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How to Maximize Your FSA and Transit Benefit Before You Lose It

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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The end of the calendar year is generally an important time to pay attention to your workplace benefits accounts. You may already have gotten an email from the head of your workplace’s HR department about making your elections for the coming year and maybe even made them already. While you’re at it, take a look at the balances in your flexible spending accounts and transportation benefits accounts — they may need your attention.

Workplace benefit accounts like your health flexible spending account (FSA) and transportation benefits accounts help you save money on the important line items in your budget like your healthcare bills and getting yourself to and from work. Since the accounts are funded with pre-tax dollars, you could help your dollars go up to 40% further on common expenses — like getting a checkup or a bus pass — that help you keep and maintain your job. However, if you don’t quite know how to best use these accounts, you could actually end up losing the money you have socked away in your benefits accounts.

Read on or click ahead to learn the ins and outs of using these benefits accounts and what you can do, if anything, to save your money when you’re in danger of losing it.

Flexible spending accounts

What is a flexible spending account?

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A flexible spending account (FSA) is an employer sponsored reimbursement plan. It allows you to set aside pre-tax money and spend it on eligible medical expenses.

For 2018, you can contribute up to $2,650 to your health FSAs, up from the 2017’s limit of $2,600.

In an ideal world, you’ll avoid losing income by using up all your funds for eligible medical expenses by deadline. But the reality is that it’s tricky to budget for medical expenses for the next year (generally you can only adjust your contribution from each paycheck during open enrollment or during a qualifying life event, such as marriage or birth of a child). Many find themselves with excessive balance in their medical FSA at the end of the year.

It’s actually not that flexible given its “use it or lose it” rule — you have to use all the funds by the deadline, otherwise you lose the money. Several plan advisers confirmed to MagnifyMoney that many people underutilize their medical benefits. FSAStore.com, a one-stop-shop website stocked with FSA-eligible products, reported that each year, hundreds of millions of dollars was forfeited back to employers simply because consumers do not deplete the funds in their accounts.

So how can you make the best use of your medical FSA and avoid wasting money? We have done research and asked experts for you.

How can I use my health FSA funds?

First off, the medical FSA reimburses you for you or your dependent’s expenses that are not paid by your health insurance.

The eligible expenses include copayments, coinsurance and deductibles, prescription costs, vision and dental expenses and many over-the-counter (OTC) items — prescribed or unprescribed. But note that you cannot pay your monthly insurance premiums with the FSA.

If you have money left over in your FSA, you may want to consider getting new prescription glasses, prescription sunglasses and contact lenses. Those are some of the most common big-ticket items you can purchase with your FSA.

You can also stock up on things like first aid kits, contact solution, bandages and sunscreen that you may use year-round.

Your FSA plan provider will have a list of eligible over-the-counter items you can purchase at the pharmacy with your FSA, such as this one. Many of the pharmacy sites have sections of their sites that list all the FSA eligible items.

Another possible way to use the money would be scheduling check-ups with all your physicians. Your annual physicals and other preventative care are covered by your health plan, but if you need special medical treatment, you can use the remaining funds for copays, coinsurance or prescriptions.

Many FSA providers recommend you visit FSAStore.com.

How much should I contribute to my health FSA?

Becky Seefeldt, director of marketing at Benefit Resource, a benefits programs provider, said the average 2017 contribution was $1,250, based on the company’s 300,000 participants. That’s roughly half of the maximum amount one could contribute for the year. For those who over-contribute to their FSAs, by the end of the year, Seefeldt said, they usually have less than $100 left in their account.

Experts suggest you contribute conservatively because there is a chance that the unspent money might be forfeited. But everyone has a different situation;it’s hard to give a single guideline that fits all.

You really need to do the math when budgeting your contribution for the next plan year during open enrollment.

Nicole Wruck, a national health practice leader at Alight Solutions, told MagnifyMoney that most of the company’s clients over-contribute every year. She suggests consumers keep track of their health care expenses they had over the last year and plan accordingly for the coming year.

You will need to do the math based on the factors below:

  • What did you spend on prescription drugs?
  • What did you spend at the doctor, or the dentist, or the eye doctor?
  • Do you have any upcoming things planned in the next year that might make you experience some additional costs? For example, are you or your dependent expecting a baby? Will you need new glasses?

To help yourself run the numbers, you will want to study your health care plans. Know your deductibles — the amount you pay for health care services before your health insurance begins to kick in — as well as your copays and coinsurance. Learn what your out-of-pocket maximum is — the most you have to pay for health care services in a plan year. After you hit your out-of-pocket max, your insurance company covers your healthcare costs for the rest of the year.

Visiting your doctors can also help. Sometimes your year-end doctor visits can help you estimate your next year’s out-of-pocket medical expense. For instance, if your dentist tells you that you will need orthodontic treatment in the near future, then consider maxing out your FSA for the next plan year to cover the big dentist bills your insurance company won’t pay.

What happens to leftover funds at the end of the plan year?

Traditionally, you would have to use up all your remaining funds by Dec. 31. But there are two options employers can adopt to make the rules more lenient now.

The roll-over option. It allows up to $500 in your FSA per year to roll over into the next plan year, so participants don’t have to rush to use the remaining funds. Seefeldt said about 40 percent of employers now adopt the roll-over option.

An extended grace period. This gives participants an additional two and half months — through March 15 — to use up the money from the previous year. At the end of the grace period, all unspent funds will be forfeited to the employer.

Depending on how your company decides to do with the FSAs, you may have a little bit more leeway to use your funds by the year end. Check with your human resource department and your FSA plan provider to find out which option is available to you.

What happens if I leave the company before I use all my FSA funds?

If your eligible expenses incurred before you left the company, you may be able to request reimbursement through your company’s claim submission deadline.

If you leave the company in the middle of the year but you have used more funds in your flexible spending account than contributed. You may not be required to pay back your company.

You have access to the total amount you have allocated for the year after your first medical FSA deposit, regardless of the balance in your flexible spending account. You are reimbursed based on your company’s pay schedule as you submit claims.

For example, if you elected to put $2,000 into your FSA throughout the year, and you have a $2,000 dental expense in May, your FSA would reimburse you for the whole $2,000, even though you’ve only contributed about $833 by then.

If you jump ship in August, you may not have to pay back the rest of your contribution. Your company will cover it: It agrees to take the potential financial risk when it signs up for the FSA program. Don’t feel too guilty just yet — your company may be able to offset the financial loss with the unspent funds forfeited from other employees.

Now, if you have money left unused in your FSA, first, try to use it as much as you can before you part ways. But If you can’t use it up by your last day, you may have a chance to extend your FSA benefits if you choose to enroll in COBRA.

COBRA allows former employees, retirees, spouses and dependents to get temporary continuation of health benefits at group rates. FSA is one of the COBRA-eligible benefits.

Generally, you have until the end of plan year to use up money left in your FSA through your prior employer, but it’s most common for someone to take their FSA COBRA for one or two months and use the funds quickly, Seefeldt said. Under COBRA, you can continue to make your health plan contributions (but pay an additional 2 percent administrative fee) before the new plan kicks in, according to the Society for Human Resource Management.

Say you leave your company in August but there is $400 left in your FSA, and you plan to continue your health insurance coverage through your previous employer for two months before your new insurance plan kicks in, you can keep submitting expenses up to $400 in that period of time but pay an administrative fee that’s 2 percent of your monthly premium. But you are not required to purchase the health coverage in order to use your FSA balance.

Again, money in your FSA cannot be used to pay your premiums. But you can use it to cover eligible medical costs.

If you’re not eligible to continue your FSA through COBRA, try to use up the money before your job ends so that you won’t leave it on the table.

Transportation benefit accounts

What are commuter benefits?

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Transportation benefit accounts, also known as commuter benefits accounts, let employees use pre-tax dollars to pay for the costs of commuting. The accounts are meant to act as an incentive for employees to use eco-friendly transportation options like carpools, mass transit or bikes on their commute to the workplace.

Commuter benefits help many workers save on their transportation costs. But, it’s possible just as many workers aren’t completely sure how their transit benefit account works, or how to make the most of it.

How can I use my commuter benefits?

If you drive to a park-and-ride, catch mass transit or ride a bike to get to work, you may be able to use pre-tax dollars contributed to a commuter benefits account to cover some or all of the cost of your commute. However, if you ride solo to work or don’t use a bike or mass transit options available to you, you won’t be able to use commuter benefits to, let’s say, pay for the gas your personal vehicle burns during your bumper-to-bumper commute each morning.

However, you may be able to take advantage of parking benefits, which we’ll explain below.

You can use the money in a transportation benefits account to pay for any of the following eligible expenses:

  • A ride in a “commuter highway vehicle” to or from home and work.
    • This is another way of saying carpooling. Riding to work in a commuter highway vehicle counts if the vehicle can seat at least 6 passengers, according to the IRS. You might not have to go through the hassle of organizing a carpool with your coworkers or neighbors to use your transportation funds this way. Some commuter benefits programs allow you to carpool using rideshare apps like Lyft or Uber, too. All you’d need to do is use your commuter benefits card to pay for UberPOOL or Lyft Line rides and join the carpool when it arrives to pick you up.
  • A transit pass.
    • A transit pass is any pass, token or other tool that permits you to ride mass transit — like a train, ferry or bus — to work.
  • Qualified parking.
    • If you need to pay to park on or near your workplace, or you have to pay for parking in order to catch a ride on public transit for work or you pay for parking for any other work-related reason, you can use your transportation benefits to cover the charge.
  • Qualified bicycle commuting reimbursement.
    • You can use up to $20 per month in transportation benefits to purchase a bicycle, make improvements or repairs to the bike, and pay for bike storage as long as you use the bicycle for regular travel between home and your workplace. Be warned: If you use your transportation benefit to be reimbursed for commuting via bicycle at some point during the month, per IRS rule, you won’t be able to use the transportation funds for any of the three aforementioned eligible expenses in that particular month.

How much should I contribute to my transit benefit?

How much you contribute to your commuter benefits account will depend on how much you spend on transportation to and from work each month. Look at your monthly commuting expenses. Do the math to figure out what you would need to contribute from each paycheck to cover the cost of your commute to work. To avoid over-contributing to your transportation benefits account, be sure to to pull out a calculator.

Step 1: Estimate how much you spend on transportation expenses — monthly parking pass, bus pass, etc. — each pay period.

Estimating your commuter benefits should be easier than, say, trying to guess how many doctor’s visits or prescriptions you’ll need to cover in the coming year. “With a commuter benefit you are making an estimate,” says Joseph Priselac, Jr., CEO P&A Group, a Buffalo, N.Y.-based employee benefits administration company. “As long as you have a job and you know you’re going to keep going to it, you know how much you will spend.”

Step 2: Elect to contribute that amount for the year. The amount you elect will be divided by the total number of remaining pay periods for the year. The benefit will be deducted from each paycheck and placed in your transportation account for your use when you need it. If you change your annual contribution, the remaining number of deductions will be adjusted accordingly to reflect the change. If, for example, you elect $1,200 for the year and are paid monthly, $100 pre-tax will be deducted from your paycheck to your transportation account.

Beware of contribution limits

Commuter benefits: In 2017, the maximum monthly pre-tax contribution limit for commuter benefits is $255, or $3,060 in a year. Moving forward, the IRS may decide to change that limit. The federal agency reviews and sets the limit annually. If you bike to work, you max out at $20 per month.

Parking benefits: An additional $255 per month. If you’ve got to ride mass transit to get to work and pay for parking, Priselac says that limit is technically doubled, since you can max out $255 for parking and another $255 for mass transit passes each month.

Unless you are certain sure you will use up the maximum in transportation spending for the year, don’t simply contribute the maximum amount you can to your transportation benefits account.

What if I want to reduce my contribution?

If, for whatever reason, you decide you don’t need to contribute as much or you want to contribute more to your transit benefit fund during the year, that’s not a problem.

Unlike an FSA, for which your contribution election can’t be changed during the year, “you can change your election anytime you want,” says Priselac.

To clarify, you can change your commuter benefits election as often as your company allows. For some, that may be once per pay period, for others, it may be once per quarter. It’s one of the few benefits you can change mid-year. Consult with your employer’s human resources department to find out how often you are able to change your election.

“If you’re not sure how much you will be spending, start by contributing a small amount,” says Caspar Yen, Senior Director of Product Management at Zenefits, a human resources software company. “There’s no need to over contribute to play it safe.”

That said, if you feel you’ve contributed too much to your commuter benefits account to use up within the period, you can stop the deductions and use up the balance you’ve accumulated until it runs out, then restart your contributions. Just be sure to keep an eye on your transportation benefits balance so you know when to restart your contributions.

What happens to leftover funds at the end of the year?

Transit benefits rollover each year so long as you are still with the company and the company still offers the benefit. That means you don’t have to rush to use leftover funds at the end of the year.

This is in contrast to a flexible spending account, which has a ‘use it or lose it’ rule, which we covered above.

In a sense, there is no ‘plan year’ for transportation benefits, although your company may ask that you confirm you’d like to stay enrolled in the program each year when you elect your annual benefit contributions. Transportation benefits accounts roll over each pay period and should roll over into the coming period at the end of the year. That means there’s no danger of losing any of the money you’ve contributed so far, as long as you remain employed with that particular employer.

What if I quit my job or get laid off?

“As long as you are still working there and you have work related transit expenses the money stays,” says Priselac.

But if you quit your job or are laid off you could lose some or all of the money remaining in your transportation benefits account. If you’ve been over-contributing, any money you don’t use up will be lost to you, and returned to your employer.

The good news is that some benefit programs will give employees a grace period to submit reimbursements requests for any transportation expenses incurred during their employment — even if they quit.

If you know you may no longer be with the company or the company is planning to terminate its program, there’s one thing you can do to save your money.

“Before leaving a company, employees can make a large eligible purchase,” says Yen.

In the Bay Area, for example, an employee can purchase a clipper card with up to $300 in credits. If the transit method you take offers individual tickets, you could purchase a large number. Or, if you are able to load your transit pass with cash, you could place a large amount on your pass.

For example, those in the New York City metro area might load a large amount of money onto their MetroCard and use it up until it’s depleted.

Whenever you’re making a decision about benefits, it helps to talk to your HR department or the benefit provider, just to be sure you understand the rules. Mistakes you make when choosing benefits can end up costing you a lot of money, so ask questions and avoid leaving your decisions to the last minute of open enrollment.

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Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

Shen Lu
Shen Lu |

Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at shenlu@magnifymoney.com

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Tax Reform 2019 Explained

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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As the 2019 tax deadline approaches, many Americans will feel the impact of last year’s tax tax reform for the first time. It was the most sweeping rewrite of the tax code in more than three decades, after all.

Of importance to most tax filers is the fact that the new tax law altered the federal income tax brackets, doubled the standard deduction and changed many other tax credits and deductions.

The bill, originally known as The Tax Cuts and Jobs Act, didn’t have an easy journey. It was first introduced in the House of Representatives in November 2017, and was signed into law by President Donald Trump on Dec. 22, 2017 after vigorous debate and multiple versions of the bill made their way through both the House and Senate.

With all the developments since then, you may have forgotten about these sweeping tax changes until now. But as you get ready to file your tax return this year, you should prepare for some of the changes that could affect you.

What’s changing— and what isn’t

The majority of the new tax law’s changes went into effect Jan. 1, 2018, which means people filing their 2018 taxes in 2019 will need to take these changes into consideration.

Read on or jump ahead to read about the rules you’re most interested in:

529 college savings plans

A 529 college savings plan is a tax-advantaged savings account designed to encourage saving for qualified future higher-education costs, such as tuition, fees and room and board. Your money is invested and grows tax free.

Old Rule

New Rule (Effective Jan. 1, 2018)

Previously, 529 plan savings could only be used on qualified higher education expenses.

New Rule (Effective Jan. 1, 2018)

In a major victory for wealthier families, you can now use 529 savings for private K-12 schooling.

Tax benefits are now extended to eligible education expenses for an elementary or secondary public, private, or religious school.

The new rules allow you to withdraw up to $10,000 a year per student (child) for education costs.

ACA individual mandate

The individual mandate was a key provision of the Affordable Care Act that required non-exempt U.S. citizens and noncitizens who lawfully reside in the country to have health insurance.

Old Rule

New Rule (Effective Jan. 1, 2019)

Consumers who did not qualify for an exemption and chose not to purchase insurance faced a range of tax penalties, depending on income.

New Rule (Effective Jan. 1, 2019)

The individual mandate is out.

Starting Jan. 1, 2019, consumers who do not purchase health insurance will no longer face penalties.

GOP lawmakers argue that the measure will decrease spending on the tax subsidies it offers to balance out the cost of premiums for millions of Obamacare enrollees.

However, without the mandate, experts caution that fewer healthy and young people will sign up for health coverage through the insurance marketplace, which will likely lead to increases in premium costs for those who remain the marketplace and could even induce some insurers to drop out of the market altogether. It’s a big blow to supporters of the long-embattled health care law.

Alimony

Old Rule

New Rule (Effective Jan. 1, 2019)

The individual paying alimony or maintenance payments can deduct payments from their income. The person receiving the payments includes them as income.

New Rule (Effective Jan. 1, 2019)

The person making alimony or maintenance payments does not get to deduct them, and the recipient does not claim the payments as income. This goes into effect for any divorce or separation agreement signed or modified on or after Jan. 1, 2019.

Alternative minimum tax

The individual alternative minimum tax, or AMT, often imposed on higher-income families, especially those with children, who live in high-tax states — but not necessarily the ultra rich. It requires many households or individuals to calculate their tax due under the AMT rules alongside the rules for regular income tax. They have to pay the higher amount. Whether or not a someone pays AMT depends on their alternative minimum taxable income (AMTI). AMTI is determined through a series of assessments of a taxpayer’s income and assets — the explanation of calculating AMTI takes up two pages in the tax bill, so we’re not getting into the details here.

Old Rule

New Rule (Effective Jan. 1, 2018)

The exemption amount is $84,500 for married joint-filing couples, $54,300 for single filers and $42,250 for married couples filing separately.

The AMT exemption begins to phase out at $120,700 for singles, $160,900 for married couples filing jointly and $80,450 for married couples filing separately.

New Rule (Effective Jan. 1, 2018)

The AMT is here to stay but fewer households will have to face it.

Under the new rules, which are in effect from Jan. 1, 2018 through Dec. 31, 2025, married couples filing jointly will be exempt from the alternative minimum tax starting at $109,400. Exemption starts at $70,300 for all other taxpayers (other than estates and trusts).

The exemption phase-out thresholds will rise to $1,000,000 for married couples filing jointly, and $500,000 for all other taxpayers.

Bicycle commuting

Old Rule

New Rule (Effective Jan. 1, 2018)

Taxpayers can exclude up to $20 a month of qualified bicycle commuting reimbursements from their gross income. That includes payments from employers for things like a bicycle purchase, bike maintenance or storage. Workers can claim the exclusion in any month they regularly use a bicycle to commute to work and do not receive other transit benefits.

New Rule (Effective Jan. 1, 2018)

The exclusion is suspended through 2025.

Child tax credit

Old Rule

New Rule (Effective Jan. 1, 2018)

The current child tax credit is $1,000 per child under the age of 17.

The credit is reduced by $50 for each $1,000 a taxpayer earns over certain thresholds. The phase-out thresholds start at a modified adjusted gross income (AGI) over $75,000 for single individuals and heads of household, $110,000 for married couples filing jointly and $55,000 for married couples filing separately.

New Rule (Effective Jan. 1, 2018)

The child tax credit doubles to $2,000 per qualifying child. Up to $1,400 of the child tax credit can be received as refundable credit (meaning it can go toward a tax refund). The new rule also includes a $500 nonrefundable credit per dependent other than a qualifying child.

The credit begins to phase out at an AGI over $200,000 — for married couples, the phase-out starts at an AGI over $400,000.

This rule is in effect through 2025.

Corporate taxes

Old Rule

New Rule (Effective Jan. 1, 2018)

Under a four-step graduated rate structure, the current top corporate tax rate is 35 percent on taxable income greater than $10 million.

New Rule (Effective Jan. 1, 2018)

Permanently cuts the top corporate tax rate to 21 percent.

Estate taxes

The estate tax, aka the “Death Tax” is a tax levied on significantly large estates that are passed down to heirs.

Old Rule

New Rule (Effective Jan. 1, 2018)

Estates up to $5.49 million in value were exempt from the tax.

The top tax rate was 40 percent.

New Rule (Effective Jan. 1, 2018)

Doubles the exemption for the estate tax.

Now, estates up to $11.2 million are exempt from the tax.

Gains made on home sales

Old Rule

New Rule (Effective Jan. 1, 2018)

Homeowners can exclude up to $250,000 (or $500,000, if married filing jointly) of gains made when selling their primary residence, as long as they owned and primarily lived in the home for at least two of the five years before the sale. The exclusion can be claimed only once in a two-year period.

New Rule (Effective Jan. 1, 2018)

Homeowners can still exclude gains up to $250,000 (or $500,000 if married filing jointly) when they sell their primary residence, but they have to have lived there longer. People who sell their homes after Dec. 31, 2017 now have to use the home as their primary residence for five of the eight years before the sale in order to claim the exclusion. It can only be claimed once in a five-year period.

The new rule expires on Dec. 31, 2025.

Medical expenses

Old Rule

New Rule

Taxpayers were previously allowed to deduct out-of-pocket medical expenses that exceed 10 percent of their adjusted gross income or 7.5 percent if they or their spouse were 65 or older.

New Rule

The threshold for all taxpayers to claim an itemized deduction for medical expenses is lowered to 7.5 percent of a filer’s adjusted gross income.

The change applies to taxable years from Dec. 31, 2016 to Jan. 1, 2019.

Miscellaneous tax deductions

Taxpayers can take the miscellaneous tax deduction if the items total more than 2 percent of their adjusted gross income. The amount that’s deductible is the amount that exceeds the 2 percent threshold. These are some of the major changes coming to the miscellaneous tax deduction.

Old Rule

New Rule (Effective Jan. 1, 2018)

Tax preparation: Taxpayers can today claim an itemized deduction of the amount of money they pay for tax-related expenses, like the person who prepares their taxes or any software purchased pr fees paid to fee to file forms electronically.

Work-related expenses: Under current law, workers can deduct unreimbursed business expense as an itemized deduction, like the cost of a home office, job-search costs, professional license fees and more.

Investment fees: Taxpayers can currently deduct fees paid to advisors and brokers to manage their money.

New Rule (Effective Jan. 1, 2018)

Tax preparation: Taxpayers may not claim tax-preparation expenses as an itemized deduction through 2025.

Work-related expenses: The bill suspends work-related expenses as an itemized deduction through 2025.

Investment fees: Under the new rules, the investment fee deduction is suspended until 2025.

Mortgage and home equity loan interest deduction

Old Rule

New Rule (Effective Jan. 1, 2018)

Currently homeowners are allowed to deduct interest paid on mortgages valued up to $1 million on a taxpayer’s principal residence and one other qualified residence.

They can also deduct interest paid on a home equity loan or home equity line of credit no greater than $100,000. These are itemized deductions.

New Rule (Effective Jan. 1, 2018)

New homeowners can include mortgage interest paid on up to $750,000 of principal value on a new home in their itemized deductions.

The old, $1 million caps continues to apply to current homeowners (those who took out their mortgages on or before Dec. 15, 2017), as well as refinancing on mortgages taken out on or before Dec. 15, 2017, as long as new mortgage amount does not exceed the amount of debt being refinanced.

Homeowners CAN deduct interest paid on a home equity line of credit or home equity loan, so long as the loan was used to buy, build or substantially improve your home.

These changes are set to expire after 2025.

Moving expenses

Old Rule

New Rule (Effective Jan. 1, 2018)

Current law allows taxpayers to deduct moving expenses as long as the move is of a certain distance from the taxpayer’s previous home and the job in the new location is full-time.

New Rule (Effective Jan. 1, 2018)

The new tax bill suspends the moving expense deduction through 2025. Until then, taxpayers are not permitted to deduct moving expenses.

Moving-related deductions and exclusions remain in place for members of the military.

Pass-through businesses

Pass-through businesses are generally small businesses (also some big firms) that don’t pay the corporate income tax. Instead, the owners report the corporate profits as their own income and pay taxes based on the individual tax rates along with their regular personal income tax.

Some of the common types of pass-through businesses are partnerships, LLCs (limited liability companies), S corporations and sole proprietorships.

Old Rule

New Rule (Effective Jan. 1, 2018)

All pass-through business owners’ income was previously subject to regular personal income tax.

New Rule (Effective Jan. 1, 2018)

Under the new laws, pass-through business owners can deduct up to 20 percent of their qualified business income from a partnership, S corporation or sole proprietorship.

Individuals earning $157,500 and married couples earning $315,000 are eligible for the fullest deduction.

Personal casualty or theft

Old Rule

New Rule (Effective Jan. 1, 2018)

Under current tax law individuals can deduct uninsured losses above $100 when property is lost to a fire, shipwreck, flood, storm, earthquake or other natural disaster. The deduction is allowed as long as the total loss amounts to greater than 10 percent of the taxpayer’s adjusted gross income.

New Rule (Effective Jan. 1, 2018)

The new tax bill only allows taxpayers to claim the deduction if the loss occurred during a federally declared disaster, through 2025.

Personal exemptions

Old Rule

New Rule (Effective Jan. 1, 2018)

Taxpayers can reduce their adjusted gross income by claiming personal exemptions — generally for the taxpayer, their spouse and their dependents.

Taxpayers could deduct $4,050 per exemption in 2017, though the deduction is phased out for taxpayers earning more than certain AGI thresholds. The phase out begins at an AGI over $313,800 for married couples filing jointly, $287,650 for heads of household, $156,900 for married couples filing separately and $261,500 for all other taxpayers.

New Rule (Effective Jan. 1, 2018)

Personal exemptions have been suspended through 2025.

Standard deductions

Old Rule

New Rule (Effective Jan. 1, 2018)

Taxpayers who do not itemize can claim the current standard deduction of $6,350 for single individuals, $9,350 for heads of household or $12,700 for married couples filing jointly

New Rule (Effective Jan. 1, 2018)

Standard deductions for all nearly double under the new rules.

Individuals see standard deductions rise to $12,000; forlim heads of household, it rises to $18,000; and for married couples filing jointly the standard deduction increases to $24,000.

State and local tax (SALT) deduction

Old Rule

New Rule (Effective Jan. 1, 2018)

Taxpayers may include state and local property, income and sales taxes as itemized deductions.

New Rule (Effective Jan. 1, 2018)

Taxpayers are limited to claiming an itemized deduction of $10,000 in combined state and local income, sales and property taxes, starting in 2018 through 2025.

Taxpayers cannot get around these limits by prepaying 2018 state and local income taxes while it is still 2017. The bill says nothing about prepaying 2018 property taxes.

Student loan debt discharge

Old Rule

New Rule (Effective Jan. 1, 2018)

Currently, student loan debt discharged due to death or disability is taxed as income.

New Rule (Effective Jan. 1, 2018)

Under the new tax bill, student loan debt discharged due to death or disability after Dec. 31, 2017, will not be taxed as income. The rule lasts through 2025.

Tax brackets and income taxes

Old Rule

New Rule (Effective Jan. 1, 2018)

There are currently seven tax brackets.

The rate on the highest earners is 39.6 percent for taxpayers earning above $418,400 for individuals and $470,700 for married couples filing taxes jointly.

New Rule (Effective Jan. 1, 2018)

The new rules retain seven tax brackets, but the brackets have been modified to lower most individual income tax rates. The new brackets expire in 2027.

Top income earners — above $500,000 for individuals and above $600,000 for married couples filing jointly — falls from 39.6 percent to 37 percent.

The majority of individual income tax changes would be temporary, expiring after Dec.
31, 2025.

2017 Tax Brackets

New Tax Brackets (Effective Jan. 1, 2018)

Single Individuals

Taxable Income

Tax Bracket

Taxable Income

Tax Bracket

$9,325 or less

10%

$9,525 or less

10%

$9,326-$37,950

15%

$9,526-$38,700

12%

$37,951-$91,900

25%

$38,701-$82,500

22%

$91,901-$191,650

28%

$82,501-$157,500

24%

$191,651-$416,700

33%

$157,501-$200,000

32%

$416,701-$418,400

35%

$200,001-$500,000

35%

Over $418,400

39.60%

Over $500,000

37%

Married Individuals Filing Joint Returns and Surviving Spouses

Taxable Income

Tax Bracket

Taxable Income

Tax Bracket

$18,650 or less

10%

$19,050 or less

10%

$18,651-$75,900

15%

$19,051-$77,400

12%

$75,901-$153,100

25%

$77,401-$165,000

22%

$153,101-$233,350

28%

$165,001-$315,000

24%

$233,351-$416,700

33%

$315,001-$400,000

32%

$416,701-$470,700

35%

$400,001-$600,000

35%

Over $470,700

39.60%

Over $600,000

37%

Heads of Households

Taxable Income

Tax Bracket

Taxable Income

Tax Bracket

$13,350 or less

10%

$13,600 or less

10%

$13,351-$50,800

15%

$13,601-$51,800

12%

$50,801-$131,200

25%

$51,801-$82,500

22%

$131,201-$212,500

28%

$82,501-$157,500

24%

$212,501-$416,700

33%

$157,501-$200,000

32%

$416,701-$444,550

35%

$200,001-$500,000

35%

Over $444,550

39.60%

Over $500,000

37%

Married Individuals Filing Separate Returns

Taxable Income

Tax Bracket

Taxable Income

Tax Bracket

$9,325 or less

10%

Not over $9,525

10%

$9,326-$37,950

15%

$9,525-$38,700

12%

$37,951-$76,550

25%

$38,701-$82,500

22%

$76,551-$116,675

28%

$82,501-$157,500

24%

$116,676- $208,350

33%

$157,501-$200,000

32%

$208,351-$235,350

35%

$200,001-$300,000

35%

Over $235,350

39.60%

Over $300,000

37%

Tax deductions that won’t be changing

Teacher deduction

Teachers can deduct up to $250 for unreimbursed expenses for classroom supplies or school materials from their taxable income.

Electric cars

Electric car owners who bought a vehicle after 2010 may be given tax credit of up to $7,500, depending on the battery capacity.

Adoption assistance

Adoptive parents are allowed a tax credit and employer-provided benefits up to $13,570 per eligible child in 2017.

Student loan interest deduction

Student loan borrowers may deduct up to $2,500 on the interest paid for student loans every year.

FAQ: Tax filing tips for 2019

Taxes for tax year 2018 are due to the IRS by April 15, 2019.  Some filers may face an unwelcome surprise this year if they end up owing more taxes than usual, while others may receive a nice refund they weren’t expecting.

What if I owe taxes due to tax reform?

You might have been overpaying or underpaying on your taxes in 2018, which could mean a tax bill or bigger-than-expected tax refund this time around.

To avoid confusion, consult a tax professional and consider adjusting your allowances on your W-4.

If you end up owing taxes, you’ll need to pay your bill by April 15th or contact the IRS to sign up for a payment plan. Late payments will result in penalties and additional fees.

When can I expect my tax refund?

The IRS typically sends out tax refunds within 21 days of receiving your filing. It can take longer in some occasions, depending on your situation. If you file your return electronically, you can check the status of your refund after 24 hours from filing, through the IRS’ Where’s My Refund? tool. If you mail in your return, you can check the status four weeks after mailing. You can also use your smartphone to download the IRS2Go app to check your refund status.

How should I spend my tax refund?

It’s certainly tempting to use the money to book your next much-deserved vacation. But treating yourself isn’t necessarily the best way to spend your tax refund. Instead, consider stashing it away inside a savings vehicle and forgetting you even had extra cash to spend. An easy option is to boost your emergency savings by depositing your refund in a high-yield online savings account. That will grow your refund efficiently over time and can save you some financial grief in the future. Here are some of the best savings accounts with high rates:

Institution
APY
Minimum Balance to Earn APY
Online Savings Account from Citizens Access
Citizens Access

2.35%

$5,000

LEARN MORE Secured

on Citizens Access’s secure website

Advertiser Disclosure.

We'll receive a referral fee if you click here. This does not impact our rankings or recommendations
High Yield Savings from Synchrony Bank
Synchrony Bank

2.25%

$0

LEARN MORE Secured

on Synchrony Bank’s secure website

Advertiser Disclosure.

We'll receive a referral fee if you click here. This does not impact our rankings or recommendations
A savings account can be easily accessed in case you need the funds in a pinch, unlike with a high-rate certificate of deposit. A CD works better if you need to save towards a longer-term goal, like making a down payment on a house in a few years. Once you make your deposit into a CD, it grows undisturbed for the length of its term. In exchange for leaving your deposit untouched with the bank, you get to grow your CD funds at high interest rates, resulting in some solid savings growth when the term ends. Here are some of the best one-year CD rates:

Institution
APY
Minimum Balance to Earn APY
12 Month CD from Synchrony Bank
Synchrony Bank

2.80%

$2,000

LEARN MORE Secured

on Synchrony Bank’s secure website

High Yield 12-Month CD from Ally Bank
Ally Bank

2.75%

$0

LEARN MORE Secured

on Ally Bank’s secure website

Other options include using your refund to expand your investment portfolio or placing the funds in an IRA. Investing your refund can be a riskier way to grow your money since your returns depend on the market instead of an APY. And of course, saving in an IRA is a smart way to invest in your retirement future. The IRS even allows you to split your refund between multiple accounts when you sign up for direct deposit. This makes it easy for you to save your refund in various ways.

Brittney Laryea and Shen Lu contributed to this article. 

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Lauren Perez
Lauren Perez |

Lauren Perez is a writer at MagnifyMoney. You can email Lauren here

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News

How the Next Government Shutdown May Affect Your Small Business

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

government shutdown
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When Texas business owners Veronica and Craig Bradley put together an application for a loan from the U.S. Small Business Administration, they detailed the risks big and small that could derail their startup brewery.

The couple filled a page with hypothetical unexpected events that could prevent Vector Brewing from making a profit, going so far as to include their own deaths, according to Veronica Bradley.

“The one thing we didn’t account for was a government shutdown,” she said. “Who thinks that’s going to happen?”

A partial government shutdown started Dec. 22, days before the Bradleys planned to submit an application for a $1 million SBA loan to fund the construction and operation of Vector Brewing in Lake Highlands, Texas. The SBA went dark during the 35-day shutdown, delaying SBA funding for many small business owners like the Bradleys.

The federal government reopened a record 35 days later on Jan. 25 after the House and the Senate passed a stopgap spending bill to restore operations until Feb. 15. If that deadline rolls around without a permanent funding agreement, the government could fall into a second shutdown that would impact small businesses still recovering from the first.

Negotiators in Congress have reached a tentative deal that would evade another shutdown, but it’s not yet set in stone. And although the recent shutdown was the longest in U.S. history, it was far from being the first one. There have been 21 stoppages in government funding since 1976, with three shutdowns occurring in 2018 alone.

The Bradleys aren’t waiting for the other shoe to drop — they have a contingency plan. They learned valuable lessons the first time around and are better prepared for another shutdown. We’ll help you understand the widespread impact of the shutdown and help you make your own plans for any unforeseen circumstances.

Effects of the shutdown

The partial government shutdown directly impacted 21% of business owners, creating delays and interrupting regular operations.

In addition to the suspension of SBA loan approvals, federal data services were inaccessible. The E-Verify system was suspended during the shutdown, which meant business owners could not use the platform to confirm the employment eligibility of new workers. Private-sector entities that experienced business shortages during the shutdown will likely never recoup that lost income; about $3 billion in lost GDP growth will not be recovered either.

Small government contractors were hit hard – 41,000 small business contractors lost $2.3 billion in revenue, according to data from the U.S. Chamber of Commerce. “It is really eye opening, down to the nickel and penny of what some of these small business owners lost,” said Tom Sullivan, vice president of small business policy for the U.S. Chamber of Commerce.

What would a second shutdown mean for small businesses?

Two back-to-back shutdowns could deal a major blow to small business owners who depend on the federal government, not just for data services or the loans it guarantees, but also for important federal permits. The Bradleys are among numerous brewery owners waiting for permits from the Alcohol and Tobacco Tax and Trade Bureau needed to brew and sell beer. The timing of a possible second shutdown would be another huge hit, as it could limit the scope of the IRS as tax season nears.

The threat of a second shutdown is on Bradley’s mind every time she writes a check. Until the SBA loan comes through — she and her husband were finally able to apply in late January — the Bradleys must pay business expenses out of pocket. The brewery isn’t open yet, but the Bradleys’ landlord, attorney, financial advisor, contractors and architects are waiting for payment, Bradley said.

“This has been a very scary balancing game,” she said.

Before the shutdown, her banker told her to expect to receive funding in eight to 12 weeks. Now, the SBA doesn’t know how long it will be until the loan is funded, she said.

The Bradleys’ home state of Texas is second only to California in suffering the effects of the partial government shutdown, according to research from ValuePenguin (ValuePenguin and MagnifyMoney are both owned by LendingTree). Since 2010, the SBA has issued more than $177 billion in 7(a) loans, the most common SBA loan for small business owners, with the most money going to entrepreneurs in California, Texas, New York, Florida and Ohio, per ValuePenguin. SBA loans typically range in size from $500 to $5 million. The SBA does not loan directly to business owners, instead guaranteeing loans issued by partner lenders such as banks, community development organizations and microlending institutions. Backing from the SBA reduces risk for lenders and helps business owners qualify for financing with favorable interest rates and repayment terms.

As those banks waited for SBA approvals, the money slowed, which has business owners like Bradley wondering if another government shutdown could impact business owners who rely on any type of bank financing, not just SBA loans solely. If SBA loans are off the table, she said competition could increase for other small business loans or lines of credit. A lack of access to capital has long been a complaint of small business owners.

“Everyone who wanted to go the SBA route is going to have to clamor for other sources of income,” or else wait, potentially stifling growth, she said. “This affects everyone.”

Alternative lenders are an option

Bernardo Martinez is U.S. managing director of Funding Circle, one of many online lenders serving as an alternative to brick-and-mortar banks that have long dominated small business lending. Although he is not expecting banks to retract from business lending, a pause would create an opportunity for alternative lenders like Funding Circle to serve more business owners.

When traditional financing is out of reach for any reason, alternative business lenders can provide funding solutions for small business owners. Funding Circle had strong loan originations in January, Martinez said, but the company isn’t crediting the shutdown.

“In January, we saw a good volume month,” he said. “But I do not believe we can pinpoint specifically to the shutdown.”

Like Funding Circle, many online business lenders could provide faster time to funding than traditional banks with less stringent eligibility requirements. These lenders consider factors such as customer reviews and current cash flow when approving borrowers, but rates are typically higher than other types of business loans.

Although Martinez said Funding Circle isn’t planning to target business owners affected by a government shutdown, online small business lender QuickBridge has a video on its homepage discussing the benefits of alternative lenders during unforeseen circumstances, including the government shutdown.

At Funding Circle, “that will create an opportunity, but right now we’re not thinking about it or seeing it in the market,” Martinez said.

How to prepare for the next shutdown – or any business interruption

As the possibility of another shutdown looms, Bradley is weighing her financing options for the brewery. Before deciding to pursue an SBA loan, Bradley and her husband considered bringing on investors or using online crowdfunding platforms to raise money. If their SBA loan is delayed a second time, they might return to their original strategy.

“If it stays shut down for a week, I see it staying shut down for another month,” she said. “If the government shuts down for another 30 days we can’t wait.”

Bradley is putting together materials to present to investors and considering asking her bank for a small business loan to tide them over until more financing comes through, she said. It’s important for small business owners to have a back-up plan if things go wrong, she said, even if it’s not ideal.

How to handle the unexpected

Keep communication open.
Like any relationship, you need open communication with the people you do business with, Bradley said. If you’re facing financial trouble or other issues within your business, you should inform your vendors, advisors and anyone else who interacts with your company.

Vendor relationships became imperative during the shutdown for business owners who needed to catch a break, said Sullivan at the U.S. Chamber of Commerce.

Bradley was able to work out a deal with her landlord and contractors after explaining the delay in SBA funding. Being upfront helps you maintain credibility and trustworthiness as a business owner, she said.

Track your spending.
Keep track of every penny you spend, Bradley said, especially when you’re in distress. You should keep your personal and business finances separate so you can clearly see how much you’re putting into the business. When it’s time to apply for financing, you’ll likely need to explain your business spending to be approved for a loan, she said.

Understand your financial needs.
If you need to apply for business financing to get you through a rough period, you should know the specific expenses that you need to cover, Martinez said. That way, you would be able to borrow the exact amount you need, rather than estimating too high or too low. You would have a better chance of finding the right lender if you know exactly what you need, he said.

Read the fine print.
Keep your financial documents in order so you could apply for financing at a moment’s notice. Be sure to understand each lender’s terms and conditions before applying, Martinez said, especially if you’re looking for financing from an alternative lending institution. Each lender has its own pricing structure, and you may want to talk to the lender directly to understand what’s required of borrowers, Martinez said.

Stash money in an emergency fund.
You should generally have three to six months’ worth of expenses saved in case of emergency — that would give you a financial cushion to fall back on during any kind of business interruption, such as a government shutdown. It could also be a good idea have a line of credit or credit card available as well if you don’t have enough in your emergency account.

“Whether it’s a wildfire, a flood or a government shutdown, there’s an opportunity there for small business owners to rethink their cash flow and think very seriously about creating reserve funds,” Sullivan said.

If the federal government shuts down again, even if the closure lasts a few days, the repercussions for small business owners could be monumental. You should prepare as best you can to minimize the impact on your operation.

“Those 35 days it was shut down put us at least three months behind,” Bradley said. “It’s crazy.”

This article contains links to ValuePenguin, which, similar to MagnifyMoney is a subsidiary of LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Melissa Wylie
Melissa Wylie |

Melissa Wylie is a writer at MagnifyMoney. You can email Melissa at melissa@magnifymoney.com

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