Every year, we take an opportunity to review our business practices and determine better and more efficient ways to serve our clients. This year has been especially challenging due to the changes in tax law, the time and costs to educate our staff in these changes and the increased responsibility for keeping our client information secure.
Our profession has seen unprecedented changes in 2018! With the passing of TCJA (Tax Cut and Jobs Act), we are tasked with learning and understanding a whole new set of tax rules and regulations – keeping in mind that California does not conform with the TCJA. This sweeping tax package drastically changed the way federal income taxes are calculated. From brand new provisions to significantly revised forms, extra time and resources will be needed to ensure we properly report your tax situation next year.
As we have seen too often, many companies have had their systems compromised and unknowingly released confidential information. We take our systems and security very serious and make sure that we are always protecting our client information. This particular dedication to securing the data comes at a high cost, but we feel it is necessary and worth the extra expenditure to give our clients’ an added security level for their private information.
Based on these considerations, we’ve determined that a fee increase is necessary to prepare your 2018 federal and state income tax returns along with year-end planning and strategies. The good news is that more work on our end typically means a lower tax bill for you, even after considering our fee increase We feel this increase is necessary due to the additional time required to comply with the new rules and ensure we take advantage of all opportunities to minimize your tax.
Please contact us if you have any questions or concerns. Again, we appreciate your business and hope to continue our relationship.
The recently enacted Tax Cuts and Jobs Act (TCJA) is a sweeping tax package. Here’s a look at some of the more important elements of the new law that have an impact on individuals.
IMPORTANT: California does not conform to the TCJA, therefore, we will still be requesting all of the information that we have in the past in order to properly prepare your federal and California tax returns. Unless otherwise noted, the changes are effective for tax years beginning in 2018 through 2025.
TAX RATES
The new law imposes a new tax rate structure with seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top rate applies to taxable income above $500,000 for single taxpayers, and $600,000 for married couples filing jointly. The rates applicable to net capital gains and qualified dividends were not changed. The “kiddie tax” rules were simplified. The net unearned income of a child subject to the rules will be taxed at the capital gain and ordinary income rates that apply to trusts and estates. Thus, the child’s tax is unaffected by the parent’s tax situation or the unearned income of any siblings.
STANDARD DEDUCTION
The new law increases the standard deduction to $24,000 for joint filers, $18,000 for heads of household, and $12,000 for singles and married taxpayers filing separately. Given these increases, many taxpayers will no longer be itemizing deductions or may benefit from “bunching” deductions in alternate years.
EXEMPTIONS
The new law suspends the deduction for personal exemptions. Thus, starting in 2018, taxpayers can no longer claim personal or dependency exemptions.
NEW DEDUCTION FOR “QUALIFIED BUSINESS INCOME”
Starting in 2018, taxpayers may be allowed a deduction up to 20 percent of “qualified business income,” otherwise known as “pass-through” income, i.e., income from partnerships, S corporations, LLCs, and sole proprietorships. The income must be from a trade or business within the U.S. Investment income does not qualify, nor do amounts received from an S corporation as reasonable compensation or from a partnership as a guaranteed payment for services provided to the trade or business. The deduction is not used in computing adjusted gross income, just taxable income. For taxpayers with taxable income above $157,500 ($315,000 for joint filers), (1) a limitation based on W-2 wages paid by the business and depreciable tangible property used in the business is phased in, and (2) income from the following trades or businesses is phased out of qualified business income: health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners.
CHILD AND FAMILY TAX CREDIT
The new law increases the credit for qualifying children (i.e., children under 17) to $2,000 from $1,000, and increases to $1,400 the refundable portion of the credit. It also introduces a new (nonrefundable) $500 credit for a taxpayer’s dependents who are not qualifying children. The adjusted gross income level at which the credits begin to be phased out has been increased to $200,000 ($400,000 for joint filers).
STATE AND LOCAL TAXES
The itemized deduction for state and local income and property taxes is limited to a total of $10,000 starting in 2018. Therefore, prepaying your state and property taxes before the end of the calendar year may not provide a tax benefit.
MORTGAGE INTEREST
Under the new law, mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000 (down from $1 million), starting with loans taken out in 2018. And there is no longer any deduction for interest on home equity loans, regardless of when the debt was incurred.
MISCELLANEOUS ITEMIZED DEDUCTIONS
There is no longer a deduction for miscellaneous itemized deductions which were formerly deductible to the extent they exceeded 2 percent of adjusted gross income. This category included items such as tax preparation costs, investment expenses, union dues, and unreimbursed employee expenses.
MEDICAL EXPENSES
Under the new law, for 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5 percent of adjusted gross income for all taxpayers. Previously, the AGI “floor” was 10% for most taxpayers.
MOVING EXPENSES
The deduction for job-related moving expenses has been eliminated, except for certain military personnel. The exclusion for moving expense reimbursements has also been suspended.
ALIMONY
For post-2018 divorce decrees and separation agreements, alimony will not be deductible by the paying spouse and will not be taxable to the receiving spouse.
HEALTH CARE “INDIVIDUAL MANDATE”
Starting in 2019, there is no longer a penalty for individuals who fail to obtain minimum essential health coverage.
ESTATE AND GIFT TAX EXEMPTION
Effective for decedents dying, and gifts made, in 2018, the estate and gift tax exemption has been increased to roughly $11.2 million ($22.4 million for married couples).
ALTERNATIVE MINIMUM TAX (AMT) EXEMPTION
The AMT has been retained for individuals by the new law but the exemption has been increased to $109,400 for joint filers ($54,700 for married taxpayers filing separately), and $70,300 for unmarried taxpayers. The exemption is phased out for taxpayers with alternative minimum taxable income over $1 million for joint filers, and over $500,000 for all others.
As you can see from this overview, the new law affects many areas of taxation. Since the Treasury has not issued final regulations in many areas of the TCJA we anticipate extending several returns in order to avoid possible amendments after additional guidance is issued. Keep in mind that extending your return does not increase your chances of an audit but an amended return might! If you wish to discuss the impact of the law on your particular situation, please give us a call.
Keeping up with the complex credit landscape can be difficult for organizations with limited resources. The Tax Cuts and Jobs Act (TCJA) adds yet another another level of complexity to tax planning. In this article, we have outlined how the TCJA will impact key tax provisions and tax minimizing strategies.
Alternative Minimum Tax
The Alternative minimum tax (AMT) should be considered before you and/or your accountant begin to time income and deductions. AMT is a separate tax system that limits some deductions and disallows others, such as state and local income tax deductions, property tax deductions, and other miscellaneous itemized deductions that are subject to the 2 percent of AGI. Deductions may include investment advisory fees and non-reimbursable employee business expenses.
The purpose of the AMT is to ensure those who receive a lot of tax breaks are still paying some level of federal income taxes. The AMT, originally intended to target high-income households, became problematic once it began affecting more and more taxpayers. The AMT failed to account for inflation. As wages increased, it eventually began to impact middle-income households.
To ensure that the AMT functions properly, the Tax Cuts and Jobs Act:
Under the Tax Cuts and Jobs Act, fewer taxpayers will be affected by the alternative minimum tax. You will want to speak with your tax professional regarding the changes made to the AMT exemption amounts.
Timing Income and Expenses
Strategic timing can reduce your tax liability, while poor timing can unnecessarily increase it.
If you don’t expect to be subject to AMT in the current or following year, consider income deferment. Deferring income and increasing deductible expenses for the current year can be a good strategy because it will postpone tax. The opposite approach should be taken if you expect to be in a higher tax bracket, or if tax rates are expected to increase.
Whatever the reason for timing your income and deductions, here are some income items you may be able to control:
Followed by potentially controllable expenses:
Charitable Donations
Charitable donations in the form of cash or in-kind items can reap great tax benefits. While the new tax reform does not eliminate charitable deductions, it does limit the tax incentive for charitable contributions. The new plan increases the standard deduction and reduces the tax bracket, meaning fewer people will itemize their deductions.
There are several giving strategies to consider, including:
Before making a large donation to the charity of your choosing, discuss options with your tax professional.
Healthcare Breaks
The Tax Reform and Jobs Act changed the AGI threshold for medical expenses from 10 percent to 7.5 percent for 2017 and 2018 for all taxpayers.
If medical expenses were not paid through tax-advantaged accounts or were reimbursable by insurance and exceed 7.5 percent of your AGI, you can deduct the excess amount. Eligible expenses may include:
You may be able to save tax by contributing to one of these accounts:
Sales Tax Deduction
The state and local tax deduction, or SALT, now has a cap. While it remains in place for those who itemize their taxes, it now has a $10,000 limit. This is a significant change as filers could previously deduct an unlimited amount for state and local property taxes, plus income or sales taxes.
Self-Employment Taxes
As a self-employed taxpayer, you may benefit from other above-the-line deductions. You can deduct 100% of health insurance costs for yourself, your spouse, and your dependents, up to your net self-employment income. You can also deduct retirement plan contributions and, if you’re eligible, an HSA. The Self-Employment Health Insurance deduction remained untouched in the Tax Cuts and Jobs Act, however employed taxpayers must itemize on their returns to claim it.
Estimated Payments and Withholdings
You can become subject to penalties if you don’t pay enough tax through estimated tax payments and withholding. Here are some strategies to help avoid underpayment penalties:
Tax Credits
Now is also a great time for organizations to re-evaluate their annual budgets to improve profit margins and consolidate spending. One strategy worth exploring is new or revised tax credits to help offset the amount owed to federal and state governments and take advantage of any county or city localized tax credits. Capturing 2018 credits, as well as retroactive 2017 tax credit opportunities, can help your organization reduce its liability, lower its tax rate, and improve the bottom line.
For example, the employer tax credit, which was created by the TCJA, is available to employers who offer paid family and medical leave to their employees who earned $72,000 or less in 2017 or 2018. To qualify, employers must have a written policy that
Whether you are an individual taxpayer or a small business owner, understanding your tax credit eligibility is important. If you have questions about these or other tax saving tips, please contact one of our professionals to schedule your year-end planning meeting.
Cindy Acord recently attended CPAsNET’s 25th Annual Meeting in Chicago, Illinois. Hamilton Tharp is one of only 25 accounting practices in the nation selected as a member of the prestigious network.
More than thirty attendees, including members and international guests attended the two-and-a-half day conference.
Attendees discussed current issues affecting the accounting profession and developed ties with accounting and tax experts in other areas of the country and internationally.
At the conference, Hamilton Tharp was recognized by CPAsNET for 10 years of membership!
The Treasury Department and the IRS recently announced that they are delaying any major changes for Form W-4, based on feedback they received from the payroll and tax communities.
Earlier in the year, the IRS released a draft version, making substantial changes to Form W-4, Employee’s Withholding Allowance Certificate. These proposed changes were originally scheduled to be made for tax year 2019. With the announcement, these changes are now planned for tax year 2020, with only minor changes expected to the 2019 version. The IRS has stated the 2019 version will remain largely consistent with the 2018 version. The IRS will work closely with stakeholders to make the more substantive adjustments to the 2020 W-4 that will accurately reflect the changes encompassed in the new tax law.
In the interim, we strongly encourage taxpayers to review their withholding situation to make sure they have the right amount of tax taken out of their paychecks and thus avoid a larger tax bill for 2018.
Click here to perform a quick “paycheck checkup” using the IRS withholding calculator.
Determining how much to withhold depends on your unique financial situation. The professionals at Hamilton Tharp can help, call us today for a paycheck checkup.
Listen to Lana Pflaum, CPA (around minute 6) provide insight on this very important topic. Hamilton Tharp, LLP is proud to have been asked to be a part of this discussion. Congratulations Lana!
https://www.facebook.com/YourWealthHour/videos/1835003159924259/
Taxpayers who are victims of a disaster might need to reconstruct records to prove their loss. Doing this may be essential for tax purposes, getting federal assistance, or insurance reimbursement.
According to the Internal Revenue Service, there are 12 things taxpayers can do to help reconstruct their records after a disaster:
On June 21, 2018, The U.S. Supreme Court issued its highly anticipated decision in the South Dakota v. Wayfair case. The verdict, declaring that states can impose sales tax nexus without requiring a seller’s physical presence in the state, will have serious implications for all sellers, not just online retailers.
The decision overturns the Supreme Court precedent in Quill Corp. v. Dakota which required retailers to have a physical presence in a state before a state could require the seller to collect sales taxes from in-state customers.
The court’s decision sides with states like South Dakota, that were ultimately missing out on billions of dollars in income by not collecting and remitting sales tax from online retailers who lacked a physical presence in their state. According to the U.S. Government Accountability Office, state and local governments could have gained up to $13 billion in 2017 if states were given authority to require sales tax collection from all remote sellers.
Historical Perspective
In 1992, North Dakota attempted to require Quill Corporation, a retailer with no physical presence in North Dakota, to collect and pay sales tax for doing business in the state. Having done business through mail orders and by phone, Quill was able to successfully argue that they should not be required to pay taxes in a state in which they had no physical presence. The courts agreed and thus the physical presence standard was born.
Since then, states have enacted a variety of nexus provisions to counteract the loss of revenue by out of state businesses that do not collect sales tax for the state. These types of provisions, which require remote sellers to collect tax or provide information about in-state customers, are known as remote seller nexus. This chart maps out the states that have passed legislation.
In the 1990’s no one could have anticipated how predominate online sales and e-commerce would become. What was once a fraction of interstate sales had become a $450 billion industry. Supreme Court Justice Anthony Kennedy displayed willingness to revisit the Quill case, recognizing the decision had become dated. South Dakota identified the window of opportunity to re-challenge the 1992 Quill verdict. In a 5-4 ruling, the Supreme Court overturned Quill’s physical presence standard in Dakota v. Wayfair.
Who Will This Impact?
It is important to note that all sellers, not just online retailers, will be impacted by the overturn of the physical presence standard. This ruling will result in increased complexities for consumers, brick-and-mortar retailers, online retailers, accountants and the technology companies that develop accounting software.
If your business sells products or services in multiple states, this ruling should warrant your attention. It will be imperative to be proactive, start by determining what the impact will be and plan accordingly. While it is unlikely that states will enforce sales tax economic nexus statutes immediately, we still urge all businesses to be prepared.
Looking Forward
While states aren’t required to collect tax from out of state retailers, many states are expected to follow South Dakota’s path since these standards were reviewed by the Court for the Wayfair decision. Some states have passed economic nexus standards that are already in affect or will take affect within the next year. But until Congress issues guidance or legislation, other states are left navigating their own course of direction.
The Multistate Tax Commission (MTC) negotiated a special program for online sellers to resolve prior sales tax liability. This program was designed for online sellers with sales and income tax obligations from previous unpaid taxes in 25 different states. The program, which ran from August 17, 2017 to November 1,2017, has expired. If you missed out on this program and would like to evaluate your options, contact us today.
If you, your spouse or a dependent are heading off to college in the fall, some of your costs may save you money at tax time. You may be able to claim a tax credit on your federal tax return. Here are some key IRS tips that you should know about education tax credits:
The AOTC is worth up to $2,500 per year for an eligible student. You may claim this credit only for the first four years of higher education. Forty percent of the AOTC is refundable. That means if you are eligible, you can get up to $1,000 of the credit as a refund, even if you do not owe any taxes.
The LLC is worth up to $2,000 on your tax return. There is no limit on the number of years that you can claim the LLC for an eligible student.
If more than one student qualifies for a credit in the same year, you can claim a different credit for each student and choose whichever the credit results in greater tax savings. For instance, you can claim the AOTC for both students if both of them are qualify for AOTC.
The tuition and fees deduction is currently no longer available in 2018. It was extended for tax year 2017 by Congress through passing the Bipartisan Budget Act of 2018. The Tax Cuts and Jobs Act (TCJA) did not extend the tuition and fees deduction; we will have to wait and see if Congress will extend it near year end.
If this break is extended for 2018, it can reduce the amount of your income subject to tax by up to $4,000.
You may be able to deduct qualified education expenses for higher education paid during the year for yourself, your spouse or your dependent, UNLESS:
You may use qualified expenses to figure your credit. These include the costs you pay for tuition, fees and other related expenses for an eligible student. To find out more on the rules that apply to each credit, contact one of our professionals today.
Eligible schools are those that offer education beyond high school. This includes most colleges and universities. Vocational schools or other postsecondary schools may also qualify. If you aren’t sure if your school is eligible, ask your school if it is an eligible educational institution or see if your school is on the U.S. Department of Education’s Accreditation database.
In most cases, you should receive Form 1098-T, Tuition Statement, from your school by Feb. 1. This form reports your qualified expenses to the IRS and to you. The amounts shown on the form may be different than the amounts you actually paid. That might happen because some of your related costs may not appear on the form. For instance, the cost of your textbooks may not appear on the form. However, you still may be able to include those costs when you figure your credit. Don’t forget that you can only claim an education credit for the qualified expenses that you paid in that same tax year. If someone else pays such expenses on your behalf, (like a parent), you still receive “credit” and therefore receive form 1098-T.
If you are in the United States on an F-1 Student Visa, the tax rules generally treat you as a nonresident alien for federal tax purposes. To find out more about your F-1 Student Visa status, visit U.S. Immigration Support. To learn more about resident and nonresident alien status and restrictions on claiming the education credits, refer to Publication 519, U.S. Tax Guide for Aliens.
These credits are subject to income limitations and may be reduced or eliminated, based on your income.
Contact one of our professionals to see if you are eligible to claim education credits.
We wanted to make you aware of a valuable new tax credit made possible by the Tax Cuts and Jobs Act (TCJA). The credit is available to employers that provide paid family and medical leave to their employees. The amount of the credit is generally 12.5% of wages paid to an employee on leave. However, you must pay at least 50% of the wages normally paid to the employee while he or she is out on qualifying leave. The credit is increased by 0.25% (but not above 25%) for each percentage point the rate of pay is more than 50% of normal wages. So, if the leave payment rate is the same as the employee’s normal rate, a maximum credit of 25% will apply.
You must satisfy several requirements to take advantage of the credit. These include the following:
The maximum length of paid family and medical leave that can qualify for the credit is 12 weeks per employee, per tax year. Also, the total credit attributable to one employee can’t exceed the employee’s normal hourly rate for each hour (or fraction of an hour) of actual work performed multiplied by the number of hours (or fraction of an hour) family and medical leave is taken. The wages for an employee who isn’t paid an hourly wage rate are prorated to an hourly wage rate to determine the credit limit.
Assuming all of these requirements are met, the new employer credit for paid family and medical leave is a win-win situation. However, it’s only available for two years (unless extended by Congress). It’s important that you act now by reviewing your current leave policy and instituting a new policy if necessary. We can help you with that. Please contact us if you have questions or want more information on the new credit.
With hurricane season in progress, we would like to remind individuals and businesses to safeguard their records against natural disasters with four simple steps.
Taxpayers should keep a set of backup records in a safe place. The backup should be stored away from the original set.
Keeping a backup set of records –– including, for example, bank statements, tax returns, insurance policies, etc. –– is easier now that many financial institutions provide statements and documents electronically, and much financial information is available on the Internet. Even if the original records are provided only on paper, they can be scanned into an electronic format. With documents in electronic form, taxpayers can save them to the cloud, download them to a backup storage device, like an external hard drive or USB flash drive, or burn them to a CD or DVD.
Another step a taxpayer can take to prepare for disaster is to photograph or videotape the contents of his or her home, especially items of higher value. It may be a good idea to compile a room-by-room list of belongings.
A photographic record can help an individual prove the market value of items for insurance and casualty loss claims. Photos should be stored with a friend or family member who lives outside the area.
Emergency plans should be reviewed annually. Personal and business situations change over time as do preparedness needs. When employers hire new employees or when a company or organization changes functions, plans should be updated accordingly and employees should be informed of the changes.
Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.
We are Ready to Help
Don’t wait until disaster strikes. If you have questions about safeguarding your records, speak to one of our team members today. We can help individuals and businesses prepare for disaster-related issues.
One of the most difficult things for a family to deal with after a loved one’s death is sorting through the endless paperwork needed to get the estate in order. Of course, this can be avoided by creating a “family file” containing all of your important documents needed in the event of your death. This file can make an already difficult process easier on your loved ones. Additionally, it is important that your documents are in order to ensure prompt payout on any life insurance policies on which your family may be depending.
The first step in assembling this file is to determine its contents. Generally, you will want copies of all of your financial and legal documents. Your financial adviser should be able to assist you in identifying files and developing a list specific to your situation, but the following paragraphs provide some general insight.
The most important document to keep a copy of is your will. Making sure that your loved ones know where this document is kept can be vital to ensuring that your final wishes are carried out. Your will should be kept at an attorney’s office or in a safety deposit box at a bank. Be sure that your family is aware of its location. You may also want to keep a letter of instruction in your home. This letter is not legally binding but oftentimes contains instructions for your funeral arrangements and the names and contact information for people listed in your will.
Documents establishing ownership of your financial assets, properties and any business interests should be kept in one location. Oftentimes family members are not aware of – or cannot remember – all of your assets. This could lead to them remaining unclaimed after your death. You also should ensure that any log-in information for online access to the accounts is kept on file, as well as information related to any safety deposit boxes you have. This information can help your family contact the bank in the event of your death. You might also want to keep a copy of your tax return with this information as it can help identify your assets in case any are missing.
In addition, you will want to keep copies of any life insurance policies you have, as well as documentation for your retirement accounts such as a pension or 401(k). This information should include the policy name, number and an agent to contact. If you have life insurance through your employer, make sure that it is included. Employer-provided policies are often overlooked.
Finally, you should keep your healthcare documentation in a file known to your family. For example, if you have a durable power of attorney – a document that lets your family make healthcare decisions on your behalf if you are incapacitated – this, too, should be in that file. You should also be sure to update this document as healthcare and privacy laws may render your documentation obsolete.
The professionals in our firm can help you identify the documentation you need to help your family in the event of a death. Call us today.
As a business owner, it is important to be able to read and understand the accounting terms found in your financial statements. Once you understand the basics of the financial statements and can interpret them, you can focus on what these statements mean to your organizations overall financial health.
Understanding your Financial Statements
A statement of financial position, also known as a balance sheet, simply shows the assets and liabilities of the organization at any given point in time. Thinking of it as a summary of what the organization owns versus owes is a great way to put this financial report into plain English.
When delivering the information found in your financial statement, use broad categories to keep the conversation at a high level. This will prevent information overload and help keep the emphasis on the bigger picture. Providing a recap of the organization’s goals and objectives will help connect the dots between the numbers and their efforts.
Investing in training is another opportunity that will help teach members of your organization about the various accounting practices and how they can be helpful in determining the organization overall financial health.
Understanding Your Cash Flow
A statement of cash flow is used to show where cash came from and how it was spent. It will tell you the revenue and expenses for the organization.
Rather than question the budget line by line, we recommend looking at the bigger picture by focusing on the following:
Asking these questions will help you gauge the health of the organization. Depending on the situation, you may want to consider digging deeper. If, for instance, expenses are significantly higher than budgeted originally, you may want to seek an explanation. And if you find that financial trends are showing stagnation or contraction, we recommend you seek an answer as to why.
Our professionals are well-versed in accounting and are eager to assist you in determining your organization’s financial well-being. Please call us today.
What does your tax return say about your financial situation? The paperwork you file each year offers excellent information about how you are managing your money—and the areas where it might be wise to make changes in your financial habits.
By taking the proper steps, your tax return will be transformed from a passive bag of receipts to proactive tax planning to help you reach your goals. As we prepare to file your taxes, we often identify common planning mistakes and missed opportunities. Below are five red flags that may present problems.
Mistake 1: Holding Title to Your Assets
One of the most common financial planning mistakes we see is a failure to make a transfer on death (TOD) designation. How you title your assets matters. Consider an asset held in joint name. In the event of your passing, this asset will automatically become owned by whomever the joint owner is through rights of survivorship. If you wish to appoint this asset to someone else, the asset may need to pass through probate before the transfer can be made. Probate, the courts process of gathering and distributing a deceased person’s assets, can take anywhere from 6 months to 2 years to complete. You can avoid probate by making a transfer on death election. We suggest speaking with an attorney to determine if your state has probate laws.
Mistake 2: Holding Too Many Accounts
We often accumulate accounts as we do our financial planning. Changing jobs or advisors or diversifying your portfolio can result in a multitude of assets. If your pile of 1099’s is growing, it may be time to reevaluate your strategy. While it may have worked in the past, holding too many accounts can lead to recordkeeping problems. Consolidating accounts will not only reduce your bookkeeping but also make overseeing and monitoring your accounts more manageable.
Mistake 3: Capital Loss Carryforwards
Capital losses can be used to offset other gains, but only $3,000 of that loss can be deducted from all other income, per year. Losses exceeding this threshold can be carried forward and applied to future tax years. When we see losses carried over year after year, it often indicates a lack of coordination between a tax plan and investments. Your tax plan should harmonize with your investments. One approach is to create gains to utilize your carryforward losses.
Mistake 4: Not Understanding Your Trust Benefits
Beneficiaries of trusts will receive a K-1 form to report their share of income and losses. If you are the beneficiary of a trust, find out who is in control of these assets and determine what authority, if any, you have to make changes. We encourage the beneficiary of any trusts to be proactive by asking questions and learning more about what they have control over, especially since it will ultimately impact their financial situation.
Mistake 5: Pass-Through Income Considerations
Businesses with pass-through income status don’t have to pay business taxes at the entity level. Instead, all income passes through the owner’s individual tax return and is taxed by the IRS at the personal tax rate. Under the new tax code, owners, partners and shareholders of S-corporations, LLCs and partnerships will receive a tax break. As long as they aren’t part of the carve-out group, those who pay their share of the business’ taxes through their individual tax returns will have a 20 percent deduction starting in 2018.
This deduction is a great financial planning opportunity, but there are exceptions. Qualifying for the deduction depends on your income threshold and what field your business is in. High-earning professionals that exceed the income threshold, such as physicians and attorneys, will likely not qualify. Likewise, those who hold occupations that provide a personal service, except engineering and architecture, are prohibited from taking the deduction. These industries include health, law, accounting and financial and brokerage services.
We can help you determine if you are eligible for this deduction and whether the business is equipped to financially handle the death or disability of an owner. It is essential that businesses with a pass-through income structure have a formal succession plan and updated buy-sell agreement with partners.
If you have questions about your financial situation, remember that we can help. Our firm is made up of highly qualified and educated professionals who serve as trusted business advisors and who work with clients like you all year long. We can review your financial situation and develop creative strategies to minimize your tax liability and help you meet your financial goals. Contact one of our professionals today.
The partners and professionals at Hamilton Tharp, LLP would like to remind our clients to watch for IRS notices and letters. With IRS scams and identity theft on the rise, stopping identity theft and refund fraud is a top priority for the Internal Revenue Service. The IRS has many new safeguards in place to help fight against stolen identity refund fraud. These safeguards are designed to better authenticate the taxpayer’s identity and the validity of the tax return at the time of filing. If the IRS received your federal income tax return, but needs more information to verify your identity and process your tax return, they will send you Letter 4883C. There are many reasons why a return may appear to be suspicious to IRS systems, and the agency takes this precautionary step to help protect you.
If you received Letter 4883C, it is not fraud. It is a legitimate request, from the IRS, asking you to verify your identity. The letter will contain instructions to call the toll-free IRS Identity Verification telephone number at 800-830-5084. Before you call, gather the following items:
If you are unable to verify your identity with the customer service representative, you may be asked to visit an IRS Taxpayer Assistance Center in person. To find a Taxpayer Assistance Center closest to you, visit https://apps.irs.gov/app/officeLocator/index.jsp and enter your zip code into the office locator. Taxpayer Assistance Centers are closed on federal holidays. You will be asked to provide photo identification and a taxpayer identification number such as your social security number. You may also be asked to provide a copy of the tax return in question.
Remember, the IRS will never
We also remind our clients, this is the time of year they may see scam emails from their tax software provider or others asking them to update online accounts. Taxpayers should learn to recognize phishing emails, calls or texts that pose as familiar organizations such as banks, credit card companies, tax software providers or even the IRS. These ruses generally urge taxpayers to give up sensitive data such as passwords, Social Security numbers and bank account or credit card numbers.
If you receive a suspicious email, check with us first. Never open an attachment or link from an unknown or suspicious source. It may infect your computer with malware or steal information. Remember, the IRS does not send unsolicited emails or request sensitive data via email.
The tax reform legislation that Congress signed into law on December 22, 2017, was the largest change to the tax system in over 3 decades. The new tax code contains many provisions that will affect individual, estate, and corporate taxpayers. One of those changes, the elimination of a business-related deduction used for entertainment, amusement or recreation expenses, will make it costlier for business owners to entertain clients.
Previously, if an entertainment or meal expense was related to or associated with the active conduct of a trade or business, it was deductible up to 50 percent. Under the new tax code, these expenses are now considered the cost of doing business. In the chart below, we have highlighted the major changes.
| Activity | 2017 Old Rules | 2018 New Rules |
| Qualified client meal expenses | 50% deductible | 50% deductible |
| Qualified employee meal expenses | 50% deductible | 50% deductible |
| Meals provided for employer convenience | 100% deductible | 50% deductible |
| Client entertainment expenses
Event tickets Qualified charitable events |
50% deductible
50% deductible at face value 100% deductible |
No deduction for entertainment expenses |
| Office holiday parties | 100% deductible | 100% deductible |
The elimination of this deduction will impact business owners who are accustomed to treating clients to golf outings or providing clients with tickets to sporting events or concerts. Businesses will have to re-evaluate their entertainment expenses related to their trade or business, as these items are no longer 50 percent deductible.
In consideration of the elimination of this deduction, we recommend creating separate accounts for meals and entertainment expenses. Educating employees to separate their expenses will be vital as business meals will remain 50 percent deductible until 2025.
Entertainment expenses are notoriously targeted by auditors. Considering the law change, we anticipate these expenses to be a heightened area of concern during an audit. The professionals in our office can help ensure you are in compliance, call us today.
Have you noticed a slight jump in your paycheck recently? You’re not alone! Millions of Americans are receiving heftier paychecks due to the new tax law signed into law in December.
To help taxpayers check their 2018 tax withholding following the major changes in the tax law, the Internal Revenue Service recently released an updated Withholding Calculator and a new version of Form W-4.
The IRS encourages taxpayers to use these tools to make sure they have the right amount of tax taken out of their paychecks and thus avoid a larger tax bill for 2018.
The withholding changes do not affect 2017 tax returns due this April. However, having a completed 2017 tax return can help taxpayers work with the Withholding Calculator to determine their proper withholding for 2018 and avoid issues when they file next year.
Determining how much to withhold depends on your unique financial situation. The professionals at Hamilton Tharp can help, call us today for a paycheck checkup.
Did you know taxpayers can check the status of their 2017 tax refund online? The “Where’s My Refund?” tool is available on irs.gov and through the IRS mobile app, IRS2GO.
Updating daily, “Where’s My Refund?” has the most up-to-date information about the status of your refund. The tool displays when the return is received, approved and sent. After the IRS approves the refund, an actual refund date is provided.
To check the status of your refund you will need three pieces of information:
The State of California Franchise Tax Board also provides a tool for individuals to check the status of their California state income tax return.
Remember, some tax returns require additional processing time. We’ve listed some of the most common circumstances below that can impact refund timing.
The Internal Revenue Service warns taxpayers of a new twist on an old scam in which criminals’ steal client data from tax professionals, file fraudulent tax returns and deposit the erroneous refund into the taxpayers’ real bank account. They will then use a variety of tactics to reclaim the refund from the taxpayer. There are currently two versions of the scam.
Version One
Criminals posing as debt collection agency officials acting on behalf of the IRS contacted the taxpayers to say a refund was deposited in error, and they asked the taxpayers to forward the money to their collection agency.
Version Two
The taxpayer who received the erroneous refund gets an automated call with a recorded voice saying he is from the IRS and threatens the taxpayer with criminal fraud charges, an arrest warrant and a “blacklisting” of their Social Security Number. The recorded voice gives the taxpayer a case number and a telephone number to call to return the refund.
What should you do if you received an erroneous refund?
The IRS urges taxpayers to follow established procedures for returning an erroneous refund to the agency. The IRS also encourages taxpayers to discuss the issue with their financial institutions because there may be a need to close bank accounts. Taxpayers receiving erroneous refunds also should contact their tax preparers immediately.
Remember, the IRS will never
The professionals in our office are closely monitoring this evolving scam, we will keep you apprised.
The Internal Revenue Service, state tax agencies and the tax industry urges all employers to educate their payroll personnel about a Form W-2 phishing scam that made victims of hundreds of organizations and thousands of employees last year.
The Form W-2 scam has emerged as one of the most dangerous phishing emails in the tax community. During the last two tax seasons, cybercriminals tricked payroll personnel or people with access to payroll information into disclosing sensitive information for entire workforces. The scam affected all types of employers, from small and large businesses to public schools and universities, hospitals, tribal governments and charities.
Reports to phishing@irs.gov from victims and nonvictims about this scam jumped to approximately 900 in 2017, compared to slightly over 100 in 2016. Last year, more than 200 employers were victimized, which translated into hundreds of thousands of employees who had their identities compromised.
The IRS and its partners in the Security Summit effort hope to limit the success of this scam in 2018 by alerting employers immediately. The IRS can take steps to protect employees, but only if the agency is notified immediately by employers about the theft. Last year, the IRS created a new process by which employers should report these scams.
How the scam works
Best Practices for Employers
To prevent falling victim of the Form W-2 Scam, employers can:
If the business or organization victimized by these attacks notifies the IRS, the IRS can take steps to help prevent employees from being victims of tax-related identity theft.
How to notify the IRS if you are a victim
The IRS established a special email notification address specifically for employers to report Form W-2 data thefts. Here’s how Form W-2 scam victims can notify the IRS:
Include the following:
Businesses and organizations that fall victim to the scam and/or organizations that only receive a suspect email but do not fall victim to the scam should send the full email headers to phishing@irs.gov and use “W2 Scam” in the subject line.
Be aware that cybercriminals’ scams are constantly evolving. Employers should be alert to any unusual requests for employee data.
Taxpayers might be eligible for a tax refund and don’t even know it! Below are four tax credits that can mean a refund for eligible taxpayers:
Taxpayers need to file a 2017 tax return to claim these credits. If you are unsure of your eligibility to claim the tax credits mentioned in this article, the professionals in our office can help. Call us today.
We know identity theft is a frustrating process for victims. The IRS is taking this issue very seriously and continues to expand on their robust screening process to stop fraudulent returns.
What is identity theft?
Identity theft occurs when someone uses personal information such as your name, Social Security number (SSN) or other identifying information without your permission, to commit fraud or other crimes, such as claiming a fraudulent refund.
How do you know if your tax records have been affected?
Usually, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund. Generally, the identity thief will use a stolen SSN to file a forged tax return and attempt to get a fraudulent refund early in the filing season.
You may only become aware this has happened to you if you file your return later in the filing season and discover that two returns have been filed using the same SSN.
Be alert to possible identity theft if you receive an IRS notice or letter that states that:
What should you do if your tax records are affected by identity theft?
If you receive a notice from the IRS, contact us immediately. If you believe someone may have used your SSN fraudulently, we will notify the IRS immediately by completing the appropriate paperwork.
If you are a victim of identity theft, the Federal Trade Commission recommends that you
If your SSN number is compromised, the IRS recommends that you
How can you protect your tax records?
If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost/stolen purse or wallet, questionable credit card activity or credit report, please let us know. We can assist you in contacting the IRS and other agencies to ensure your identity is safe.
How can you minimize the chance of becoming a victim?
If you become a victim of identity theft, the professionals in our office can assist you in dealing with the IRS and any other agencies with which you must communicate. Call us today.
The IRS recently announced the 2018 cost-of-living adjustments for various retirement plan dollar limits.
The indexed amounts, and other commonly used limits, are listed below:
| 2018 | 2017 | 2016 | |||
IRAs |
|||||
|---|---|---|---|---|---|
| IRA Contribution Limit | $5,500 | $5,500 | $5,500 | ||
| IRA Catch-Up Contributions | 1,000 | 1,000 | 1,000 | ||
IRA AGI Deduction Phase-out Starting at |
|||||
| Joint Return | 101,000 | 99,000 | 98,000 | ||
| Single or Head of Household | 63,000 | 62,000 | 61,000 | ||
SEP |
|||||
| SEP Minimum Compensation | 600 | 600 | 600 | ||
| SEP Maximum Contribution | 55,000 | 54,000 | 53,000 | ||
| SEP Maximum Compensation | 275,000 | 270,000 | 265,000 | ||
SIMPLE Plans |
|||||
| SIMPLE Maximum Contributions | 12,500 | 12,500 | 12,500 | ||
| Catch-up Contributions | 3,000 | 3,000 | 3,000 | ||
401(k), 403(b), Profit-Sharing Plans, etc. |
|||||
| Annual Compensation | 275,000 | 270,000 | 265,000 | ||
| Elective Deferrals | 18,500 | 18,000 | 18,000 | ||
| Catch-up Contributions | 6,000 | 6,000 | 6,000 | ||
| Defined Contribution Limits | 55,000 | 54,000 | 53,000 | ||
| ESOP Limits |
1,105,000 220,000 |
1,080,000 215,000 |
1,070,000 210,000 |
||
Other |
|||||
| HCE Threshold | 120,000 | 120,000 | 120,000 | ||
| Defined Benefit Limits | 220,000 | 215,000 | 210,000 | ||
| Key Employee | 175,000 | 175,000 | 170,000 | ||
| 457 Elective Deferrals | 18,500 | 18,000 | 18,000 | ||
| Control Employee (board member or officer) | 110,000 | 105,000 | 105,000 | ||
| Control Employee (compensation-based) | 220,000 | 215,000 | 215,000 | ||
| Taxable Wage Base | 128,400 | 127,200 | 118,500 | ||
The Internal Revenue Service recently issued the 2018 optional standard mileage rates to be used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
As of January 1, 2018, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) are:
The mileage rate for service to a charitable organization is not alterable by the IRS. Instead, it must be changed by statute passed by Congress.
It is important to remember that a taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. For more information, please contact one of our professionals today.