Harless Tax Blog
Now that new tax rules are in place, employers and their advisers are coping with the difficulties faced in implementing the changes, adjusting to a new normal. New tax laws are always a product of give-and-take, with many constituencies fighting to retain favorable rules and congressional staff putting the pieces together so there are enough votes to pass the legislation. The changes brought about by P.L. 115-97, known as the Tax Cuts and Jobs Act (TCJA), are no exception.
The goal of lowering tax rates, primarily for businesses, needed to be tempered by eliminating certain business deductions or individual income tax exclusions so that federal revenues didn't decline too much. The elimination of employer deductions or individual income tax exclusions causes taxpayers to consider behavior adjustments to account for the increased cost of the formerly deductible or excludable expense. Never has this adjustment had to occur so quickly, with the TCJA legislation enacted on Dec. 22, 2017, and many effective dates occurring only 10 days later, on Jan. 1, 2018.
Congress is always concerned that certain business deductions or individual income tax exclusions may not be fair to all taxpayers, as some individuals and businesses benefit more than others from tax incentives. To eliminate this unfairness, Congress can either (1) eliminate the business deduction for incurring the expense, or (2) in the case of employee benefits, tax the individuals receiving the benefit. While both approaches accomplish the same tax policy result of not providing an income tax incentive for certain behaviors, the effect on Social Security taxes and the optics of the change are quite different. In one case, the cost to business for the expense is increased, and, in the other, the cost to individuals for receiving the benefit is increased. Of course, the true economic cost of these changes is borne by business owners and employees, with the relative changes for each group being dictated by their own adjustments to accommodate the increased tax costs.
This article addresses two common business expenses whose tax rules changed beginning Jan. 1, 2018: entertainment expenses and transportation fringe benefits. While the TCJA legislative changes were not detailed, the effects are significant. Without detailed legislative changes, the hard work falls to tax administrators and professionals as they help taxpayers cope with the required changes. In these two areas, administrative guidance will be particularly important. Guidance, by necessity, will follow the statute, taking into account the legislative history. However, where interpretations of the statute can differ or issues are not addressed by the statute or committee reports, the guidance may reflect the interpretation of the current IRS and Treasury leadership.
As tax advisers, we are called upon to help clients implement the new law with limited and incomplete guidance. The best we can do is make our own decisions on what is reasonable and what rules we think may be promulgated later, understanding that tax administrators may be liberal in transition relief for unexpected or significant changes and tax enforcers may be willing to accept a reasonable interpretation. This article offers practical approaches to dealing with implementing these tax rules, in a world of less than complete guidance.
Entertainment expenses — no longer deductible
Under TCJA, entertainment expenses incurred on or after Jan. 1, 2018, are nondeductible. Prior to the most recent tax law changes, entertainment expenses were 50% deductible to the extent that they were directly related to, or, in the case of an item directly preceding or following a substantial and bona fide business discussion, associated with, the active conduct of a trade or business. Detailed regulations further defined when this could occur.
Over the years, businesses interpreted many activities as falling within these exceptions, liberally interpreting the regulatory rules to claim more deductions for entertainment costs. IRS agents tended to ignore these costs, except where expenses were clearly entertainment (e.g., trips to the Super Bowl). Over the years Congress enacted additional limitations on expenses, focusing on meal expenses, spousal travel, and conventions outside North America. Beginning in 2018, U.S. taxpayers will no longer be funding a portion of these entertainment costs through tax incentives as the new law makes all entertainment expenses nondeductible. (Interestingly, tax-exempt organizations are not affected by these rule changes except to the extent associated with unrelated business income, likely because tax-exempt status appropriately limits all those expenses with the rule requiring expenses to promote the organization's exempt purpose.)
One of the most controversial areas that guidance will need to address is whether business meals with current and prospective clients are considered entertainment expenses and thus nondeductible. It may seem obvious that when a business owner shares a restaurant meal that is not lavish or extravagant with a current client or customer during which several topics are discussed, including the health of each other and their families, recent political developments, and business news affecting the client's industry, as well as the current and expected future projects for the client/customer, that the cost should be 50% deductible, just as business meals with other employees of the same firm are 50% deductible. (In 1986, Congress limited the deduction for meal expenses to 80% of the cost, further limiting the deduction to 50% in 1993, as a way of recognizing that the personal expense of eating should not receive tax benefits.)
However, what if the person joining the taxpayer is not a current client, but rather another professional or a prospective client? Isn't it just as important to maintain contact with prospective clients and other professionals as with current clients? If so, should the business cost of doing so be any different?
Some commentators suggest that even the business meal with a current client or a meal with a prospect or other business relationship may be nondeductible as an entertainment expense. Their argument is based on the development of the tax law since entertainment expense deductions were prohibited in 1962, with an exception for business meals in circumstances conducive to business deductions (repealed in 1986), current regulations, and case law. IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses, which has not been modified since enactment of the legislation, makes the distinction between entertainment and nonentertainment meals meaningful and provides insight into how the IRS views meals:
A meal as a form of entertainment. Entertainment includes the cost of a meal you provide to a customer or client, whether the meal is a part of other entertainment or by itself. A meal expense includes the cost of food, beverages, taxes, and tips for the meal. To deduct an entertainment-related meal, you or your employee must be present when the food or beverages are provided.
Taxpayers will prefer to look to the TCJA conference committee report, which describes both the House bill and Senate amendment by stating, "Taxpayers may still generally deduct 50 percent of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel)" (H.R. Conf. Rep't No. 115-466, 115th Cong., 1st Sess. 460 (Dec. 15, 2017)). A parenthetical phrase highlighting an example of food and beverage expense associated with operating a trade or business, suggests that this is not the only example. It appears then that Congress's intent is for business meals that are not incurred while traveling should be treated similarly.
In fact, former Ways and Means Committee Chairman Dave Camp's proposal, the Tax Reform Act of 2014, H.R. 1 (113th Cong.), which included this change, stated the rule more broadly. "The 50-percent limitation under current law would apply only to expenses for food and beverages and to qualifying business meals under the provision, with no deduction allowed for other entertainment expenses" (Ways and Means Committee Majority Staff, Tax Reform Act of 2014, Discussion Draft, Section-by-Section Summary, p. 64 (2014)). Additionally, congressional committee staffers have informally indicated that it was not Congress's intent to limit deductions for business meals that are not lavish or extravagant beyond the 50% limit already in place.
If there was not uncertainty on this point, however, the AICPA and others would not be asking IRS for additional guidance. While we wait for guidance, how should we be advising clients? We should caution clients that amounts may not be deductible, and we will not know if they are until IRS guidance is issued. Before that time, we may get some helpful language in the Joint Committee on Taxation's Bluebook, a description of the legislative changes. Until that time, for purposes of making estimated tax payments, taxpayers may want to conservatively assume that amounts are not deductible.
Next year, as tax returns are prepared, there should be a review of all these expenses taking into account all guidance issued by then. Certainly, we believe that it is fair and reasonable that business meals with a business purpose and intent are deductible. Tax administrators, realizing the importance of these rules for many taxpayers, will no doubt make every effort to issue guidance as soon as possible, with generous transition rules to the extent that the changes are unexpected.
Transportation fringe benefits
In the early 1990s, Congress wanted to provide incentives to use mass transit and limit the exclusion for employer-provided parking to a specified dollar amount, and enacted an exclusion for qualified transportation fringe benefits. While those benefits could be provided through a reimbursement arrangement (i.e., one in which the expense incurred by employees was reimbursed tax free by the employer, assuming substantiation requirements were met), amounts could not be provided in lieu of compensation. That rule changed for tax years beginning after 1997 when Congress provided that an employee could choose to reduce compensation to receive a nontaxable qualified transportation fringe benefit. The use of employer-provided parking exploded as a tax-free fringe benefit.
By its nature, this is a benefit enjoyed primarily by employees working in urban areas, where parking is expensive. Camp's proposal noted that elimination of a deduction for qualified transportation fringes aligns the treatment with amenities provided to employees that are primarily personal in nature and not directly related to a trade or business. Not wanting to eliminate an individual income tax exclusion, Congress decided to leave the exclusion in place and eliminate the employer's expense deductions associated with this benefit. To include tax-exempt and governmental organizations where elimination of a tax deduction is not meaningful, Congress made those amounts subject to unrelated business income tax.
Some have thought that the salary reduction provisions of qualified transportation fringes provide an opportunity to avoid the disallowed deduction rule, because it appears that the employee is funding the benefit. However, that is not correct. If an employee reduces future compensation on a pre-tax basis in exchange for the employer providing parking, the parking benefit is a provision of a qualified transportation fringe benefit, the costs of which would be disallowed. However, if the salary reduction is on an after-tax basis, the employee is not receiving a qualified transportation fringe and the disallowed deduction or, in the case of a tax-exempt organization, unrelated business income is avoided.
Qualified parking is a qualified transportation fringe benefit. As such, there is a disallowed cost that the employer must determine for qualified parking. To determine that cost, taxpayers should look to lease costs or ownership costs and, if amounts are not separately stated, make a good-faith allocation of these costs, taking into account the relative fair market values of the various items included in the lease or ownership costs. For example, a parking lot owned by a business may have snow removal, depreciation, maintenance, security, and similar expenses. There may be costs to administering a program that provides transit passes to employees. The employer will need to aggregate all of these costs and, if the costs relate to employee and nonemployee use, allocate the costs between employees' use and others' use. A conservative approach to accumulating and identifying nondeductible costs should be applied in 2018 tax planning.
Value of parking benefit
Because the employee exclusion amount is the fair market value (FMV) of the parking benefit provided, and the disallowed employer deduction is the cost of providing that parking benefit, questions arise regarding whether a value of $0 for qualified parking might eliminate the existence of the qualified transportation fringe benefit as the provision of the benefit by the employer is not a provision of anything of value.
Notice 94-3 provides helpful guidance by stating:
Generally, the value of parking provided by an employer to an employee is based on the cost (including taxes or other added fees) that an individual would incur in an arm's length transaction to obtain parking at the same site. If that cost is not ascertainable, then the value of parking is based on the cost that an individual would incur in an arm's-length transaction for a space in the same lot or a comparable lot in the same general location under the same or similar circumstances.
The notice continues by helpfully giving an example of an industrial plant in a rural area in which no commercial parking is available. In this example, while the employer provides parking free of charge, the FMV of the parking would be $0 because nonemployees would not normally pay for parking. The implication is that with a $0 market value, there is no qualified transportation fringe benefit. With no qualified transportation fringe benefit, the TCJA rule limiting employer deductions for qualified transportation fringes may not apply. (However, the inability to deduct commuting expenses may apply, if parking is considered to be part of commuting.)
A second example highlights an additional rule for parking available for customers (e.g., at a mall that provides free parking to customers and employees). Under that rule, only if an employer maintains reserved preferential spaces (i.e., parking spaces that are more favorably located than the spaces available to customers) for employees would the FMV of $0 rule not apply.
Notice 94-3 applies to the income exclusion rule for qualified transportation fringe benefits and may not extend to this new disallowed deduction rule. The TCJA deduction limitation focuses on employer costs incurred and not employee value received. Thus, even if the $0 FMV rule applies, the employer may have a cost disallowed, since the employer likely has expenses for lease or maintenance of a parking lot and other related expenses.
While this is a reasonable position, IRS guidance is needed to be confident that a value of $0 could result in no disallowed deduction. Until that time, taxpayers should be conservative and assume that if the employer incurs costs for providing qualified transportation fringes, possibly including parking with a $0 FMV under the rules of Notice 94-3, there is a disallowed cost that must be determined. Again, a conservative approach can only bring good news when tax returns are prepared and guidance is available.
CPA | South Florida
by: Harless and Associates Staff
We have seen an increase in market volatility in early 2018. A steep pullback in stocks could be good news for working people who are building retirement funds, but those approaching or recently beginning retirement might be hurt.
Historically, stock market setbacks have proven to be buying opportunities for patient investors.
Example 1: Harry Walker was 50 years old in 2008, with most of his retirement savings invested in stock funds within his 401(k) account. Then, Harry’s holdings dropped heavily.
Harry stayed the course and continued to buy stock funds as the Dow Jones Industrial Average (DJIA) rebounded from a 2008 low around 7,500 to 10,000 in 2009, 11,000 in 2010, and so on. Therefore, Harry has built substantial wealth, with the DJIA around 24,000 as of this writing.
Vulnerable to volatility
Ten years later, Harry’s situation is different.
Example 2: Harry is age 60 now, with $1 million in his 401(k). He plans to retire at 62, but a stock market collapse could trigger a 40% drop, reducing his $1 million 401(k) to $600,000. Harry might have to postpone his retirement or reduce the amount he withdraws from a smaller portfolio. If Harry stops working, he may not be able to keep investing and profit again from any market rebound.
Harry could avoid this potential problem by moving his 401(k) account from stock funds into cash. However, yields on bank accounts and the like are extremely low. If Harry moves out of stocks at age 60, he’ll avoid market risk but also reduce his opportunity for substantial investment growth going forward.
Going for the flow
Instead of moving 100% to cash, Harry could implement a so-called “bucket plan.” These plans vary, but the key to success is to have a substantial cash bucket. Continuing our example, Harry Walker would figure out how much money he’ll need for living expenses each month from his portfolio after he stops working. Typically, a cash bucket will hold at least a year’s worth of cash flow.
Example 3: Harry calculates that he’ll need $4,000 a month from his 401(k) or from an IRA after a rollover to maintain a desired lifestyle. If Harry needs to take $4,000 a month from his retirement plan, he would hold at least $48,000 in his cash bucket at the start of retirement with this strategy. From the cash bucket, Harry would arrange to have $4,000 paid into his checking account each month, just as his paychecks from work were handled.
Setting up the cash bucket is just the beginning of a bucket plan. That bucket must be replenished so cash can keep flowing.
One way to do this is to divide portfolio assets into two broad categories: fixed income (mainly bonds) and equities (mainly stocks). At regular intervals, money can flow from the fixed income bucket into the cash bucket and from the equities bucket into the fixed income bucket. This allows stocks to be held for the long term, which, historically, has been a winning investment strategy.
Other bucket plan strategies can be used. If this method appeals to you as a way to address possible market volatility, our office can go over your plan to illustrate how various portfolio assets can be delivered to you as after-tax cash flow.
by: Harless and Associates Staff
During the summer, it may be true that “the living is easy,” as the old song goes. The midyear season, though, is often not so easy at small businesses because many employees are taking vacations. Total work hours often shrink and so may company productivity.
Spreading vacation time over the rest of the year might not be practical, especially if many of your workers have school-age children and desire family vacations during summer break. You may prefer to squeeze most vacations into the summer so the disruption is minimal the remainder of the year. Nevertheless, you probably won’t welcome a warm weather slowdown, so it’s best to take steps to keep things running at an acceptable pace.
It’s vital to create and maintain a visual schedule of who is taking time off and when. This might be created with a simple wall board or online. In a relatively small company, you could have your assistant keep up this schedule and show it to you every week or so. A larger firm could leave the schedule supervision to department or division heads, each of whom would track their workers.
However you decide to do it, you should have an easy way to see who will be away next week, the week after, and so on. If several people are scheduled for vacations during, say, the third week of July, you (or the manager who will be affected) might push forward some projects or delay them until you have a full crew in the office. Also, you probably should be cautious about approving additional vacation requests for weeks when multiple employees are already planning time off.
Summer vacations can be extra troubling because your business won’t be the only one shorthanded from now until Labor Day. Chances are that your customers, suppliers, and other companies with which you work also will have employees who won’t be available. Their absence can put a crimp in your own operations. If you have strong relationships with such business associates, you might ask about their vacation schedules and who to contact if your company runs into a snag.
In some situations, you might decide to revise some of your company’s efforts to make the timing mesh with that of key outsiders.
Filling the gaps
There is not much you can do about vacationing employees elsewhere, but there are things you can do this summer to help your company manage with a reduced workforce. If there are deadlines, require employees to finish all projects before they leave. For ongoing efforts, have your workers write up a summary of work-to-date with helpful materials attached. Get mobile numbers and email addresses where they can be reached, in case a need for contact should arise.
Make sure employees place vacation responses on their work phones and email, with dates of departures and returns. You might consider assigning someone to create templates for these employees to use for their vacation responses; this can assure that vacation responses will contain the required information and without any comments that could offend or reveal confidential matters.
In addition, arrange for some employees to cover for those on vacation, if necessary. You’re probably better off if you can avoid one-on-one coverage because the worker staying at the office will be doing two jobs. Work sharing among multiple co-workers might be a better solution. If you have summer interns, ask if they might be able to handle some of the tasks usually assigned to the vacationers.
Clarity begins at home
With all this planning, don’t forget to schedule your own vacation. Obviously, you also work hard throughout the year, so some downtime will be beneficial, whether you travel or wind down at home.
In addition, you should keep track of what unexpected flaws arise this vacation season and how you might remedy them in 2019. Should you require all summer vacation requests two weeks, or even a month, ahead of time? Demand that all requests be turned in by Memorial Day before you grant any approvals? Treat conflicts in favor of seniority? Offer those who lose out by conflict a chance to jump the line next year? The more clarity in a vacation plan you disseminate to all employees, the greater the chance your company will keep operating at its peak this summer and next.
Accounting Services | Stuart
by: Harless and Associates Staff
The median U.S. house price reached $241,700 in early 2018, marking 72 consecutive months of year-on-year price gains.
If you're waiting until the absolute last moment to file your taxes, you're not alone — and you're not out of luck.
As of the last tally, the Internal Revenue Service has received 103 million of the 155 million total returns the agency expects this year. (In fact, 20 to 25 percent of Americans wait until the last 14 days before the deadline to prepare their tax returns.)
But there is still time before Tax Day on April 17 to nail down everything you need — and take advantage of certain tax breaks before it's too late.
So for all you 11th-hour filers, here are seven tips from Lisa Greene-Lewis, a certified public accountant and tax expert at TurboTax, for meeting the filing deadline without worry.
- Get the right forms. When you sit down to file your taxes, make sure you have all the necessary documents in front of you — including W-2s and 1099s as well as receipts for expenses, mortgage interest, bank routing information and your family's Social Security numbers.
- Give yourself a deadline. Of course, there's a hard cutoff courtesy of Uncle Sam (that would be Tuesday, April 17). But you can do yourself a huge favor by aiming to get everything done at least a day or two in advance, Greene-Lewis said. That small buffer will ensure you don't have to hurry through the paperwork and stress about missing something. Also, you will avoid the Tax Day frenzy — and get your tax refund faster.
- The devil is in the details. Some of the most common mistakes taxpayers make when rushing to meet the deadline include putting down an incorrect Social Security number for a child or spouse, or forgetting to simply sign a paper return. So slow down when it comes to entering in your information.
- Don't forget what you did last year. Use your return from last year as a cheat sheet. This is especially helpful if you are on the margin between taking
the standard deduction and itemizing, which could lower your tax liability.
To see whether itemizing makes sense, add up your individual deductions, including unreimbursed employee expenses, job search expenses and charitable contributions. (Keep in mind that some, like medical expenses and miscellaneous itemized deductions, have their own thresholds to be deductible.) Then check if the total exceeds the standard deduction for 2017, which is $6,350 for single filers and $12,700 for married couples filing jointly.
- If you're self-employed, make estimated tax payments. If you're working in the gig economy or as a freelancer, you're allowed to take advantage of
business expense deductions that you may not be eligible for as a W-2 employee, such as start-up costs, computers, car expenses and so on, according
But you have to make quarterly tax payments using Form 1040-ES if you expect to owe more than $1,000. The first payment for tax year 2018 is due April 17.
- E-file with direct deposit. If you expect to receive a refund this year, choosing to e-file with direct deposit will get you access to your money faster. Just be sure that the bank routing and account numbers entered on the return are accurate. Incorrect numbers can cause a refund to be delayed or worse — deposited into the wrong account.
- If you need more time, get an extension. For taxpayers who just can't meet the April deadline, requesting an extension will prevent steep late-filing penalties, Greene-Lewis said. You can use the IRS Free File to request an extension electronically or submit a paper Form 4868. But keep in mind that while an extension grants additional time to file, tax payments are still due on April 17.
If you're looking to save big on taxes by packing up your small business and shipping it to a friendlier state, it may be time to hit the brakes.
The new federal tax law grants special breaks for owners of businesses — there's the 20 percent deduction on qualified business income and lower tax rates for C-corporations — and entrepreneurs are searching for additional ways to save on state and local levies as well.
That's especially valuable because on individual returns, filers can only deduct up to $10,000 in state and local taxes, which include income and property taxes.
"Companies are determining whether they can move their business to low tax jurisdictions," said Lance D. Christensen, partner at accounting firm Margolin Winer & Evens.
"It's a question that's one of many asked as a result of this sweeping tax legislation," he said.
Leaving New York for Florida sounds like a no-brainer, yet tax professionals warn that entrepreneurs should proceed with caution. It'll take more than just moving your headquarters to ramp up your savings.
Here's what you should know before relocating.Location, location, location
The issue of "tax nexus" — where you conduct your business — matters when it comes to whether you can easily pack up and move.
Establishing a tax nexus is based on a number of factors, including where your employees are, where your property is located and whether you have inventory in a particular location.
Based on whether you have a nexus in a given state and the nature of your business, your company may be required to pay income and sales taxes there.
This is why it's easy for a one-person shop — say, an Uber driver — to pick up and move from New York to Florida, but it's not so simple for a business with multiple locations and a wide client base.
"If half of my property is in North Carolina and half in New York, I need to file returns in both states," Christensen said. "The taxes apportioned to those states will be based on shipments of property, where services are provided, and where the property is."
States themselves also use different methods to collect taxes from companies. Some assess levies based on where the work is performed, while others tax businesses based on where the customers are located.Changing residency
Maybe you and your business can easily flee to a state with lower taxes.
In that case, you'll need to establish domicile — your true permanent home — in that new state in order to benefit from their friendlier taxes.
"We would recommend a driver's license change and updating your voter's registration, but it goes beyond that," said Christensen. "It's where your social clubs are, where you return when you go on vacation."
Work with your tax planner to make sure you get this right.
New York, which has a top marginal income tax rate of 8.82 percent, has been known to challenge individuals who claim to have left the Empire State for income-tax-free Florida.Structure matters
If it's difficult to uproot your business, talk to your accountant about whether it makes sense to change your company's structure from a pass-through entity to a C-corp.
Under the new tax law, pass-through entities — including S-corps, partnerships and limited liability companies — may qualify for a 20 percent deduction of qualified business income.
These small businesses get their name from the way income and profits "pass through" to the owner's individual tax return. Pass-throughs are subject to individual income tax rates, which run as high as 37 percent.
Business owners with C-corps can take aggressive deductions — and they're subject to a corporate tax rate of 21 percent.
"If you're paying taxes in many different states, you should consider the large state and local income tax deduction that you can get as a C-corp but not as a pass-through entity," said Mark Nash, a tax partner at PwC.
However, C-corps are subject to double taxation, meaning profits are taxed to the corporation and then levied a second time when shareholders get their dividends.
Your accountant may help you develop a strategy to soften the blow.
"You might be able to avoid the double tax if you reinvest in the growth of the business," Nash said.
Tax Accountant | South Florida
Keep an eye on your mailbox over the next few weeks: All of the information you need to prepare your return should be on its way.
Filing season for the 2017 tax year began on Jan. 29. This year, the IRS bumped the deadline to file returns to April 17 because the traditional filing date of April 15 falls on a Sunday. And Emancipation Day — a legal holiday in some locations — will be observed Monday, April 16.
The IRS expects it will receive nearly 155 million individual tax returns this season.
There's good reason to get organized and file in a timely fashion this year. Experts have said the massive Equifax credit breach could contribute to tax fraud.
Even if you submit your return early, you'll have to wait a while for your refund if you claim the earned income tax credit or the additional child tax credit. Those who choose direct deposit will receive those refunds starting on Feb. 27.
The IRS has delayed refunds on returns claiming these two credits in order to give itself more time to detect phony returns and keep cash out of the hands of thieves.
Here's what you'll need to get a jump start on your filing.What's new
Though most of the changes from the Tax Cuts and Jobs Act will take effect in the 2018 tax year, one major change will affect the 2017 filing season.
Under the previous tax law, filers who take the medical expense deduction could only deduct qualifying costs that exceed 10 percent of their adjusted gross income.
Now, that threshold has been dropped to 7.5 percent for the 2017 and 2018 tax years.
You can also still save on your 2017 taxes if you make an IRA contribution by April 17.
Other than that, the opportunities to save this filing season are limited.
"It would be challenging at this point to be able to make some kind of payment and get a benefit in 2017," said Melissa Labant, director of tax policy and advocacy at the American institute of Certified Public Accountants.
Here's when to look for key documents in your mailbox (or email inbox):January
If you're an employee, you should have already received your W-2.
Businesses that hire independent contractors should have given them their 1099-MISC by the end of January. It will include information regarding nonemployee income.
However, if you're an independent contractor, you should be tracking your income throughout the year.
"Be proactive and contact companies to find out when they're issuing those 1099-MISC forms," said Gavin Morrissey, managing partner at Financial Strategy Associates in Needham, Massachusetts.
Read whole article here.
Accounting and Tax Service | Jupiter
Just six weeks after lawmakers and the public got their first glimpse of the first draft of a tax overhaul bill, Republicans on Friday released their final version. They aim to pass it next week and send it to President Trump for his signature.
The final bill still leans heavily toward tax cuts for corporations and business owners. But it also expands or restores some tax benefits for individuals relative to the earlier bills passed by the House and Senate.
The individual provisions would expire by the end of 2025, but most of the corporate provisions would be permanent.
All told, the final bill includes trillions in tax cuts, most of which but not all are offset by revenue-raising measures. The bill on net would increase deficits by an estimated $1.46 trillion over a decade, according to the nonpartisan Joint Committee on Taxation. That number would be much higher if, as Republicans assume, a future Congress does not allow the individual tax cuts to expire after 2025.
One important note: The bill would not affect 2017 taxes, for which Americans will start filing their returns in a month or so.
With that, here's a quick rundown of 16 key provisions in the final bill.
FOR INDIVIDUAL FILERS
- Lowers (many) individual rates: The bill preserves seven tax brackets, but changes the rates that apply to: 10%, 12%, 22%, 24%, 32%, 35% and 37%.
Today's rates are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
Here's how much income would apply to the new rates:
-- 10% (income up to $9,525 for individuals; up to $19,050 for married couples filing jointly)
-- 12% (over $9,525 to $38,700; over $19,050 to $77,400 for couples)
-- 22% (over $38,700 to $82,500; over $77,400 to $165,000 for couples)
-- 24% (over $82,500 to $157,500; over $165,000 to $315,000 for couples)
-- 32% (over $157,500 to $200,000; over $315,000 to $400,000 for couples)
-- 35% (over $200,000 to $500,000; over $400,000 to $600,000 for couples)
-- 37% (over $500,000; over $600,000 for couples)
- Nearly doubles the standard deduction: For single filers, the bill increases it to $12,000 from $6,350 currently; for married couples filing jointly it increases to $24,000 from $12,700.
The net effect: The percentage of filers who choose to itemize would drop sharply, since the only reason to do so is if your deductions exceed your standard deduction.
- Eliminates personal exemptions: Today you're allowed to claim a $4,050 personal exemption for yourself, your spouse and each of your dependents. Doing so lowers your taxable income and thus your tax burden. The GOP tax plan eliminates that option.
For families with three or more kids, that could mute if not negate any tax relief they might get as a result of other provisions in the bill.
Caps state and local tax deduction: The final bill will preserve the state and local tax deduction for anyone who itemizes, but it will cap the amount that may be deducted at $10,000. Today the deduction is unlimited for your state and local property taxes plus income or sales taxes.
The SALT break has been on the book for more than a century. The original House and Senate GOP bills sought to repeal it entirely to help pay for the tax cuts, but that met with stiff resistance from lawmakers in high-tax states.
Residents in the vast majority of counties across the country claim an average SALT deduction below $10,000, according to the Tax Foundation. So for low- and middle-income families who currently itemize because of their SALT deduction, they're likely to take the much higher standard deduction under the bill if it becomes law, unless their total itemized deductions, including SALT, top $12,000 if single or $24,000 if married filing jointly. Preserving the break -- albeit with a cap -- is likely to provide more help to higher income households in high-tax states.
- Expands child tax credit: The credit would be doubled to $2,000 for children under 17. It also would be made available to high earners because the bill would raise the income threshold under which filers may claim the full credit to $200,000 for single parents, up from $75,000 today; and to $400,000 for married couples, up from $110,000 today.
Like the first $1,000 of the child tax credit, $400 of the additional $1,000 also will be refundable, meaning a low- or middle-income family will be able get the money refunded to them if their federal income tax liability nets out at zero.
Even with the additional $400 in refundability, however, 10 million children from working low-income families would receive only an additional $75 in benefit under the bill, according to the Center on Budget and Policy Priorities estimates.
- Creates temporary credit for non-child dependents: The bill would allow parents to take a $500 credit for each non-child dependent whom they're supporting, such as a child 17 or older, an ailing elderly parent or an adult child with a disability.
- Lowers cap on mortgage interest deduction: If you take out a new mortgage on a first or second home you would only be allowed to deduct the interest on debt up to $750,000, down from $1 million today.
Homeowners who already have a mortgage would be unaffected by the change. The bill would no longer allow a deduction for the interest on home equity loans. Currently that's allowed on loans up to $100,000.
- Curbs who's hit by AMT: Earlier bills called for the elimination of the Alternative Minimum Tax. The final version keeps it, but reduces the number of filers who would be hit by it by raising the income exemption levels to $70,300 for singles, up from $54,300 today; and to $109,400, up from $84,500, for married couples.
- Preserves smaller but popular tax breaks: Earlier versions of the bill had proposed repealing the deductions for medical expenses, student loan interest and classroom supplies bought with a teacher's own money. They also would have repealed the tax-free status of tuition waivers for graduate students.
The final bill, however, preserves all of these as they are under the current code. And it actually expands the medical expense deduction for 2018 and 2019.
- Exempts almost everybody from the estate tax: Unlike the House GOP bill, the final bill does not call for a repeal of the estate tax.
But it essentially eliminates it for all but the smallest number of people by doubling the amount of money exempt from the estate tax -- currently set at $5.49 million for individuals, and $10.98 million for married couples. Even at today's levels, only 0.2% of all estates ever end up being subject to the estate tax.
- Slows inflation adjustments in tax code: The bill would use "chained CPI" to measure inflation, which is a slower measure than is used today. The net effect is your deductions, credits and exemptions will be worth less -- since the inflation adjusted dollars defining eligibility and maximum value would grow more slowly. It also would subject more of your income to higher rates in future years than would be the case under the current code.
- Eliminates mandate to buy health insurance: There would no longer be a penalty for not buying insurance. While long a goal of Republicans to get rid of it, the measure also would help offset the cost of the tax bill. It is estimated to save money because it would reduce how much the federal government spends on insurance subsidies and Medicaid.
The Congressional Budget Office expects fewer consumers who qualify for subsidies will enroll on the Obamacare exchanges, and fewer people who are eligible for Medicaid will seek coverage and learn they can sign up for the program.
But policy experts also note that the mandate repeal could raise premiums because more healthy people might decide to skip buying insurance.
Read whole article here.
With the end of the year looming, the window is quickly closing for taxpayers who want to minimize the taxes they will pay next spring.
What's more, for those trying to make year-end adjustments to their income and deductions, a tax reform bill being discussed in the District of Columbia has created uncertainty. Although it's tempting to take action based on expected changes to the law, some finance experts urge caution. "Until the law becomes formal, we have to be very careful," says Kristin Bulat, senior vice president of strategic resources for insurance and consulting firm NFP.
Taxpayers shouldn't make rash decisions based on a bill which may or may not become law. However, there are some smart money moves that can help hedge against potential changes.
Here are 10 tax tips to reduce the amount of federal income tax you'll pay for 2017.
- Make 401(k) and HSA contributions. People can make tax deductible contributions to traditional IRAs up to April 17 of next year. However, the door closes on Dec. 31 for 401(k) and health savings account contributions.
Taxpayers with a qualified high-deductible family health insurance plan can deduct up to $6,750 in contributions to a health savings account. Those age 55 or older are eligible for an additional $1,000 catch-up contribution.
Tax deductible contributions to a traditional 401(k) are capped at $18,000 for 2017. Workers age 50 and older can make an additional $6,000 in catch-up contributions.
- Avoid taxes on a RMD with a charitable donation. Seniors who have a traditional 401(k) or IRA account must take a required minimum distribution each year once they reach age 70 1/2. Those who don't need this money for living expenses may want to consider having it sent directly to a charity as a qualified charitable distribution. "If you take it out as a qualified charitable distribution, it doesn't increase your adjusted gross income," says Mike Piershale, president of Piershale Financial Group in Crystal Lake, Illinois. "It can also hold down the amount of Social Security that is taxed."
- Hold off on mutual fund purchases. People should be wary of buying mutual funds at this time of year if they will be held in a taxable account. You could get hit with a tax bill for year-end dividends even if you just purchased shares. "It's a big surprise," says Emilio Escandon, managing principal of the Northeast region for accounting firm MBAF. To avoid paying those additional taxes, Escandon recommends consulting with a broker before making a purchase to find out when distributions are made.
- Convert money from a traditional to a Roth IRA. Withdrawals from traditional IRAs are taxed in retirement, but distributions from Roth IRAs are tax-free. Money can be converted from a traditional to a Roth account prior to retirement, but taxes must be paid on the converted amount.
Tax experts say people should be careful that the amount they convert doesn't bump them into the next tax bracket. The one exception might be those who expect to pay the alternative minimum tax for 2017. The top AMT tax bracket is 28 percent, but it is targeted for elimination in the D.C. tax reform bill. If that happens, people paying the AMT this year could find themselves in a higher tax bracket next year. As a result, some people may be better off converting a greater amount in 2017. "If you were considering [a Roth conversion] and you're in the AMT, do it this year," Escandon says.
- Harvest your capital losses. If you own stocks that have lost money, you can sell them and deduct up to $3,000 on your federal taxes. Just be careful not to violate the wash sale rule, which would disallow the deduction. This rule states you cannot purchase the same or a substantially similar stock within 30 days before or after the sale.
- Pick up capital gains if you're in a low tax bracket. The end of the year is also a good time for some people to sell stocks that have appreciated significantly in value. "If you are in the 10 or 15 percent bracket, the long-term gains [tax rate] is zero," Piershale says. "Sell them in the 15 percent [tax bracket] and buy the stock back the next day to reset the basis." By resetting the basis, taxpayers can minimize the amount of tax they could pay on future gains.
- Use your flexible spending account balance. Workers who have flexible spending accounts need to use up their balances soon. These accounts have "use it or lose it" provisions in which money reverts back to an employer if not spent. While some companies provide a grace period for purchases made in the new year, others end reimbursements at the close of the calendar year. "So it's time to get a new pair of glasses or something like that," Bulat says.
- Bunch your itemized deductions. Taxpayers who itemize deductions for 2017 may not need to in 2018. "They're talking about almost doubling the standard deduction next year," Piershale says of the tax reform discussion. "Because of that, we've been talking [with clients] about maximizing itemized deductions this year." People may want to prepay their January mortgage payment in December, make additional charitable donations or pull the trigger on big purchases before the end of the year. "Buy the car this year if you are deducting the sales tax," Piershale says.
- Prepay your state income taxes. Another major change that is brewing in D.C. concerns state income taxes. "Both the House and the Senate bills eliminate the state income tax deduction," Escandon says. Should that happen, taxpayers won't be able to deduct any payments made in 2018, even if they are for the 2017 tax year. Therefore, Escandon recommends that anyone who thinks they will owe state income tax in April to send in that money this December.
- Consider whether to defer your bonus. Some workers might want to consider asking their bosses to wait until after the new year to send bonus checks. "Tax rates may be dropping for some, thanks to tax reform," Escandon says. If that happens, people may be better off delaying income until 2018 when it could be taxed at a lower rate.
There's only a month to go until we ring in 2018. If you want to minimize your 2017 federal income taxes, the time to act is now.
Tax Services | South Florida
The Senate tax bill is headed for a marathon debate this week after Republican leaders brought the measure to the floor Wednesday with the goal of holding a final vote by the end of the week. Here are the latest developments, updated throughout the day:
John McCain Says He Will Support Senate Bill
Republican John McCain of Arizona said in a statement Thursday that he’s decided to support the Senate tax bill.
“I believe this legislation, though far from perfect, would enhance American competitiveness, boost the economy, and provide long overdue tax relief for middle class families,” McCain said.
McCain hadn’t taken an official position on the tax plan until now—and no one was taking his vote for granted after he shocked the political world by voting against a rushed attempt to demolish the Affordable Care Act this summer.
The lawmaker has pushed for the Senate return to regular order—hearings, markups, bipartisan input and amendments—for passing major bills, including tax legislation.
McCain has a mixed record on tax cuts, voting against measures in 2001 and 2003, citing deficit concerns.
“I take seriously the concerns some of my Senate colleagues have raised about the impact of this bill on the deficit,” McCain said. “However, it’s clear this bill’s net effect on our economy would be positive.”
Collins Says ‘Not Committed’ on Bill Yet
Republican Senator Susan Collins of Maine said it “would be very difficult” to support the Senate tax bill unless Congress agrees to preserve an individual deduction for state and local property taxes and passes separate legislation to support the individual health care market.
“I am not committed to voting for this bill,” she said during a breakfast session organized by the Christian Science Monitor. She has said that Senate Majority Leader Mitch McConnell has committed to making health care legislation a priority.
Collins also said she’ll pursue an amendment to enhance the child tax credit—and pay for the revenue cost by ending the “carried interest” tax break that favors investment managers. Carried interest is the portion of an investment fund’s profit—usually 20 percent—that’s paid to investment managers. Currently, it’s taxed as capital gains, meaning it qualifies for a tax rate as low as 23.8 percent. The top individual tax rate is currently 39.6 percent.
The Senate bill would address carried interest by requiring that only gains on assets held more than three years—up from one year—would qualify for the break. Collins called that provision “modest.”
Collins’s health-care concerns center on the Senate bill’s provision to repeal the Obamacare law’s individual mandate, which requires individuals to buy health insurance. Repealing the provision is estimated to save the federal government more than $300 billion over 10 years and result in roughly 13 million fewer insured people.
On the property-tax deduction, Collins said she’s seeking a provision that would mirror the House bill approved earlier this month: retaining the break for property taxes, but capping it at $10,000. Currently, the Senate bill proposes to abolish deductions for all state and local taxes.
Corker Says Trigger Deal Still Facing ‘Difficulties’
Senate Republicans are looking to approve their tax-overhaul legislation as soon as Thursday night—but wrangling continues over whether to include a trigger for tax increases if economic growth doesn’t meet revenue targets.
“They’re having a few difficulties but hopefully in the morning they’ll have something,” Senator Bob Corker of Tennessee, who’s pushing for the trigger mechanism, said Wednesday evening. “There’s nothing to show right now.”
Corker and Republican Senator Pat Toomey of Pennsylvania are negotiating over the trigger concept, according to Senate Majority Whip John Cornyn of Texas. Corker and Toomey, both members of the Budget Committee, reached an agreement in September that allowed a budget that would add to the deficit.
Toomey said a deal would be announced Thursday, but declined to provide details.
Corker, along with Arizona Senator Jeff Flake and Oklahoma Senator James Lankford, have said their votes are contingent on the tax trigger. Others, like Senator Thom Tillis of North Carolina have said they are wary of the effect on the economy of tax increases during a recession.
While Senate Finance Chairman Orrin Hatch said he thought it was likely a trigger would be included, Senator David Perdue of Georgia countered that, saying: “There is no foregone conclusion that we will have a trigger. Because there is a debate going on about that.”
“We’re not going to do anything to jeopardize this bill,” Perdue said.
In addition to deciding whether or how to include a future tax increase if revenue targets aren’t met, Republicans may have to tweak or add other provisions during the next 24 hours or so to secure the votes they need. Another change in the works would deepen the tax cut for pass-through businesses such as partnerships and limited liability companies.
All 52 Senate Republicans united to vote to open debate on the $1.4 trillion tax-cut measure Wednesday in the latest sign that the bill has the momentum it needs to pass. Republicans must have 50 of their 52 members vote “aye” in order to send the bill to a planned House-Senate conference, the next step in GOP efforts to get tax legislation to President Donald Trump by the end of 2017.
The Senate is now spending 20 hours of limited debate time on the tax bill. During that period, Democrats may try to strip out parts of the bill by raising objections to them based on Senate rules. Republican staff members have been working to tweak tax and oil-drilling provisions in the bill to comply with rules meant to exclude provisions that aren’t primarily fiscal in nature.
The formal debate time is set to expire close to midnight on Thursday, after which an unlimited amendment vote series known as “vote-a-rama” would ensue. Senators could agree to speed up the debate and start the amendment votes sooner.
During vote-a-rama, Democrats are likely to offer numerous amendments meant to highlight any flaws they believe the bill contains. Democrats say the bill gives most tax benefits to the wealthy while raising taxes on many in the middle and working class, in addition to increasing budget deficits.
“What’s on offer is a plan to force working people and middle-class families to pay for handouts to corporations and tax cheats," said Democratic Senator Ron Wyden as debate kicked off Wednesday evening.
Republican Senator Mike Enzi, chairman of the Budget Committee, disputed that characterization. “We need tax reform that will make our system simpler and fairer and allow people to keep more of what they earn,” he said. “This bill before us would do that.”
Some Republicans are expected to offer amendments that would be paid for by setting the corporate rate higher than the 20 percent proposed in the Senate tax bill. The current corporate rate is 35 percent.
Moderate GOP Senator Susan Collins filed an amendment that would retain the individual deduction for state and local property taxes and cap it at $10,000 for individuals—mirroring the House tax bill. She said she would pay for the change with a 21 percent corporate rate and by keeping the individual top rate at 39.6 percent.
“I think it’s significant that many members believe that we don’t need to go all the way to 20 percent in order to spur investment and job creation,” Collins said.
Republican senators Mike Lee and Marco Rubio also plan to make the bill’s child tax credit refundable up to 15.3 percent of earnings, paid for with a 22 percent corporate rate.
Behind the scenes, Republicans will be crafting a final substitute amendment containing any changes they’ll need to get the required 50 votes.
Wavering senators Steve Daines of Montana and Ron Johnson of Wisconsin appear to be on track to support the bill after securing a 20 percent deduction for pass-throughs, an increase from the 17.4 percent in the draft bill. Johnson said Wednesday he expects to see the larger deduction included in the final version of the Senate legislation. He added he would support an amendment calling for the elimination of state and local tax deductions for corporations.