Author Archives: kevinpohle

Tax Update – June, 2019 -Here are some general updates to the tax code for 2019!

The income levels to qualify for the health premium credit in 2019 go up. The credit is available for people with household incomes ranging from 100% to 400% of the federal poverty level…$12,140 to $48,560 for singles and $25,100 to $100,400 for a family of four…who buy health insurance through one of the exchanges.  Individuals eligible for Medicare or other federal insurance don’t qualify for a credit. Nor do people who can get affordable health coverage through their employer.

The annual cap on deductible contributions to HSAs rises in 2019 to $3,500 for self-only coverage and $7,000 for account owners with family coverage.  Qualifying policies must limit out-of-pocket costs for deductibles and copayments to $13,500 for family health plans and $6,750 for people with individual coverage. 

Tax rates on long-term capital gains and qualified dividends do not changeBut the income thresholds to qualify for the various rates go up for 2019. The 0% rate applies for individual taxpayers with taxable incomes up to $39,375 on single returns, $78,750 for joint returns and $52,750 for head-of-household filers. The 20% rate starts at $434,550 for singles, $461,700 for heads of household and $488,850 for couples filing jointly. The 15% rate is for filers with taxable incomes between the 0% and 20% break points. The 3.8% surtax on net investment income kicks in for single people with modified AGI over $200,000…$250,000 for marrieds. Minimum policy deductibles stay at $2,700 for families and $1,350 for individuals.

Alimony paid under post-2018 divorce agreements is not deductible, and ex-spouses aren’t taxed on alimony they get under post-2018 agreements.  Older divorce pacts can be modified to follow the new tax rules if both parties concur and they modify the agreement in 2019 or later to specifically adopt the tax changes.

You can give up to $15,000 each to a child, grandchild or any other person in 2019 without having to pay gift tax or tap your lifetime estate and gift tax exemption.

The first $1,100 of net unearned income of a child, someone under age 19, or under age 24 if a full-time student…is tax-free.  The next $1,100 is taxed at the child’s rate. Any unearned income exceeding $2,200 is taxed at the ordinary income and capital gains rates above that apply for trusts.  Earned income of children is taxed at the individual tax rates for single filers.

Many key dollar limits on IRAs and retirement plans are higher for 2019The maximum 401(k) contribution rises to $19,000. People born before 1970 can contribute an extra $6,000. These limits apply to 403(b) and 457 plans as well. The cap on SIMPLEs climbs to $13,000. People age 50 and up can put in $3,000 more.

The 2019 payin limit for traditional IRAs and Roth IRAs jumps to $6,000.  Individuals who are age 50 and older next year can contribute an additional $1,000.  The income ceilings on Roth IRA payins go up. Contributions phase out at AGIs of $193,000 to $203,000 for couples and $122,000 to $137,000 for individuals.   Deduction phaseouts for traditional IRAs start at larger amounts for 2019, from AGIs of $103,000 to $123,000 for couples and $64,000 to $74,000 for singles.  If only one spouse is covered by a plan, the phaseout zone for deducting a contribution for the uncovered spouse will start at $193,000 of AGI and top out at $203,000.

The Social Security annual wage base is $132,900 for 2019, up $4,500 from 2018’s cap. The Social Security tax rate on employers and employees remains at 6.2%. The employer’s share of Medicare tax stays at 1.45% of all pay. The employee’s share is 1.45%, too, but employees also pay the 0.9% Medicare surtax on wages that exceed $200,000 for singles and $250,000 for married couples.  This extra levy doesn’t hit employers. Self-employeds are also subject to the surtax.

The 2019 standard mileage rate for business driving rises to 58¢ a mile, up 3.5¢ from 2018. Businesses with four or fewer vehicles can use this rate, but each vehicle’s basis must be reduced by the depreciation component…26¢ a mile.   The rate for medical travel and moving is going up 2¢, to 20¢ per mile.  But the charitable driving rate will stay put at 14¢ a mile. It’s fixed by law.  You can also claim the cost for parking and tolls. But you can’t add the cost of fuel or repairs. Nor can you use these rates if you depreciated or expensed the car. 

$1,020,000 of assets can be expensed in 2019, and this amount phases out dollar for dollar once over $2,550,000 of assets are put into service during 2019.

Here’s an idea to help a child or grandchild who will be working this summer:   You can contribute to a Roth IRA for him or her…up to $6,000 for 2019, but not more than the child’s 2019 earnings. Inside the Roth, earnings grow tax-free. If you go down this path, you have until April 15, 2020, to make the contribution. The payin counts toward your $15,000 gift tax exclusion ($30,000 if married).  This can provide a nice nest egg. And there are key tax advantages to Roths: All distributions made after age 59½ are nontaxable. Contributions can be pulled out free of tax at any time. And when the child is ready to buy his or her first home, $10,000 of earnings can be taken out tax-free.

Hiring your children can lower your payroll tax bill. No FICA tax is due if sole proprietors or husband-wife partnerships hire their kids who are under age 18. Ditto if the kid works for a parent’s one-person LLC that’s disregarded for tax purposes. Also, federal unemployment tax is not owed on their salaries until they reach 21.

 

How long does a levy last?

The IRS can seize your assets as long as you owe any part of a tax debt and the 10 year statute on collections has not expired.  Generally, levies are one-shot affairs.  The government must prepare and send a new levy notice every time it wants to seize an asset.

EXAMPLE:  If the IRS levies your bank account on Monday, the bank must remit everything in the account to the IRS on that day.  If the balance gets to zero, then the IRS gets nothing form the bank.  If you deposit $150,000 on Tuesday, the IRS can’t touch it without sending a new levy notice.  If the bank sends anything to the IRS from Tuesday’s deposit without receiving another levy notice, then the bank will have to pay you the amount it remits to the IRS.

Independent contractors and employees:  As long as you work for the same employer, your employer must withhold a portion of each paycheck for the IRS.  This rule does not apply to independent contractors.  The IRS can intercept funds owed to a self-employed person to a business.  The payor, however, must send only what it owes you at the time it receives the levy notice (current accounts receivable).  It is not liable to the IRS for any future amounts unless the IRS sends a new levy order.

What should you do when the IRS files a tax lien?

If you can’t informally convince the IRS to forgo recording a tax lien, here are some options to consider once the tax lien has been filed.

 

  1. Appeal the lien filing.  The IRS has 5 business days after the filing of the lien to provide written notice to the taxpayer.  The must include notice of the right to request a hearing within 30 days form the 6th day after the lien filing.  If you want he appeal, the lien will be withdrawn. Unfortunately, the lien filing will still appear on your credit report.

 

  1. Pay in full. If you don’t have the funds, you can always borrow from friends or relatives.  The IRS must release a lien within 30 days of full payment you can call the IRS Centralized Lien Office in order to verify that the lien has been released.

 

  1. Request a partial discharge. If you own several assets that are encumbered by the tax lien and want to use one to pay off the IRS, ask for a discharge from the tax lien.  The IRS will likely do this.

Tax Update 12/8/2018

Take a look at your investment portfolio.  You have lots of tax-saving opportunities in the coming months as the year’s end approaches. But don’t let the tax impact alone dictate your moves. Your decisions should make economic sense, too.  Consider getting rid of poor performers. Capital losses you incur can offset capital gains plus up to $3,000 of other income. Any excess losses are carried forward and can help offset future gains.

See if you’re eligible for the 0% rate on long-term gains and qualified dividends. If taxable income other than gains or dividends does not exceed $38,600 for singles… $77,200 for joint filers…then dividends and profits on the sales of assets owned for more than a year are taxed at 0% until they push you over the threshold amounts.

Some words of caution on the 0% rate. Zero-percent-rate gains and dividends hike adjusted gross income, which can cause more of your Social Security benefits to be taxed and can squeeze some itemized write-offs, such as charitable contributions.

The Social Security wage base is going up to $132,900 in 2019, a $4,500 hike.  The Social Security tax rate on employers and employees stays at 6.2%. Both will continue to pay the 1.45% Medicare tax on all compensation, with no cap. Individuals also pay the 0.9% Medicare surtax on wages and self-employment income over $200,000 for singles and $250,000 for couples. This levy doesn’t hit employers.

A reminder for business drivers who use IRS’s standard mileage rates: You can’t also depreciate or expense the vehicle. Nor can you claim write-offs for actual expenses incurred, such as for car repairs, insurance, gasoline and the like.  IRS has seen such shenanigans before and is on the lookout for more. Take this case in which a couple deducted vehicle expenses on Schedule C using the optional standard mileage allowance and claimed depreciation deductions and Section 179 expensing on the same automobile. IRS selected their return for audit and allowed only expenses based on mileage rates (Eldred, TC Summ. Op. 2018-49).

IRS’s opportunity zone program is under way. It allows taxpayers to defer capital gains from the sale of business or personal property by investing the proceeds in opportunity funds to help development of low-income communities.

Many key dollar limits on IRAs and retirement plans will be higher in 2019.  The maximum 401(k) contribution rises to $19,000. People born before 1970 can contribute an extra $6,000. These limits apply to 403(b) and 457 plans as well. The cap on SIMPLEs climbs to $13,000. People age 50 and up can put in $3,000 more.  Retirement plan contributions can be based on up to $280,000 of salary.  The payin limitation for defined contribution plans increases to $56,000.  Anyone making over $125,000 is highly paid for plan discrimination testing.

Think twice before donating an annuity contract you own to a charity. It’s not the best move taxwise. You’re treated as receiving taxable income equal to the difference between the annuity’s cash surrender value and your investment in the contract. Say you have a small variable annuity in which you invested $10,000, and it’s now worth $18,000. If you donate it to charity, you’ll have to report $8,000 of appreciation as additional income on your tax return in the year of transfer.  If you’re able to itemize on Schedule A, you also get a charitable write-off

equal to the value of the annuity in most cases. But with higher standard deductions and cutbacks to itemizations under the new tax law, far fewer people will itemize.  You’ll owe the 10% tax on early distributions if you donate before age 59½.  Be aware of tax consequences when trading one annuity for another.

To avoid income tax, it must be a direct exchange. Cashing out a policy triggers tax, even if the funds are later used to buy an annuity from another issuer.

Note that the new tax law repealed all miscellaneous itemized deductions on Schedule A that were subject to the 2%-of-adjusted-gross-income threshold.  This means that unreimbursed employee business expenses are no longer deductible.  Ditto for hobby expenses, though taxpayers must still pay tax on their hobby income.  Also nondeductible: Tax preparation costs, investment account management fees, IRA custodial fees paid by the account owner, the cost of a safe-deposit box and more.

 

November 15th News Release

In a November 15 news release, the IRS reminded small business taxpayers that changes to the tax law per the Tax Cuts and Jobs Act (TCJA) mean they can immediately expense more of the cost of certain business property. Many are now able to write off most depreciable assets in the year they are placed into service.

Section 179 expensing changes
A taxpayer may elect to expense all or part of the cost of any Section 179 property and deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million. These changes apply to property placed in service in taxable years beginning after December 31, 2017, and will most likely affect 2018 business tax returns filed next year.

New 100 percent, first-year ‘bonus’ depreciation
The 100 percent depreciation deduction generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances and furniture generally qualify. The law also allows expensing for certain film, television, and live theatrical productions, and used qualified property with certain restrictions.

Taxpayers may elect out of the additional first-year depreciation for the taxable year the property is placed in service. If the election is made, it applies to all qualified property that is in the same class of property and placed in service by the taxpayer in the same taxable year.

How long does the IRS have to collect a tax liability?

There is very little mercy in the tax code.  One of the provisions, however, offers the taxpayer who has had some difficult times a bit of relief.  It’s called the statute of limitations on the collection of a tax debt.  In general, the IRS has 10 years to collect a past due debt.  (Internal Revenue Code Section 6502).  After 10 years, the debt is wiped out.  There are a number of ways that the statute can be extended, though.

 

  1. The 10 year period does not start to run until you file your return and the IRS assesses the tax against you.  Not filing a return and hiding for 10 years accomplishes nothing.
  2. The IRS can extend the 10 year period by suing you in Federal court. The IRS usually won’t do this and if it’s getting close to the 10 year mark and you don’t owe millions, the IRS may let the statute expire and you’re off the hook forever.
  3. Certain actions on your part may extend the 10 year statute: Some examples are as follows:
    1. Filing an Offer in Compromise
    2. Living outside of the United States
    3. Bankruptcy
    4. Requesting a Taxpayer Assistance Order
    5. Signing a Waiver Form
    6. Requesting a Due Process Hearing

Options for taxpayers who owe taxes

If you owe taxes but can’t pay in full, there options for you. Most importantly, make sure you file your tax return and pay as much as you can. Then let the us help you choose your best option to pay. Here are some options to consider, even if you can’t pay the full amount right now:

  • Borrow the money.  If you don’t have the money to pay all your taxes now, then you may want to get a loan from a bank or other source. The interest rate may be lower than the interest and penalties the IRS charges on late taxes. You also may be able to borrow against your assets or sell them to raise cash.
  • Make an Online Payment Agreement.  If you are unable to pay in full, then consider paying over time. If you owe $50,000 or less, you can apply for an installment agreement. You may choose to make convenient monthly direct debit payments for up to 72 months. With this option, there are no checks to write or send. And you won’t miss a payment or pay late.

We can also help if your tax debt is more than $50,000 or you need more than six years to pay. In these cases, the IRS may ask for further financial information. See Form 433-A or Form 433-F, Collection Information Statement.

  • Offer in Compromise.  An Offer in Compromise is an agreement that allows you to settle your tax debt for less than the full amount. Generally, the IRS will accept an offer if it represents the most the agency can expect to collect within a reasonable time. The IRS looks at several factors to make a decision on your offer.

Figure Your Withholding.  The IRS Withholding Calculator tool can help you avoid having too much or too little income tax withheld from your pay. You can use it anytime throughout the year to stay on target.

Year Round Tax Tips

Year Round Tax Tips

With the end of the year just around the corner, I get quite a few calls from clients and potential clients about what they should do to plan for year end.  Tax planning is a year round activity, not something we try to accomplish in the last week of the year, although there are things we can do to mitigate tax before the ball drops in Times Square.

  1. Start a filing system.  If you don’t have a filing system for your tax records, you should start one. It can be as simple as saving receipts in a shoebox, which is better than nothing (not much) but it can cost you quite a bit more for a tax professional to go through and decipher. We recommend a more complex yet effective approach like creating folders or spreadsheets. It’s always a good idea to save tax-related receipts and records. Keeping good records now will save time and help you file a complete and accurate tax return next year.
  2. Make Charitable Contributions.  If you plan to give to charity, consider donating before the year ends. That way you can claim your contribution as an itemized deduction for 2016. This includes donations you charge to a credit card by Dec. 31, even if you don’t pay the bill until 2017. A gift by check also counts for 2016 as long as you mail it in December. Remember that you must give to a qualified charity to claim a tax deduction. Once again, save your receipts. You must have a written record for all donations of money in order to claim a deduction. Special rules apply to several types of property, including clothing or household items, cars and boats.

If you are age 70½ or over, the qualified charitable distribution allows you to make tax-free transfers from your IRAs to charity. You can give up to $100,000 per year from your IRA to an eligible charity, and exclude the amount from gross income. You can use the excluded amount to satisfy any required minimum distributions that you must otherwise receive from your IRAs in 2016. This benefit is available even if you do not itemize deductions. This special provision is set to expire at the end of 2016.

  1. Contribute to Retirement Accounts.  You need to contribute to your 401(k) or similar retirement plan by Dec. 31 to count for 2016. On the other hand, you have until April 15, 2017, to set up a new IRA or add money to an existing IRA and still have it count for 2016.