Category: Tax Services

Posted on Apr 4, 2019

The IRS announced that it is providing expanded penalty relief to certain individuals whose  2018 federal income tax withholding and estimated payments fell short of their total tax liability for the year. (Notice 2019-25)

The IRS is now lowering to 80% the threshold required to qualify for this relief. Under the relief originally announced January 16, 2019, the threshold was 85%. The usual percentage threshold is 90% to avoid a penalty.

This means that the IRS is now waiving the estimated tax penalty for taxpayers who paid at least 80% of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments — or a combination.

Why Did Some People Not Have Enough Withheld?

The U.S. tax system is pay-as-you-go. By law, it requires taxpayers to pay most of their tax obligation during the year, rather than at the end of the year. This can be done by either having tax withheld from paychecks or pension payments, or by making quarterly estimated tax payments.

The expanded relief will help many taxpayers who owe tax when they file, including taxpayers who didn’t adjust their withholding and estimated tax payments to reflect an array of changes under the Tax Cuts and Jobs Act (TCJA), which was enacted in December 2017.

“We heard the concerns from taxpayers and others in the tax community, and we made this adjustment in an effort to be responsive to a unique scenario this year,” said IRS Commissioner Chuck Rettig. “The expanded penalty waiver will help many taxpayers who didn’t have enough tax withheld. We continue to urge people to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019.”

The revised waiver computation will be integrated into commercially-available tax software and reflected in the forthcoming revision of the instructions for Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts.

What If You Already Filed?

Taxpayers who have already filed for tax year 2018 but qualify for this expanded relief may claim a refund by filing Form 843, Claim for Refund and Request for Abatement and include the statement “80% Waiver of estimated tax penalty” on Line 7.  This form cannot be filed electronically.

If you have questions about withholding or the recently announced penalty relief, contact your Cornwell Jackson tax advisor.

 

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Posted on Apr 2, 2019

Most businesses will owe less tax for the 2018 tax year than they would have under prior law, thanks to changes brought by the Tax Cuts and Jobs Act (TCJA). But have you done everything possible to lower your business tax bill for last year? Even though 2018 is in your review mirror, there are some possibilities for business owners to consider if your return for the last tax year hasn’t been prepared yet.

New QBI Deduction for Pass-Through Entities

Before the TCJA, net taxable income from so-called “pass-through” business entities was simply passed through to you as an individual owner and taxed at your personal rates. This includes sole proprietorships, partnerships, limited liability companies (LLCs) treated as sole proprietorships or partnerships for tax purposes, and S corporations.

For tax years beginning in 2018, the TCJA allows a new deduction for individual owners of pass-through entities based on their share of qualified business income (QBI) from those entities. The deduction can be up to 20% of QBI, subject to restrictions that can apply at higher owner income levels.

If you qualify, the deduction is claimed on your personal tax return. (See “Filing Deadlines for 2018 Returns” at right.) The IRS has issued regulations on how to calculate the QBI deduction, but they’re lengthy and complex. So, it’s important to discuss the details with your tax advisor.

Filing Deadlines for 2018 Returns

Tax Day varies depending on how your business is set up. Here are the basics.

For Sole Proprietorships and Single-Member LLCs

The 2018 filing deadline for an individual who operates a business as a sole proprietorship or as a single-member limited liability company (LLC) that’s treated as a sole proprietorship for tax purposes is the same as the deadline for filing their personal tax return. That’s generally April 15, 2019. However, for taxpayers in Massachusetts and Maine, the deadline is April 17, 2019, due to holidays. (April 15 is Patriots’ Day in Maine and Massachusetts; April 16 is Emancipation Day in Washington, D.C., where the IRS is located.)

Those dates are rapidly approaching. Your deadline can be extended to October 15, 2019. But you still must pay your tax liability by the April deadline.

To avoid penalties for the 2018 tax year, your payments from withholding and estimated payments (combined) generally must equal at least 80% of the current year’s tax liability or 100% of the prior year’s tax liability. Higher income taxpayers may be required to pay at least 110% of the prior year’s tax liability to avoid an interest charge penalty for inadequate estimated tax payments.

For Other Pass-Through Entities

For partnerships, LLCs treated as partnerships for tax purposes, and S corporations that use the calendar year for tax purposes, the 2018 filing deadline is March 15, 2019. But your tax advisor may have extended the deadline to September 15, 2019, to give you extra time to deal with changes included in the Tax Cuts and Jobs Act (TCJA).

When these types of pass-through entities use a fiscal year end for federal income tax purposes, returns are due on or before the 15th day of the third month after the fiscal year ends. The due date can be extended for six months.

For example, an S corporation with a March 31 tax year end must file or extend its return for the tax year beginning in 2018 by June 17, 2019, and the extended due date would be December 16, 2019. (These deadlines have been adjusted for weekends and holidays.)

For C Corporations

For 2018, the tax filing deadline for C corporations that use the calendar year for federal income tax purposes is generally April 15, 2019. It’s April 17, 2019, for calendar-year corporations registered in Massachusetts or Maine. The deadline can be extended for six months to October 15, 2019.

Generally, a corporation with a fiscal tax year end must file its return by the 15th day of the fourth month after the end of the tax year. However, a corporation with a fiscal tax year ending June 30 must file by the 15th day of the third month after the end of its tax year.

100% First-Year Bonus Depreciation

Under the bonus depreciation program, businesses are allowed to deduct 100% of the cost of certain assets in the first year, rather than capitalize them on their balance sheets and gradually depreciate them. This break applies to qualifying assets placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain assets with longer production periods and for aircraft). After that, the bonus depreciation percentage is reduced by 20% per year, until it’s fully phased out after 2026 (or after 2027 for certain assets with longer production periods and for aircraft).

Bonus depreciation is allowed for both new and used qualifying assets, which include most categories of tangible depreciable assets other than real estate. This change will be a major tax-saving benefit on many 2018 business returns, including returns for sole proprietors and owners of pass-through entities.

Expanded Section 179 First-Year Depreciation Deductions

For qualifying assets (including expenditures for certain building improvements) placed in service in tax years beginning in 2018, the TCJA increased the maximum Section 179 first-year depreciation deduction to $1 million (up from $510,000 for 2017). The TCJA also expanded the definition of qualifying assets to include depreciable tangible personal property used mainly in the furnishing of lodging (such as furniture and appliances).

The definition of qualifying real property eligible for the Sec. 179 deduction was also expanded to include eligible expenditures for nonresidential real property:

  • Roofs,
  • HVAC equipment,
  • Fire protection systems, and
  • Alarm and security systems.

These favorable Sec. 179 deduction changes will deliver tax-saving benefits on many 2018 business returns, including returns for sole proprietors and owners of pass-through entities. However, the deduction is subject to several limitations.

Important: When both 100% first-year bonus depreciation and the Sec. 179 deduction privilege are available for the same asset, it’s generally more advantageous to claim 100% bonus depreciation, because there are no limitations on that break.

Generous Depreciation Deductions for Passenger Vehicles Used for Business

For new or used passenger vehicles that were  placed in service in 2018 and used over 50% for business, the maximum annual depreciation deductions allowed under the TCJA are as follows:

  • $10,000 for 2018 (or $18,000 if you claim first-year bonus depreciation),
  • $16,000 for 2019,
  • $9,600 for 2020, and
  • $5,760 for 2021 and thereafter until the vehicle is fully depreciated.

Under prior law, the 2017 limits for passenger cars were as follows:

  • $11,160 for the first year for a new car (or $3,160 for a used car),
  • $5,100 for the second year,
  • $3,050 for the third year, and
  • $1,875 for the fourth year and thereafter.

Slightly higher limits applied to light trucks and light vans. So, the TCJA limits are much more taxpayer friendly.

Favorable New Tax Accounting Rules

Starting with tax years beginning in 2018, the new tax law increases the gross receipts limit to $25 million for eligible C corporations and partnerships that want to:

  • Elect the cash method of accounting (rather than the accrual method),
  • Elect out of the requirement to use the percentage-of-completion method to report income from long-term construction contracts,
  • Elect simplified alternatives for inventory accounting, or
  • Avoid the complex uniform capitalization (UNICAP) rules that generally require producers and resellers of real and personal property to include in inventory direct costs and certain indirect costs.

The $25 million gross receipts limit will be adjusted annually for inflation after 2018. Whether it’s advantageous to use these accounting alternatives depends on your business situation — and there’s more to consider than just taxes.

For example, the cash basis method of accounting generally defers income recognition for tax purposes and allows greater tax-planning flexibility. However, the accrual method conforms to U.S. Generally Accepted Accounting Principles (GAAP) and, therefore, facilitates M&A due diligence and comparisons with public companies.

Deductions for Business-Related Meals

Under prior law, you could generally deduct 50% of business-related entertainment expenses. For amounts incurred in 2018 and beyond, the TCJA generally disallows deductions for business-related entertainment.

However, meal expenses incurred in connection with business entertainment (for example, meals at sporting events) and meal expenses to wine and dine customers, clients and prospects are still 50% deductible. Be sure receipts from vendors separate the costs of meals from the total bill, rather than providing just a combined total.

SEP Plans

If you own a small business and haven’t yet set up a tax-favored retirement plan for yourself, you can establish a simplified employee pension (SEP). Unlike other types of small business retirement plans, a SEP can be created this year and still generate a deduction on last year’s return.

In fact, if you’re self-employed and extend your calendar-year 2018 personal tax return, you’ll have until October 15, 2019, to take care of the paperwork and make a deductible contribution for last year. The deductible contribution can be up to:

  • 20% of your 2018 self-employment income, or
  • 25% of your 2018 salary if you work for your own corporation.

The absolute maximum amount you can contribute for the 2018 tax year is $55,000.

Important: You may not want a SEP if your business has employees, because you might have to cover them and make contributions to their accounts. That could be cost prohibitive.

What’s Right for Your Business?

This article just covers some widely available options for your 2018 business tax return. Your Cornwell Jackson tax advisor may be able to suggest others to consider, depending on your unique business situation.

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Posted on Apr 1, 2019

The London Interbank Offered Rate (LIBOR) has served as the primary reference rate for various types of adjustable-rate financial products for decades. However, its role as the finance industry’s reference rate may soon diminish in favor of a U.S.-based alternative. What is LIBOR, and why might it disappear?

The Basics

Unlike fixed interest rates, adjustable rates vary depending on market conditions. These rates are commonly charged to individuals who buy homes, businesses that borrow from retail banks and even banks that enter complex derivative contracts. The market interest rate for these arrangements is typically a function of LIBOR, plus a risk premium.

There are many variations of LIBOR. In its simplest form, LIBOR provides a theoretical rate that a major bank might charge a competitor to borrow funds overnight.

It’s theoretical because, in the aftermath of the Great Recession, interbank borrowing is rare due to increasingly stringent capital requirements. So, LIBOR approximates the risk-free cost of borrowing, which serves as the foundation of variable interest rate financial products.

An Uncertain Future

LIBOR is compiled from voluntary submissions by banks. It’s not tied to real transactions. So, there’s a risk that it can be manipulated. In fact, in 2008, regulators uncovered collusion between banks to manipulate LIBOR to profit on the financial instruments supported by LIBOR.

Given the potential for abuse, the United Kingdom’s Financial Conduct Authority (FCA) recently announced its intention to make the submission of quotes to calculate LIBOR optional beginning in 2021.

But LIBOR may continue to be used as a market reference rate. While the FCA won’t require bank participation in deriving a rate, leading many to opt out of the process, some banks may continue to provide input.

Possible Replacements

One possible alternative to LIBOR comes from the Federal Reserve Bank of New York. The Secured Overnight Financing Rate (SOFR) addresses the shortcomings of LIBOR by using interest rates associated with repurchasing agreements, which involves a large volume of overnight lending activity.

These repurchasing agreements are secured by U.S. government securities, such as Treasury bills and bonds. So, SOFR closely approximates the risk-free rate.

Swapping SOFR for LIBOR minimizes the potential for market manipulation because, with SOFR, the Federal Reserve assumes responsibility for its aggregation and reporting, not a corporation. By comparison, individual companies assume responsibility for aggregation and reporting LIBOR.

Impact of Market Conditions

Using SOFR does have a potential downside: Because it involves the collation of real-world transactions, any volatility in the economy and the market for repurchase agreements could result in SOFR fluctuations. In turn, this volatility could cause frequent changes in the rates charged to consumers for variable-rate financial products. Right now, the use of SOFR as a reference rate is in its infancy. So, only time will tell how much market volatility will affect the rate.

If consumers experience frequent changes in interest rates and their associated debt payments, the market may shift to a market-adjusted SOFR. This alternative would reflect real-world rates while removing some of the market volatility.

Making the Switch

How can lenders and borrowers that currently use LIBOR prepare for the probable adoption of SOFR?

You’ll need to identify loans and other contracts that refer to LIBOR and revise them to reference the alternative market reference rate. In addition to updating documents, a robust communication plan must exist to explain the change in market reference rates and the implications for parties to a transaction. This process needs to be completed before the anticipated demise of LIBOR in 2022.

This isn’t as simple as finding and replacing one word in a contract. In some cases, it may also be necessary to adjust the risk premium that’s added to the new-and-improved market reference rate. LIBOR and SOFR (or another reference rate) may not be completely equivalent, so it’s important to make sure that the risk premium isn’t too high or low to compensate a financial institution for its risk.

To illustrate this point, let’s assume that the three-month LIBOR rate, expressed as an annual percentage, stands at 2.69%, and SOFR equals 2.39%. To arrive at the current rate for a traditional 30-year mortgage of 4.375%, an institution would need to add 1.685% to LIBOR and 1.985% to SOFR. While the end rate is the same, the risk premium differs.

For More Information

At this point, it’s unclear exactly which reference rate will replace LIBOR — or if LIBOR will somehow survive the FCA changes. Contact your financial advisor if you have questions about how these recent developments are likely to affect your organization and to devise a game plan to modify any existing or future market-based financial arrangements.

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Posted on Mar 22, 2019

Today (and since 2004) salaried employees who earn at least $455 per week aren’t eligible  for overtime pay under the Fair Labor Standards Act, if their job duties are executive, administrative or professional (EAP) in nature. That’s true no matter how many hours these employees work in a week.

Under proposed regulations, the limit would rise to $679 in 2020. So, salaried employees earning up to around $35,308 annually would be overtime-eligible even if they fall into those EAP job roles as defined by the Department of Labor (DOL).

Although the jump in the threshold is substantial, it’s not nearly as high as the $913 weekly pay threshold set in an earlier version of the proposed regulations. If that version — which was blocked by a federal judge — had passed, it would’ve been much more costly to employers.

Highly Compensated Employees

The other significant change in the newly re-proposed regulations would raise the threshold for “highly compensated employee” (HCE) status from a $100,000 annual salary to $147,414. HCEs aren’t eligible for overtime, even if they don’t fall under the EAP job categories. In other words, if that new higher HCE threshold takes effect next year, a non-management employee earning, for example, $146,000, could still be eligible for overtime pay after logging more than 40 hours of work in a week.

Chances are, you don’t have many (or any) employees earning that kind of money who don’t meet the EAP test. Even so, you may need to take a close look at your higher paid employees’ job duties to be sure you don’t inadvertently neglect to meet the regulations’ requirements next year.

An employer who wishes to avoid paying overtime needs to pay at least the $35,308 threshold. However, a wrinkle in existing regulations that was preserved in the new proposal allows you to pay only 90% of the salary threshold ($31,778) to employees who are also eligible for a “non-discretionary” bonus. Assuming the bonus is earned, it must be sufficient to carry them over the $35,308 annual income level. A non-discretionary bonus (or commission) is one awarded based on an employee’s objective performance against concrete goals, such as profitability or productivity levels.

That works out to eligibility for a bonus of at least $3,531. If it turns out that, by the end of the year, the employee doesn’t earn the full bonus and misses the $35,308 threshold, the employer can make up the difference in the following pay period.

No Automatic Raises

Under the 2016 version of the proposed regulations, the compensation thresholds would have risen regularly based on a cost of living index. That provision isn’t included in the latest version, which indicates only that the DOL would periodically update thresholds using an amendment process (including public input).

Also unchanged in the current version: Overtime protections for police officers, fire fighters, paramedics, nurses and laborers. The “laborers” category includes:

  • Non-management production-line employees, and
  • Non-management employees in maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers and longshoremen.

What This Means for You

So, what’s the bottom line for employers, assuming the regulations are finalized as proposed? The DOL estimates that “average annualized [additional] employer costs” over the next decade will be $120.5 million. Your share of that estimated cost will depend on what steps, if any, you take to mitigate the impact.

For example, if you have employees who are now earning close to $35,308 annually and who would become newly eligible for overtime pay, you might come out by raising their compensation above the $35,308 threshold. Doing so would eliminate eligibility for overtime pay (assuming their jobs qualify for overtime based on the EAP test). Alternatively, you can take steps to minimize overtime work by previously exempt employees who suddenly become eligible for overtime pay.

Something to Think About

Be aware, this topic is one where it’s easy to be “penny wise and pound foolish.” Unemployment is low and the labor market is tight. If employees believe you’re changing your policies to do an end-run around the intent of the updated regulations, you may save a little money but the result could be a spike in your employee turnover rate.

Nearly 15 years have elapsed since the last change in the minimum pay overtime eligibility threshold level, so change is most likely coming. Even so, the DOL will probably receive some complaints from employers who don’t believe the threshold should be raised as much as proposed. The agency will accept comments on the revised proposal until early May.

 

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Posted on Mar 9, 2019

Tax filing season kicked off as scheduled on January 28. But tax returns for 2018 may require extra time to file and process due to confusion over the sweeping tax law changes under the Tax Cuts and Jobs Act (TCJA). Most the TCJA provisions that affect individuals are effective for 2018 through 2025, unless Congress extends them.

In addition, people who prepare their own returns may experience further delays and possibily incur unexpected tax liabilities (including penalties and interest) if they make one of the six common do-it-yourself tax filing errors listed below. These are some of the ways an experienced tax preparer can help at filing time and ensure you claim all the tax breaks to which you are entitled.

1. Inserting Incorrect Names and SSNs

It’s surprising how often taxpayers misspell their own names and transcribe incorrect Social Security numbers (SSNs). Getting a digit wrong on your SSN throws your entire return into jeopardy. You also can’t use a nickname or shorthand version of your name, such as Nick for Nicholas or Liz for Elizabeth.

IRS computers match up information, so it’s likely that this type of mistake will be flagged right away. Then, a return may be rejected, causing refund delays and sometimes costing extra tax dollars.

2. Providing Inaccurate Financial Account Information

Another potential trouble spot involves reporting information from banks, brokerage firms and other financial institutions. Generally, taxpayers are required to report capital gains and losses, dividends and interest on their returns. Again, if just one digit is wrong or missing, it can create problems.

If a taxpayer files electronically, data usually can be imported from most major institutions into the tax software program. However, some taxpayers have difficulty using this function or make mistakes when they input numbers manually.

In the same vein, if a taxpayer arranges for a direct deposit of a tax refund, he or she must enter the bank’s routing numbers accurately. If not, he or she may have to wait months until the error is discovered and corrected to receive a refund.

3. Using the Wrong Filing Status

One of the first items to enter on Form 1040 is your filing status. Depending on a taxpayer’s situation, an unmarried individual may be eligible to file a return as a single person or as a head of household. Married people can file a joint return or opt for separate returns. The tax rates and thresholds vary based on filing status, so this choice can make a big difference in the amount of taxes a taxpayer incurs for the year.

Usually, a married couple fares best by filing a joint return, but that’s not always the case. For instance, under the TCJA a taxpayer may be able to preserve a deduction for “qualified business income” (QBI) received from a pass-through entity by filing separately. There may be significant tax savings to be won or lost with the filing status election. Plus, it’s a hassle to fix things if a taxpayer doesn’t qualify for the status chosen.

4. Missing or Omitting Income

Sometimes taxpayers forget to report sources of income, such as Form W-2 from a side job or Form 1099-G from the previous year’s state tax refund. Taxpayers are required to report all sources of income, even if an employer doesn’t send a W-2 or a 1099. This can be especially challenging for self-employed people who receive multiple 1099s for services rendered.

It’s easy for a 1099 form to be unintentionally discarded or fall into the wrong pile of papers. So, it’s important to assemble all the forms in an organized fashion.

5. Filing Paper Returns

Technically, filing a tax return on paper isn’t a “mistake.” But doing things the old-fashioned way can lead to errors and delays. With a paper return, it’s more likely that taxpayers will enter information incorrectly, such as a name or SSN or make math errors. To help prevent common errors, a tax preparer is aware of items from the previous year and will ask questions to help eliminate discrepancies.

Furthermore, if you file electronically, you generally will receive a refund faster than you would if you mail your return to the IRS. Typically, in a normal tax filing season, the IRS processes e-filed returns within 48 hours. Plus, you’ll receive confirmation of receipt when you e-file. Keep in mind that DIY software isn’t a substitute for the expertise of an experienced tax professional. Using software without an in-depth understanding of tax law can lead to inadvertent mistakes and missed tax-saving opportunities.

6. Filing in Haste

Even if taxpayers file electronically, instead of by paper, they can make mistakes if they’re in a rush. This usually happens when the filing deadline is approaching. April 15 is the deadline for most taxpayers to file (or extend) a return for the 2018 tax year. For taxpayers in Massachusetts and Maine, the deadline is April 17 due to holidays. (April 15 is Patriots’ Day in Maine and Massachusetts; April 16 is Emancipation Day in Washington, D.C., where the IRS is located.)

Some early filers also may complete their returns at breakneck speed or try to “wing it” before they receive supporting figures from their employers, banks and other third parties.

If you’re not ready to sign off, you can request an automatic six-month filing extension. This gives you and your tax preparer until October 15, 2019, to complete your return. But filing an extension doesn’t extend the deadline for paying taxes. You still must make a good faith estimate of your tax liability by either withholding from your paycheck or making quarterly tax estimates.

Help Your Tax Professional Help You

There are several benefits of using an experienced CPA to prepare your tax return, including convenience and potential tax savings. But you still need to do your part to ensure accurate and timely filing.

First off, you’ll need to provide your tax return preparer with accurate information. Include all forms and documents that will be needed to file your return. If you omit a 1099 or fail to disclose information about foreign investments, for example, you only have yourself to blame.

Those documents should be organized in a logical fashion. If you present your preparer with a shoe box of receipts or dump a pile of records on his or her desk, it will take a while to sort things out and your return may be delayed.

Lessons Learned

Using an experienced tax preparer is the best way to avoid mistakes and achieve peace of mind when you file your tax return. Most CPA firms have implemented quality control measures — such as checklists and review procedures — to prevent common mistakes. Moreover, a trained tax professional understands the ins and outs of current tax laws and can inform you about tax-saving opportunities to lower your tax bill for 2018 and beyond.

 

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Posted on Feb 21, 2019

The minimum wage remains a popular issue for legislators on a federal, state and local level. Recently, a bill was introduced in both the U.S. House and the U.S. Senate titled the “Raise the Minimum Wage Act of 2019.” Since 2009, the federal minimum wage has remained $7.25 per hour. However, many states and localities have increased their minimum wage rates above the federal minimum wage.

According to a fact sheet about the proposed law, under the bill, the federal minimum wage rate would gradually increase over the next six years to $15 per hour. It includes a provision that would adjust the federal minimum wage thereafter to median wage growth. The bill also proposes tipped employees receive the full federal minimum wage by eliminating the tip credit. Additionally, it proposes to repeal the sub-minimum wage rates currently allowed for youth workers and individuals with disabilities.

Illinois Law Passed

As Congress mulls over the federal minimum wage, states continue to examine their minimum wages. In Illinois, for example, Governor J.B. Pritzker signed a law on February 19 that would increase the minimum wage from $8.25 per hour to $9.25 per hour on January 1, 2020. The law provides annual increases until the minimum wage reaches $15 per hour on January 1, 2025. The legislation provides employers with 50 or fewer full-time equivalent employees a credit against tax withheld beginning January 1, 2020 and would be reduced beginning January 1, 2021. The bill also includes a penalty of $100 per employee for failure to maintain required records.

What’s Happening in Other States?

Meanwhile, some other states are considering increases or making changes. Here are some examples.

Texas. A bill has been introduced that would increase the minimum wage from $7.25 per hour to $15 per hour.

Arizona. Legislation introduced a bill that seeks to exempt baseball players from minimum wage requirements. It would align with a federal law that exempts minor league players from the federal minimum wage. The bill has had a second reading. Another bill proposes a youth wage equal to the federal minimum wage, currently $7.25 per hour, for a worker who is: 1) under age 22; 2) works no more than 20 hours per week or who works excessive hours of employment for irregular and intermittent periods, and 3) enrolled as a full-time student. Arizona’s current minimum wage is $11 per hour.

Arkansas. A bill proposes to exempt certain workers from the current state minimum wage of $9.25 per hour. The proposed legislation would exempt employers with fewer than 50 employees (currently, fewer than four employees). Additionally, the bill would exempt schools including public and private universities, not-for-profit organizations and exclude workers under age 18 from the minimum wage rate.

California. On February 11, the Pasadena City Council approved a minimum wage increase of $14.25 per hour for employers with 26 or more workers and $13.25 per hour for small employers (25 or fewer workers), effective July 1, 2019. The rate increases to $15 per hour ($14.25 per hour for small employers) on July 1, 2020, then $15 per hour for small employers on July 1, 2021. Thereafter, the ordinance requires the minimum wage to be adjusted annually based on the regional Consumer Price Index (CPI). The current Pasadena minimum wage is $12 per hour. The ordinance must be drafted and requires two readings prior to enactment.

Connecticut. Governor Ned Lamont announced a minimum wage increase among several proposals aimed at working families. Lamont’s plan would increase the minimum wage from $10.10 per hour to $11.25 per hour in 2020, with scheduled annual increases of $1.25 per hour until it reaches $15 per hour in 2023. The details of the proposal were submitted to the legislature along with the proposed budget.

Delaware. Legislation has been introduced that seeks to eliminate the training and youth minimum wage, beginning in 2020. Employers can currently pay a training wage to an employee who is 18 years old or older, during the first 90 consecutive calendar days of employment, at a rate up to 50 cents less than the state minimum wage rate. The current state minimum wage is $8.75 per hour.

Hawaii. The state is considering a minimum wage increase from the current $10.10 per hour. The House Committee on Labor & Public Employment has passed a bill that would increase the minimum wage to $11.75 per hour, effective January 1, 2020. The bill would also schedule $1 increases annually until the minimum wage reaches $17 per hour, beginning January 1, 2025. For employers that are required to provide health benefits and the employees who receive health coverage, the minimum wage would increase to $11.25 on January 1, 2020, then $12 per hour on January 1, 2021, and would increase 50 cents per hour annually until it reaches $14 per hour on January 1, 2025. Additionally, the minimum wage would thereafter be adjusted annually based on the CPI.

Idaho. Minimum wage legislation has been introduced and referred to the Ways and Means Committee. A bill would increase the minimum wage from $7.25 per hour to $8.75 per hour, effective July 1, 2019, then $10.50 per hour on July 1, 2020, and finally, $12 per hour on July 1,  2021. Thereafter, the minimum wage would increase on January 1 of each year adjusted according to the CPI. Cash tipped minimum wage would increase from $3.35 per hour to $7.35 per hour by July 1, 2021.

Kentucky. Proposed legislation would raise the minimum wage rate from $7.25 per hour to $8.20 per hour, effective July 1, 2019, with gradual scheduled increases until the minimum wage reaches $15 per hour on July 1, 2026. The bill would also raise the cash minimum wage for tipped employees and would allow local governments to establish minimum wage ordinances that exceed the state minimum wage.

Maryland. A bill proposes gradually raising the minimum wage rate to $15 per hour by July 1, 2023. In 2014, Maryland passed legislation that provided for a gradual increase to the current minimum wage rate of $10.10 per hour.

Michigan. In September 2018, a ballot initiative was approved and was headed to the November 6, 2018 booths that would increase the minimum wage from $9.25 per hour to $10 per hour, effective January 1, 2019. The initiative included scheduled annual increases until the minimum wage reached $12 per hour in 2022. A separate initiative was approved regarding paid leave. In response, the legislature passed a bill mirroring the initiative, which subsequently was amended in December 2018. The amended bill raised the minimum wage from $9.25 per hour to $9.45 per hour, effective March 29, 2019, with annual scheduled increases until the minimum wage reaches $12.05 per hour by 2030. State Senator Stephanie Chang formally requested that the Michigan Attorney General, Dana Nessel, review the constitutionality of the legislature’s “adopt and amend” method. Specifically, Chang argues, that under Article II, Section 9 of the Michigan Constitution, the legislature must either enact or reject an initiative petition and that an amendment is prohibited. Nessel has agreed to evaluate the request and has asked interested parties to submit written comments by March 6, 2019 to miag@mi.gov, ATT: Opinions Division, so that they may be considered in the evaluation.

Missouri. A bill has been introduced and read for a second time in the House that would repeal the minimum wage increase, which went into effect Jan. 1, 2019 as approved by voters. The current minimum wage is $8.60 per hour, previously $7.85 per hour.

Nevada. Governor Steve Sisolak, in his State of the State address, called upon state lawmakers to introduce legislation to increase the minimum wage from $8.25 per hour to an unspecified amount.

New Hampshire. Proposed legislation would increase the minimum wage from $7.25 per hour to $10 per hour, effective Jan. 1, 2020, and beginning Jan. 1, 2022, the rate would increase to $11 per hour for employers who offer at least 10 paid sick days to employees or $12 per hour for employers who don’t.

New Mexico. A bill proposes to increase the minimum wage from $7.50 per hour to $10 per hour on July 1, 2019. The minimum wage would increase to: 1) $11 per hour on July 1, 2020; and 2) $12 per hour on July 1, 2021. Thereafter, the minimum wage would receive a cost of living adjustment annually. The legislation would eliminate the tip credit for tipped employees.

North Dakota. Proposed legislation would prohibit cities, counties, townships, school districts, and other local governments from passing an ordinance that would require an employer to pay any or all of the employees a wage rate not otherwise required under state or federal law.

Pennsylvania. Governor Tom Wolf advocates raising the minimum wage from $7.25 per hour to $12 per hour effective July 1, 2019, with gradual 50 cent increases until the minimum wage reaches $15 per hour in 2025. Wolf noted that the state minimum wage hasn’t seen an increase in a decade. A proposed law has been introduced that would raise the cash minimum wage for tipped employees from $2.13 per hour to $3.95 per hour. Beginning July 1, 2020, the cash minimum wage would increase to the greater of 70% of state minimum wage or 70% the federal minimum wage.

Rhode Island. Governor Gina Raimondo, in her State of the State address, called for an increase to the minimum wage. Her proposal would increase the minimum wage from $10.50 per hour to $11.10 per hour on January 1, 2020.

South Carolina. The state currently doesn’t have a minimum wage law. A proposed law would provide a base minimum wage $8.75 per hour, effective January 1, 2020. It would increase to $9.75 per hour by 2021 and $10.10 per hour by 2022. It also provides for the state minimum wage to be adjusted annually based on the CPI.

Texas. A bill has been introduced that would increase the minimum wage from $7.25 per hour to $15 per hour.

Virginia. Proposed legislation that sought to increase the minimum wage from $7.25 per hour to $10 per hour, effective July 1, 2019 and gradually increase the minimum wage to $15 per hour by 2021 was defeated in the Senate. Additionally, a bill that sought to permit localities to pass local minimum wage ordinances was also defeated.

Wyoming. Proposed legislation, which sought to increase the minimum wage from $5.15 per hour to $8.50 per hour and called for scheduled annual increases of 25 cents per hour from July 1, 2019 until June 30, 2025, passed the House Labor committee but was defeated in the House.

 

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Posted on Feb 20, 2019

Many businesses will pay less federal income taxes in 2018 and beyond, thanks to the Tax Cuts and Jobs Act (TCJA). And some will spend their tax savings on merging with or acquiring another business. Before you jump on the M&A bandwagon, it’s important to understand how your transaction will be taxed under current tax law.

3 Favorable TCJA Changes for Businesses

The Tax Cuts and Jobs Act (TCJA) contains several provisions that will lower federal income taxes for businesses. Here’s an overview of three pro-business changes.

1. Tax Rate Changes

The TCJA permanently reduced the corporate federal income tax rate to a flat 21% for tax years beginning after 2017.

For 2018 through 2025, the TCJA also lowered the individual federal income tax  rates on income from pass-through business entities. These include sole proprietorships, limited liability companies (LLCs), partnerships and S corporations. For those years, the maximum individual federal rate is 37%. However, the 3.8% net investment income tax (NIIT) may also apply to passive business income recognized by individual taxpayers.

Important: The federal income tax rates  are unchanged for long-term capital gains recognized by individuals. The maximum rate is 20%, but the 3.8% NIIT   may also apply.

2. New Deduction for Income from Pass-Through Business Entities

For tax years beginning in 2018 through 2025, the qualified business income (QBI) deduction is potentially available to  individual pass-through entity owners. The deduction can be up to 20% of an owner’s share of passed-through QBI. This break expires at the end of 2025, unless Congress extends it.

Numerous rules and restrictions apply to the QBI deduction. For example, above certain income levels, the deduction may be limited or eliminated for service businesses and businesses that haven’t paid enough in W-2 wages or invested enough in fixed assets. Contact your tax pro to determine whether you qualify for this tax break.

3. Expanded First-Year Depreciation Breaks

The TCJA allows 100% first-year bonus depreciation for qualifying property placed in service between September 28, 2017, and December 31, 2022. The bonus depreciation percentages are scheduled to gradually phase out as follows:

  • 80% for property placed in service in calendar year 2023,
  • 60% for property placed in service in calendar year 2024,
  • 40% for property placed in service in calendar year 2025, and
  • 20% for property placed in service in calendar year 2026.

Bonus depreciation is scheduled to expire at the end of 2026, unless Congress extends it.

Important: For certain property with longer production periods and aircraft, the bonus depreciation cutbacks are delayed by one year. For example, the 100% bonus depreciation rate applies to such property that’s placed in service before the end of 2023, and the 20% rate applies to property that’s placed in service in calendar year 2027.

In addition, the TCJA permanently increases the maximum Section 179 deduction to $1 million for qualifying property placed in service in tax years beginning in 2018. That amount will be adjusted annually for inflation.

The Sec. 179 deduction phaseout threshold has also been permanently increased to $2.5 million, with annual inflation adjustments.

For tax years beginning in 2019, the maximum deduction is $1.02 million, and the phaseout threshold is $2.55 million.

As under prior law, Sec. 179 deductions can be claimed for qualifying real property expenditures, up to the maximum annual allowance. There’s no separate limit for real property expenditures, so Sec. 179 deductions claimed for real property reduce the maximum annual allowance dollar for dollar.

Stock vs. Asset Purchase

From a tax perspective, a deal can be structured in two basic ways:

1. Stock (or ownership interest) purchase. A buyer can directly purchase the seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes. This is commonly referred to as a “stock sale,” although some sales may involve partner or member units.

The now-permanent flat 21% corporate federal income tax rate under the TCJA makes buying the stock of a C corporation somewhat more attractive for two reasons. First, the corporation will pay less tax and, therefore, generate more after-tax income. Second, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold. These considerations may justify a higher purchase price if the deal is structured as a stock purchase.

In theory, the TCJA’s reduced individual federal tax rates may also justify higher purchase prices for ownership interests in S corporations, partnerships and LLCs treated as partnerships for tax purposes. Why? The passed-through income from these entities also will be taxed at lower rates on the buyer’s personal tax returns. However, the TCJA’s individual rate cuts are scheduled to expire at the end of 2025, and they could be eliminated even earlier, depending on future changes enacted by Congress.

2. Asset purchase. A buyer can also purchase the assets of the business. This may be the case if the buyer cherry-picks specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC (SMLLC) that’s treated as a sole proprietorship for tax purposes.

Under federal income tax rules, the existence of a sole proprietorship or an SMLLC treated as a sole proprietorship is ignored. Rather, the seller, as an individual taxpayer, is considered to directly own all the business assets. So, there’s no ownership interest to buy.

Important: In certain circumstances, a corporate stock purchase can be treated as an asset purchase by making a Section 338 election. Ask your tax advisor for details.

Divergent Objectives

Business buyers and sellers typically have differing financial and tax objectives. While the TCJA doesn’t change these basic objectives, it may change how best to achieve them.

Buyers typically prefer asset purchases. A buyer’s main objective is usually to generate sufficient cash flow from the newly acquired business to service any acquisition-related debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after the deal closes.

For legal reasons, buyers usually prefer to purchase business assets rather than ownership interests. A straight asset purchase  transaction generally protects a buyer from exposure to undisclosed, unknown and contingent liabilities.

In contrast, when an acquisition is structured as the purchase of an ownership interest, the business-related liabilities generally transfer to the buyer — even if they were unknown at closing.

Buyers also typically prefer asset purchases for tax reasons. That’s because a buyer can step up (increase) the tax basis of purchased assets to reflect the purchase price.

Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets. Expanded first-year depreciation deductions under the TCJA make asset purchases even more attractive, possibly warranting higher prices if the deal is structured that way. (See “3 Favorable TCJA Changes for Businesses” at right.)

In contrast, when corporate stock is purchased, the tax basis of the corporation’s assets generally can’t be stepped up unless the transaction is treated as an asset purchase by making a Sec. 338 election.

Important: When an ownership interest in a partnership or LLC treated as a partnership for tax purposes is purchased, the buyer may be able to step up the basis of his or her share of the assets. Consult your tax advisor for details.

Sellers generally prefer stock sales. On the  other side of the negotiating table, a seller has two main nontax objectives:

  • Safeguarding against business-related liabilities after the sale, and
  • Collecting the full amount of the sales price if the seller provides financing.

A seller may provide financing through an installment sale or an earnout provision (where a portion of the purchase price is paid over time or paid only if the business achieves specific financial benchmarks in the future).

Of course, the seller’s other main objective is minimizing the tax hit from the sale. That can usually be achieved by selling his or her ownership interest in the business (corporate stock or partnership or LLC interest) as opposed to selling the business assets.

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Important: Some, or all, of the gain from selling a partnership interest (including an interest in an LLC treated as a partnership for tax purposes) may be treated as higher-taxed ordinary income. Consult your tax advisor for details.

Balancing Act

When negotiating a sale, the buyer and seller need to give and take, depending on their top priorities. For example, a buyer may want to structure the deal as an asset purchase. Agreeing on a higher purchase price, combined with an earnout provision, may convince the seller to agree to an asset sale, which comes with a higher tax bill than a stock sale.

Alternatively, a seller might insist on a stock sale that would result in lower-taxed long-term capital gain. In exchange, the buyer might agree to pay a lower purchase price to partially compensate for the inability to step up the basis of the corporation’s assets. And the seller might agree to indemnify the buyer against certain specified contingent liabilities (such as underpaid corporate income taxes in tax years that could still be audited by the IRS).

Purchase Price Allocations

Another bargaining chip in asset purchase deals — including corporate stock sales that are treated as asset sales under a Sec. 338 election — is how the purchase price is allocated to specific assets. The amount allocated to each asset becomes the buyer’s initial tax basis in the  asset for depreciation or amortization purposes. It also serves as the sales price for the seller’s taxable gain or loss on each asset.

In general, buyers generally want to allocate more of the purchase price to:

Assets that will generate higher-taxed ordinary income when converted into cash, such as purchased receivables and inventory, and
Assets that can be depreciated in the first year under the expanded bonus depreciation and Sec. 179 deduction breaks.
Buyers prefer to allocate less to assets that must be amortized or depreciated over relatively long periods (such as buildings and intangibles) and assets that must be permanently capitalized for tax purposes (such as land).

On the flip side, sellers want to allocate more of the purchase price to assets that will generate low-taxed long-term capital gains, such as intangibles, buildings and land. Tax-smart negotiations can result in allocations that satisfy both sides.

Need Help?

Buying or selling a business may be the most important transaction of your lifetime, so it’s critical to seek professional tax advice as you negotiate the deal. After the deal is done, it may be too late to get the best tax results.

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Posted on Feb 12, 2019

Thanks to the Tax Cuts and Jobs Act (TCJA), the federal income tax rate on C corporations is now a flat 21%, for tax years beginning in 2018 and beyond. Under prior law, C corporations were subject to graduated tax rates ranging from 15% to 35%. This is a permanent change, as long as Congress doesn’t reverse it.

By comparison, the maximum federal income tax rate for an individual taxpayer’s income from sole proprietorships and so-called “pass-through” entities (including partnerships, limited liability companies and S corporations) has been reduced to 37% under the TCJA. Starting in 2026, the individual federal income tax rates are scheduled to return to the pre-TCJA levels (which maxed out at 39.6%).

Based on these tax rate considerations, what’s the optimal structure for your business now? Many business owners are asking if they should switch to C corporation status. The answer varies from business to business. But there’s more to consider than just federal income tax rates. And C corporations also have certain tax disadvantages that you need to understand before you can decide.

Double Taxation

Income earned by a C corporation can potentially be taxed twice:

  1. At the corporate level, and
  2. At the shareholder level when corporate profits are paid out as taxable dividends.

Under current law, dividends received by individual shareholders and trusts and estates are taxed at a maximum federal rate of 20%. But dividends have been taxed at much higher rates in the past. And there’s no guarantee that the tax rate on dividends won’t be higher in the future, if Congress changes the tax law.

In addition, dividends can be hit with the 3.8% net investment income tax (NIIT). This effectively raises the maximum federal rate to 23.8% under current law.

Double taxation can also arise indirectly if you sell your C corporation shares for a profit. The corporation’s income is taxed once at the corporate level and undistributed profits can be indirectly taxed again at the shareholder level — in the form of capital gains tax when your shares are sold.

Under current law, the maximum federal income tax rate on long-term capital gains from shares held for more than one year is 20%. However, the 3.8% NIIT may also apply. 

The double taxation threat generally makes it a bad idea to use a C corporation to own appreciating assets, such as real estate and patents. When the corporation sells an appreciated asset, it can trigger tax at the corporate level and again at the shareholder level if the sales proceeds are distributed as 1) dividends, or 2) liquidation proceeds if the company is disbanded after the asset sale. Double taxation can also arise if undistributed asset sale profits contribute to selling your shares for a gain.    

So, the fundamental tax planning objectives for C corporations haven’t changed under the TCJA. Corporate business owners should still try to avoid double taxation, if possible.   

Excess Accumulated Earnings

One way to avoid double taxation is to keep all corporate profits and gains inside the corporation. However, if you do that, your corporation runs the risk of being exposed to the accumulated earnings tax (AET).

The AET is a corporate-level tax assessed by the IRS (as opposed to a tax that is paid voluntarily with a corporate tax return). The IRS can assess the AET when:

  • Accumulated earnings exceed $250,000 for a C corporation (or $150,000 for a personal  service corporation), and
  • The corporation can’t demonstrate economic need for the “excess” accumulated earnings.

When the AET is assessed, the rate is the same as the current maximum 20% federal rate on dividends received by individuals.

Important note: When a business owes the AET, it’s in addition to the regular corporate federal income tax.

Personal Holding Companies

The personal holding company (PHC) tax is another corporate-level tax that’s intended to prevent C corporations from avoiding double taxation by keeping all profits and gains inside the business. PHC status is determined annually.

So, a corporation can inadvertently fall into the PHC trap if it wasn’t considered a PHC in previous years. Essentially, the tax planning objective to avoid the PHC tax is to maximize the odds that your corporation will fail one of two tests — or both.

1. Income test.

To fail the income test, a corporation’s PHC income must be less than 60% of its adjusted ordinary gross income (AOGI).

PHC income equals the portion of AOGI that consists of dividends, interest income, royalties, annuities, rents, taxable distributions from estates and trusts, and income from personal service contracts.

A corporation’s ordinary gross income is income from operations minus 1) gains from the sale or disposition of capital assets (typically investment assets), and 2) Section 1231 assets (business assets that are taxed similarly to capital assets).

AOGI is ordinary gross income adjusted for certain rental property expenses, certain expenses allocable to revenues from oil and gas and mineral production, and other items.

2. Ownership test.

A corporation passes this test for a particular tax year if more than 50% of its stock value is owned directly or indirectly by five or fewer individuals during any part of the second half of that tax year.

Ownership by five or fewer individuals can potentially occur at any time during the second half of a year. So, the test can’t be based solely on year-end ownership percentages if there have been ownership changes during the second half.

Sometimes the ownership structure will result in the corporation passing the ownership test. When that happens, the shareholders may be able to adjust their ownership percentages during the first half in order to fail the test during the second half.

Most closely held C corporations will find it easier to fail the income test than the ownership test. And, if you fail the income test, you can ignore the ownership test.

A corporation that passes both tests is a PHC that’s currently taxed based on its undistributed PHC income. This is calculated by making various adjustments to the corporation’s regular taxable income and deducting any dividends paid. The remainder is subject to the 20% PHC tax.

Important note: When a business owes the PHC tax, it’s in addition to the regular corporate federal income tax bill.

The PHC tax is designed to encourage corporations that are classified as PHCs to pay out earnings as taxable dividends to shareholders. So, paying dividends can reduce or eliminate the tax.

However, those dividends must be reported as income on the shareholders’ tax returns, and probably taxed at the maximum 20% rate for individual shareholders. If so, it’s basically a wash from a federal income tax perspective. The trick is to avoid exposure to the PHC tax in the first place, usually by managing to fail the income test.

Should Your Business Operate as a C Corporation?

Be aware that, if you do choose to operate as a C corporation to take advantage of the new 21% corporate federal income tax rate, the IRS may target C corporations and give more attention to the AET and the PHC tax under the TCJA. So, avoiding these taxes and providing thorough documentation should be a key planning goal for corporations in the future.

There’s no one-size-fits-all business structure. The best structure depends on your circumstances. Your tax advisor can help you put the pieces of the puzzle together to derive the best answer for your specific situation.

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Posted on Feb 9, 2019

Did you withhold enough money from your regular paychecks in 2018? If you withheld too little — or, didn’t pay enough estimated taxes if you’re self-employed — you could have an unpleasant surprise when you file your 2018 return.

Tax Law Changes

The Tax Cuts and Jobs Act (TCJA) has made several significant changes to the tax rules for individuals for 2018 through 2025. As a result, many taxpayers who previously itemized deductions are expected to claim the standard deduction, starting in 2018.

Specifically, the TCJA:

  • Almost doubles the standard deduction to $12,000 for single filers, $24,000 for joint filers, and $18,000 for heads of households.
  • Limits the itemized deduction for state and local taxes combined to $10,000 per year. This applies to any combination of 1) state and local property tax, and 2) state and local income tax (or state and local general sales taxes if you chose to deduct them instead of state and local income taxes). Previously, these amounts were fully deductible by most taxpayers who itemized deductions.
  • Potentially reduces the itemized deduction for mortgage interest. The interest deduction for new acquisition debt is limited to interest paid on the first $750,000 of debt, down from $1 million. (Pre-TCJA home acquisition debts of up to $1 million are grandfathered under prior law.) In addition, the deduction for interest paid on up to $100,000 of home equity debt is generally repealed (unless the home equity debt is used to buy, build or substantially improve the home secured by the debt, in which case it can be treated as acquisition debt subject to the $750,000 limit).
  • Eliminates itemized deductions for most miscellaneous expenses, such as investment advisory fees and unreimbursed employee business expenses.  
  • Eliminates personal and dependent exemption deductions.
  • Increases the child tax credit — which generally applies to dependent children under age 17 — to $2,000, and the income phase-out thresholds to $200,000 for singles and heads of households and $400,000 for married couples who file jointly. So, many more households will be eligible for the increased credit.
  • Introduces a new $500 credit for other qualified dependents, including a qualifying 17- or 18-year-old, a full-time student under age 24, a disabled child of any age, and other qualifying (nonchild) relatives if all the requirements are met.

Withholding Basics

Employers are required to withhold taxes from the paychecks of employees. Likewise, self-employed individuals and retirees and others with investment income or retirement account withdrawals must make quarterly estimated payments.

If you fail to comply with the requirements, you could be liable for an estimated tax underpayment penalty, in addition to the tax liability.

The due dates for the quarterly estimated payments for a tax year are:

  • April 15,
  • June 15,
  • September 15, and
  • January 15 of the following year.

These dates are adjusted for weekends and holidays.

Safe Harbors

In general, you can avoid an estimated tax underpayment penalty using any one of these three  safe harbor rules:

  1. You pay at least 90% of the current year’s tax liability. This requires you to make a calculated guess of your current tax situation.
  2. You pay at least 100% of the prior year’s tax liability. (Or you pay at least 110% of the prior year’s tax liability if your adjusted gross income for the prior year exceeded $150,000.) This safe harbor is usually the easiest one to use because you know the exact amount of your previous tax liability.
  3. You pay at least 90% of the current year’s “annualized income.” The annualization method often works well for certain individuals, such as independent contractors, who receive most of their income on a seasonal basis.

IRS Relief

On January 16, the IRS announced that it will waive the estimated tax penalty for any taxpayer who paid at least 85% of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or a combination of the two. The usual percentage threshold is 90% to avoid a penalty.”We realize there were many changes that affected people last year, and this penalty waiver will help taxpayers who inadvertently didn’t have enough tax withheld,” said IRS Commissioner Chuck Rettig. “We urge people to check their withholding again this year to make sure they are   having the right amount of tax withheld for 2019.” 

Contact Us

Contact your tax professional to discuss your specific situation and what you can due to remedy any shortfalls to minimize any penalties and interest. Your tax advisor can help you sort through the provisions of the TCJA that will affect your tax situation and address other withholding objectives in the coming years.

 

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Posted on Feb 5, 2019

Health care is a top concern for many Americans, especially people who are age 65 and older. While these individuals qualify for basic Medicare insurance, they may need to pay additional premiums to get the level of coverage they desire.

Those premiums can add up to a substantial annual sum, especially if you’re married and both you and your spouse are paying them. But the silver lining is that paying those premiums may help your tax situation.    

Medicare Basics

For starters, many people are unclear about Medicare health insurance programs and options. Here’s a brief overview.

Medicare Part A.

This coverage is commonly known as hospital insurance. It covers inpatient hospital care, skilled nursing facility care and some home health care services.

Part A is free to people over age 65 who paid Medicare taxes for 40 or more quarters during their working years. They’re considered to have already paid their Part A premiums via Medicare taxes on wages and/or self-employment income.

People who didn’t pay Medicare taxes for enough months while working generally must pay for Part A coverage. The premium amount depends on how many quarters the individual paid taxes into the program.   

  • If you paid Medicare taxes for 30 to 39 quarters during your working years, the 2019 Part A premium is $240 per month ($2,880 for the full year).
  • If you paid Medicare taxes for less than 30 quarters, the 2019 Part A premium is $437 per month ($5,244 for the full year).
  • The same Part A premiums apply to a spouse who paid Medicare taxes for less than 40  quarters while working. 

Medicare Part B.

This coverage is commonly called Medicare medical insurance. It mainly covers doctors and outpatient services. Medicare-eligible individuals must pay monthly premiums for this benefit. The premium amount depends on the individual’s modified adjusted gross income (MAGI) for two years earlier.

For example, your 2019 premiums depend on your 2017 MAGI. This term refers to the adjusted gross income (AGI) amount plus any tax-exempt interest income.     

To get Part B coverage, you have to pay a base premium, which is $135.60 per month ($1,627 for the full year) for 2019. Plus, higher income individuals must pay a surcharge. 

For 2019, the Part B surcharge applies to:

  • Singles with 2017 MAGI in excess of $85,000, and
  • Married individuals who filed 2017 joint returns with MAGI in excess of $170,000.

Surcharges accrue on a graduated schedule. That is, the more MAGI you earned in 2017, the higher your Part B costs will be for 2019. Including the surcharge (if you owe it), the 2019 Part B monthly premiums for each covered person can be $189.60 ($2,275 for the full year), $270.90 ($3,251 for the full year), $352.20 ($4,226 for the full year), $433.40 ($5,201 for the full year) or $460.50 ($5,526 for the full year). 

The maximum premium for 2019 applies to:

  • Singles with 2017 MAGI in excess of $500,000, and
  • Married individuals who filed 2017 joint returns with MAGI in excess of $750,000.

Medicare Part D.

This option is for private prescription drug coverage. Base premiums vary depending on the plan you select. Higher-income individuals must pay a surcharge in addition to the base premium. 

For 2019, the Part D surcharges depend on your 2017 MAGI, and they increase based on the same scale as Part B surcharges. The good news is that the 2019 surcharges are slightly lower than for 2018, except for those in the highest income category. The 2019 monthly Part D surcharge amounts for each covered person can be $12.40, $31.90, $51.40, $70.90 or $77.40.

Medigap.

Medicare Parts A and B don’t cover all health care expenses. Coverage gaps include co-payments, co-insurance and deductibles. So, some people opt to buy a so-called “Medigap” policy. This is private supplemental insurance that’s intended to cover some or all gaps.

In most states, insurance companies can sell only standardized Medigap policies that offer the same basic benefits. Some policies offer additional benefits for an additional cost. Premiums vary depending on the plan you select.  

Important note: Before you travel outside the United States, find out whether Medicare will cover you while you’re away. Generally, the coverage is limited or nonexistent. If you don’t have coverage when traveling overseas, you can purchase supplemental policies to cover medical expenses incurred outside the United States, including evacuations.

Medicare Advantage.

Federal Medicare benefits may be provided through Part A and Part B coverage or through a so-called “Medicare Advantage plan” offered by a private insurance company. Medicare Advantage plans are sometimes called Medicare Part C.

Medicare pays the insurance company to cover your Medicare Part A and Part B benefits. The Medicare Advantage insurance company then pays your claims. A Medicare Advantage plan may also include prescription drug coverage (Medicare Part D), and it may cover dental and vision care expenses that are not covered by Medicare Part B.

Medicare Advantage Plans can include:

  • HMOs that only cover medical service providers that are in the plan’s network,
  • PPOs that encourage you to use in-network providers, and
  • Private fee-for-service plans that generally allow you to go to any medical service provider that accepts the plan’s payment terms.

When you enroll in a Medicare Advantage plan, you continue to pay Medicare Part B premiums to the government. You may need to pay a separate additional monthly premium to the insurance company for the Medicare Advantage plan, but some Medicare Advantage plans don’t charge an additional premium. The additional premium, if any, depends on the plan you select.

Important note: Medigap policies don’t work with Medicare Advantage plans. So, people who join a Medicare Advantage plan should discontinue their Medigap coverage.

Tax Deductions for Medicare Premiums

Premiums for Medicare health insurance can be combined with other qualifying health care expenses for purposes of claiming an itemized deduction for medical expenses on your individual tax return.

For 2018, you could deduct medical expenses only if you itemized deductions and only to the extent that total qualifying expenses exceeded 7.5% of AGI. For 2019, the itemized deduction threshold for medical expenses increases to 10% of AGI, unless Congress extends the 7.5% hurdle.

The Tax Cuts and Jobs Act nearly doubled the standard deduction amounts for 2018 through 2025. For 2019, the standard deduction amounts are $12,200 for single filers, $24,400 for married joint-filing couples and $18,350 for heads of households. So, fewer individuals will claim itemized deductions.

However, having significant medical expenses (including Medicare health insurance premiums) may allow you to itemize and collect some tax savings.

Important note: Self-employed people and shareholder-employees of S corporations can generally claim an above-the-line deduction for their health insurance premiums, including Medicare premiums. So, they don’t need to itemize to get the tax savings from their premiums.

For More Information

Contact your tax advisor if you have additional questions about Medicare coverage options or claiming medical expense deductions on your personal tax return. Your advisor can help determine the optimal overall tax-planning strategy based on your personal circumstances.

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