Big Tax Law Changes – Bigger Opportunities for You

Big Tax Law Changes – Bigger Opportunities for You

by | Feb 22, 2018 | Tax, Tax planning, Tax Tips, Uncategorized

The tax law changes in the Tax Cuts and Jobs Act, passed at the end of December 2017, enacted some of the most sweeping changes taxpayers have seen in 30 years. Here are a few big changes to come out of the new act — and what you can do about it.

  1. The medical expense deduction threshold was lowered to 7.5 percent.

The tax reform bill retroactively lowers the threshold to deduct medical expenses in 2017 to 7.5 percent of adjusted gross income. The previous threshold was 10 percent. This new 7.5 percent threshold remains in place for 2018, but reverts back to 10 percent in the following years.

What this means: You may want to consider using the medical expense deduction this year. If there are any qualified medical expenses you can make (drug purchases, medical equipment, etc.) to push you over the new, lower threshold, consider doing so in 2018.

  1. The healthcare individual mandate penalty stays in place until 2019.

The shared responsibility penalty (also known as the individual mandate) in the Affordable Care Act is effectively repealed by the tax reform legislation, but not right away. The penalty is set to zero in 2019, but remains in place for 2018.

What this means: You still need to retain your Forms 1095 this year in order to provide evidence of your healthcare coverage. Without proof of coverage, you may have to pay the higher of $695 or 2.5 percent of your income. Unless there are further changes coming, 2018 may be the last year you’ll need to worry about the individual mandate penalty.

More changes to consider for 2018 tax planning

We’re experiencing some of most significant tax law changes since the 1980s. There will be a lot of things to consider for tax planning this year. Here are some of the most significant:

  • Reduced income tax rates
  • Doubled standard deductions
  • Suspension of personal exemptions
  • New limits on itemized deductions, including:
    • Combined state and local income, property and sales tax deduction limited to $10,000
    • Casualty losses limited to federally declared disaster areas
    • Elimination of miscellaneous deductions subject to the 2 percent of adjusted gross income threshold
  • Boosts to:
    • The child tax credit ($2,000 in 2018)
    • A new $500 family tax credit
    • 529 education savings plan expansion for K-12 private school education
    • The estate tax exemption​ (doubled)

Stay tuned

There will surely be more details on the tax reform changes and how they are implemented by the IRS in the weeks to come. In the meantime, contact us if you have urgent questions regarding your situation.

Taxes and virtual currencies: What you need to know

Taxes and virtual currencies: What you need to know

by | Feb 21, 2018 | Tax, Tax planning, Tax Tips

Virtual currencies are all the rage lately. Here are some tax consequences you must know if you decide to dip your toe into that world.

The IRS is paying close attention
The first thing to know is that the IRS is scrutinizing virtual currency transactions, so if you live in the U.S. you’ll have to report your transactions in Bitcoins and the like to the IRS. Despite some early misconceptions, virtual currency transactions can be traced back to their owners by governments and other cyber sleuths.

If you decide to use or hold virtual currencies, carefully report and pay tax on your transactions. Act as if you are going to be audited, because if you don’t, you just might be!

It’s property, not money
Note that the IRS doesn’t consider Bitcoin or other virtual currencies as money, because they aren’t legal tender. Instead, they are considered property. That means that if you are paid in Bitcoin, you will have to report it as income based on its fair market value on the date you received it.

And, if you sell Bitcoin, you have to pay tax on your gain using the cost (basis) of when you received it. The IRS has said that if Bitcoin is held as a capital asset, like a stock or a bond, then you would pay capital gains tax. Otherwise, if it is not held as a capital asset (for example if it is treated as inventory that you intend to sell to customers), it would be taxed as ordinary income.

Be aware of the risk
In addition to the increased oversight by the IRS, virtual currencies are at risk of virtual theft with no recourse to a government agency like the Federal Deposit Insurance Corporation, which insures U.S. bank balances. Do your research on storage and security before you invest. And if you need help with any tax questions related to virtual currency, don’t hesitate to call.

Watch Out for this Tax Season Scams

Watch Out for this Tax Season Scams

by | Feb 16, 2018 | Security, Tax, Tax Tips

The IRS is warning taxpayers to keep on high alert for the next few months for tax season scams. Scammers may try to get their hands on your money or tax return by collecting your personal or financial data. According to the IRS, its employees will never:

  • Threaten to immediately bring in local police or other law enforcement groups to have you arrested for not paying taxes you owe.
  • Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
  • Ask for credit or debit card numbers over the phone.

Remember, the IRS will typically mail you a bill if you owe any taxes. It doesn’t initiate contact with people via email or texts.

Going Through Your Tax Records? What You Should Consider Keeping

Going Through Your Tax Records? What You Should Consider Keeping

by | Feb 15, 2018 | Tax, Tax planning, Tax Tips, Uncategorized

You’re probably getting ready to go through last year’s tax records and prepare for this year. But what should you keep and what can you throw away? Here are some things to keep in mind as you sort through your tax records.

Chances are you’re a little confused about what to keep and what to throw when it comes to tax and financial records. No worries. It’s time to sort through what you’ve got and keep only the important stuff. Here’s what to keep in mind:

  • Keep records that directly support income and expense items on your tax return. For income, this includes W-2s, 1099s and K-1s. Also keep records of any other income you might have received from other sources. It’s also a good idea to save your bank statements and investment statements from brokers.
  • The IRS can audit you within three years after you file your return. But in cases where income is underreported, they can audit for up to six years. To be safe, keep your tax records for seven years.
  • Retain certain records even longer. These include records relating to your house purchase and any improvements you make. Also keep records of investment purchases, dividends reinvested and any major gifts you make or receive.
  • Hold on to copies. Keep copies of all your tax returns and W-2s in case you ever need to prove your earnings for Social Security purposes.
Tax Savings for Your Small Business – New Capital Expense Rules for 2018 That Can Benefit You!

Tax Savings for Your Small Business – New Capital Expense Rules for 2018 That Can Benefit You!

by | Feb 9, 2018 | Tax, Tax planning, Tax Tips, Uncategorized

There are many provisions in the tax reform bill passed in late 2017 designed to benefit small business owners. New capital expense rules are one of them. Also, There are a variety of new tax tools affecting how small businesses account for deducting the cost of capital purchases under the new tax law. Here’s what you need to know:

Tool #1: Section 179 deduction

The new law increases the amount of business property purchases that you can expense each year under Section 179 to $1 million (from $500,000 previously). Normally, spending on business property (machines, computers, vehicles, software, office equipment, etc.) is capitalized and depreciated so that the tax benefit is spread out slowly over several years. Section 179 allows you to get the tax break immediately in the year the property is placed into service.

Tips:

  • There is an eligibility phaseout for Section 179 that ensures it’s only used by small businesses, but that was also raised to $2.5 million (from $2 million) by the new law. If you spend more than $2.5 million on business property in total during the year, your ability to use the $1 million Section 179 deduction is reduced dollar-for-dollar above that amount.
  • Section 179 deductions can be used on both new and used equipment.
  • You can now use Section 179 on property used to furnish lodging or in connection with furnishing lodging (such as rental real estate). It also includes improvements to nonresidential real estate assets such as roofs, heating and air conditioning, and alarm systems.

Tool #2: Bonus depreciation

Bonus depreciation limits (also known as first-year bonus depreciation) are also improved under the new law, but for a limited time. Bonus depreciation is similar to Section 179 and allows you to immediately expense capital purchases rather than depreciating them over several years. Under the new law, first-year bonus depreciation increases to 100 percent of the qualified asset purchase price for the next five tax years (starting in 2018) and can now be applied to the expense of purchasing used property as well as new.

Tips:

  • Bonus depreciation is typically used on short-lived capital investments (with a 20-year or less useful life) such as machinery, equipment and software.
  • Bonus depreciation had been only for purchases of new equipment, but can now be applied to used equipment as long as you place it into service at your business during the tax year.
  • The allowable bonus depreciation starts to decline after 2022. It falls to 80 percent in 2023, 60 percent in 2024, 40 percent in 2025 and 20 percent in 2026.

Remember, though tax reform and these new capital expense rules give you expanded tools to accelerate depreciation, it may not benefit you to use them in every case. Sometimes it’s better to use the standard capitalization and depreciation tax treatment. These tax benefits do not change the amount a capital purchase can be expensed – only the timing. Calculating whether your business will benefit from these revamped expensing tools can get complicated, so give us a call if you need assistance.

Additional Note: Hawkinson Muchnick & Associates strives to provide small businesses with the information they need to optimize their tax situation and financial planning by publishing helpful articles such as this to social media. Please help us make this contribution by liking us on Facebook, as well as following us on Twitter and LinkedIn. Thank you!!

The Best Way to Avoid an Audit: Preparation

The Best Way to Avoid an Audit: Preparation

by | Feb 6, 2018 | Audit, Financial planning, Tax, Tax Tips

Getting audited by the IRS is no fun. Some taxpayers are selected for random audits every year, but the chances of that happening to you are very small. You are much more likely to fall under the IRS’s gaze if you make one of several common mistakes. So what is the best way to avoid an audit?
That means your best chance of avoiding an audit is by doing things right before you file your return this year. Here are some suggestions:
Don’t leave anything out. Missing or incomplete information on your return will trigger an audit letter automatically, since the IRS gets copies of the same tax forms (such as W-2s and 1099s) that you do.
Double-check your numbers. Bad math will get you audited. People often make calculation errors when they do their returns, especially if they do them without assistance. In 2016, the IRS sent out more than 1.6 million examination letters correcting math errors. The most frequent errors occurred in people’s calculation of their amount of tax due, as well as the number of exemptions and deductions they claimed.
Don’t stand out. The IRS takes a closer look at business expenses, charitable donations and high-value itemized deductions. IRS computers reference statistical data on which amounts of these items are typical for various professions and income levels. If what you are claiming is significantly different from what is typical, it may be flagged for review.
Have your documentation in order. Keep your records in order by being meticulous about your recordkeeping. Items that will support the tax breaks you take include: cancelled checks, receipts, credit card and investment statements, logs for mileage and business meals, and proof of charitable donations. With proper documentation, a correspondence letter from the IRS inquiring about a particular deduction can be quickly resolved before it turns into a full-blown audit.
Remember, the average person has a less than 1 percent chance of being audited. If you prepare now, you can narrow your audit chances even further and rest easy after you’ve filed.
Do You Have a Household Employee? Don’t Ignore the Nanny Tax

Do You Have a Household Employee? Don’t Ignore the Nanny Tax

by | Jan 30, 2018 | Financial planning, Tax, Tax Tips

As you review your filing requirements for 2018, make sure you don’t overlook the nanny tax related to household employees. If you have a housekeeper or any other household employee, you could be liable to pay state and federal payroll taxes.

How to know if you must pay the nanny tax

First, you’ll need to determine whether you have a household employee. Generally, this is someone you hire to work in or around your house. It could be a babysitter, nurse, gardener, etc. It doesn’t matter whether they work part-time or full-time, or whether you pay them hourly, weekly, or by the job.

But not everyone who works around your house is an employee. For example, if a lawn service sends someone to cut your grass each week, that person is not your employee.

As a general rule, workers who bring their own tools, do work for multiple customers and/or control when and how they do the work are not your household employees.

Your responsibilities

If you have a household employee, you’ll generally be responsible for 2017 payroll taxes if you paid that individual more than $2,000 last year. However, federal unemployment tax kicks in if you pay more than $1,000 to all domestic employees in any quarter.

It’s not always easy to tell whether you have a household employee, or whether exceptions apply. If in doubt, don’t hesitate to call our office.

Tax Rules for Small Business: Changes to Pass-Through Entity Rules

Tax Rules for Small Business: Changes to Pass-Through Entity Rules

by | Jan 23, 2018 | Business planning, Financial planning, Tax, Tax Tips

One of the most important – and complicated – changes in the new tax reform act is to the tax rules for small business that are treated as “pass-through entities.”

The good news is that if you own one of these businesses you may get as much as a 20 percent reduction to the taxation of business net income under the new rules.  However, calculating the actual deduction can become very complex. It depends upon several factors, including your level of income, your profession, the amount your business spends on wages and property acquired during the year.

Tax reform background

Most small businesses in the U.S. use pass-through business structures, which pass their profits on to their individual owners. Owners pay tax on those profits at their individual tax rates, in conjunction with other income. The new tax rates range from 10 percent to 37 percent in the 2018 tax year. Pass-through business structures include S corporations, partnerships and LLCs. Sole proprietorships handle business income in a similar way using Form 1040 Schedule C and are also covered by the new rules.

Because the Tax Cuts and Jobs Act signed in late December 2017 changed the corporate tax rate structure to a flat 21 percent rate from a progressive scale with a top rate of 35 percent, that meant many pass-through business structures would pay more than regular C corporations. To offset this, Congress gave pass-through owners the new 20 percent business income deduction.

But Congress also put in place special rules limiting the ability of “specified service trades” to take the full deduction. The list includes health, law, consulting, athletics, financial services, brokerage services, accounting firms, “or any trade or business where the principal asset … is the reputation or skill of one or more of its employees or owners.” An earlier version of the bill included the engineering and architectural professions, but those were later taken off the list, so they are considered exempt from the limits.

How to figure out your deduction – easy cases

First, make a rough calculation of your expected qualified business income (QBI), which is generally your net income other than income in the way of compensation. This figure excludes business losses, as well as factoring in amortization and capitalized expenditures. QBI is figured separately for each business activity, not on a per-taxpayer basis.

Easy Case 1: If your QBI is less than $157,500 as an individual filer, or $315,000 as a married couple filing jointly – you can take the full 20 percent deduction.

Easy Case 2: If your QBI is greater than $207,500 as an individual filer, or $415,000 as a married couple filing jointly, AND you are in one of the specified
service professions (health, law, consulting, athletics, financial services, accounting, brokerage services, etc.) – you can’t take anyof the deduction.

How to figure out your deduction – hard cases

If you don’t fall into either of the easy cases, figuring out your pass-through deduction gets much more difficult.

Who is affected: Small business owners with QBI of more than $157,500 as individual filers ($315,000 for married filing jointly) but less than the phaseout of $207,500 as an individual filer ($415,000 married filing jointly).

After your QBI passes the threshold amount of $157,500 as an individual filer, or $315,000 as a married couple filing jointly, special wage and capital limits that reduce your deduction start to apply.

After your QBI passes the threshold amount PLUS the phaseout amount, which is $207,500 as an individual filer, or $415,000 as a married couple filing jointly, the wage and capital limits are applied fully to reduce your deduction. You’ll still get a reduced deduction (unless you are in one of those specified service professions – then your deduction is eliminated completely).

The formula for calculating the wage and capital limits is based on the greater of 50 percent of the W-2 wages paid by your business, OR 25 percent of the W-2 wages, plus 2.5 percent of the unadjusted basis of all qualified property acquired by your business during the year.
Sound confusing? In most cases the calculation will be straightforward – but not for everyone.

REMINDER: If you’re familiar with the wage and capital limits calculation, it may be because your small business used the Domestic Production Activities Deduction (DPAD) in the past, which uses a somewhat similar calculation. The DPAD was repealed in the Tax Cuts and Jobs Act for 2018 and subsequent tax years, so keep that in mind as you chart your business plans.

The rules are in flux

Every tax reform bill is subject to technical amendments that clarify and adjust what is confusing or not working as lawmakers intended. The Tax Cuts and Jobs Act will likely be no different. The pass-through rules are among the most complicated parts of the act, so many of the moving parts will change over the coming months. We will know more as 2017 taxes are completed and the focus turns to the 2018 rules.
If you own a pass-through business, you will need help navigating the choppy waters of tax reform. When the storm of the recent passage subsides and the details are clarified, reach out to schedule a consultation to chart a course for your business in 2018.
Note: The threshold amounts cited in this memo are for tax year 2018 and are indexed to inflation in subsequent years.

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Bonus Questions and Answers

You likely have more questions about the new 20 percent income deduction rule than anyone can possibly answer right now. Clarification from the IRS is coming in the following months. Until then, here are answers to some common questions businesses are asking.

Q.  Why is there a wage and service business limit calculation in the deduction?

A.  Lawmakers were concerned that the owners of service businesses would change how they pay themselves in order to reduce their tax burden. They said they intended to “deter high-income taxpayers from attempting to convert wages or other compensation for personal services to income eligible for the 20-percent deduction.”

Source: U.S. Congress Conference Report, page 37.

Q.  I’ve heard that rental property owners could possibly get this deduction. Is this correct?

A.  Yes, in all likelihood Schedule E filers will also be eligible for the deduction. While most of these entities do not have wages, the capital portion of the calculation may result in a deduction for these businesses.

Q.  What about losses? Do they affect my ability to get the deduction?

A. Yes, losses will lower your eligible income. Excess losses will carry over to future years, limiting your ability to take the deduction in the future.

Q.  How is qualified property calculated? How does bonus depreciation and Section 179 expensing affect the 2.5 percent property calculation?

A.  These answers can get pretty complicated and will require clarification from the IRS. While we wait for that, here is a short explanation based on what we know now: Qualified property must be tangible property subject to depreciation and available for use in a qualified trade or business. The calculation for businesses subject to limitation will be based on 2.5 percent of the property value. The value of the property appears to be its basis after it is placed into service, and it must be actively used as of the end of the year. There will be provisions to account for the leveling out of different recovery period calculations and the prior use of accelerated depreciation methods. But stay tuned; this area could be full of further clarifications and guidance.

Q.  Where is the deduction taken on Form 1040?

A.  The deduction probably will be taken on page 2 of Form 1040, following the calculation of adjusted gross income.

Q. What about my hobby activity, does it get this deduction?

A.  Probably not. It’s likely that you would need to pass the threshold rules relating to hobby versus business activity. But this area too, could use some help with clarification.

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This brief summary of the pass-through rules in the tax reform act is provided for your information. Any major financial decisions or tax-planning activities in light of this new legislation should be considered with the advice of a tax professional. Call if you have questions regarding your particular situation. Feel free to share this memo with those you think may benefit from it.

The 2018 Tax Filing Season is Almost Here!

The 2018 Tax Filing Season is Almost Here!

by | Jan 8, 2018 | Financial planning, Hawkinson Muchnick & Associates PC, Tax

IRS Announces Delayed Start for Tax Filing Season 2018! This year, the IRS filing season will begin Jan. 29, which is a little later than last year’s filing season, which began on Jan. 23.  The IRS is still updating its systems to prepare for the 2018 tax filing season.

Individual tax returns are due April 17 this year because April 15 is a Sunday and April 16 is a holiday in the District of Columbia.

Although we cannot submit tax returns to the IRS until Jan. 29, we are encouraging all of our clients to get us their information as soon as possible so that we can process them on our end now and file them when the IRS begins accepting them.

It is also important to note that the IRS informed taxpayers that, by law, it cannot issue refunds related to claims for the earned income tax credit or the additional child tax credit until mid-February.

Is it Time to Update Your Beneficiary List?

Is it Time to Update Your Beneficiary List?

by | Jan 5, 2018 | Business planning, Financial planning, Hawkinson Muchnick & Associates PC, Money Safety

Simply said, it’s extremely important to update your beneficiary list and keep it up to date. Consider making it a priority or things might not go as you planned.

It’s not uncommon to lose track of your beneficiaries, including which accounts have them, and who you designated. However, it is important to keep them current.

Make your beneficiary designations a priority

When you designate a beneficiary for an account, that person inherits the assets in the account, regardless of what your will says. That’s why updating your will periodically may not be enough.

Typically, you’ll have beneficiaries for each of your IRAs, your 401(k) or other retirement plans, annuities and insurance policies. Your designations could be out of date just because of life’s changes. Since you made your initial choices, you may have married, had children or divorced. Some of the beneficiaries you chose could have died, divorced or married. Their circumstances could have changed so you no longer want them to be the beneficiary.

Tax laws change frequently as well, and they can have an impact on your choices. Choosing the wrong beneficiary, or failing to name a contingent beneficiary, can affect the long-term value of your IRA assets after you die. That’s why it’s important to review your choices with tax consequences in mind.

How to update your designations

At a minimum, you should have copies of your beneficiary designations in one place. If you don’t, call the trustees of your retirement accounts and your insurance agent and request copies.

Then review the documents and decide what changes you’d like to make. Make an appointment to review your decisions with your tax- and estate-planning advisor. Discuss matters such as naming secondary beneficiaries and whether to name your estate as a beneficiary (which is sometimes not a good idea).

Finally, send your changes to the account trustee, ask for a confirmation, and keep copies in your records. If you have questions about tax consequences or other tax matters related to your estate, contact our office.

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