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The New 1040

  By David Schaper, CPA     dschaper@bvcocpas.com

 

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     jclark@bvcocpas.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  ehoppe@bvcocpas.com

 

 

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.

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.

On December 20, the House approved H.R. 1, the Tax Cuts and Jobs Act, a sweeping tax reform measure. While much still needs to be determined for tax planning opportunities, we can look at the new income tax rates and how they compare to the pre-Act law.

 

2017 2018
Single
Up to 9,325.00 10.0% Up to 9,525.00 10.0%
Up to 37,950.00 15.0% Up to 38,700.00 12.0%
Up to 91,900.00 25.0% Up to 82,500.00 22.0%
Up to 191,650.00 28.0% Up to 157,500.00 24.0%
Up to 416,700.00 33.0% Up to 200,000.00 32.0%
Up to 418,400.00 35.0% Up to 500,000.00 35.0%
Over 418,400.00 39.6% Over 500,000.00 37.0%
MFJ
Up to 18,650.00 10.0% Up to 19,050.00 10.0%
Up to 75,900.00 15.0% Up to 77,400.00 12.0%
Up to 153,100.00 25.0% Up to 165,000.00 22.0%
Up to 233,350.00 28.0% Up to 315,000.00 24.0%
Up to 416,700.00 33.0% Up to 400,000.00 32.0%
Up to 470,700.00 35.0% Up to 600,000.00 35.0%
Over 470,700.00 39.6% Over 600,000.00 37.0%
As you can see, the majority of the tax rates are lower, where we start to see some discrepancies is when we get to Single filers making over $200,000. With the pre-tax law, an individual making in the range of $200,000 – $420,000, will be taxed at a 33% marginal rate. Under the “Tax Cuts and Jobs Act”, a single person making between $200,000-$420,000 will be taxed at a 35% marginal rate. It appears on its face that these individuals will be paying more in taxes. So let’s look at the real world numbers.

It isn’t until we get to $387,000 where we see the 2018 tax surpass that of the 2017 tax rates. From this point on there is a window of taxpayers (Single filers) who make between $387,000 and $417,000 who, with no other changes, will see their taxes go up for 2018. For the remaining filers, it appears that for the next 8 years you should see a tax rate decrease.

 

 

 

Having just lost my mother this year, there were many lessons I learned.

My mother did not have much in assets when she passed away but she did get a will prepared several years ago. I would strongly encourage that you make sure your parents have a will or trust in place and that you are informed as to their intentions. This can sometimes be a difficult conversation. My mother was 95 years old when she passed away and I was still struggling to get her to even bring up the subject of the eventuality of her death. Not until she was under the care of Hospice did she start informing me of what she wanted done with some of her personal effects.

My mother was a hoarder and had lived in her home for 46 years. One of the things she told me a few weeks before her death was that she felt bad for my husband who would have to deal with all of her things. As it turns out I am the one dealing with all of her things. Note to self – Do not do this to your kids. After this experience I am determined not to leave a mess for my children. My sister shared a Facebook post with me – ‘Death Cleaning’ is the newest way to declutter. Many are decluttering to save their loved ones stress down the road. Highly recommended.

In connection with my going through her things, I have found there is much that I wished we had talked about. Photos found that look precious and old that I don’t know anything about. I always wanted to make time to go through memories with her but never did. This is one of my deepest regrets. Find the time to spend with your parents to document these memories.

And finally, make sure you don’t make any tough decisions until you have had time to get through the grieving process. I was surprised at how hard her death hit me, even though as I said she was 95, and I knew it was eventually going to happen. Make sure you have a support team to help you through any immediate decisions you have to make. I was fortunate to have my daughter and husband with me that first week when I was making arrangements. It was difficult to make even what you would think are easy decisions.

When you lose a loved one, reach out to your Trusted Advisor when you are looking to make any financial decisions. This could be your attorney, financial advisor, or your CPA. I am now a firm believer that you should also have a family or friend support member of your team. Decisions are hard when you are grieving. Take the time to heal. And reach for support.

 

It’s only November but there’s still time to make the filing of your 2017 tax return less taxing in 2018.

Withholding and Estimated Taxes. Make sure enough taxes are withheld to avoid surprises at tax time. Generally taxes are withheld from wages and other income such as pensions, bonuses, commissions and gambling winnings. Taxpayers with interest, dividends, capital gains, rents and royalties will usually make additional tax payments by making estimated tax payments. Self-employed individuals who do not pay tax through withholding will also pay estimated taxes.

  1. Employees starting a new job must fill out a Form W-4, Employee’s Withholding Allowance Certificate. Use the IRS Withholding Calculator to figure out how much tax to withhold.
  2. Taxpayers expecting to owe $1,000, or more than taxes that are withheld, will need to make estimated tax payments to avoid penalties.
  3. Martial status changes, birth of a child or the purchase of a home may change the amount of taxes a taxpayer owes. Employees should submit a new Form W-4 to their employer when necessary.

Name changes. Taxpayers with name changes due to a marital status change should notify the Social Security Administration. SSA should also be notified if there’s a name change for a dependent. Notifying the SSA with name changes will ensure that the new name on the tax return matches the SSA records to avoid any delay in the processing.

Individual Taxpayer Identification Numbers. Taxpayers who use Individual Taxpayer Identification Numbers which have expired or are due to expire should apply to renew their ITIN to avoid processing delays next year. A Form W-7 must be completed as well as submission of original or certified copies of identity documents to renew an ITIN.

With the passing of another tax deadline, I thought it would be helpful to go over the consequences of not filing your tax return on time. If you have not filed your 2016 tax return, file it as soon as possible to minimize the penalties that you may owe.

There are three types of payments that could be assessed if you do not pay the tax owed on time. These are late filing penalties, late payment penalties, and interest.

If you owe taxes and don’t file your tax return or extension by the original due date, or if you filed an extension but fail to file your return by the extension due date you will be subject to late filing penalties.

The late filing penalty is 5% of the tax owed for every month your return is late, up to a maximum of 25%. If you fail to file your return for over 60 days after the due date or extended due date, the minimum penalty is the lesser of $205 (for 2016) or 100% of the unpaid tax due.

Late payment penalties could be assessed if you do not pay all of the taxes you owe. These apply if you do not pay all of the taxes owed by the original due date, regardless of whether or not you filed an extension. The late filing penalty is 0.5% of the tax owed for each month the tax remains unpaid, up to a maximum of 25%.

If both penalties apply to you the monthly penalty would be 5%, up to maximum penalty of 25%.

You will also be charged interest on any unpaid taxes starting the day after the return’s due date.

If you correctly expect to get a refund there is no penalty. You have three years to file from the due date or you will no longer be eligible for your refund.

 

 

Between Hurricane Harvey, the fast-approaching Hurricane Irma and the various wildfires ravaging the west, unfortunately natural disasters have been all too common this summer.

The last thing on anyone’s mind living in those areas is taxes, but nonetheless, there are various tax aspects of a disaster that people should be aware of. Fortunately, this is one area that the IRS makes rapid decisions to help those in need. Below is a sampling of the latest relief for victims of Hurricane Harvey from the IRS. Those impacted by disasters should check the IRS’s page frequently as other disasters may get similar relief from the IRS in the near future.

Finally, for those who want to help and support those victims of any natural disaster, be cautious of who you make donations to. In order for donations to be tax deductible, they must be made to recognized charitable organizations under the IRS. For instance, Go Fund Me donations are typically not deductible as they go to a person and not a charitable organization. If you are donating online, make sure you are on the legitimate website for the charity. Unfortunately, it is all too common for charity scams to pop up during disasters with fake websites that are very similar to legitimate ones. You should ensure that the organization clearly has their Employee Identification Number (EIN) posted and you can use that and their name to check their exempt status on the IRS website. If you are donating a significant sum, that little bit of homework on your part is well worth it.

 





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