The new shrunken Form 1040

The new shrunken Form 1040

by | Aug 11, 2018 | Tax, Tax planning, Tax Tips

The IRS recently debuted the new shrunken Form 1040, its a postcard-sized draft of Form 1040 that will be replacing all previous versions for 2018. While the form reduces the number of lines, six new schedules have been added. It’s likely that most taxpayers will be tasked with filing multiple forms.

Keep in mind that this new version is a draft. Revisions are expected before it’s considered final. If you’re curious, you can take a look at a copy of the proposed 2018 Form 1040 on the IRS website.

Audit-proof Your Shareholder Loan

Audit-proof Your Shareholder Loan

by | Jul 23, 2018 | Audit, Business planning, Financial planning, Tax, Tax planning, Tax Tips

If you’re a business owner and your company lends you money, you’ll enter it in the books as a shareholder loan. However, if your return is audited, the IRS will scrutinize the loan to see whether it is really disguised wages or a dividend taxable to you as income.

Knowing what the IRS might look at may be useful when you structure the arrangement. Here are some items that will be considered if you’re audited:

  • Your relationship with the business. First, the IRS will look at your relationship to the company. If you’re the sole shareholder with full control over earnings, that may weaken your case that the loan is genuine. On the other hand, if you’re one of several shareholders and none of the others received similar payments, that suggests it may be a genuine loan.
  • Loan details. The IRS will want to know all the details related to your loan. This may include whether or not you signed a formal promissory note, if you pledge any security against the loan and if the loan has a specific maturity date or a repayment schedule. Other questions may come up about the rate of interest you’re paying and if you missed any payments. The more businesslike the terms of the loan, the more it will appear to be a genuine debt.
  • Other financial details. In addition to loan specifics, the IRS may ask you if your company is paying you a salary that’s in line with the work you perform, and if the company pays dividends.

Whether the IRS taxes you on the loan will depend on all these factors. If you’ve paid attention to the details, the loan should withstand IRS scrutiny. Contact us if you’d like more information about getting a loan from your business.

Switching Jobs This Summer? Don’t Forget Your Taxes

Switching Jobs This Summer? Don’t Forget Your Taxes

by | Jul 16, 2018 | Financial planning, Tax, Tax Tips

As you look forward to starting your new job, it’s important to keep in mind how your employment change will affect your taxes.  Here are three tax-smart tips that’ll put you in the best position come tax season if you’re switching jobs this summer:

  • Roll over your retirement plan. You may be tempted to cash out the balance in an employer-sponsored plan such as a 401(k). But remember that distributions from these plans are generally taxable.

Instead, ask your plan administrator to make a direct rollover to your IRA or another qualified plan. This avoids the additional 10 percent penalty on early distributions you would face if you’re under age 59½. Your retirement money will continue to grow tax-deferred.

  • Adjust your withholding. Assess your overall tax situation before you complete a Form W-4 for your new employer. Did you receive severance pay, unemployment compensation or other taxable income? You might need to increase your withholding to avoid an unexpected tax bill when you file your return.
  • Don’t expect to deduct job-related moving expenses. Unless you are a member of the U.S. Armed Forces, you can no longer deduct moving expenses related to your employment.

More tax issues to consider when you change jobs include stock options, employment-related educational expenses and the sale of your home. Give us a call. We’ll be happy to help you with your new employment tax updates.

Considering Divorce? Think About Your Tax Filing Status!

Considering Divorce? Think About Your Tax Filing Status!

by | Jun 29, 2018 | Financial planning, Tax, Tax planning, Tax Tips

The advantage of filing a joint tax return is well known — couples generally save money when compared with filing separately. However, there is at least one potential disadvantage. Both spouses are liable for the entire income tax bill, including interest and penalties, even if one earned most or all of the income. Divorce changes everything.

The joint-filing downfall

This issue most commonly arises when there are unpaid taxes from joint-filing years, and a couple later separates or divorces. The IRS can pursue either spouse for the full amount. If you’re the easiest one to find, or if you have liquid assets, you can end up paying the entire bill.

When this happens, the only relief is called the innocent spouse rule. If you can prove that you had no reason to suspect tax shortfalls and you did not personally benefit from unreported income, or that you signed joint returns only under duress, you may get off the hook. Unfortunately, the IRS and the courts don’t often allow innocent spouse relief.

What can you do to head off trouble?

If your family spends much more money than the income shown on your tax returns, it’s an indicator that something’s not right.  Ask questions if you don’t understand all the tax and financial issues in the joint return. In certain circumstances, you may even want to consider hiring your own tax professional to advise you before signing.

If you are headed toward separation or divorce, it may be best to file separately. You may pay a little more tax, but that’s better than leaving yourself liable for the tax issues of someone who is no longer on your side. Don’t sign a joint return unless you’re sure that all income has been reported and that the taxes have actually been paid.

How to handle a gap in health care coverage

How to handle a gap in health care coverage

by | Jun 22, 2018 | Financial planning, Tax, Tax Tips

A gap in Health care coverage happens. Whether because of job loss or an extended sabbatical between gigs, you may find yourself with a gap in health care coverage for a period. Here are some tax consequences you should know about, as well as tips to fix a coverage gap.

 

Coverage gap tax issues

You will have to pay a penalty in 2018 if you don’t have health care coverage for three consecutive months or more. Last year the annual penalty was equal to 2.5 percent of your household income, or $695 per adult (and $347.50 per child), whichever was higher. The 2018 amounts will be slightly higher to adjust for inflation.

Example: Susan lost her job-based health insurance on Dec. 31, 2016, and applied for a plan through her state’s insurance marketplace program on Feb. 15, 2017, which went into effect on March 1, 2017. Because she was without coverage for three months, she owes a fourth of the penalty on her 2017 tax return (three of 12 months uncovered, or 1/4 of the year).

While the penalty is still in place for tax years 2018 and earlier, it is eliminated starting in the 2019 tax year by the Tax Cuts and Jobs Act.

Three ways to handle a gap

There are three main ways to handle a gap in health care coverage:

  1. COBRA. If you’re in a coverage gap because you’ve left a job, you may be able to keep your previous employer’s health care coverage for up to 18 months through the federal COBRA program. One downside to this is that you’ll have to pay the full premium yourself (it’s typically split between you and your employer while you are employed), plus a potential administrative fee.
  2. Marketplace. You can enroll in an insurance marketplace health care plan through Healthcare.gov or your state’s portal. Typically you can only sign up for or change a Marketplace plan once a year, but you can qualify for a 60-day special enrollment period after you’ve had a major life event, such as losing a job, moving to a new home or getting married.
  3. Applying for an exemption. If you are without health care coverage for an extended period, you may still avoid paying the penalty by qualifying for an exemption. Valid exemptions include unaffordability (you must prove the cheapest health insurance plan costs more than 8.16 percent of your household income), income below the tax filing threshold (which was $10,400 for single filers below age 65 in 2017), ability to demonstrate certain financial hardships, or membership in certain tribal groups or religious associations.

 

Tax Checklist for Business Startups

Tax Checklist for Business Startups

by | Mar 23, 2018 | Business Consulting, Business planning, Financial planning, Tax, Tax Tips

Starting your own business can be equal parts thrilling and intimidating. Complying with regulations and tax requirements definitely falls into the latter category. But, with some professional help, it doesn’t have to be that way. You can get started with this checklist of things you’ll need to consider.

 

  • Are you a hobby or a business? This may seem basic to some people, but the first thing you’ll have to consider when starting out is whether you really are operating a business, or pursuing a hobby. A hobby can look like a business, but essentially it’s something you do for its own sake that may or may not turn a profit. A true business is generally run for the purpose of making money and has a reasonable expectation of turning a profit. The benefit of operating as a business is that you have more tax tools available to you, such as being able to deduct your losses.
  • Pick your business structure. If you operate as a business, you’ll have to choose whether it will be taxed as a sole proprietorship, partnership, S corporation or C corporation. All entities except C corporations “pass through” their business income onto your personal tax return. The decision gets more complicated if you legally organize your business as a limited liability corporation (LLC). In this case you will need to choose your tax status as either a partnership or an S corporation. Each tax structure has its benefits and downsides – it’s best to discuss what is best for you.
  • Apply for tax identification numbers. In most cases, your business will have to apply for an employer identification number (EIN) from both the federal and state governments.
  • Select an accounting method. You’ll have to choose whether to use an accrual or cash accounting method. Generally speaking, the accrual method means your business revenue and expenses are recorded when they are billed. In the cash method, revenue and expenses are instead recorded when you are paid. There are federal rules regarding which option you may use. You will also have to choose whether to operate on a calendar year or fiscal year.
  • Create a plan to track financials. Operating a business successfully requires continuous monitoring of your financial condition. This includes forecasting your financials and tracking actual performance against your projections. Too many businesses fail in the first couple of years because they fail to understand the importance of cash flow for startup operations. Don’t let this be you.
  • Prepare for your tax requirements. Business owners generally will have to make quarterly estimated tax payments to the IRS. If you have employees, you’ll have to pay your share of their Social Security and Medicare taxes. You also have the obligation to withhold your employees’ share of taxes, Social Security and Medicare from their wages. Your personal income tax return can also get more complicated if you operate as one of the “pass-through” business structures.

This is just a short list of some of the things you should be ready to discuss as you start your business. Knowing your way around these rules can make the difference between success and failure, but don’t be intimidated. Help is available so don’t hesitate to call if you have any questions.

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