Avoid the Gift Tax—Use the Tuition and Medical Strategy

If you or a well-off relative are facing the gift and estate tax, here’s a planning opportunity often overlooked: pay tuition and medical expenses for loved ones. Such payments, structured correctly, do not represent gifts.

The monies spent by you on the qualified medical and tuition payments reduce your net worth and taxable estate, but they do no harm to your income, gift, or estate taxes. Further, the loved one who benefits from your help does not incur any tax issues.

As unusual as this sounds, with the tuition and medical payments, you operate in a tax-free zone.

Gift and Estate Tax Exclusion

If you die in 2020, your heirs won’t pay any estate or gift taxes if your estate and taxable gifts total less than $11.58 million.

If you are married and have done some planning, you and your spouse can avoid estate and gift taxes on up to $23.16 million.

Lawmakers set the current rates with the TCJA and also set them to drop by 50 percent in 2026. Gifts made now continue as excludable should they exceed the upcoming 50 percent drop.

Beating the Gift Tax with Tuition

The tuition exception to the normal gift tax rules involves direct payment of tuition (money for enrollment) made to an educational organization on behalf of another individual.

You may not two-step this. For example, you can’t write a check to granddaughter Amy for $50,000 that she in turn uses for her tuition. Here, you made a $50,000 gift.

But if you write the $50,000 check directly to the educational organization to pay for Amy’s tuition, you are in the tax-free zone. The $50,000 does not bite into your gift and estate tax exemptions, because it’s for tuition.

The unlimited benefit here applies only to tuition for full-time and part-time students. You can’t use it for items such as dorm fees and books. You can’t pay the money to a trust and then require the trust to pay a grandchild’s future tuition costs (this fails the test for direct payment to the institution).

Qualifying Educational Organization

Tax code Section 170(b)(1)(A)(ii) defines “educational organization” as “an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.”

The regs elaborate by explaining that the term “educational institution” includes primary, secondary, preparatory, or high schools, and colleges and universities.

Example. You have four children, ages 7, 8, 9, and 10, at a private school where the tuition is $17,000 per year per student. Grandma Grace pays directly to the school the tuition for each of the children. Grandma Grace has no gift tax or other tax issues. Her payments are in the tax-free zone.

You can also pay the tuition to a foreign university. That tuition payment is in the tax-free zone just as if you had paid it to the University of Chicago.

Irrevocable prepaid tuition meets the rules and offers planning opportunities. Grampa Zeke has four grandchildren, all in the first and second grades of private schools. He sets up and funds an irrevocable plan with each of the private schools to pay the tuition at their respective schools. The plans qualify for tax-free zone treatment.

Planning note. Prepaid tuition can be a great death-bed strategy.

Beating the Gift Tax with Medical

The tax-free zone treatment of medical expenses requires that you pay the money directly to the medical care provider or insurance company (when paying for health insurance).

Under this plan, you avoid gift taxes when you pay directly to the provider any medical expense that would qualify as an itemized deduction on your Form 1040. Here are the basics:

  • Qualifying medical expenses are limited to those expenses defined in Section 213(d) and include expenses incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body or for transportation primarily for and essential to medical care. (See IRS Pub. 502, Medical and Dental Expenses for an easy-to-understand list of itemized medical deductions—note this link produces a PDF of the publication.)
  • In addition, the unlimited exclusion from the gift tax includes amounts paid directly to the insurance company for medical insurance on behalf of any individual.
  • The unlimited exclusion from the gift tax does not apply to amounts paid for medical care that are reimbursed by the donee’s insurance. Thus, if payment for a medical expense is reimbursed by the donee’s insurance company, the donor’s payment for that expense, to the extent of the reimbursed amount, is not eligible for the unlimited exclusion from the gift tax, and the gift is treated as having been made on the date the reimbursement is received by the donee.

Example. Sam, your buddy, takes a big fall while climbing Mount Everest. You pay $67,000 of his medical bills directly to the medical providers. You are in the tax-free zone and face no gift tax.

Say that the insurance company reimburses Sam for $31,000 of the medical bills that you paid, and Sam keeps the money. Now, you have the following tax situation:

  • You have $36,000 of medical bills that you paid directly to the provider that are in the tax-free zone and not subject to gift taxes ($67,000 – $31,000).
  • You can avoid $15,000 of gift taxes because of the 2020 annual exclusion. Thus, of the $31,000 reimbursed to Sam by the insurance company, you pay gift taxes on $16,000 and avoid taxes on the remaining $15,000 because of the annual exclusion.

Final Thoughts

The primary rule to remember when using the tuition and medical gift tax-free strategy is that you must make the payments directly to the institutions and providers. Imbed this rule in your brain as rule one for this strategy. Don’t violate it.

If you have a loved one who needs tuition or medical help from you, use the tax-free zone method. For example, you have an estate tax problem and Uncle Jimmy needs help with his medical bills. Don’t make a monetary gift to Jimmy to help him. Instead, make your checks payable to the medical providers who are billing Uncle Jimmy.

Even if you don’t have a gift tax problem today, use the tax-free method because, who knows, you could win the lottery tomorrow.

And don’t forget this strategy. Sure, you have an $11.58 million estate and gift tax exemption this year. In 2026, that’s scheduled to drop by 50 percent (adjusted for inflation). But the current deficit issues could trigger a drop to, say, the 2008 exemption amount of $2 million, or lower.

Use Your Business to Maximize Charitable Donations

Giving to your church, school, or other 501(c)(3) charity is a noble act no matter how you choose to give.

But for the purposes of tax savings, some forms of giving are much more beneficial to you than are others. As a business owner, you can use some business strategies to get the money to these institutions as business expenses.

While this does not change anything from the institution’s perspective, it hugely increases your tax savings. The Tax Cuts and Jobs Act (TCJA) makes it harder to benefit from your personal donations.

Let’s say you donate $10,000 to a church, school, or other 501(c)(3) charity:

  1. Will you get a tax deduction—in other words, will you itemize?
  2. Will you benefit from the entire $10,000 as an itemized deduction? In other words, did the $10,000 simply put you over the hump that beat the standard deduction?
  3. Say you can deduct all $10,000 as an itemized deduction. Would making it a business deduction increase the tax benefit value to you?

The TCJA made two big changes that make it less likely that you will itemize. First, the TCJA set a $10,000 limit on your state and local income and property tax deductions. Second, it increased the 2020 standard deductions (adjusted for inflation) to

  • $12,400 for individuals, and
  • $24,800 for married couples filing jointly.

Even if you make a big donation, think about the problem this creates—suppose you are married and donate $17,000 to charity. If this is your only itemized deduction, your donation does you no good because it’s less than $24,800. Fortunately, there’s a much more tax-savvy way to give.

As a business owner, you can make a few modifications and convert your church, school, and other 501(c)(3) donations to a different type of deduction—an ordinary business expense—which increases the tax savings that land in your pocket year after year.

To turn a charitable donation into a business expense, the donation has to be involved in some way in promoting your business. In one way or another, you need to prove that your strategy has as its purpose attracting customers and revenue for your business.

The tax law rule is that your donation must

  • have a direct relationship to your business, and
  • create a reasonable expectation for a commensurate economic return.

Here are four examples of successful business practices that benefit charities and create business deductions:

  1. In the Marcell case, the owner of a trucking company contributed cash to a hospital because he wanted to impress the chairman of the charity drive, who was a potential customer. The court found that Philip Marcell had a reasonable expectation for a commensurate return on his donation and treated the contribution as a business expense.
  2. ABC Company attaches rebate slips to some of its products that it sells to customers. The customers can then present the rebate slips to the charity, at which point ABC Company pays the charity the amount listed on the slip.
  3. In Revenue Ruling 72-314, the IRS ruled that the stockbroker corporation that paid 6 percent of its brokerage commissions to the neighborhood charity could deduct the payments as business expenses because there was a reasonable expectation that the arrangement with the charity would direct new business to the brokerage and help retain existing business.
  4. Sarah Marquis, a sole-proprietor travel agent, made payments to charities on the basis of business they did with her. She had 30 charities as clients, and those 30 charities accounted for 57 percent of her business.

Solo 401(k) Could Be Your Best Retirement Plan Option

Have you procrastinated about setting up a tax-advantaged retirement plan for your small business? If the answer is yes, you are not alone.

Still, this is not a good situation. You are paying income taxes that could easily be avoided. So consider setting up a plan to position yourself for future tax savings.

For owners of profitable one-person business operations, a relatively new retirement plan alternative is the solo 401(k). The main solo 401(k) advantage is potentially much larger annual deductible contributions to the owner’s account—that is, your account. Good!

Solo 401(k) Account Contributions

With a solo 401(k), annual deductible contributions to the business owner’s account can be composed of two different parts.

First Part: Elective Deferral Contributions

For 2020, you can contribute to your solo 401(k) account up to $19,500 of

  • your corporate salary if you are employed by your own C or S corporation, or
  • your net self-employment income if you operate as a sole proprietor or as a single-member LLC that’s treated as a sole proprietorship for tax purposes.

The contribution limit is $26,000 if you will be age 50 or older as of December 31, 2020. The $26,000 figure includes an extra $6,500 catch-up contribution allowed for older 401(k) plan participants.

This first part, called an “elective deferral contribution,” is made by you as the covered employee or business owner.

  • With a corporate solo 401(k), your elective deferral contribution is funded with salary reduction amounts withheld from your company paychecks and contributed to your account.
  • With a solo 401(k) set up for a sole proprietorship or a single-member LLC, you simply pay the elective deferral contribution amount into your account.

Second Part: Employer Contributions

On top of your elective deferral contribution, the solo 401(k) arrangement permits an additional contribution of up to 25 percent of your corporate salary or 20 percent of your net self-employment income.

This additional pay-in is called an “employer contribution.” For purposes of calculating the employer contribution, your compensation or net self-employment income is not reduced by your elective deferral contribution.

  • With a corporate plan, your corporation makes the employer contribution on your behalf.
  • With a plan set up for a sole proprietorship or a single-member LLC, you are effectively treated as your own employer. Therefore, you make the employer contribution on your own behalf.

Combined Contribution Limits

For 2020, the combined elective deferral and employer contributions cannot exceed

  • $57,000 (or $63,500 if you will be age 50 or older as of December 31, 2020), or
  • 100 percent of your corporate salary or net self-employment income.

For purposes of the second limitation, net self-employment income equals the net profit shown on Schedule C, E, or F for the business in question minus the deduction for 50 percent of self-employment tax attributable to that business.

Key point. Traditional defined contribution arrangements, such as SEPs (simplified employee pensions), Keogh plans, and profit-sharing plans, are subject to a $57,000 contribution cap for 2020, regardless of your age.

Example 1: Corporate Solo 401(k) Plan

Lisa, age 40, is the only employee of her corporation (it makes no difference if the corporation is a C or an S corporation).

In 2020, the corporation pays Lisa an $80,000 salary. The maximum deductible contribution to a solo 401(k) plan set up for Lisa’s benefit is $39,500. That amount is composed of

  1. Lisa’s $19,500 elective deferral contribution, which reduces her taxable salary to $60,500, plus
  2. a $20,000 employer contribution made by the corporation (25 percent x $80,000 salary), which has no effect on her taxable salary.

The $39,500 amount is well above the $20,000 contribution maximum that would apply with a traditional corporate defined contribution plan (25 percent x $80,000). The $19,500 difference is due to the solo 401(k) elective deferral contribution privilege.

Variation. Now assume Lisa will be age 50 or older as of December 31, 2020. In this variation, the maximum contribution to Lisa’s solo 401(k) account is $46,000, which consists of

  1. a $26,000 elective deferral contribution (including the $6,500 extra catch-up contribution), plus
  2. a $20,000 employer contribution (25 percent x $80,000).

That’s much more than the $20,000 contribution maximum that would apply with a traditional corporate defined contribution plan (25 percent x $80,000). The $26,000 difference is due to the solo 401(k) elective deferral contribution privilege.

Example 2: Self-Employed Solo 401(k) Plan

Larry, age 40, operates his cable installation, maintenance, and repair business as a sole proprietorship (or as a single-member LLC treated as a sole proprietorship for tax purposes).

In 2020, Larry has net self-employment income of $80,000 (after subtracting 50 percent of his self-employment tax bill). The maximum deductible contribution to a solo 401(k) plan set up for Larry’s benefit is $35,500. That amount is composed of

  1. a $19,500 elective deferral contribution, plus
  2. a $16,000 employer contribution (20 percent x $80,000 of self-employment income).

The $35,500 amount is well above the $16,000 contribution maximum that would apply with a traditional self-employed plan set up for Larry’s benefit (20 percent x $80,000). The $19,500 difference is due to the solo 401(k) elective deferral contribution privilege.

Variation. Now assume Larry will be age 50 or older as of December 31, 2020.

In this variation, the maximum contribution to Larry’s solo 401(k) account is $42,000, which consists of

  1. a $26,000 elective deferral contribution (including the $6,500 extra catch-up contribution), plus
  2. a $16,000 employer contribution (20 percent x $80,000).

That’s much more than the $16,000 contribution maximum that would apply with a traditional self-employed defined contribution plan (20 percent x $80,000). The $26,000 difference is due to the solo 401(k) elective deferral contribution privilege.

As you can see, in the right circumstances, the 401(k) can make for a great retirement plan.



Eight Changes in the SECURE Act You Need to Know

As has become usual practice, Congress passed some meaningful tax legislation as it recessed for the holidays. In one of the new meaningful laws, enacted on December 20, you will find the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act).

The SECURE Act made many changes to how you save money for your retirement, how you use your money in retirement, and how you can better use your Section 529 plans. Whether you are age 35 or age 75, these changes affect you.

Here are eight of the changes.

1. Small-Employer Automatic Contribution Tax Credit

If your business has a 401(k) plan or a SIMPLE (Savings Incentive Match Plan for Employees) plan that covers 100 or fewer employees and it implements an automatic contribution arrangement for employees, either you or it qualifies for a $500 tax credit each year for three years, beginning with the first year of such automatic contribution.

This change is effective for tax years beginning after December 31, 2019.

Tax tip. This credit can apply to both newly created and existing retirement plans.

2. IRA Contributions for Graduate and Postdoctoral Students

Before the SECURE Act, certain taxable stipends and non-tuition fellowship payments received by graduate and postdoctoral students were included in taxable income but not treated as compensation for IRA purposes. Thus, the monies received did not count as compensation that would enable IRA contributions.

The SECURE Act removed the “compensation” obstacle. The new law states: “The term ‘compensation’ shall include any amount which is included in the individual’s gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study.”

The change enables these students to begin saving for retirement and accumulating tax-favored retirement savings, if they have any funds available (remember, these are students). This change applies to tax years beginning after December 31, 2019.

Tax tip. If your child pays no income tax or pays tax at the 10 or 12 percent rate, consider contributing to a Roth IRA instead of a traditional IRA.

3. No Age Limit on Traditional IRA Contributions

Prior law stopped you from contributing funds to a traditional IRA if you were age 70 1/2 or older. Now you can make a traditional IRA contribution at any age, just as you could and still can with a Roth IRA.

This change applies to contributions made for tax years beginning after December 31, 2019.

4. No 10 Percent Penalty for Birth/Adoption Withdrawals

You pay no 10 percent early withdrawal penalty on IRA or qualified retirement plan distributions if the distribution is a “qualified birth or adoption distribution.” The maximum penalty-free distribution is $5,000 per individual per birth or adoption. For this purpose, a qualified plan does not include a defined benefit plan.

This change applies to distributions made after December 31, 2019.

Tax tip. A birth or adoption in 2019 can signal the start of the one year, allowing qualified birth and adoption distributions as soon as January 1, 2020.

5. RMDs Start at Age 72

Before the SECURE Act, you generally had to start taking required minimum distributions (RMDs) from your traditional IRA or qualified retirement plan in the tax year you turned age 70 1/2. Now you can wait until the tax year you turn age 72.

This change applies to RMDs after December 31, 2019, if you turn age 70 1/2 after December 31, 2019.

6. Open a Retirement Plan Later

Under the SECURE Act, if you adopt a stock bonus, pension, profit-sharing, or annuity plan after the close of a tax year but before your tax return due date plus extensions, you can elect to treat the plan as if you adopted it on the last day of the tax year.

Under prior law, you had to establish the plan before the end of the tax year to make contributions for that tax year. This change applies to plans adopted for tax years beginning after December 31, 2019.

How it works. You can establish and fund, for example, an individual 401(k) for a Schedule C business as late as October 15, 2021, and have the 401(k) in place for 2020.

7. Expanded Tax-Free Section 529 Plan Distributions

Distributions from your child’s Section 529 college savings plan are non-taxable if the amounts distributed are

  • investments into the plan (your basis), or
  • used for qualified higher education expenses.

Qualified higher-education expenses now include

  • fees, books, supplies, and equipment required for the designated beneficiary’s participation in an apprenticeship program registered and certified with the Secretary of Labor under Section 1 of the National Apprenticeship Act, and
  • principal or interest payments on any qualified education loan of the designated beneficiary or his or her siblings.

If you rely on the student loan provision to make tax-free Section 529 plan distributions,

  • there is a $10,000 maximum per individual loan holder, and
  • the loan holder reduces his or her student loan interest deduction by the distributions, but not below $0.

This change applies to distributions made after December 31, 2018 (not a typo—see below).

Tax tip. Did you notice the 2018 above? Good news. You can use the new qualified expense categories to identify tax-free Section 529 distributions that are retroactive to 2019.

8. RMDs on Inherited Accounts

Under the old rules for inherited retirement accounts, you could “stretch” out the account and take RMDs each year to deplete the account over many years.

Now, if you inherit a defined contribution plan or an IRA, you must fully distribute the balances of these plans by the end of the 10th calendar year following the year of death. There is no longer a requirement to take out a certain amount each year.

The current stretch rules, and not the new 10-year period, continue to apply to a designated beneficiary who is

  • a surviving spouse,
  • a child who has not reached the age of majority,
  • disabled as defined in Code Section 72(m)(7),
  • a chronically ill individual as defined in Code Section 7702B(e)(2) with modification, or
  • not more than 10 years younger than the deceased.

This change applies to distributions for plan owners who die after December 31, 2019.

Congress Reinstates Expired Tax Provisions

Congress let many tax provisions expire on December 31, 2017, making them dead for your already-filed 2018 tax returns.

In what has become a much too common practice, Congress resurrected the dead provisions retroactively to January 1, 2018. That’s good news. The bad news is that if you have any of these deductions, we have to amend your tax returns to make this work for you.

And you can relax when filing your 2019 and 2020 tax returns because lawmakers extended the “extender” tax laws for both years. Thus, no worries until 2021—and even longer for a few extenders that received special treatment.

Back from the Dead

The big five tax breaks that most likely impact your Form 1040 are as follows:

  1. Exclusion from income for cancellation of acquisition debt on your principal residence (up to $2 million)
  2. Deduction for mortgage insurance premiums as residence interest
  3. 7.5 percent floor to deduct medical expenses (instead of 10 percent)
  4. Above-the-line tuition and fees deduction
  5. Non-business energy property credit for energy-efficient improvements to your residence

Congress extended these five tax breaks retroactively to January 1, 2018. They now expire on December 31, 2020, so you’re good for both 2019 and 2020.

Other Provisions Revived

Congress also extended the following tax breaks retroactively to January 1, 2018, and they now expire on December 31, 2020 (unless otherwise noted):

  • Black lung disability trust fund tax
  • Indian employment credit
  • Railroad track maintenance credit (December 31, 2022)
  • Mine rescue team training credit
  • Certain racehorses as three-year depreciable property
  • Seven-year recovery period for motorsports entertainment complexes
  • Accelerated depreciation for business property on Indian reservations
  • Expensing rules for certain film, television, and theater productions
  • Empowerment zone tax incentives
  • American Samoa economic development credit
  • Biodiesel and renewable diesel credit (December 31, 2022)
  • Second-generation biofuel producer credit
  • Qualified fuel-cell motor vehicles
  • Alternative fuel-refueling property credit
  • Two-wheeled plug-in electric vehicle credit (December 31, 2021)
  • Credit for electricity produced from specific renewable resources
  • Production credit for Indian coal facilities
  • Energy-efficient homes credit
  • Special depreciation allowance for second-generation biofuel plant property
  • Energy-efficient commercial buildings deduction

Temporary Provisions Extended

Congress originally scheduled these provisions to end in 2019 and has now extended them through 2020:

  • New markets tax credit
  • Paid family and medical leave credit
  • Work opportunity credit
  • Beer, wine, and distilled spirits reductions in certain excise taxes
  • Look-through rule for certain controlled foreign corporations
  • Health insurance coverage credit

Tax Tips for the Self-Employed Age 50 and Older

If you are self-employed, you have much to think about as you enter your senior years, and that includes retirement savings and Medicare. Here a few thoughts that will help.

Keep Making Retirement Account Contributions, and Make Extra “Catch-up” Contributions Too

Self-employed individuals who are age 50 and older as of the applicable year-end can make additional elective deferral catch-up contributions to certain types of tax-advantaged retirement accounts.

For the 2019 tax year, you can take advantage of this opportunity if you will be 50 or older as of December 31, 2019.

  • You can make elective deferral catch-up contributions to your self-employed 401(k) plan or to a SIMPLE IRA.
  • You can also make catch-up contributions to a traditional or Roth IRA.

The maximum catch-up contributions for 2019 are as follows:

401(k) Plan SIMPLE IRA Traditional or Roth IRA
$6,000 $3,000 $1,000

Catch-up contributions are above and beyond

  1. the “regular” 2019 elective deferral contribution limit of $19,000 that otherwise applies to a 401(k) plan.
  2. the “regular” 2019 elective deferral contribution limit of $13,000 that otherwise applies to a SIMPLE IRA.
  3. the “regular” 2019 contribution limit of $6,000 that otherwise applies to a traditional or Roth IRA.

How Much Can Those Catch-up Contributions Be Worth?

Good question.You might dismiss catch-up contributions as relatively inconsequential unless we can prove otherwise. Fair enough. Here’s your proof:

401(k) catch-up contributions. Say you turned 50 during 2019 and contributed on January 1, 2019, an extra $6,000 for this year to your self-employed 401(k) account and then did the same for the following 15 years, up to age 65. Here’s how much extra you could accumulate in your 401(k) account by the end of the year you reach age 65, assuming the indicated annual rates of return below:

4% Return 6% Return 8% Return
$136,185 $163,277 $196,501

Is There an Upper Age Limit for Regular and Catch-up Contributions?

Another good question.

While you must begin taking annual required minimum distributions (RMDs) from a 401(k), SIMPLE IRA, or traditional IRA account after reaching age 70 1/2, you can continue to contribute to your 401(k), SIMPLE IRA, or Roth IRA account after reaching that age, as long as you have self-employment income (subject to the income limit for annual Roth contribution eligibility).

But you may not contribute to a traditional IRA after reaching age 70 1/2.

Claim a Self-Employed Health Insurance Deduction for Medicare and Long-Term Care Insurance Premiums

If you are self-employed as a sole proprietor, an LLC member treated as a sole proprietor for tax purposes, a partner, an LLC member treated as a partner for tax purposes, or an S corporation shareholder-employee, you can generally claim an above-the-line deduction for health insurance premiums, including Medicare health insurance premiums, paid for you or your spouse.

Key point. You don’t need to itemize deductions to get the tax-saving benefit from this above-the-line self-employed health insurance deduction.

Medicare Part A Premiums

Medicare Part A coverage is commonly called Medicare hospital insurance. It covers inpatient hospital care, skilled nursing facility care, and some home health care services. You don’t have to pay premiums for Part A coverage if you paid Medicare taxes for 40 or more quarters during your working years. That’s because you’re considered to have paid your Part A premiums via Medicare taxes on wages and/or self-employment income.

But some individuals did not pay Medicare taxes for enough months while working and must pay premiums for Part A coverage.

  • If you paid Medicare taxes for 30-39 quarters, the 2019 Part A premium is $240 per month ($2,880 if premiums are paid for the full year).
  • If you paid Medicare taxes for less than 30 quarters, the 2019 Part A premium is $437 ($5,244 for the full year).
  • Your spouse is charged the same Part A premiums if he or she paid Medicare taxes for less than 40 quarters while working.

Medicare Part B Premiums

Medicare Part B coverage is commonly called Medicare medical insurance or Original Medicare. Part B mainly covers doctors and outpatient services, and Medicare-eligible individuals must pay monthly premiums for this benefit.

Your monthly premium for the current year depends on your modified adjusted gross income (MAGI) as reported on Form 1040 for two years earlier. For example, your 2019 premiums depend on your 2017 MAGI.

MAGI is defined as “regular” AGI from your Form 1040 plus any tax-exempt interest income.

Base premiums. For 2019, most folks pay the base premium of $135.60 per month ($1,627 for the full year).

Surcharges for higher-income individuals. Higher-income individuals must pay surcharges in addition to the base premium for Part B coverage.

For 2019, the Part B surcharges depend on the MAGI amount from your 2017 Form 1040. Surcharges apply to unmarried individuals with 2017 MAGI in excess of $85,000 and married individuals who filed joint 2017 returns with MAGI in excess of $170,000.

Including the surcharges (which go up as 2017 MAGI goes up), the 2019 Part B monthly premiums for each covered person can be $189.60 ($2,275 for the full year), $270.90 ($3,251 for the full year), $352.20 ($4,226 for the full year), $433.40 ($5,201 for the full year), or $460.50 ($5,526 for the full year).

The maximum $460.50 monthly premium applies to unmarried individuals with 2017 MAGI in excess of $500,000 and married individuals who filed 2017 joint returns with MAGI in excess of $750,000.

Medicare Part D Premiums

Medicare Part D is private prescription drug coverage. Premiums vary depending on the plan you select. Higher-income individuals must pay a surcharge in addition to the base premium.

Surcharges for higher-income individuals. For 2019, the Part D surcharges depend on your 2017 MAGI, and they go up using the same scale as the Part B surcharges.

The 2019 monthly surcharge amounts for each covered person can be $12.40, $31.90, $51.40, $70.90, or $77.40. The maximum $77.40 surcharge applies to unmarried individuals with 2017 MAGI in excess of $500,000 and married individuals who filed 2017 joint returns with MAGI in excess of $750,000.

Medigap Supplemental Coverage Premiums

Medicare Parts A and B do not pay for all health care services and supplies. Coverage gaps include copayments, coinsurance, and deductibles.

You can buy a so-called Medigap policy, which is private supplemental insurance that’s intended to cover some or all of the gaps. Premiums vary depending on the plan you select.

Medicare Advantage Premiums

You can get your Medicare benefits from the government through Part A and Part B coverage or through a so-called Medicare Advantage plan offered by a private insurance company. Medicare Advantage plans are sometimes called Medicare Part C.

Medicare pays the Medicare Advantage insurance company to cover Medicare Part A and Part B benefits. The insurance company then pays your claims. Your Medicare Advantage plan may also include prescription drug coverage (like Medicare Part D), and it may cover dental and vision care expenses that are not covered by Medicare Part B.

When you enroll in a Medicare Advantage plan, you continue to pay Medicare Part A and B premiums to the government. You may pay a separate additional monthly premium to the insurance company for the Medicare Advantage plan, but some Medicare Advantage plans do not charge any additional premium. The additional premium, if any, depends on the plan that you select.

Key point. Medigap policies do not work with Medicare Advantage plans. So if you join a Medicare Advantage plan, you should drop any Medigap coverage.

Premiums for Qualified Long-Term Care Insurance

These premiums also count as medical expenses for purposes of the above-the-line self-employed health insurance premium deduction, subject to the age-based limits shown below. For each covered person, count the lesser of premiums paid in 2019 or the applicable age-based limit.

Your age as of December 31, 2019, determines your maximum self-employed health insurance tax deduction for your long-term care insurance as follows:

  • $790—ages 41-50
  • $1,580—ages 51-60   
  • $4,220—ages 61-70   
  • $5,270—over age 70

Know Whether Your Trip Is a Deductible Business Expense

To help you understand business travel, consider this:

You planned a personal trip to Los Angeles, arriving on Friday afternoon and leaving on Sunday afternoon.

About a week later, you learn that a vendor you need to meet with is going to be in L.A. when you are. You arrange a dinner on Friday night to finalize negotiations on a large contract.

Can you now deduct 100 percent of your flight expenses to Los Angeles? How about meals?

Trouble. You must have business as your primary purpose for the trip. In general, a business trip can involve two types of business days:

  1. Travel day. You count as business those days you spend traveling in a reasonably direct route to your business destination. (Again, note this is your business not your personal destination.)
  2. Presence-required day. If someone requires your presence at a particular place for a specific and bona fide business purpose, this counts as a business day. That “someone” could be any business associate, employee, partner, client, customer, or vendor.

 This trip we created for you works like this:

  • Day 1, Friday, is a personal day. (You may deduct the cost of the business meal with the vendor whether you pay for it in total or go Dutch treat.)
  • Day 2, Saturday, is a personal day.
  • Day 3, Sunday, is a personal day.

But let’s say you had this situation: you travel on Friday to meet with the vendor on Saturday and return home on Sunday. Now, you have a deductible trip.

Act Fast to Claim a 30 Percent Tax Credit for Residential Solar Panels

Here’s a heads-up. The 30 percent residential solar credit

  • drops to 26 percent for tax year 2020,
  • drops to 22 percent for tax year 2021, and
  • terminates in 2022.

Also, unlike the 30 percent commercial solar credit, where you can qualify for the 30 percent tax credit when you commence construction (as defined by the IRS, but easy to do), your 30 percent residential credit is granted when you place the solar property in service.

If you are thinking of the 30 percent tax credit for a solar installation on a residence you own, don’t let the time slip away, because you must have the solar property in use before December 31 to qualify for the 30 percent tax credit (dollar for dollar).

New Tool for Your Use: 2019 Section 199A Calculator

If you operate your business as a pass-through entity, such as a proprietorship, partnership, or S corporation, the profits of that business can generate the Section 199A tax deduction.

No-Problem Businesses

You qualify for the Section 199A deduction—period, regardless of pass-through business type—when you have

  • pass-through qualified business income (QBI), and
  • 2019 Form 1040 taxable income equal to or less than $160,700 single (and head of household) or $321,400 married, filing jointly.

With Form 1040 taxable income equal to or less than the thresholds above, doctors, lawyers, accountants, financial planners, stockbrokers, manufacturers, retailers, consultants, and all other businesses with pass-through income qualify for the deduction.

There’s no out-of-favor specified service business problem with income below the thresholds.

And the calculation is easy.

With taxable income equal to or less than the thresholds, you qualify for the Section 199A deduction. Your deduction will equal the lesser of:

  1. 20 percent of your Form 1040 taxable income less net capital gains and dividends, or
  2. 20 percent of your QBI.

Note that qualification for the deduction starts with your Form 1040 taxable income.

Example. You are married with joint taxable income of $320,000 and QBI of $350,000. Your Section 199A deduction is $64,000.

As you can see, no issues.

Once your taxable income is above the thresholds, you need to consider tax planning—now. Why now? Because some strategies require that you have time on your side.

For example, if you switch from a proprietorship to an S corporation to benefit from the W-2 wage strategy, your switch does not begin until you have the S corporation in place.

If you are looking at a retirement plan strategy, you want time to consider your options and get that tax-savings plan in place.

If your taxable income is going to exceed the thresholds, we should spend some time examining your situation and, if needed, looking at tax-planning opportunities. – contact us TODAY!

Claiming Business Deductions for Work-Related Education

As a small-business owner, you probably incur work-related education expenses from time to time. You may even decide to pursue an advanced degree, such as a Master of Business Administration (MBA).

You likely want your employees to be on a path of continuous improvement.

There’s much to know about how such business deductions work for both you and your employees. The Tax Cuts and Jobs Act (TCJA) tax reform may trigger a need for you to change your strategy to help your continuous learning (likely your most valuable) employees.

Your employees will find this new rule beyond the “oh, shucks” reaction. For 2018–2025, the TCJA outlaws write-offs for miscellaneous itemized expenses that under prior law were subject to the 2 percent of adjusted gross income (AGI) deduction threshold.

Included in this category are unreimbursed employee business expenses. So for 2018–2025, employees may not take miscellaneous itemized deductions for unreimbursed work-related education expenses.

If you want your employees to continue on their continuous learning pathways, you may now want to reimburse those employees for their educational expenses. The reimbursements can give you three benefits:

  1. You will have smarter, better employees who benefit your business because of their continuous improvement.
  2. You will have happier employees because you not only save them money by reimbursing them for their continuous learning, but also visibly show that you care about them.
  3. You deduct the education reimbursements.

If you operate your business as a corporation and you are an employee in your corporation, the corporation can reimburse you for your work-related education expenses. The education reimbursement is (a) tax-free to you, just as with any employee, and (b) a deductible business expense for your corporation.

Make sure that employees, including you, turn in their work-related education expenses on an expense report that includes proof of the outlays and why such expenses are business-related.

If you would like our help with the education possibilities and deductions for you, your business, and your employees, contact us TODAY!