By David Schaper, CPA firstname.lastname@example.org
There have long been campaign promises of simplifying the federal tax code, with pledges of ultimately filing personal taxes on a postcard. To be amenable to this, the IRS recently released the draft 1040 tax return for individuals to take into consideration all of the tax changes that are effective for 2018. The size of this 1040 has been dwindled to 2 half-pages and eliminated more than 50 lines compared to the 2017 version.
Does this mean that your taxes have been simplified and will require fewer pages, time, and effort to file? Most likely the answer is no, especially if you are a business owner. Various income and deductions items have been moved to an additional schedule, Schedule 1, which must be attached to the 1040. This schedule includes lines for alimony, business income, capital gains, farm income, real estate, pass-through activity from partnerships and S corporations, health savings account deductions, and IRA deductions, among others. So instead of these tax items being on the front of the 1040, they have simply been shifted to a separate schedule that must be attached to the 1040.
The new 1040 also summarizes other information that must be detailed on a separate schedule, which was previously on the 1040. This information includes a form to detail the various types of tax liabilities, a form to detail various nonrefundable credits and a form to detail other federal tax payments and refundable credits.
The 1040 has become simpler to file for 2018 if you only have wage income, interest income, and do not own a home. Otherwise, it has not become simpler to file as many politicians have promised, they have merely put this information onto other forms that must be included in your tax filing. Combine these separate schedules with new complex tax laws for qualified business income deductions and many other changes and a Reno CPA may still be needed to assist you in your filings.
The Tax Cuts and Jobs Act brought to mainstream attention the use of temporary tax provisions by Congress. As temporary provisions near their expiration dates several options exist for Congress to choose from. Congress may decide to keep the provision temporary by extending the expiration date, make a temporary provision permanent, or simply allow the provision to expire. When a temporary provision has expired, Congress can also extend the provision retroactively; as was the case in 2018 when Congress retroactively extended the majority of 2016 expired provisions with the passing of the Bipartisan Budget Act of 2018.
As in years past, 2017 saw the expiration of many of these temporary provisions. Twenty eight provisions expired at the end of 2017. Of these, twelve were related to business entities, thirteen to energy credits, and three to individuals.
The three individual provisions that expired will impact a large number of taxpayers.
The first of three expired individual provisions was the tuition and fees deduction. We first saw this provision in the Economic Growth and Tax Relief Reconciliation Act of 2001. This provision allowed a qualified individual to take an above the line deduction on up to $4,000 of qualified education expenses. This temporary provision has been extended in the past several times and if you were a qualified individual in 2017 and still a student in 2018 this change will impact your tax return.
The second expired individual provision was the mortgage insurance premium deduction. This provision allowed individuals to deduct the entire premium for mortgage insurance on a qualified residence as an itemized deduction on Schedule A. We first saw this provision in 2006 with the Tax Relief and Health Care Act. Like the tuition and fees deduction, this provision has been extended several times in the past. If you had a qualified mortgage in 2017 and 2018 and paid mortgage insurance, this expiration will impact your tax return in 2018.
The final individual temporary tax provision that expired in 2017 was the exclusion in income of the cancellation of mortgage debt on your primary residence. Typically, when a debtor receives debt forgiveness the IRS requires this to be included as income. This temporary provision allowed for qualified mortgage debt forgiveness to be excluded. We first saw this deduction with the passing of The Mortgage Forgiveness Debt Relief Act of 2007. If you received mortgage forgiveness on a qualified residence in 2018, you will now likely be required to include this in your taxable income in 2018.
The three expired individual tax provisions described in this post have been used in tax planning and filing for at least a decade. Many of us have used them in the past, and may have been planning on using them in 2018. It is impossible to determine the impact this may have when combined with the increase of the standard deduction in 2018 without being familiar with your individual tax situation. If you are concerned with the impact these changes may have on your 2018 tax return, consult with your trusted tax professional. For more detailed reading on the subject of this post see Congressional Research Service Report R45347.
By Jarad Clark, CPA email@example.com
It is no secret that the majority of our friends and family are on social media. But small business is taking on an expanded roll into the usually social environment. “Friend me”, “Follow me” or “Find me on LinkedIn” are the new aged business card exchange. Gone are the days of stacks of business cards on young professional’s desk, now we share LinkedIn profiles for contact information. Here are a few statistics about the power of social media in 2018:
In 2018, there are 3.196 billion global social media users. A 42% penetration of the worlds population.
There are few other platforms that you can reach such a wide array of potential clients with relatively cheap advertising.
These stats show the power that social media has become in the marketing and business development world. Social media is the most likely place that your potential clients, employees, and business partners are going to hear about you. Now is the time to utilize the platforms at hand to gain an edge on your competition.
By Erika Hoppe, CPA, JD firstname.lastname@example.org
Each year, the Statistics of Income Division of the IRS compiles data and produces a wide range of statistics measuring various components of the U.S. tax system. With the federal estate tax exemption increasing from $5,490,000 ($10,980,000 for married couples) in 2017 to $11,200,000 ($22,400,000 for married couples) in 2018 under the Tax Cuts and Jobs Act, fewer estate tax returns are expected to be filed in the future. While it is true that fewer taxpayers will be subject to the estate tax, there are many other reasons why estate planning remains important. One example is charitable giving.
The most recent statistics published by the IRS regarding charitable giving are from 2016. For tax purposes, there were 12,411 estates worth $192,218,976,000 gross across the country with 2,718 charitable bequests totaling $19,296,922,000 gross. California had the highest number of estates, specifically, 2,419 estates worth $38,300,167,000 gross with 454 charitable bequests totaling $4,599,647,000 gross. Florida came in second with 1,451 estates worth $32,881,907,000 gross with 334 charitable bequests totaling $1,662,045,000 gross. The state with the fewest number of estates was Alaska, which had 18 estates worth $236,663,000 gross. Since there were so few estates, the IRS did not release information on charitable bequests to protect individual taxpayer data. Vermont had the highest ratio of charitable bequests to gross estates with 17 charitable bequests totaling $92,387,000 gross and 41 gross estates worth $378,858,000.
To see these statistics as well as prior year statistics on charitable bequests by state of residence, click here. To find additional statistics relating to other areas of the tax system, visit the IRS website.
The Tax Cuts and Jobs Act (TCJA) was approved by Congress and signed into law on December 22, 2017. It provides drastic changes to the Internal Revenue Code and affects taxpayers of all different types, including individuals, corporations, partnerships, estates, and trusts. Following are some of the key changes with regard to trusts and estates.
Prior to the TCJA, there were five tax brackets for trusts. The TCJA eliminated one tax bracket and decreased the overall tax rates for each bracket, reducing the top tax rate for trusts from 39.6% to 37%. Under the new law, if taxable income is:
Not over $2,550, the tax is 10% of taxable income;
Over $2,550 but not over $9,150, the tax is $255 plus 24% of the excess over $2,550;
Over $9,150 but not over $12,500, the tax is $1,839 plus 35% of the excess over $9,150;
Over $12,500, the tax is $3,011.50 plus 37% of the excess over $12,500.
While the overall tax rates are now reduced, the tax brackets are still very compressed with the top tax rate taking effect at $12,500.
The TCJA did not change the exemption amounts for trusts and estates. Estates, simple trusts, and complex trusts are still allowed a $600, $300, $100 exemption, respectively.
There are additional changes to trusts and estates under the TCJA, such as the deductibility of some expenses. For instance, trusts and estates are no longer able to deduct miscellaneous itemized deductions subject to the 2% of AGI limitation, such as investment management fees. For additional changes under the TCJA, check the IRS website.
A few weeks ago, the Internal Revenue Service issued a notice stating they would be preparing regulations and guidance to clarify the treatment of income re-characterized for purposes of working around the new $10,000 cap on the state and local tax (SALT) deduction. So far, several states including New York, New Jersey, and Connecticut have passed legislation designed to enable high-income taxpayers to bypass the cap, with legislation pending elsewhere. In the notice, the IRS emphasized the “substance over form” doctrine, meaning they care about the actual substance of a payment, and not the name or form it may be given.
While the direct guidance remains to be seen, this is clearly bad news for the charitable contributions in lieu of taxes approach that California was looking into to, and will greatly reduce the itemized deductions of CA residents for 2018. The IRS has made clear in this notice that it is concerned with whether a payment is made in satisfaction of a tax liability, and not whether it is re-characterized in some other way. The impact on other workarounds, such as New York’s optional payroll tax swap or Connecticut’s entity-level tax swap, is not immediately clear, though both approaches could be at risk as well.
We should continue to practice skepticism of any SALT deduction cap avoidance schemes until we receive the IRS guidance. Most agree that existing statutes, case law, and regulations are fairly clear on this matter and states have just muddied the waters. Formal IRS guidance will help protect taxpayers, so hopefully they do not rely on state-endorsed strategies, which could result in penalties and increased liability.
California can be a great market for selling goods with its large and diverse population. However, entering this market is fraught with additional tax requirements and fees. For instance, Corporations are taxed at 8.84% in additional to their minimum $800 yearly minimum franchise tax. Additionally, pass-through entities such as S Corporations are taxed at 1.5% plus an $800 yearly fee and Limited Liability Companies (LLCs) must pay taxes ranging from $800 to $6,800 each year. If you’re an individual residing in California this pass-through income is then taxed again at up to 13.3%, the highest state income tax rate in the country!
It can come as a surprise to some businesses with no sales or business assets in California that there could still be a filing requirement and of course tax due. For instance if a business is headquartered in any state such as Nevada or Arizona, performs all work in their home state, but makes the mistake of hiring some employees that reside in California, then they are considered “doing business” in California. If California considers that you are doing business in their state then tax filings and minimum fees are required. Another example is if you’re a Nevada LLC that has a small ownership in a California company that could also be considered doing business in California.
Most of the time selling goods profitably in California are worth the extra expense and headaches. An individual can easily avoid having all their income, including social security, pensions, business income from outside California, or investment income being taxed by California by becoming a nonresident. There are many tests that California uses to determine if a person is a resident of California. The main qualifiers to be classified as a nonresident and avoid California’s onerous taxes, are to spend less than six months in California, keep your main home outside of California and moving various business contacts, bank accounts, automobile registrations, and professional services such as your CPA outside of the State.
The Tax Cuts and Jobs Act (TCJA) has done a stellar job of removing all or part of the “deduction” from the Meals and Entertainment Deduction.
Business related entertainment deductions turned out to be a big loser when the dust settled after the passage of the TCJA in late December 2017. Entertainment expenses were hit particularly hard as the TCJA completely eliminates the deduction for entertainment expenses (including food purchases), for activities such as taking clients or prospective clients to concerts, movies, the theater, sporting events or amusement parks. The Act also eliminates deductions for amounts paid for memberships in any club organized for business, pleasure, recreation or social purposes.
One entertainment expense that did survive the new law is expenses employers incur for recreational, social, or similar activities primarily for the benefit of employees, such as expenses incurred for an annual holiday party or summer outing or picnic.
Businesses are allowed a 50% deduction for amounts paid for meals in conjunction with the active conduct of the taxpayer’s trade or business. However, we must take note of two changes made by the new tax act relating to meals.
First, a definition for “business meal” has been removed, and meals provided to employees traveling on business are still deductible at 50%. However, beginning in 2018 through the end of 2025, the cost of meals provided for the convenience of the employer, such as meals provided to employees who need to be available throughout the mealtime, are only deductible at 50%. Prior to TCJA these types of meals were deductible at 100%. Also, the new tax law expands the definition of meals for the convenience of the employer subject to the 50% limitation to include meals provided in the employer’s on-site dining facility. Further, beginning in 2026, no deduction will be allowed for meals for the convenience of the employer and for the cost, including meals, of operating an on-site dining facility.
While the new law ratchets down on the meals and entertainment deduction that we have become used to over the years, the deduction does survive in some forms. While customers and clients will likely enjoy fewer trips to the ball field or concert venue, employees should continue to look forward to a nice summer picnic and festive holiday party with their coworkers.
One of the changes to itemized deductions because of the Tax Cuts and Jobs Act of 2017 was the suspension of the deduction on interest on up to $100,000 of home equity indebtedness. The Internal Revenue Service announced that in many cases taxpayers will be able to continue deducting interest paid on home equity loans.
Prior to the Tax Cuts and Jobs Act, taxpayers were able to deduct interest on up to $1 million in mortgage debt and also up to $100,000 of home equity debt. Under the new law, taxpayers are now limited to $750,000 of home acquisition debt with no separate carve out for home equity debt. However, tax filers with mortgage debt taken out prior to December 14, 2017, are still allowed to deduct interest on up to $1 million in mortgage debt (not inclusive of home equity debt).
So, how do you determine if interest on home equity debt is deductible for tax years beginning after 2017? Here are a couple of guidelines:
It is good to see that interest on home equity debt is still available for deduction. Check the IRS’ announcement for some examples to illustrate the new limits.
The Tax Cut and Jobs Act – How does it affect non-corporate taxpayers with business income?
The Tax Cut and Jobs Act decreased the tax rate for corporations from graduated rates of up to 35% to a flat rate of 21% beginning after December 31, 2017. The Act also added a 20% deduction for non-corporate taxpayer with domestic qualified business income from sole proprietorship, partnership, limited liability company (LLC) and S corporations, effective for tax years after December 31, 2017 and before January 1, 2026.
The 20% deduction is allowed as a deduction reducing taxable income and not allowed in computing adjusted gross income. The deduction is limited to the greater of:
The 20% deduction is also limited to qualified non-personal service businesses income. Qualified non-personal service income is defined as the net amount of domestic qualified items of income, deduction and loss from trade or business other than health, law, consulting, athletics, financial services, brokerage services or any business where the main asset of the business is the reputation or skill of one or more of its employees or owners.
The above limitations do not apply for taxpayers with taxable income below the “threshold amount” ($315,000 for couples filing jointly, $157,000 for other individuals). The 20% deduction is phased in for individuals with taxable income exceeding the threshold amount, over the next $100,000 of taxable income for married individuals filing jointly, $50,000 for other individuals.
Basically, non-corporate taxpayers with taxable income below the $157,000 or $315,000 threshold may generally claim the full 20% deduction. Non-corporate taxpayers with taxable income above the threshold with non-personal service business income may claim the deduction, but may be limited by the wage and capital limit exception or may be completely phased out.