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Tax Filing Season Begins
January 28, 2019, marked the start of this year's tax filing season, and it's the first time taxpayers will be filing under the new tax reform laws, most of which became effective in 2018. Complicating matters is a newly revised Form 1040, U.S. Individual Income Tax Return, as well as the partial shutdown of the federal government. With more than 150 million individual tax returns expected to be filed for the 2018 tax year, here's what individual taxpayers can expect:
Government Shutdown; Filing as Usual, Tax Refunds on Schedule
Despite the government shutdown (referred to by the IRS as the lapse in appropriations) in December and January, all taxpayers should continue to meet their tax obligations as per the normal time frame. That is, individuals and businesses should continue to file tax returns and make payments and deposits with the IRS, as required by law. For taxpayers receiving tax refunds there are no anticipated delays due to the lapse in appropriations.
New Design for Form 1040
The new Form 1040 has been redesigned for 2018. It is now "postcard sized" and gathers information about the taxpayer(s) and dependents. It's also the form you need to sign and date when filing your return. The new Form 1040 can also be filed by itself; however, more complex tax situations will generally require using one or more of the supplemental Schedules 1 through 6 (also new for 2018), which are briefly described below.
Note: Forms 1040A and 1040EZ no longer exist for tax year 2018. Instead, use the new Form 1040.
Schedules 1 through 6
As mentioned, these supplemental schedules are to be used as needed and are generally for those with more complex tax returns.
Schedule 1, Additional Income and Adjustments To Income - Report income or adjustments to income that can't be entered directly on Form 1040.
Schedule 2, Tax - To be used if you have additional taxes that can't be entered directly on Form 1040. These include alternative minimum tax and excess advance premium tax credit repayment.
Schedule 3, Nonrefundable Credits - Used to report nonrefundable credits other than the child tax credit or the credit for other dependents.
Schedule 4, Other Taxes - If you have other taxes that can't be entered on Form 1040 such as additional tax on IRAs or other qualified retirement plans or household employment taxes.
Schedule 5, Other Payments and Refundable Credits - If you have other payments or refundable credits such as any estimated tax payments for 2018 or the amount paid when requesting an extension to file.
Schedule 6, Foreign Address and Third Party Designee - If you have a foreign address or want to allow another person (other than your paid tax preparer) to discuss this return with the IRS.
For most taxpayers the filing deadline to submit 2018 tax returns is Monday, April 15, 2019; however, due to the Patriots' Day holiday on April 15 in Maine and Massachusetts, and the Emancipation Day holiday on April 16 in the District of Columbia, taxpayers who live in Maine or Massachusetts have until April 17, 2019 to file their returns.
Help is just a phone call away.
Don't hesitate to contact the office if you have any questions about the new tax forms or need assistance preparing and filing your tax return this year.
Seven Common Small Business Tax Myths
The complexity of the tax code generates a lot of folklore and misinformation that could lead to costly mistakes such as penalties for failing to file on time or, on the flip side, not taking advantage of deductions you are legally entitled to take and giving the IRS more money than you need to. With this in mind, let's take a look at seven common small business tax myths.
1. Start-Up Costs are Deductible Immediately
Business start-up costs refer to expenses incurred before you actually begin operating your business. Business start-up costs include both start-up and organizational costs and vary depending on the type of business. Examples of these types of costs include advertising, travel, surveys, and training. These start-up and organizational costs are generally called capital expenditures.
Costs for a particular asset such as machinery or office equipment are recovered through depreciation or Section 179 expensing. When you start a business, you can elect to deduct or amortize certain business start-up costs.
Business start-up and organizational costs are generally capital expenditures. However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs. The $5,000 deduction is reduced (but not below zero) by the amount your total start-up or organizational costs exceed $50,000. Remaining costs must be amortized.
2. Overpaying the IRS makes you "Audit Proof"
It is never a good idea to knowingly or unknowingly overpay the IRS. You should only pay the amount of tax that you owe. The IRS doesn't care if you pay the right amount of taxes or overpay your taxes; however, they do care if you pay less than you owe and you can't substantiate your deductions with good recordkeeping. The best way to "Audit Proof" yourself is to properly document your expenses and make sure you are getting good advice from your tax accountant.
3. You can take more Deductions if your Business is Incorporated.
The good news is that self-employed individuals (sole proprietors and S Corps) qualify for many of the same deductions that incorporated businesses do. As such, becoming incorporated is often an unnecessary expense and burden that many small business owners don’t need. For instance, start-ups can spend thousands of dollars in legal and accounting fees to set up a corporation, only to discover soon thereafter that they need to change their name or take the company in a different direction. Furthermore, plenty of small business owners who incorporate don't make money for the first few years and find themselves saddled with minimum corporate tax payments and no income.
4. The Home Office Deduction is a Red Flag for an Audit.
While the home office deduction used to be a red flag, this is no longer true. In fact, with so many people operating home-based businesses the IRS rolled out a new simplified home office deduction in 2013, which makes it even easier to claim the home office deduction (as long as it can be substantiated with excellent recordkeeping).
Furthermore, because of the proliferation of home offices, tax officials cannot possibly audit all tax returns of small business owners taking the home office deduction. In other words, there is no need to fear an audit just because you take the home office deduction; however, a high deduction-to-income ratio, however, may raise a red flag and lead to an audit.
5. You can’t Deduct Business Expenses if you don't take the Home Office Deduction.
You are still eligible to take deductions for business supplies, business-related phone bills, travel expenses, printing, wages paid to employees or contract workers, depreciation of equipment used for your business, and other expenses related to running a home-based business, whether or not you take the home office deduction.
6. An Extension to File gives you an extra Six Months to Pay any Tax you Owe.
Extensions enable you to extend your filing date only. Penalties and interest begin accruing from the date your taxes are due.
7. Part-time Business Owners Cannot Set up Self-employed Pension Plans.
If you start a company while you have a salaried position complete with a 401K plan, you can still set up a SEP-IRA for your business and take the deduction.
If you have any questions about these and other tax myths, don't hesitate to call and speak to a tax professional.
Avoiding the Penalty on Early Distributions
Many people use IRAs, SEP Plans, SIMPLE IRA plans, and employee-sponsored retirement savings plans such as the 401(k) to save money for their retirement years, but what if you need to tap that money before age 59 1/2? The bad news is that you generally have to pay a 10 percent penalty for early withdrawal of your funds. While that may seem unfair (after all, most of it is probably your money), you need to remember that the purpose of these types of plans is to save money for the years when you are no longer working.
Sometimes, however, life intervenes, and there may be times when you need access to those funds before you've reached retirement age. The good news is that under IRS rules you may be able to use one of the following exceptions to avoid paying the tax penalty. However, you need to remember that although the exceptions listed below will help you avoid the 10 percent penalty tax, you are still liable for any regular income tax that's owed on the funds that you've withdrawn.
1. Death of the Participant/IRA Owner. If you are the beneficiary of a deceased IRA owner, you do not have to pay the 10 percent penalty on distributions taken before age 59 1/2 unless you inherit a traditional IRA from your deceased spouse and elect to treat it as your own. In this case, any distribution you later receive before you reach age 59 1/2 may be subject to the 10 percent additional tax.
2. Total and Permanent Disability. Distributions made because you are totally and permanently disabled are exempt from the early withdrawal penalty. You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued, and indefinite duration.
3. Higher Education Expenses. Distributions from IRAs, SEP Plans, and SIMPLE IRA Plans that are used for qualified higher education expenses are also exempt, provided they are not paid through tax-free distributions from a Coverdell education savings account, scholarships and fellowships, Pell grants, employer-provided educational assistance, and Veterans' educational assistance. Qualified higher education expenses include tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution, as well as expenses incurred by special needs students in connection with their enrollment or attendance. If the individual is at least a half-time student, then room and board are considered qualified higher education expenses. This exception applies to expenses incurred by you, your spouse, children and grandchildren.
Caution: Early distributions from employee-sponsored retirement plans such as 401(k)s are not exempt from the 10 percent penalty if used for higher education expenses.
4. IRS Levy. Distributions due to an IRS levy of the qualified plan are exempt from the 10 percent penalty.
5. Healthcare Premiums. Even if you are under age 59 1/2, you may not have to pay the 10 percent additional tax on any distributions during the year that are not more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You will not have to pay the tax on these amounts if all of the following conditions apply: you lost your job, you received unemployment compensation paid under any federal or state law for 12 consecutive weeks because you lost your job, you receive the distributions during either the year you received the unemployment compensation or the following year, you receive the distributions no later than 60 days after you have been reemployed.
Caution: Early distributions from employee-sponsored retirement plans such as 401(k)s are not exempt from the 10 percent penalty if used for healthcare premiums.
6. Military Reservists called to Active Duty. Generally, these are distributions made to individuals called to active duty after September 11, 2001, and on or after December 31, 2007.
7. Equal Payments. Similar to an annuity, you can take the money as part of a series of substantially equal periodic payments over your estimated lifespan or the joint lives of you and your designated beneficiary. These payments must be made at least annually, and payments are based on IRS life expectancy tables. If payments are from a qualified employee plan, they must begin after you have left the job. The payments must be made at least once each year until age 59 1/2, or for five years, whichever period is longer.
8. Medical Expenses. If you have out-of-pocket medical expenses that exceed 10 percent of your adjusted gross income, you can withdraw funds from a retirement account to pay those expenses without paying the penalty. For example, if you had an adjusted gross income of $100,000 for tax year 2019 and medical expenses of $12,500, you could withdraw as much as $2,500 from your pension or IRA without incurring the 10 percent penalty tax.
9. First-time Homebuyers (up to $10,000). An IRA distribution used to buy, build, or rebuild a first home also escapes the penalty; however, you need to understand the government's definition of a "first time" home buyer. In this case, it's defined as someone who hasn't owned a home for the last two years prior to the date of the new acquisition. You could have owned five prior houses, but if you haven't owned one in at least two years, you qualify.
The first time homeowner can be yourself, your spouse, your or your spouse's child or grandchild, parent or another ancestor. The "date of acquisition" is the day you sign the contract for the purchase of an existing house or the day construction of your new principal residence begins. The amount withdrawn for the purchase of a home must be used within 120 days of withdrawal and the maximum lifetime withdrawal exemption is $10,000. If both you and your spouse are first-time home buyers, each of you can receive distributions up to $10,000 for a first home without having to pay the 10 percent penalty.
Caution: First-time homebuyers are not exempt from the 10 percent penalty for early withdrawals of funds from employee-sponsored retirement plans such as 401(k)s.
If you are thinking about tapping your retirement money early, call and speak to a trusted tax advisor first.
Who Should File a 2018 Tax Return?
Most people file a tax return because they have to, but even if you don't, there are times when you should--because you might be eligible for a tax refund and not know it. The six tax tips below should help you determine whether you're one of them.
1. General Filing Rules. Whether you need to file a tax return this year depends on several factors. In most cases, the amount of your income, your filing status, and your age determine whether you must file a tax return. For example, if you're single and 27 years old you must file if your income, was at least $12,000 ($24,000 if you are married filing a joint return). If you're self-employed or if you're a dependent of another person, other tax rules may apply.
2. Premium Tax Credit. If you purchased coverage from the Marketplace in 2018 you might be eligible for the Premium Tax Credit if you chose to have advance payments of the premium tax credit sent directly to your insurer during the year; however, you must file a federal tax return and reconcile any advance payments with the allowable premium tax credit.
3. Tax Withheld or Paid. Did your employer withhold federal income tax from your pay? Did you make estimated tax payments? Did you overpay last year and have it applied to this year's tax? If you answered "yes" to any of these questions, you could be due a refund, but you have to file a tax return to receive the refund.
4. Earned Income Tax Credit. Did you work and earn less than $54,884 last year? You could receive EITC as a tax refund if you qualify with or without a qualifying child. You may be eligible for up to $6,431. If you qualify, file a tax return to claim it.
5. Additional Child Tax Credit. Do you have at least one child that qualifies for the Child Tax Credit? If you don't get the full credit amount, you may qualify for the Additional Child Tax Credit and receive a refund even if you do not owe any tax.
6. American Opportunity Credit. The AOTC (up to $2,500 per eligible student) is available for four years of post-secondary education. You or your dependent must have been a student enrolled at least half-time for at least one academic period. Even if you don't owe any taxes, you still may qualify; however, you must complete Form 8863, Education Credits, and file a return to claim the credit.
If you have any questions about whether you should file a return, please contact the office.
Five Facts about the Opportunity Zone Tax Incentive
Providing tax benefits to investors who invest eligible capital into distressed communities throughout the U.S. and its possessions, Qualified Opportunity Zones (QOZs) were created under the Tax Cuts and Jobs Act of 2017 to spur economic development and job creation. If you're considering investing in a QOZ, here are five facts you should know:
1. Defer Tax on Capital Gains. Taxpayers may defer tax on eligible capital gains by making an appropriate investment in a Qualified Opportunity Fund (QOF) and meeting other requirements.
2. Partnerships. In the case of an eligible capital gain realized by a partnership, the rules allow either a partnership or its partners to elect deferral. Similar rules apply to other pass-through entities, such as S corporations and its shareholders, as well as estates and trusts and its beneficiaries.
3. Qualifying for the Deferral. To qualify for the deferral, investors must meet the following criteria:
4. Investment held 5 to 7 years. If a taxpayer holds its QOF investment at least five years, the taxpayer may exclude 10 percent of the original deferred gain. If a taxpayer holds its QOF investment for at least seven years, the taxpayer may exclude an additional five percent of the original deferred gain for a total exclusion of 15 percent of the original deferred gain. The original deferred gain – less the amount excluded due to the five and seven year holding periods – is recognized on the earlier of sale or exchange of the investment, or December 31, 2026.
5. Investment held 10 years. If the taxpayer holds the investment in the QOF for at least 10 years, the taxpayer may elect to increase its basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged. This may eliminate all or a substantial amount of gain due to appreciation on the QOF investment.
To view the current list of designated Qualified Opportunity Zones navigate to the Opportunity Zones Resources page at the Department of Treasury's www.cdfifund.gov.
Questions about the Opportunity Zone Tax Incentive? Don't hesitate to call.
Penalty Relief for Witholding, Estimated Tax Shortfalls
The estimated tax penalty has been waived for many taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year; however, there is a catch: the penalty is only waived for taxpayers who paid at least 85 percent of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or a combination of the two. Typically, a taxpayer must pay 90 percent to avoid a penalty.
The waiver computation will be reflected in a revised Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts, and instructions.
This penalty relief is designed to help taxpayers who were unable to properly adjust their withholding and estimated tax payments to reflect an array of changes under the Tax Cuts and Jobs Act (TCJA), the far-reaching tax reform law enacted in December 2017. Although most 2018 tax filers are still expected to get refunds, some taxpayers will unexpectedly owe additional tax when they file their returns.
The updated federal tax withholding tables, released in early 2018, largely reflected the lower tax rates and the increased standard deduction brought about by the new law. This generally meant taxpayers had less tax withheld in 2018 and saw more in their paychecks.
However, the updated withholding tables were not able to fully factor in other changes, such as the suspension of dependency exemptions and reduced itemized deductions. As a result, some taxpayers could have paid too little tax during the year, if they did not submit a properly-revised W-4 withholding form to their employer or increase their estimated tax payments; i.e., a "Paycheck Checkup" to avoid a situation where they had too much or too little tax withheld when they file their tax returns.
Please call the office if you need assistance updating your withholding this year to make sure you are having the correct amount of tax withheld for 2019.
Tax Due Dates for February 2019
Employees - who work for tips. If you received $20 or more in tips during January, report them to your employer. You can use Form 4070.
Employers - Social Security, Medicare, and withheld income tax. File Form 941 for the fourth quarter of 2018. This due date applies only if you deposited the tax for the quarter in full and on time.
Farm Employers - File Form 943 to report Social Security and Medicare taxes and withheld income tax for 2018. This due date applies only if you deposited the tax for the year in full and on time.
Certain Small Employers - File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2018. This tax due date applies only if you deposited the tax for the year in full and on time.
Employers - Nonpayroll taxes. File Form 945 to report income tax withheld for 2018 on all nonpayroll items. This due date applies only if you deposited the tax for the year in full and on time.
Employers - Federal unemployment tax. File Form 940 for 2018. This due date applies only if you deposited the tax for the year in full and on time.
Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in January.
Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in January.
All businesses. Give annual information statements to recipients of certain payments made during 2018. You can use the appropriate version of Form 1099 or other information return. This due date applies only to payments reported on Form 1099-B, Form 1099-S, and substitute payments reported in Box 8 or gross proceeds paid to an attorney reported in Box 14, respectively.
Individuals - If you claimed exemption from income tax witholding last year on the Form W-4 you gave your employer, you must file a new Form W-4 by this date to continue your exemption for another year.
Employers - Begin withholding income tax from the pay of any employee who claimed exemption from withholding in 2018, but did not give you a new Form W-4 to continue the exemption this year.
Businesses - File information returns (for example, certain Forms 1099) for certain payments you made during 2018. However, Form 1099-MISC reporting nonemployee compensation must be filed by January 31. There are different forms for different types of payments. Use a separate Form 1096 to summarize and transmit the forms for each type of payment. See the General Instructions for Certain Information Returns for information on what payments are covered, how much the payment must be before a return is required, what form to use, and extensions of time to file.
If you file Forms 1097, 1098, 1099 (except a Form 1099-MISC reporting nonemployee compensation), 3921, 3922 or W-2G electronically, your due date for filing them with the IRS will be extended to April 1. The due date for giving the recipient these forms generally remains January 31.
Payers of Gambling Winnings - File Form 1096, Annual Summary and Transmittal of U.S. Information Returns, along with Copy A of all the Forms W-2G you issued for 2018. If you file Forms W-2G electronically, your due date for filing them with the IRS will be extended to April 1. The due date for giving the recipient these forms remains January 31.
Large Food and Beverage Establishment Employers - with employees who work for tips. File Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips. Use Form 8027-T, Transmittal of Employer's Annual Information Return of Tip Income and Allocated Tips, to summarize and transmit Forms 8027 if you have more than one establishment. If you file Forms 8027 electronically, your due date for filing them with the IRS will be extended to April 2.
Health Coverage Reporting - If you are an Applicable Large Employer, file paper Forms 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and 1095-C with the IRS. For all other providers of minimum essential coverage, file paper Forms 1094-B, Transmittal of Health Coverage Information Returns, and 1095-B with the IRS. If you are filing any of these forms with the IRS electronically, your due date for filing them will be extended to April 1.
Farmers and Fishermen - File your 2018 income tax return (Form 1040) and pay any tax due. However, you have until April 15 (April 17 if you live in Maine or Massachusetts) to file if you paid your 2018 estimated tax by January 15, 2019.
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