Must Reads

Many taxpayers opt for the standard deduction because it is easier, but sometimes itemizing your deductions is the better choice – often resulting in a lower tax bill. Whether you bought a house, refinanced your current home, or had extensive gambling losses, you may be able to take advantage of tax breaks for taxpayers who itemize. Here’s what to keep in mind:

1. Deducting state and local income, sales and property taxes.

The deduction that taxpayers can claim for state and local income, sales and property taxes is limited to a combined, total deduction of $10,000 – $5,000 if married filing separately. State and local taxes paid above this amount can’t be deducted.

2. Refinancing a home. 

The deduction for mortgage interest is limited to interest paid on a loan secured by the taxpayer’s main home or second home. Homeowners who choose to refinance must use the loan to buy, build, or substantially improve their main home or second home, and the mortgage interest they may deduct is subject to the limits described under “buying a home,” below.

3. Buying a home. 

People who bought a new home in 2019 can only deduct mortgage interest paid on a total of $750,000 ($375,000 married filing separately) in qualifying debt for a first and second home. For existing mortgages, if the loan originated on or before December 15, 2017, taxpayers may continue to deduct interest on a total of $1 million in qualifying debt secured by first and second homes.

4. Charitable donations. 

Donations to a qualified charity also qualify as a tax break. Taxpayers must itemize deductions to deduct charitable contributions and must have proof of all donations. The non-profit organization must be a 501(c)(3) public charity or private foundation and non-cash donations may require a qualified appraisal.

5. Deducting mileage for charity.

Miles driven using a personal vehicle for charitable service activities could qualify you for a tax break. Itemizers can deduct 14 cents per mile for charitable mileage driven in 2019.

6. Reporting gambling winnings and claiming gambling losses. 

Taxpayers who itemize can deduct gambling losses up to the amount of gambling winnings. You may deduct gambling losses; however, the amount of losses you deduct can’t be more than the amount of gambling income you report on your return. Furthermore, you must keep a record of your winnings and losses, for example, you must keep an accurate diary or similar record of your gambling winnings and losses and be able to provide receipts, tickets, statements, or other records that show the amount of both your winnings and losses.

7. Investment interest expenses.

Investment interest expense is interest paid or accrued on a loan or part of a loan that is allocated to property held for taxable investments – the interest on a loan you took out to buy stock in a brokerage account, for example. Taxable investments include interest, dividends, annuities or royalties.

Wondering whether you should itemize deductions on your 2019 tax return? Don’t hesitate to call the office and find out.

While the 2020 tax filing season promises to be less confusing than 2019, there are still a number of changes that taxpayers should be aware of.

New, Revised or Updated Tax Forms

Form 1040: Revised and Redesigned

The IRS released a draft Form 1040 for 2019 tax returns that has been updated from the 2018 version. Of significance is that there are now three schedules instead of the six that appeared in the 2018 Form 1040. Schedule 6 is now part of Form 1040. Schedules 2 and 4 have been combined into a single schedule as have Schedules 3 and 5. Schedule 1 remains as is. Another notable change is that the signature line is once again, at the end of the form. While the new Form 1040 for 2019 is no longer “postcard size,” it is still shorter than it was in 2018 – although slightly longer than the 2019 version.

Form 1040SR: U.S. Tax Return for Seniors

The new Form 1040SR for 2019, was created in response to the Bipartisan Budget Act of 2018 and is intended for taxpayers age 65 and older. While similar to the standard Form 1040, the font size is larger and it includes a chart of the standard deduction and additional standard deduction amounts for taxpayers over 65 years old or blind. Taxpayers with more complicated tax situations should use the regular Form 1040.

Other New Tax Forms for 2019

• Forms 8995 and 8995-A: Qualified Business Income Deduction Simplified Computation
• Form 8985: Pass-Through Statement [Pass-Through Statement — Transmittal/Partnership Adjustment Tracking Report]
• Forms 965-C, 965-D, and 965-E: Inclusion of Deferred Foreign Income Upon Transition to Participation Exemption System
• Form 8978: Partner’s Additional Reporting Year Tax
• Form 8997: Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments

Important Tax Changes

Health Insurance Mandate Penalty Eliminated.

The penalty for failing to obtain health insurance expired at the end of 2018. As such, for 2019 tax returns there is no box on Form 1040 to check off indicating you had health insurance.

!!! Some states have their own individual health insurance mandate requiring coverage. If you live in a state with a mandate and don’t have insurance (or an exemption) you must pay a fee when you file your state taxes. Currently, Massachusetts, New Jersey, and Washington, D.C. have such mandates (effective for 2019) in addition to Vermont whose mandate is effective starting in 2020. !!!

Alimony is No Longer Deductible.

Starting January 1, 2019, alimony is no longer deductible to the payer and is no longer taxable to the payee for separation or divorce agreements or decrees in effect on this date or later.

Medical Expense Deduction Threshold Remains at 7.5 Percent.

For tax years 2017 and 2018 the medical expense deduction threshold was rolled back to 7.5 percent of adjusted gross income (AGI). In 2019 it was scheduled to revert to 10 percent; however, the Further Consolidated Appropriations Act, 2020, extended the 7.5 percent threshold through 2020 (including tax year 2019).

Deduction for Qualified Tuition and Related Expenses Extended.

This above-the-line deduction was extended through 2020.

 

Questions? Help is just a phone call away.

Small business owners who are also employers should remember that the Electronic Federal Tax Payment System (EFTPS) has features that make it easier to meet their tax obligations – whether they prepare and submit payroll taxes themselves or hire an outside payroll service provider to do it on their behalf.

Background

Many employers outsource some or all of their payroll and related tax duties such as tax withholding, reporting and making tax deposits to third-party payroll service providers. Third-party payroll service providers can help assure filing deadlines and deposit requirements are met and streamline business operations. Most payroll service providers administer payroll and employment taxes on behalf of an employer, where the employer provides the funds initially to the third party. They also report, collect and deposit employment taxes with state and federal authorities.

Treasury regulations require that employment tax deposits be made electronically and it is the employer’s responsibility to ensure their third-party payer uses the Electronic Federal Tax Payment System (EFTPS).

Benefits of EFTPS

EFTPS is secure, accurate, easy to use and provides immediate confirmation for each transaction and anyone can use it. The service is offered free of charge from the U.S. Department of Treasury and enables employers to make and verify federal tax payments electronically 24 hours a day, seven days a week through the internet or by phone.

Employers who use payroll service providers can also verify that payments are made by using EFTPS online. To enroll online go to EFTPS.gov. You can also call EFTPS Customer Service at 800-555-4477 to request an enrollment form.

Employers should not change their address of record to that of the payroll service provider as it may limit the employer’s ability to be informed of tax matters.

EFTPS Employer Inquiry PIN

Third parties making tax payments on behalf of an employer will generally enroll their clients in the EFTPS under their account. This allows them to make deposits using the employer’s Employer Identification Number (EIN).

When third parties do this, it may generate an EFTPS Inquiry PIN for the employer. Once activated, this PIN allows employers to monitor and ensure the third party is making all required tax payments. Employers who have not been issued Inquiry PINs and who do not have their own EFTPS enrollment should register on the EFTPS system to get their own PIN and use this PIN to periodically verify payments. A red flag should go up the first time a service provider misses or makes a late payment.

Missed Payments and Changing Third-Party Payroll Service Providers

Employers enrolled in EFTPS can make up any missed tax payments and keep making tax payments if they change payroll service providers in the future. They can also update their information to receive email notifications about their account’s activities. Access to this feature requires a PIN and password for the system.

Once they opt-in for email notifications, they’ll receive notifications about payments they submit including those made by their payroll service provider. Email notification messages show when payments are scheduled, canceled, or returned, as well as reminders of scheduled payments.

Employers who believe that a bill or notice received is a result of a problem with their payroll service provider should contact the IRS as soon as possible by calling or writing to the IRS office that sent the bill, calling 800-829-4933 or making an appointment to visit a local IRS office.

Fraudulent Activities

If an employer suspects their payroll service provider of improper or fraudulent activities involving the deposit of their federal taxes or the filing of their returns, they can file a complaint with the Return Preparer Office using Form 14157, Complaint: Tax Return Preparer. A check-box on Form 14157 allows the employer to select “Payroll Service Provider” as the subject of the complaint. Once received, Form 14157 complaints will receive expedited handling and investigation.

Questions?

For more information about IRS notices, bills, and payment options, please call the office and speak to a tax and accounting professional today.

 

Tax breaks for charitable giving aren’t limited to individuals, your small business can benefit as well. If you own a small to medium-size business and are committed to giving back to the community through charitable giving, here’s what you should know.

1. Verify that the Organization is a Qualified Charity

Once you’ve identified a charity, you’ll need to make sure it is a qualified charitable organization under the IRS. Qualified organizations must meet specific requirements as well as IRS criteria and are often referred to as 501(c)(3) organizations. Note that not all tax-exempt organizations are 501(c)(3) status, however.

There are two ways to verify whether a charity is qualified:

• Use the IRS online search tool; or
• Ask the charity to send you a copy of their IRS determination letter confirming their exempt status.

2. Make Sure the Deduction is Eligible

Not all deductions are created equal. In order to take the deduction on a tax return, you need to make sure it qualifies. Charitable giving includes the following: cash donations, sponsorship of local charity events, in-kind contributions such as property such as inventory or equipment.

Lobbying. A 501(c)(3) organization may engage in some lobbying, but too much lobbying activity risks the loss of its tax-exempt status. As such, you cannot claim a charitable deduction (or business expense) for amounts paid to an organization if both of the following apply:

• The organization conducts lobbying activities on matters of direct financial interest to your business.
• A principal purpose of your contribution is to avoid the rules discussed earlier that prohibit a business deduction for lobbying expenses.

Further, if a tax-exempt organization, other than a section 501(c)(3) organization, provides you with a notice on the part of dues that is allocable to nondeductible lobbying and political expenses, you cannot deduct that part of the dues.

3. Understand the Limitations

Sole proprietors, partners in a partnership, or shareholders in an S-corporation may be able to deduct charitable contributions made by their business on Schedule A (Form 1040). Corporations (other than S-corporations) can deduct charitable contributions on their income tax returns, subject to limitations.

Note: Cash payments to an organization, charitable or otherwise, may be deductible as business expenses if the payments are not charitable contributions or gifts and are directly related to your business. Likewise, if the payments are charitable contributions or gifts, you cannot deduct them as business expenses.

Sole Proprietorships.As a sole proprietor (or single-member LLC), you file your business taxes using Schedule C of individual tax form 1040. Your business does not make charitable contributions separately. Charitable contributions are deducted using Schedule A, and you must itemize in order to take the deductions.

Partnerships. Partnerships do not pay income taxes. Rather, the income and expenses (including deductions for charitable contributions) are passed on to the partners on each partner’s individual Schedule K-1. If the partnership makes a charitable contribution, then each partner takes a percentage share of the deduction on his or her personal tax return. For example, if the partnership has four equal partners and donates a total of $2,000 to a qualified charitable organization in 2019, each partner can claim a $500 charitable deduction on his or her 2019 tax return.

Note: A donation of cash or property reduces the value of the partnership. For example, if a partnership donates office equipment to a qualified charity, the office equipment is no longer owned by the partnership, and the total value of the partnership is reduced. Therefore, each partner’s share of the total value of the partnership is reduced accordingly.

S-Corporations. S-Corporations are similar to Partnerships, with each shareholder receiving a Schedule K-1 showing the amount of charitable contribution.

C-Corporations. Unlike sole proprietors, partnerships, and S-corporations, C-Corporations are separate entities from their owners. As such, a corporation can make charitable contributions and take deductions for those contributions.

4. Categorize Donations

Each category of donation has its own criteria with regard to whether it’s deductible and to what extent. For example, mileage and travel expenses related to services performed for the charitable organization are deductible but the time spent on volunteering your services is not.

Here’s another example: As a board member, your duties may include hosting fundraising events. While the time you spend as a board member is not deductible, expenses related to hosting the fundraiser such as stationery for invitations and telephone costs related to the event are deductible.

Generally, you can deduct up to 50 percent of adjusted gross income. Non-cash donations of more than $500 require completion of Form 8283, which is attached to your tax return. In addition, contributions are only deductible in the tax year in which they’re made.

5. Keep Good Records

The types of records you must keep vary according to the type of donation (cash, non-cash, out of pocket expenses when donating your services) and the importance of keeping good records cannot be overstated.

Ask for – and make sure you receive – a letter from any organization stating that said organization received a contribution from your business. You should also keep canceled checks, bank and credit card statements, and payroll deduction records as proof or your donation. Furthermore, the IRS requires proof of payment and an acknowledgment letter for donations of $250 or more.

Questions about charitable donations? Help is just a phone call away.

Taxpayers using optional standard mileage rates in computing the deductible costs of operating an automobile for business, charitable, medical or moving expense purposes should be aware of an updated set of rules. The updated rules reflect changes to certain deductible expenses resulting from the Tax Cuts and Jobs Act (TCJA).

Also updated, are tax rules relating to substantiating the amount of an employee’s ordinary and necessary travel expenses reimbursed by an employer using the optional standard mileage rates. As such, taxpayers are not required to use the standard mileage rate, but may instead use actual allowable expenses as long as they maintain adequate records that substantiate these expenses.

In addition, a number of modifications and clarifications are also in effect, including – but not limited to – the following for tax years 2018-2025 (the “suspension period”):

• A taxpayer may not use the business standard mileage rate to claim a miscellaneous itemized deduction for the suspension period.
• A taxpayer may not claim a miscellaneous itemized deduction during the suspension period for parking fees and tolls attributable to the taxpayer using the automobile for business purposes.
• Amounts paid under a mileage allowance to an employee regardless of whether the employee incurs deductible business expenses are treated as paid under a nonaccountable plan.

Background

The TCJA suspended for tax years 2018-2025 the miscellaneous itemized deduction for most employees with unreimbursed business expenses, including the costs of operating an automobile for business purposes. Self-employed individuals, however, as well as certain employees, such as Armed Forces reservists, qualifying state or local government officials, educators, and performing artists, may continue to deduct unreimbursed business expenses during the suspension.

The TCJA also suspended the deduction for moving expenses during these same tax years. However, this suspension does not apply to a member of the Armed Forces on active duty who moves pursuant to a military order and incident to a permanent change of station.

Don’t hesitate to contact the office with any questions regarding the updated rules for deductible business, charitable, medical, and moving expenses.

A number of end-of-year tax planning strategies are available to business owners that can be used to reduce their tax liability. Here are a few of them:

Deferring Income

Businesses using the cash method of accounting can defer income into 2020 by delaying end-of-year invoices, so payment is not received until 2020. Businesses using the accrual method can defer income by postponing the delivery of goods or services until January 2020.

Purchase New Business Equipment

Section 179 Expensing. Businesses should take advantage of Section 179 expensing this year for a couple of reasons. First, is that in 2019 businesses can elect to expense (deduct immediately) the entire cost of most new equipment up to a maximum of $1.02 million for the first $2.55 million of property placed in service by December 31, 2019. Keep in mind that the Section 179 deduction cannot exceed net taxable business income. The deduction is phased out dollar for dollar on amounts exceeding the $2.55 million thresholds and eliminated above amounts exceeding $3.57 million.

The TCJA removed computer or peripheral equipment from the definition of listed property. This change applies to property placed in service after December 31, 2017.

Tax reform legislation also expanded the definition of Section 179 property to allow a taxpayer to elect to include certain improvements made to nonresidential real property after the date when the property was first placed in service (see below). These changes apply to property placed in service in taxable years beginning after December 31, 2017.

1. Qualified improvement property, which means any improvement to a building’s interior. However, improvements do not qualify if they are attributable to:

• the enlargement of the building,
• any elevator or escalator or
• the internal structural framework of the building.

2. Roofs, HVAC, fire protection systems, alarm systems, and security systems.

Bonus Depreciation. Businesses are allowed to immediately deduct 100% of the cost of eligible property placed in service after September 27, 2017, and before January 1, 2023, after which it will be phased downward over a four-year period: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026.

Qualified Property

Qualified property is defined as property that you placed in service during the tax year and used predominantly (more than 50 percent) in your trade or business. Property that is placed in service and then disposed of in that same tax year does not qualify, nor does property converted to personal use in the same tax year it is acquired.

Under tax reform, real estate qualified improvement property is not eligible for bonus depreciation.

Many states have not matched these amounts and, therefore, state tax may not allow for the maximum federal deduction. In this case, two sets of depreciation records will be needed to track the federal and state tax impact.

Please contact the office if you have any questions regarding qualified property.

As the end of the year approaches, taxpayers should be reminded that business expense deduction for meals and entertainment have changed due to tax law changes in the Tax Cuts and Jobs Act (TCJA) of 2017. Until proposed regulations clarifying when business meal expenses are deductible and what constitutes entertainment are in effect, taxpayers should rely on transitional guidance that was issued by the IRS late last year.

Prior to 2018, a business could deduct up to 50 percent of entertainment expenses directly related to the active conduct of a trade or business or, if incurred immediately before or after a bona fide business discussion, associated with the active conduct of a trade or business. However, the TCJA eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation.

Taxpayers may continue to deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact.

Please note that food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the even and the cost is stated separately from the entertainment on one or more bills, invoices or receipts.

For more information about Deductions for Meals, view our infograph below:

New variations of tax-related scams show up at regular intervals, the most recent one related to Social Security numbers. Don’t be fooled, however; it’s nothing more than a new twist on an old scam and yet another attempt to frighten people into returning “robocall” voicemails.

How the Scam Works

Con artists claim to be able to suspend or cancel the victim’s SSN and may mention overdue taxes in addition to threatening to cancel the person’s SSN. The following are actions that the IRS and its authorized private collection agencies will never undertake, but are the telltale signs of this and many other scams:

• Call to demand immediate payment using a specific payment method such as a prepaid debit card, iTunes gift card or wire transfer. The IRS does not use these methods for tax payments.
• Ask a taxpayer to make a payment to a person or organization other than the U.S. Treasury.
• Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
• Demand taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.

What to Do

If taxpayers receive a call threatening to suspend their SSN for an unpaid tax bill, they should just hang up. Taxpayers should not give out sensitive information over the phone unless they are positive they know the caller is legitimate.

Taxpayers who don’t owe taxes and have no reason to think they do should:

• Report the call to the Treasury Inspector General for Tax Administration.
• Report the caller ID and callback number to the IRS by sending it to phishing@irs.gov. The taxpayer should write “IRS Phone Scam” in the subject line.
• Report the call to the Federal Trade Commission. When reporting it, they should add “IRS Phone Scam” in the notes.

Taxpayers who owe tax or think they do should:

• View tax account information online at IRS.gov to see the actual amount owed and review their payment options.
• Call the number on the billing notice
• Call the IRS at 800-829-1040.

Taxpayers who relinquish citizenship without complying with their U.S. tax obligations are subject to the significant tax consequences of the U.S. expatriation tax regime. If you’re an expat who has relinquished — or intends to relinquish — your US citizenship but still has US tax filing obligations (including owing back taxes) you’ll be relieved to know there are new IRS procedures in place that allow you to come into compliance and receive relief for any back taxes owed.

Here’s what you need to know:

Background

Intended for anyone who has relinquished, or intends to relinquish their United States (U.S.) citizenship, the Relief Procedures for Certain Former Citizens apply to taxpayers who want to come into compliance with their US income tax and reporting obligations and avoid being taxed as a “covered expatriate” under section 877A of the U.S. Internal Revenue Code (IRC).

Intended Use

The Relief Procedures for Certain Former Citizens apply only to individuals (not estates, trusts, corporations, partnerships, and other entities) who:

• Have not filed U.S. tax returns as U.S. citizens or residents;
• owe a limited amount of back taxes to the United States; and
• have net assets of less than $2 million.

Furthermore, only those US taxpayers whose past compliance failures were non-willful can take advantage of these new procedures. Typically, this situation involves someone born in the United States to foreign parents or someone born outside the United States to U.S. citizen parents, who may be unaware of their status as U.S. citizens or the consequences of such status.

The Details

Eligible individuals wishing to use these relief procedures are required to file outstanding U.S. tax returns, including all required schedules and information returns, for the five years preceding and their year of expatriation. Provided that the taxpayer’s tax liability does not exceed a total of $25,000 for the six years in question, the taxpayer is relieved from paying U.S. taxes. The purpose of these procedures is to provide relief for certain former citizens. Individuals who qualify for these procedures will not be assessed penalties and interest.

There is no specific termination date associated with the new IRS procedures; however, a closing date will be announced prior to ending the procedures. Also, individuals who relinquished their U.S. citizenship any time after March 18, 2010, are eligible as long as they satisfy the other criteria of the procedures.

Relinquishing U.S. citizenship and the tax consequences that follow are serious matters that involve irrevocable decisions. Please contact the office if you have any questions about this topic.