Wednesday, January 15, 2020


2020 Marks New Tax Law Changes

Happy new year from LWH CPAs!

2020 marks a new year and many tax law changes have occurred that we believe may have a direct impact on you. Such changes include:

RETIREMENT

·         Effective 2020:  no age limit on contributions to an IRA if you have earned income (previously prohibited after turning 70 ½).
·         Effective 2020:  mandatory age to begin distributions from an IRA now 72 (up from 70 ½).
·         IRAs inherited from people (other than your spouse and a few other exceptions) who passed away after 2019 must now be distributed within 10 years of death.
·         Stipends and fellowship now qualify the recipient to make IRA contributions.
·         Up to $5,000 may be withdrawn from a retirement plan without penalty for the birth or legal adoption of a child, for up to one year after birth or adoption.  Note that the amount withdrawn is still taxable, but may be redeposited without penalty, and if redeposited within 60 days of withdrawal is not even taxable.

COLLEGE/CHILDREN

·         You may now withdraw up to $10,000 total during your lifetime from a 529 plan to repay student loans of the account beneficiary (or siblings) without tax or penalty.
·         Children are once again retroactively taxed at their parent’s tax rates instead of the potentially higher trust tax rates.
·         The tuition and fees deduction has been retroactively restored for 2018-2020.
·         A 529 can be used tax free to pay for an apprenticeship program if it is approved as such.

OTHER

·         The deduction for mortgage insurance premiums has been retroactively restored.
·         The deduction for medical expenses has been restored to a lower threshold.
·         The credit for installing an electric car charger has been restored.

These are just some of the year-end tax law changes that may impact your tax situation. Please contact us for specific information on how these new tax law changes may impact you.

Credit for Employee Cash Tips

If you operate a food and beverage establishment with employees who receive cash tips from patrons, you may qualify for a credit.

This credit relates to the Social Security taxes you pay on an employee's cash tip income which is treated (for tax purposes) as paid by you to the employee. The credit applies with respect to tips received from customers in connection with the provision of food or beverages, regardless of whether the food or beverages are for consumption on or off the premises.

These tips are required to be reported to you by the employee; however, you may still take the credit even if the employee did not report the tips to you.

The credit only applies to the tip income in excess of that needed to bring your employee's wages up to $5.15 per hour, which was the minimum wage on Jan. 1, 2007. (In 2007 tax legislation that was tied to passage of the increase in the minimum wage, Congress in effect froze the FICA tax credit based on pre-2007 law so that the credit wouldn't be affected by any subsequent increase in the minimum wage.) In other words, to the extent the tip income just brings the employee up to the minimum wage level, no credit is available. Calculations are made on a monthly basis.

Example: A waiter is employed in the ABC Restaurant. He or she is paid $2 an hour plus tips. During the month, he or she works 160 hours for $320 and receives $2,000 in cash tips which he or she reports to his or her employer.

The waiter's $2 an hour rate is below the $5.15 minimum wage rate (as in effect on Jan. 1, 2007) by $3.15 an hour. Thus, for the 160 hours worked, he or she is below the minimum rate by $504 (160 × $3.15). Therefore, the first $504 of tip income just brings him or her up to the minimum rate. The rest of the tip income is $1,496 ($2,000 − $504). The waiter's employer pays Social Security taxes at the rate of 7.65% for him or her. The employer's credit is thus $114.44 for the month: $1,496 × 7.65%.

Social security taxes paid with respect to tip income used to determine the credit cannot also be deducted (but you can elect not to take the credit, in which case you can claim the deduction).

If you have any questions relating to this credit, or wish to discuss the refund opportunities mentioned above, please contact us.

Tuesday, December 10, 2019


Year-End Tax Planning Moves for Individuals

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Year-end planning for 2019 takes place against the backdrop of recent major changes in the rules for individuals and businesses. For individuals, these changes include lower income tax rates, a boosted standard deduction, severely limited itemized deductions, no personal exemptions, an increased child tax credit, and a watered-down alternative minimum tax (AMT).

We have compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them.

... Higher-income earners must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer's approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

... The 0.9% additional Medicare tax also may require higher-income earners to take year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of a threshold amount. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax.

... Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer's taxable income. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that it, when added to regular taxable income, is not more than the maximum zero rate amount (e.g., $78,750 for a married couple). If the 0% rate applies to long-term capital gains you took earlier this year, for example you are a joint filer who made a profit of $5,000 on the sale of stock bought in 2009, and other taxable income for 2019 is $70,000, then before year end try not to sell assets yielding a capital loss because the first $5,000 of such losses won't yield a benefit this year. And if you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains sheltered by the 0% rate.

... Postpone income until 2020 and accelerate deductions into 2019 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2019 that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2019. For example, that may be the case where a person will have a more favorable filing status this year than next, or expects to be in a higher tax bracket next year.

…If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA in 2019 if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2019, and possibly reduce tax breaks geared to AGI (or modified AGI).

... It may be advantageous to try to arrange with your employer to defer, until early 2020, a bonus that may be coming your way. This could cut as well as defer your tax.

... Many taxpayers won't be able to itemize because of the high basic standard deduction amounts that apply for 2019 ($24,400 for joint filers, $12,200 for singles and for marrieds filing separately, $18,350 for heads of household), and because many itemized deductions have been reduced or abolished. Some taxpayers may be able to work around these deduction restrictions by applying a bunching strategy to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. If you are not sure if this will affect you, contact us for help in determining how these changes will impact you.

...

... Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2019 deductions even if you don't pay your credit card bill until after the end of the year.

... Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70½.  Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn.

... If you are age 70½ or older by the end of 2019, have traditional IRAs, and particularly if you can't itemize your deductions, consider making 2019 charitable donations via qualified charitable distributions from your IRAs. Such distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. But the amount of the qualified charitable distribution reduces the amount of your required minimum distribution, which can result in tax savings.

... Consider increasing the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year.

... If you become eligible in December of 2019 to make health savings account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for 2019.

... Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $15,000 made in 2019 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

These are just some of the year-end steps that can be taken to save taxes. By contacting us, we can tailor a particular plan that will work best for you.

 

Friday, December 6, 2019


Year-End Tax-Planning Moves for Businesses & Business Owners

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Year-end planning for 2019 takes place against the backdrop of recent major changes in the rules for individuals and businesses.  For businesses, the corporate tax rate has been reduced to 21%, there is no corporate AMT, there are limits on business interest deductions, and there are very generous expensing and depreciation rules. And non-corporate taxpayers with qualified business income from pass-through entities may be entitled to a special deduction.

We have compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you will likely benefit from many of them.

... Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2019, if taxable income exceeds $321,400 for a married couple filing jointly, $160,700 for singles and heads of household, and $160,725 for marrieds filing separately, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property held by the trade or business. The limitations are phased in; for example, the phase-in applies to joint filers with taxable income between $321,400 and $421,400 and to single taxpayers with taxable income between $160,700 and $210,700.

Taxpayers may be able to achieve significant savings with respect to this deduction by deferring income or accelerating deductions so as to come under the dollar thresholds for 2019. Depending on their business model, taxpayers also may be able increase the new deduction by increasing W-2 wages before year-end. The rules are quite complex, so don't make a move in this area without consulting your tax adviser.

... More small businesses are able to use the cash (as opposed to accrual) method of accounting than were allowed to do so in earlier years. To qualify as a small business a taxpayer must, among other things, satisfy a gross receipts test. For 2019, the gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts don't exceed $26 million (the dollar amount was $25 million for 2018, and for earlier years it was $5 million). Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings until next year or by accelerating expenses by paying bills early or by making certain prepayments.

... Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2019, the expensing limit is $1,020,000, and the investment ceiling limit is $2,550,000. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for qualified improvement property, roofs, HVAC, fire protection, alarm, and security systems. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all of their outlays for machinery and equipment. The expensing deduction is not prorated for the time that the asset is in service during the year. This can be a potent tool for year-end tax planning. Property acquired and placed in service in the last days of 2019, rather than at the beginning of 2020, can result in a full expensing deduction for 2019.

... Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment bought used (with some exceptions) or new if purchased and placed in service this year. The 100% write off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write off is available even if qualifying assets are in service for only a few days in 2019.

... Businesses may be able to take advantage of the de minimis safe harbor election to expense the costs of lower-cost assets and materials and supplies, assuming the costs don't have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (e.g. a certified audited financial statement) or $2,500 if there is no applicable financial statement. Where the UNICAP rules aren't an issue, consider purchasing such qualifying items before the end of 2019.

…To reduce 2019 taxable income, consider deferring a debt cancellation event until 2020.

... To reduce 2019 taxable income, consider disposing of a passive activity in 2019 if doing so will allow you to deduct suspended passive activity losses.

These are just some of the year-end steps that can be taken to save taxes. By contacting us, we can tailor a particular plan that will work best for you.

Monday, November 11, 2019


Self-employed individual's deduction for health insurance costs

There are tax benefits available to self-employed individuals who pay health insurance costs. Self-employed taxpayers can deduct 100% of their health insurance costs in computing their income taxes. This tax savings can reduce your after-tax cost of health coverage.

A brief review of the tax rules on health insurance premiums may be useful. Health insurance premiums paid by non-self-employed taxpayers are deductible as itemized medical expense deductions, but, for 2019 and later, only to the extent your total medical expenses exceed 10% of your adjusted gross income (AGI).

Because of the "floor" that applies to the medical expense deduction, if total medical expenses don't exceed 10% of AGI, no itemized deduction is available.

However, a self-employed taxpayer can deduct - as an "above the line" deduction, reducing AGI - 100% of the health insurance costs for the taxpayer, spouse, and dependents, and for any child of the self-employed taxpayer who is under age 27 as of the end of the tax year.

Example. M, who is self-employed, pays $3,000 in health insurance premiums and has no other medical expenses. M's AGI is $50,000. For 2019, since 10% of $50,000 equals $5,000, M could not claim an itemized medical expense deduction for the health insurance premiums. But, since M is self-employed, M can deduct the entire $3,000 above the line.

The health insurance deduction for self-employed taxpayers only applies for any calendar month in which you aren't otherwise eligible to participate in any subsidized health plan maintained by any employer of yours or of your spouse, or any plan maintained by any employer of your dependent or your under-age-27 child.

Also, the deduction can't exceed your earned income from the trade or business for which the health insurance plan was established.

These rules also apply to partners in partnerships and more-than-2% shareholders of S corporations where the partnership or corporation pays for health insurance coverage for its partners or shareholders.

The tax benefits of a self-employed individual's health insurance costs can effectively reduce your cost of health insurance. You may wish to consider stepping up your coverage in light of these savings. Please contact us if you wish to discuss how these rules apply to your particular situation or if you have any questions.

 

 

Wednesday, October 16, 2019


Tax treatment of scholarships

Receiving a scholarship is exciting and can be beneficial in paying for education costs, but the tax effects of such scholarships can be confusing.

Scholarships (and fellowships) are generally tax-free, whether for elementary or high school students, for college or graduate students, or for students at accredited vocational schools. It makes no difference whether the scholarship takes the form of a direct payment to the individual or a tuition reduction.

However, for the scholarship to be tax-free, certain conditions must be satisfied. The most important are that the award must be used for tuition and related expenses (and not for room and board) and that it must not be compensation for services.

Tuition and related expenses. A scholarship is tax-free only to the extent it is used to pay for (1) tuition and fees required to attend the school or (2) fees, books, supplies, and equipment required of all students in a particular course. For example, if a computer is recommended but not required, buying one wouldn't qualify. Other expenses that don't qualify include the cost of room and board, travel, research, and clerical help.

To the extent a scholarship award isn't used for qualifying items, it is taxable. The recipient is responsible for establishing how much of the award was used for qualified tuition and related expenses so as to be tax-free. You should maintain records (e.g., copies of bills, receipts, cancelled checks) that reflect the use of the scholarship money.

Scholarship award can't be payment for services. Subject to limited exceptions, a scholarship isn't tax-free if the payments are linked to services that your child performs as a condition for receiving the award, even if those services are required of all degree candidates. Thus, a stipend your child receives for required teaching, research, or other services is taxable, even if the child uses the money for tuition or related expenses.

Returns and records. If the scholarship is tax-free and your child has no other income, the award doesn't have to be reported on a return. However, any portion of the award that is taxable as payment for services is treated as wages, and the payor should withhold accordingly. Estimated tax payments may have to be made if the payor doesn't withhold enough tax. Your child should receive a Form W-2 showing the amount of these "wages" and the amount of tax withheld, but any portion of the award that is taxable must be reported, even if no Form W-2 is received.

Your child's award can have the following impact on these related tax issues:

(1) The dependency exemption (suspended for 2018-2025) that you claim for your child shouldn't be threatened by the scholarship. To claim an individual as your dependent, you must meet a support test. Although education is a support item, a special rule provides that educational costs covered by a scholarship (or fellowship) for a dependent who is a child of the taxpayer (but not for other dependents) aren't included in the calculation of total support.

(2) Any scholarship amounts that are taxable to the student will also increase your child's standard deduction. As noted above, to the extent scholarship funds are spent on room, board, or other nonqualifying expenses, the award is taxable. But the portion that's taxable to the student can be absorbed by a higher standard deduction. Because that taxable portion is treated as "earned income" (for purposes of the calculation of the standard deduction amount for dependents, see below), the student will qualify for a higher standard deduction.

The standard deduction allowed to dependents for 2019 is the greater of: (a) $1,100 or (b) $350 plus the dependent's earned income. But the standard deduction can't be more than the regular standard deduction ($12,200 for 2019 for single taxpayers). Thus, even though part of a scholarship is taxable, it may be "covered" by the standard deduction.

Example. T is a dependent of his parents. T's only income is $3,000 T received as part of a scholarship, which is taxable because it was applied to cover T's costs of room and board. Since the $3,000 is treated as earned income, T is entitled to a $3,350 standard deduction, which reduces his taxable income to zero.

(3) The tax-free scholarship may limit other higher education tax benefits to which you or your child may be entitled. Neither you nor your child may claim a credit, deduction, or exclusion for expenses paid with tax-free scholarship funds.

Thus, if your child receives a tax-free scholarship and his or her higher education expenses also qualify for any of the following credits, deductions, and exclusions, the expenses taken into account in computing any of these other benefits must first be reduced by the tax-free amounts used to pay the expenses:

        American Opportunity tax credit and Lifetime Learning credit.

        Deduction for interest on student loans.

        Coverdell ESA distribution exclusion.

        Qualified tuition (529) plan distribution exclusion.

        Savings bond interest exclusion.

         

Please contact us if you wish to discuss these or related matters further.

 

Wednesday, September 18, 2019


Taxation of social security benefits

How are Social Security benefits taxed? That depends on your other income. In the worst case scenario, 85% of your benefits would be taxed. (This doesn't mean you pay 85% of your benefits back to the government in taxes-merely that you would include 85% of them in your income subject to your regular tax rates.)
 
To determine how much of your benefits are taxed, you must first determine your other income, including certain items otherwise excluded for tax purposes (for example, tax-exempt interest). Add to that the income of your spouse, if you file jointly. To this add half of the Social Security benefits you and your spouse received during the year. The figure you come up with is your total income plus half of your benefits. Now apply the following rules:

1. If your income plus half your benefits is not above $32,000 ($25,000 for single taxpayers), none of your benefits are taxed.

2. If your income plus half your benefits exceeds $32,000 but is not more than $44,000 (exceeds $25,000 but is not more than $34,000 for single taxpayers), you will be taxed on (1) one half of the excess over $32,000 ($25,000 for single taxpayers), or (2) one half of the benefits, whichever is lower.

Example (1): S and D have $20,000 in taxable dividends, $2,400 of tax-exempt interest, and combined Social Security benefits of $21,000. So, their income plus half their benefits is $32,900 ($20,000 plus $2,400 plus 1/2 of $21,000). They must include $450 of the benefits in gross income (1/2 ($32,900 − $32,000)).

Example (2):  If S and D’s combined Social Security benefits were $5,000, and their income plus half their benefits were $40,000, they would include $2,500 of the benefits in income: 1/2 ($40,000 − $32,000) equals $4,000, but 1/2 the $5,000 of benefits ($2,500) is lower, and the lower figure is used.

3. If your income plus half your benefits exceeds $44,000 ($34,000 for single taxpayers), the computation in many cases grows far more complex. Generally, however, 85% of your Social Security benefits will be taxed if you fall into this category.

Caution: If you aren't paying tax on your Social Security benefits now because your income is below the above floor, or are paying tax on only 50% of those benefits, an unplanned increase in your income can have a triple tax cost. You'll have to pay tax (of course) on the additional income, you'll also have to pay tax on (or on more of) your Social Security benefits (since the higher your income the more of your Social Security benefits that are taxed), and you may get pushed into a higher marginal tax bracket. This situation might arise, for example, when you receive a large distribution from a retirement plan (such as an IRA) during the year or have large capital gains. Careful planning might be able to avoid this stiff tax result. For example, it may be possible to spread the additional income over more than one year, or liquidate assets other than an IRA account, such as stock showing only a small gain or stock whose gain can be offset by a capital loss on other shares. If you should need a large amount of cash for a specific purpose, we would be happy to help you determine what your additional tax cost will be before you liquidate any assets.

If you know your social security benefits will be taxed, you can voluntarily arrange to have the tax withheld from the payments by filing a Form W-4V. Otherwise, you may have to make estimated tax payments.

If you would like us to run some specific numbers for you, or if you would like to discuss this matter further, please contact us.