By Bill Saylor, CPA    bsaylor@bvcocpas.com

Two major pieces of legislation were finalized and signed on December 20, 2019 and are effective now. Specifically, the tax extender provisions were covered in the previous article Late December Tax Changes are Effective Now – and Retroactively! The SECURE Act provides significant changes for retirement accounts for both individuals and businesses. Major changes are noted below.

Individual provisions

1. Required minimum distributions (RMDs): Individuals under 70 ½ years old at December 31, 2019 may defer RMDs until the year they turn 72. If you turned 70 ½ years in 2019, you can still take the RMD until April 1, 2020.
2. Individuals who are working, including self-employment, may continue to make IRA contributions. Those over 70 ½ years who make such contributions may have a reduced qualified charitable contribution limit.
3. Non-tuition fellowship and stipend payments paid to graduate and postdoctoral students are now considered compensation for determining eligibility to make IRA contributions. There is a similar provision for foster care “difficulty of care” payments in the law.
4. Directed investments that are no longer allowed based on amended plan rules may now be distributed as a nontaxable qualified distribution.
5. Long-term part-time workers can now participate in 401k plans as long as they work at least 500 hours per year for at least 3 consecutive years.
6. The 10% penalty for distributions is waived for births or adoption expense up to $5,000 per individual (so $5,000 for each spouse if applicable.)
7. Section 529 accounts can now cover registered apprenticeships.
8. Inherited retirement plans and IRAs must generally be paid out within 10 years of the death of the account owner. Exceptions apply for surviving spouses, child beneficiaries who have not reached their majority, chronically ill beneficiaries, etc.
9. Changes to the kiddie tax added under the Tax Cuts and Jobs Act in 2017 are repealed going forward or taxpayers can elect to apply the repeal retroactively to 2018 or 2019.

Business provisions

1. Multiple employer reporting and Form 5500 filing requirements are reduced and a new pooled employer plan option is defined.
2. Auto enrollment safe harbors for 401k increased with default rates allowed as high as 15.
3. 401k plans making nonelective contributions to non-highly compensated employees (non HCE) no longer has to provide a safe harbor notice.
4. Employers may take a credit of the lesser of $500 or 50% of qualified startup costs for starting a new qualified retirement plan, SIMPLE IRA plan or SEP that covers at least one non HCE.
5. There is an additional credit up to $500 for new plans that include an automatic enrollment provision.
6. 403b plans that are terminating can now convert employees to individual accounts.
7. Qualified plans can now be adopted until the due date including extensions of the tax return for the year.
8. Failure to file penalties for 5500 returns and related returns increased.

If you have any questions, please talk to your tax preparer or business advisor.

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.

As we approach the last month of summer, many of us are still trying to gather documents to finalize the 2015 tax returns due in the next few months. But these are the prime months to begin the planning procedures to reduce your taxes in 2016. With the passing of the PATH Act of 2015 last year, the looming issues of expiring tax deductions have been delayed, or extended permanently. For the first time in several years, we know before December what our tax break limitations will be. Here are a few planning options to look into:

Are you in need of new equipment?

This is the best time of year to review your P & L from the first half of the year to project your net income at year’s end. If you have excess income and are looking to reduce the tax burden, it may be the perfect opportunity to purchase new vehicles or equipment and utilize Section 179 or Bonus Depreciation.

Review your withholding or estimate payments for adjustments.

Have you had any life changes, such as getting married, having children, etc.? Or has your business produced more income than you expected when your estimates were prepared? You should review your withholding now to make sure you are not surprised with a substantial bill at tax time, or alternatively, that the IRS is not holding excess funds for the rest of the year that you could be utilizing.

Are you on track to max out your 401K contributions?

You may have an opportunity mid-year to adjust your contributions to make sure you are maximizing your limits. Retirement contributions are a fantastic way to reduce your AGI if you are being hit with Net Investment Income Tax, high tax rates, or limited deductions.

Convert a Traditional IRA into a Roth IRA.

If income is projected to be lower than expected this year, it may be the ideal time to convert your Traditional IRA to a Roth. If you anticipate that this will be the lowest tax bracket that you may be in for the foreseeable future, converting a Traditional to a Roth IRA and taking advantage of the lower tax rates may be ideal. You will have to pay taxes on the converted value of the IRA, but your converted funds will be able to grow and be withdrawn tax free in the future.

Stay Organized.

The best tax advantage for your small business may just be getting every deduction that you deserve. Being organized and maintaining good records throughout the year will help ensure that all of your expenses get properly recorded. This includes maintaining mileage logs, which are much tougher to recreate months later.

And last, but certainly not least, contact your accountant now if you plan to make any large financial moves.

If your accountant is informed about your financial plans before the transaction is made, strategies to mitigate taxes can be discussed. After the transaction is completed, it cannot always be readily reversed and can lead to huge tax implications if done incorrectly.

So enjoy the remaining warm days of summer, but get into the habit of planning for taxes now, and you can reap the benefits of your hard work for years to come.

Two years ago the Treasury Department implemented new Tangible Property Regulations through the passing of TD 9636. The new regulations contained a “Safe Harbor” election to expense any piece of tangible property purchased under $500. Many felt this was too low and increased the administrative burden on small businesses along with the IRS.

After receiving hundreds of comments from tax payers and professionals suggesting an increase to the “Safe Harbor” threshold amount, and the Treasury Department reviewing the goals of the new regulations, common sense prevailed and the Department agreed to increase the election amount to $2,500 per invoiced piece of tangible property. This election does not require you to expense all items under this threshold. You may choose any amount up to $2,500 that fits your business. Just make sure that your capitalization policy states your dollar threshold.

The effective date of the new safe harbor de minimis is for tax years beginning on or after January 1, 2016. Although, the IRS has allowed for those individuals and businesses that had a capitalization policy in place at the beginning of 2015 to use the $2,500 limit. IRS Notice 2015-82 states:

“AUDIT PROTECTION

For taxable years beginning before January 1, 2016, the IRS will not raise upon examination the issue of whether a taxpayer without an AFS can utilize the de minimis safe harbor provided in 1.263(a)-1(f)(1)(ii) for an amount not to exceed $2,500 per invoice (or per item as substantiated by invoice) if the taxpayer otherwise satisfies the requirements of 1.263(a) – 1(f)(1)(ii). Moreover, if the taxpayer’s use of the de minimis safe harbor provided in 1.263(a) – 1(f)(1)(ii) is an issue under consideration in examination, appeals, or before the U.S. Tax Court in a taxable year that begins after December 31, 2011, and ends before January 1, 2016, the issue relates to the qualification under the safe harbor of an amount (or amounts) that does not exceed $2,500 per invoice (or per item as substantiated by invoice), and the taxpayer otherwise satisfies the requirements of 1.263(a) – 1(f)(1)(ii), then the IRS will not further pursue the issue. “

Taxpayers should review their capitalization policy for 2016 in order to implement the new safe harbor limit. If you have been using the new limit for the 2015 tax year or before, you should review IRS Notice 2015-82 to be sure that your business qualifies for audit protection.

It is never too early to start thinking about the upcoming tax season. The closer to the filing deadline it gets, the more pressure you will feel when getting your documents together and the possibility that something could be missed may increase. The other side of that is your tax preparer will get busier and busier as the tax deadline nears, which may prolong the time it takes for you to get your return completed. There is no harm in trying to get your return done before the deadline. You always have the option to wait to file the completed return until closer to the deadline.

Here are some tips to help you get ready for tax season, and avoid silly errors that could delay the filing process.

• Determine how you will file your taxes for the year

Will you prepare yourself, use computer software, or use a tax preparer?

• Consider if any major life changes occurred during the year that will affect your return

Did you get married? Divorced? Have a child? Move?

• Gather all tax documents

This may include employment W-2s, 1099s, K-1s, mortgage interest statements, student loan interest forms, etc.

A good place to start with this is by looking at your prior year’s tax return and at the documents used to prepare this return.  Then determine what has changed, i.e. new house, changed jobs, new investments, etc.

• Make sure all social security numbers and spellings of names are correct on the tax documents and with your tax preparer

This includes all dependents’ ID numbers and names.

• Gather any receipts/backup for your itemized deductions including any tax deductible donations, health & dental care, real estate taxes, personal tax records, etc.

• Be aware of all tax deadlines applicable to you and your business

• Don’t forget to sign all necessary forms

Now is the time to think about year-end tax planning strategies. While no significant change in tax rates is expected for 2016, there are still year-shifting maneuvers that could be employed if you expect to be in either a higher or lower tax bracket for 2016.

For instance, if you anticipate being in a lower tax bracket next year, you should consider delaying sale of assets producing gains, deferring any year-end bonuses and pushing out collection of outstanding accounts receivable. At the same time you should look at accelerating deductions into the current year by prepaying property taxes or January’s mortgage. You might also try to bunch medical and dental expenses into the current year if you expect them to exceed the adjusted gross income floor limitation for both years. Moving future charitable contributions into the current year as well as converting stock losses by selling before year-end should be considered.

On the other hand, if you expect to be in a higher bracket in 2016, the above strategies should be employed in reverse. Accelerate those income items over which you have control into the current year while pushing out deductible expenses until next year.

Again this year, one must keep an eye on the impact of the net investment income tax, which applies if the taxpayer’s modified adjusted gross income (MAGI) exceeds threshold amounts. Those threshold amounts are $250,000 for married filing jointly (and surviving spouses), $125,000 for married filing separately, and $200,000 for all others. The tax is 3.8% on the lesser of net investment income or the amount by which your MAGI exceeds the threshold amounts. To mitigate the impact of this tax one might consider moving income producing investments into tax-exempt bonds, thus lowering MAGI. Since the investment income tax applies to income from passive activities, you should explore whether any steps could be taken to reclassify such income as non-passive.

And, as always, you should make the maximum contributions allowable to retirement plans, especially if your employer makes a matching contribution.

Next year, unless Congress acts before the end of 2012, year-end tax planning will be challenging. Since 2013 tax rates are set to go up, the conventional wisdom of deferring income into subsequent years should be reconsidered. Thus certain high-income taxpayers may want to actually accelerate income into 2012 rather than deferring income into 2013 when the tax rate will probably be higher.

If you expect to be in a higher tax bracket in 2013, there are a few tax planning strategies you should consider:

• Consider selling real estate, securities and other assets held more than one year in 2012, rather than deferring such gains to future years.

• The tax rate on qualified dividends could go from 15% to as high as 43.4% in 2013. Regular corporations and S corporations with excess earnings and profits should look at making dividend payments before the end of 2012.

• Business owners may want to consider pushing into a subsequent year such deductions as retirement plan funding contributions, year-end bonuses and other controllable expense deductions. Asset acquisitions eligible for Sec. 179 expensing could be deferred until 2013, and not electing the 50% bonus depreciation on 2012 assets purchased could be considered in order to increase depreciation deductions in later years.

• Estate and gift tax rates are set to rise from the current 35% rate to a maximum 55% and the lifetime exclusion is decreasing from $5.12 million to $1 million. Thus taxpayers with even modest sized estates should undertake a thorough estate plan review.

Of course, it is difficult to know if Bush tax rates will be extended again for all or just some taxpayers. However, you should be prepared to implement these strategies if tax rates go up significantly.