you have payroll and unemployment responsibilities on behalf of your employee if you pay them more than $2,000 in 2017. Please consult with a trusted tax professional in this area if you have questions here.

Start Saving for College

It is no secret that life is expensive. Life with kids is even more! Perhaps one of the largest expenses that parents worry about is paying for college one day. As tuition costs skyrocket and student debt is a top priority in discussions about fiscal well-being, new parents can take important steps to help a child be prepared for these future costs. Mark has previously written a good article about this topic, so please visit it for additional considerations; however, I would like to just list a couple of popular options here:

  • Coverdell Education Savings Account (ESA): These plans can grow tax-free and come out tax-free if utilized for qualified education expenses (such as tuition, books, fees, supplies, a computer, and even room and board subject to certain limitations). They can also be self-directed. Contributions are limited to $2,000 per year per child under age 18. Income thresholds apply as well and can phase out.
  • Qualified 529 Plans: This is a great option because families can contribute significant amounts and there are no limits based on the parent’s income tax brackets. These plans generally permit an “account holder” to open an account for a future student, or beneficiary, for the purpose of paying the beneficiary’s eligible college expenses. The account holder generally chooses among several investment options for his or her contributions, which the college savings plan invests on behalf of the account holder. Contributions are generally not tax deductible for federal purposes, but many states offer a tax incentive to participate in these plans.

BONUS: Adoption Tax Credits

Many clients are unaware that there exists a federal tax credit (and oftentimes something at the state level) to assist with what can be the high costs of adopting a child or a baby. This is an awesome help to many families that desire to give a child a home. I personally have a great respect for the many families that are willing to do this!

The adoption tax credit is available to families who adopt through foster care systems, private U.S. adoption, and intercountry adoption. For 2017, qualifying families can claim a credit of up to $13,750 in qualified adoption expenses. Families who adopt a child that a state has determined has special needs may even be able to claim the maximum credit regardless of their actual expenses. Higher income families who make more than $201,920 in a tax year may only claim a partial credit. This credit completely phases out for families making more than $241,920. If a family’s tax liability is less than the credit, the credit can be carried forward for up to five years to reduce a future tax liability.

For those of you that are expecting a new addition to your family, whether through giving birth to a child or through adoptions, you are probably both excited as well as a little anxious. Enjoy the journey! It is such an awesome time in your life! Look to your family and friends for support, and you will do just great. If you need any assistance with tax, legal, or financial planning assistance, please give us a call at K&E or KKOS Lawyers, and we’ll be glad to help. Best of luck in your new adventures!

Cassidy Carter is a Tax Manager and Certified Public Accountant (CPA) at the home office of Kohler & Eyre CPAs, LLP. Cassidy’s practice areas include small business and individual tax planning with an emphasis on entrepreneurship and real estate.  Cassidy previously worked in the tax department at Deloitte in Las Vegas, Nevada, and is currently married with 4 children living in Cedar City, Utah.

Tax Strategies for US Military Personnel- Active Duty

At KKOS Lawyers and Kohler & Eyre CPA’s, we salute our brave men and women in uniform. THANK YOU for putting your life on the line to protect our great country. We honor and cherish your sacrifices that keep us safe.

In turn, we try to give back where we can, personally, to you amazing service members.  As such we have summarized some important tax strategies for active duty military personnel. We work diligently to help our active-duty military clients as well as military veterans strategize and make the most of tax planning opportunities.

Here are 5 tax strategy/opportunities to be aware of and discuss with your tax advisor each year.

Strategy #1: Know what benefits/compensation are taxable and which ones are not!

Like all U.S. citizens, members of the Armed Forces receive income that is taxable to them. This includes foreign source income (income earned overseas). Some foreign income may be excluded, but these exclusions aren’t available for wages and salaries of military and civilian employees of the U.S. Government. The following list provides payments are typically included as taxable benefits and compensation for members of the Armed Forces:

  1. Basic pay: This includes compensation for active duty, attendance at a designated services school, drills, reserve training and training duty pay, and CONUS COLA amounts (supplemental cost of living allowances).
  2. Special pay
  3. Bonus pay
  4. Incentive pay
  5. Other pay: This would include accrued leave, student loan repayment programs, high deployment per diem amounts, personal money allowances for high-ranking officers, and the personal use of government provided vehicles.
  6. Differential wage payments: Differential wage payments are payments made by an employer (other than the Armed Forces) to an individual. They are paid for a period during which the individual performed services in the uniformed services while on active duty for a period of more than 30 days. These payments represent all or a portion of the wages the individual would have received from the employer if the individual had been performing services for the employer during that period.
  7. Qualified reservist distributions (QRD): The portion of your QRD reported by your employer as wages on Form W-2, Wage and Tax Statement, is included in your gross income and is taxable. A portion of this amount may also be subject to employment taxes as well.
  8. Uniformed Services Traditional Thrift Savings Plan (TSP) distributions (except for tax-exempt combat pay contributions)

Depending on the type of income, there are many items that should not be included in the taxable income for members of the Armed Forces. The following list provides payments are typically excluded from your taxable income:

  1. Combat pay: This is compensation for active service while in a combat zone. Some states may have bonus pay programs that are also typically not taxable.
  2. Disability payments, including payments received for injuries incurred as a direct result of a terrorist or military action
  3. Group-term life insurance amounts received by an individual or his/her family
  4. Professional education or ROTC educational and subsistence allowances
  5. Uniforms and uniform allowances
  6. Death allowances such as burial services, death gratuity payments to eligible survivors or travel of dependents to burial site.
  7. Family allowances including certain educational expenses for dependents, emergency allowances, evacuation to a place of safety or separation allowances.
  8. Living allowances including a basic allowance for housing (BAH), basic allowance for subsistence (BAS), overseas housing allowances (OHA), or housing and cost-of-living allowances abroad paid the US or a foreign government
  9. Moving allowances
  10. Most travel allowances
  11. In-kind military benefits such as dependent-care assistance programs, legal assistance, medical/dental care, commissary or exchange discounts, and space-available travel on government aircrafts
  12. Military base realignment and closure benefits paid under the Homeowners Assistance Program (HAP) (unless total payments are greater than certain thresholds)

Strategy #2: Deduct expenses paid with your excluded basic allowance for housing

A common question that military clients may have is whether or not they can claim a deduction for items paid for with their BAH, since the BAH is a living allowance that was not included in taxable income in the first place. Great news here—you can still deduct mortgage interest and real estate taxes on your home even if you pay these expenses with your BAH!

Strategy #3: Be aware of special combat zone and/or contingency operation extensions

If you serve in the Armed Forces in a combat zone, you have qualifying service outside of a combat zone, or if you serve in the Armed Forces on deployment outside the United States away from your permanent duty station while participating in a contingency operation, you may be allowed additional time to file your tax returns and/or pay your taxes. Spouses also may be able to enjoy these benefits.

The extension period may vary, but you could be entitled to at least an extra 180 days after the later of (1) the last day you are in a combat zone, serve outside the combat zone, or serve in a contingency operation or (2) the last day of any continuous qualified hospitalization from injury from service in these areas. Take the later of those dates and add at least 180 days (i.e. almost six months) to do the following items:

  • Filing tax returns
  • Paying taxes due
  • Filing for credit or refund from the IRS
  • Making contributions to an IRA account
  • Giving or making any notice or demand by the IRS for payment of taxes

Strategy #4: Deduct unreimbursed expenses

Unreimbursed employee expenses are deducted on Schedule A as an itemized deduction. These expenses are deductible to the extent that they are more than 2% of your adjusted gross income, or AGI. Keep good records here and you may find that they can really add up!

Even if you are a reservist, you may be entitled to deductions for many of the activities that you do. For example, if you are a member of a reserve component of the Armed Forces and you travel more than 100 miles away from your home in connection with your work as a reserve member, you can typically deduct your unreimbursed travel expenses from the time you leave home to the time you return home. Record keeping is critical here to substantiate your deduction. Track your meals, lodging, your total miles driven, and keep receipts. For the miles, it helps to maintain a mileage log that includes the date and the purpose of the trip.

Other expenses to consider are unreimbursed expenses to maintain uniforms of which you are prohibited to wear off duty. In other words, the cost and upkeep of uniforms like military battle dress and utility uniforms that are not typically allowed to be worn off duty are deductible. You may also be able to deduct unreimbursed professional dues if they are required for your military service. For example, if you are an electrical engineer at a military base and you pay dues to the American Society of Electrical Engineers without reimbursement, you would be able to claim a deduction for those dues.

Strategy #5: Start your small business ‘on the side’ NOW!

One of the best tax strategies in America, that YOU ARE FIGHTING for, is the opportunity to have a small business.  Get started now!!  This could be an online business you start on the web during your time down and days off, it could be a service business that you are laying the ground work for on your ‘leave’ when you are home, OR it could be simply investing in a rental property where you have family or have been serving on a base.

A small business will give you an extra source of income, tax deductions related to starting the business (including but not limited to travel, dining, entertainment, computers, supplies, equipment and auto…just to name a few).  Most importantly, it can give you some focus and direction for what your plans may be after your tour is up.  Why not build your own business, then search and look for J.O.B. when you get back.  Plan the future you want!!

Keep your eyes open. No idea is a bad one.  If you don’t know where to start, consider my 8 Steps to Start and Grow your Business.  It’s an affordable workbook and series of videos to walk you through the steps to build your Business Plan, Marketing Plan and Strategic Plan to get it off the ground.

In, sum, we love our active-duty military men and women as well as those that have served in the past! We thank you for your service, and we are here to help with whatever situation you find yourself in. Whether you are actively serving or making the transition back to civilian life, consider these ideas above to help along your journey.

Cassidy Carter is a Tax Manager and Certified Public Accountant (CPA) at the home office of Kohler & Eyre CPAs, LLP. Cassidy’s practice areas include small business and individual tax planning with an emphasis on entrepreneurship and real estate.  Cassidy previously worked in the tax department at Deloitte in Las Vegas, Nevada, and is currently married with 4 children living in Cedar City, Utah.