Tax Regulations

The Tax Cuts and Jobs Act (TCJA) made a lot of tax changes and raises many questions for taxpayers looking to plan for the coming year. Below are answers to some of them.

Do I need to adjust my withholding allowances, given that tax brackets have changed?

You may notice a change in your net paycheck as a result of the tax law, which alters tax rates, brackets, and other items that affect how much tax is withheld from your pay. The IRS has already issued new withholding tables, and your employer should adjust its withholding without requiring any action on your part. But you may want to take the opportunity to make sure you are claiming the appropriate number of withholding allowances by filling out IRS Form W-4. This form is used to determine your withholding based on your filing status and other information. The IRS suggests that you consider completing a new Form W-4 each year and when your personal or financial situation changes.

Can I take advantage of the new deduction for pass-through business income?

The tax changes also implement new rules for owners of pass-through entities — partnerships, limited liability companies, S corporations, and sole proprietorships — which allow them to deduct 20% of their business pass-through income. The 20% deduction is available to owners of almost any type of trade or business whose taxable income does not exceed $315,000 (joint return) or $157,500 (other returns). Above those amounts, the deduction is subject to certain limitations based on business assets and wages. Different deduction restrictions apply to individuals in specified service businesses (e.g., law, medicine, and accounting).

Can I still deduct mortgage interest and real estate taxes paid on a second home?

Yes, but the new tax changes limit these deductions. The deduction for total mortgage interest is limited to the amount paid on underlying debt of up to $750,000 ($375,000 for married individuals filing separately). Previously, the limit was $1 million. Note that the new restriction will not apply to taxpayers with home acquisition debt incurred on or before December 15, 2017. Additionally, the deduction for interest on home equity loans (new and existing) is suspended and will not be available for tax years 2018-2025.

Note that the law also establishes a $10,000 limit on the combined total deduction for state and local income (or sales) taxes, real estate taxes, and personal property taxes. As a result, your ability to deduct real estate taxes may be limited.

Are there any tax changes to capital gains rates and rules that I should know about?

The rules concerning how capital gains are determined and taxed remain essentially unchanged. But since short-term gains (for assets held one year or less) are taxed as ordinary income, they will be taxed at the new ordinary income rates and brackets. Net long-term gains will still be taxed at rates of 0%, 15%, or 20%, depending on your taxable income. And the 3.8% net investment income tax that applies to certain high earners will still apply for both types of capital gains.

2018 Long-Term Capital Gains Breakpoints

Rate	Single Filers	Joint Filers	Head of Household	Married Filing Separately
0%	Below $38,600	Below $77,200	Below $51,700	Below $38,600
15%	$38,600-$425,799	$77,200-$478,999	$51,700-$452,399	$38,600-$239,499
20%	$425,800 and above	$479,000 and above	$452,400 and above	$239,500 and above

Can I still deduct my student loan interest?

Yes. Although some earlier versions of the tax bill disallowed the deduction, the final law left it intact. That means that student loan borrowers will still be able to deduct up to $2,500 of the interest they paid during the year on a qualified student loan. The deduction is gradually reduced and eventually eliminated when modified adjusted gross income reaches $80,000 for those whose filing status is single or head of household, and over $165,000 for those filing a joint return.

I have a large family and formerly got to take an exemption for each member. Is there anything in the new law that compensates for the loss of these exemptions?

The new law suspends exemptions for you, your spouse, and dependents. In 2017, each full exemption translated into a $4,050 deduction from taxable income which, for large families, added up. Compensating for this loss, the new law almost doubles the standard deduction to $12,000 for single filers and $24,000 for joint filers. Additionally, the child tax credit is doubled to $2,000 per child, and the income levels at which the credit phases out are significantly increased. Depending on your situation, these new provisions could potentially offset the suspension of personal exemptions.

I have been gifting friends and relatives $14,000 per year to reduce my taxable estate. Can I still do this?

Yes, you may still make an annual gift of up to $15,000 in 2018 (increased from $14,000 in 2017) to as many people as you want without triggering gift tax reporting or using any of your federal estate and gift tax exemption. But TCJA also doubles the exemption to an estimated $11.2 million ($22.4 million for married couples) in 2018. So anyone who anticipates having a taxable estate lower than these thresholds may be able to gift above the annual $15,000 per-recipient limit and ultimately not incur any federal estate or gift tax. Note, however, that the higher exemption amount and many of TCJA’s other tax changes to personal taxes are scheduled to expire after 2025, unless Congress acts to extend them.

This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax circumstances are different. Give us a call to discuss your particular situation.

If you suddenly discover a mistake on the income-tax return you just filed, don’t panic. You can correct it. And you’re probably better off correcting it yourself rather than waiting to see if the IRS discovers the error.

Hot to Fix the Mistake

The IRS has a special form you can use to correct mistakes — Form 1040X, in the case of a individual tax return. You list the amount you originally reported in the first column of the form, changes in the numbers in the second column, and the corrected figures in the third. Write an explanation of your changes in Part III of the form.

You then have to attach to Form 1040X the forms and schedules of your income tax return that were affected by the error, both as originally filed and as amended.

If the error is the result of a corrected W-2 or 1099, attach a copy of that form to your return. And if the error is due to a missed deduction, attach a copy of the receipt to your return. The more documentation you provide, the better.

For a corporation return, you can correct the mistake by filing Form 1120X.  If the business is an S corporation, you will redo Form 1120S and check “Amended Return” box at the top of the first page. The same applies for a business filing as a partnership: you redo Form 1065 and check the “Amended Return” box at the top of the first page.

You must be careful when amending a return for a business taxed as an S corporation or as a partnership. When amending a business return of a flow-through entity, this will generate an amended K1 form that will flow on the owners’ personal returns. Thus the business owners will now have to amend their own personal income tax return by filing Form 1040X.

Don’t Delay

Generally, for an individual tax return, for a credit or refund, you must file Form 1040X within three years after the date you filed the original return or within two years after the date you paid the tax, whichever is later.

Give us a call today, so we can help you determine the right course of action for you.

Once you’ve filed your tax return, you may be tempted to clean house and get rid of some of your old records that are taking up space. The guidelines that follow will help you decide which items can go and which should stay in your files.¹

Records for Income and Expenses

Keep for at least three years after the date you file your return (or its due date, if later) the records proving your income and expenses, such as:

• Form(s) W-2
• Form(s) 1099
• Form(s) K-1
• Bank and brokerage statements
• Canceled checks or other proof of payment

Three years is generally considered a minimum. The IRS advises keeping employment records for a minimum of four years.

If you can, consider keeping your documentation for six years, the IRS’s time limit for auditing a return when income is substantially understated and no fraud exists.

If fraud exists, the IRS doesn’t have a time limit for auditing your return and records must be kept indefinitely.

Investments Records

You’ll need your investment documents to figure your gains and losses when you sell the investments. After you’ve sold an investment, continue to retain your records for as long as you keep the other items supporting the tax return on which you report the sale (three or six years). Investment records include statements showing when you purchased the investment, the purchase price, brokerage commissions, and any reinvested dividends.

Residence Purchases and Improvements Documentation

Hold on to closing statements and other paperwork related to the purchase of your principal residence for use when you eventually sell the home. Put records of any home improvements you’ve made in the file, too. While many homeowners won’t have a taxable gain when they sell their homes because of the $250,000 ($500,000 for married couples) exemption, special circumstances, such as renting out your home or having a home office, could result in a taxable profit.

Your Tax Returns

Maintain one or more permanent files with important personal documents, including your tax returns. If you don’t file a return, the IRS can assess tax at any time. You’ll need a copy of your return in case the IRS has no record of your filing.

You can find additional information about how long you should keep your records on the IRS website.

Source/Disclaimer:

¹This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax situation is different. Contact us to discuss your personal situation.

Old Rule: Tax-Exempt Organizations Reported Contributors’ Information on Schedule B, Form 990, 990-EZ, 990-PF

Until now, the regulations for tax-exempt organizations under 501(a) required filling of  schedule B. The non-profits organizations reported on schedule B  the names, addresses and other information of their contributors that contributed more than a certain limit, in general over $5000, during the filing tax year. Contributions could be either in the form of cash, securities, or other type of property.

The reporting organizations had to complete and attach Schedule B to their Form 990, 990-EZ or 990-PF, unless the organization certified that it didn’t meet the filing requirements of this schedule.

Revenue Procedure 2018-38 Eliminates Reporting Contributors’ Information for Certain Organizations

Recently IRS announced that organizations exempt from tax under 501(a) of the Internal Revenue Code, other than organizations described in 501(c)(3), are no longer required report the names and addresses of their contributors on the Schedule B.
The IRS can still require that this information is made available to them. That is why you should  still collect and keep this information in your records.

Please observe that the IRS still requires some 501(c)3 organizations to report their contributors’ information by filing Schedule B.

Here is a link to Revenue Procedure 2018-38. The IRS published it in  IRB 2018-31 dated July 30, 2018.

Give us a call today, to find out how we can assist you and your non-profit organization.

A few dollars here, a few dollars there. What do you do when the money from a hobby starts to add up?

Maybe you didn’t consider it a real business when you first started working on friends’ computers or building birdhouses or designing logos and other graphics for people. At first, you just charged for materials. But eventually, you started charging more for your time, and then you realized that you were making a profit from your work.

That’s when the Internal Revenue Service gets interested. If you’ve turned a profit for three of the last five years (including the current one), the IRS considers your hobby to be a business, complete with the obligation to pay income taxes.

The good news is, of course, that you can start writing off some expenses. And there’s something to be said for building something from nothing on your own. But you need to consider whether it’s time to formalize your venture by filing a Schedule C.

When it’s time to stop calling it a hobby and call it a business, you’ll be filing a Schedule C with your Form 1040.

9 Questions For Your Hobby Activity

There is some gray area in determining the difference between being a hobby or a business in the eyes of the IRS. If you think you’re a business and you’re happily doing what you’re doing to make a profit, you’re a business.

Maybe, though, you’d rather your efforts remained a hobby. There’s no absolute, cut-and-dried test to determine your status. But there are nine issues that the IRS would like you to consider. The agency wants you to “…take into account all facts and circumstances with respect to the activity. No one factor alone is decisive.”

Here, then, is what you’ll need to ask yourself.

• Whether you’re carving little wooden figures, creating your own jewelry, or writing online content for people, are you doing it in a “businesslike manner?”
• Think of the time and effort you put into your work. Are they enough that it seems you’re clearly trying to make your venture profitable?
• Do you need the money you’re making? Does it represent at least a part of your livelihood?
• What about the losses you’ve taken? Are they caused by “circumstances beyond your control?” Or do you consider them normal for a fledgling small business?
• Have you ever changed the way you do things to turn a higher profit?
• Are you going it alone, or are people advising you? Do you–or they–know enough about what’s required to turn your hobby into a successful business?
• Did you make a profit in previous years from doing the same activity?
• Do you make a profit some years? How much?
• Are you anticipating making a profit in future years from the “appreciation of the assets used in the activity?”

Claiming Expenses

You’ll claim business expenses on the Schedule C.

The IRS does have rules about what you may and may not claim on the Schedule C as business expenses. You’ll learn all about them the first time you file taxes as a business.

The agency’s general rule of thumb is that you can deduct “ordinary and necessary expenses” required by the work that you do. Other words it uses to define the allowable expenses are:

• Common
• Accepted, and,
• Appropriate.

Here’s where you may need our help. You can, of course, call us if you want to talk about whether you are indeed a business. You may also want to explore your options for your business structure. Many one-person ventures are sole proprietors, but there are alternatives.

Determining what you can and cannot claim as legitimate business expenses may be challenging for you the first time or two around. We can help you in three ways here. First, we’ll get you set up with good cloud-based applications or mobile apps that can help you with your ongoing record-keeping. Attempting to run a business on paper is very difficult, and things can slip through the cracks.

We’re also available to work with you on your income tax return. Finally, once we’ve learned about your business, we can get you started on a year-round tax planning strategy. No one likes surprises at tax filing time, and we’d be happy to help you avoid them.

Call us today.

New Form 1040

IRS is working on replacing the current Form 1040 as well as Forms 1040A and 1040EZ for tax year 2019. The IRS is trying to finalize the new form 1040 over the summer, but they did release an early draft this last Friday. This is good news for taxpayers that have simpler financial situations.

Early Draft For New Form 1040 Released

The new draft, which has a “building block” approach, is the size of a postcard:

You can find out more information about the new draft on the IRS website.

If you need help with your taxes, we are here to help. Give us a call.