TAX TIME is just around the corner. This letter is to assist your memory regarding transactions that have already occurred in 2018 and remind you of things that can/should be completed before year-end.
Late in 2017, changes to the tax laws were made. The overall tax rates were reduced but there were many changes that could increase taxable income, thereby eliminating the perceived tax reduction due to the reduced rates.
One thing that did change for 2019 is that the “Obamacare Mandate” for health insurance is no longer required effective January 1, 2019. However, for 2018, as we have the past four years, we are required to obtain information and include the information relating to health insurance coverage for you, your spouse and any child under the age of 26. Supposedly, the IRS will not allow tax returns to be filed electronically unless that information is included.
The following is a summary of some of the items that changed and some you should be considering when compiling the necessary information (the following does not cover all situations):
1. Increase in standard deduction – the standard deduction was increased to $12,000 for single people and $24,000 for married filing joint returns. This increase will eliminate some people from itemizing.
2. Elimination of personal exemption – the personal exemption was eliminated.
3. Kiddie tax –The Kiddie tax could become applicable for children up to age 18 or up to 23 if the child is a full-time student and their earned income doesn’t exceed one-half of their support. Children meeting the guidelines will be taxed at trust and estate rates which may be higher than the parent’s rate. This change was effective for 2018.
4. Sale of stocks and bonds – Review stock sales for long-term gains. These gains can be offset by selling some losers. When reviewing the stocks for sale, you need to remember the “wash” sale rule whereby if a stock is sold at a loss and then repurchased within the next 30 days the sale is treated as if it never occurred. The maximum tax rate on capital gains is 20% (23.8% if income is over $250,000).
Gain information – your broker is required to provide you with basis information if they have it. Due to this, there could be up to six attachments to Schedule D.
5. Section 179 Depreciation – The maximum section 179 depreciation for 2018 is $1,000,000. This does not include SUV’s. That limit is still $25,000.
6. Bonus Depreciation - For 2018, there is a deduction under section 168(k) that allows a deduction of 100% of all new and used depreciable property with lives of 20 years or less. You must elect out if bonus deprecation is not wanted. The election is made on an annual basis by class of property.
7. Child Credit – The child credit for qualifying children under the age of 17 was increased to $2,000 per child for 2018 with up to $1,400 being able to be refunded. If income levels are too high (> than $400,000, this credit is phased out).
8. Student Loan Interest – The maximum deduction for qualifying student loan interest for 2018 is $2,500.
9. Health Savings Accounts – Due to the ever-increasing cost of health insurance many have gone to high deductible health plans. If so, you can put $3,450 into an HSA with individual coverage and $6,900 into an HSA with family coverage. These amounts can be increased by $1,000 if the individual with the plan is at least 55. Prior to opening an HSA account, you will want to verify your plan is eligible.
10. Retirement Plans – Maximizing contributions to retirement plans can save taxes.
11. Social Security Wages – The maximum wages that are subject to social security in 2018 is $128,400 and for 2019 this amount is increased to $132,900.
12. Social Security/Medicaid Benefits – To receive social security or Medicaid benefits (disability is included) you need to have 40 quarters of credit. The maximum number of credits that can be received in any one year is 4.
13. Higher Education Credits –The maximum American Opportunity Credit is $2,500 (100% x $2,000 + 25% x 2,000). This credit is now applicable to 4 years instead of two. Please provide all information relating to books, tuition, fees and other related expenses. Like the requirement for the last two years you will need to have a 1098-T in hand before the credit can be taken. Make sure to provide us with a copy of the 1098-T.
14. Sales/Trades of Fixed Assets – Please bring all related information for fixed asset sales, purchases and trade-ins. For 2018, there are no longer any like-kind exchanges for equipment.
15. W-2’s – For those of you with businesses that will be filing forms W-2, you will want to make sure that they are accurate as to name, address, and social security number, as the IRS is going to assess a $50 penalty for each incorrect W-2. This also applies to those who file 1099’s.
16. Health Insurance for S-Corp Owners - If you are operating an S-Corporation and pay health insurance premiums for a person that owns more than 2% of the stock, the premiums are supposed to be included in compensation on that person’s W-2. The amount of premiums is then passed to the shareholder and that person will take the deduction on the front of their form 1040. The IRS has stated and will require upon audit that if the amount is not included on the W-2, the deduction by the shareholder belongs on Schedule A subject to the 7.5% allowance.
17. Mileage Rates – The 2018 rate for business use of auto was $0.545. The 2019 rate is not yet available.
18. Disability Payments May Be Taxable – If premiums for disability are paid from an entity and a tax deduction is taken for the cost of the premiums, when disability payments are received, they are more than likely to be taxable.
19. Dividend Income – If stocks are held for a period of at least 61 days and they pay dividends, the dividends are then taxed at a maximum rate of 20%. For those of you who play the stock market, this may be an important planning tool.
20. Conversion of Regular IRA’s to Roth IRA’s – If you are going to have minimal income or a loss for 2018 and have regular IRA’s, one planning idea may be to convert part or all of your IRA’s from regular to Roth.
21. Section 199 20% Qualified Business Deduction – this deduction can be very complicated to calculate. A general definition to arrive at this deduction is “Income and Gains less Deductions and less Losses, including a deduction for reasonable owner compensation”. Other factors taken into consideration – (1) is the business a Specified Trade or Business (SSTB), (2) is the taxable income of the taxpayer between $315,000 and $415,000, (3) what was the total of the W-2 compensation paid for the year, (4) what it the total value of the assets of the entity with various adjustments, etc. As one can see, this calculation is anything but easy and must be done for all Schedule C’s, Schedule F’s, partnerships, S-Corps, and all Schedule E rental properties that can be deemed a trade or business.
22. Contributions – Cash contributions cannot be deducted in 2018 without the proper documentation. For amounts under $250, it will be necessary to have banking information (cancelled check or debit authorization) or a written acknowledgement from the charity with the date that the cash contribution was made. If the contribution is for $250 or more, the organization is required to provide you with an acknowledgment and as part of the acknowledgement it must state, “No goods or services were received in exchange for the above contribution.” A donor cannot take the contribution deduction without the acknowledgment. This also means that the $20 cash left in the collection plate on Sunday will no longer be tax deductible unless you get a receipt. Non-cash items must be in “good used or better condition” to take a deduction. In addition, non-cash items with minimal value will no longer be able to be deducted. Most non-cash contributions in excess of $5,000 require a formal appraisal to be done. The appraisal is required to be performed by someone licensed by the state of Colorado and the appraiser must have at least two years of experience. We will be requesting that you sign the organizer or another document stating that you do have the required information.
23. Self-employed with children under the age of 18 – If your children work for you, you can pay them up to $12,000. The child could also put up to $5,500 into a tax-deductible IRA. Funding the IRA to the fullest would increase the total to $17, 500 (which could be used to pay for college) and the child would still not pay any income taxes. Their wages are not subject to Social Security, Medicare, Federal Unemployment or State Unemployment, but you do have to file Forms W-2 and W-3, Form 941/944 and Form 940 and all of these are due January 31, 2019. You will need to make sure and treat them as employees. Please contact us with the information if you want us to prepare the forms.
24. Electronic filing – The IRS has mandated that we file all individual and trust tax returns electronically. As a firm, we are going to file all returns that can be filed electronically.
25. Gift exclusion – The gift exclusion is $15,000 for 2018 and 2019.
26. Taxable estate – In 2018, you could have an estate valued up to $11,180,000 and not have to pay any estate taxes. This amount increases to $11,400,000 for 2019.
27. Business meals and entertainment – 50% of your business meals are deductible in 2018 unless you are in the transportation industry (railroad, airplane pilots, over-the-road trucker, etc.) and the amount deductible increases to 80%. Entertainment expenses are not deductible in 2018.
28. Required minimum distributions – for those of you who may be or know of someone who is older than 70 ½, make sure you take the RMD before the end of the year. If you need help calculating the RMD, contact us and we will assist you.
29. Child Tax Credit and Earned Income Credit – We now need to have some sort of supporting documentation to support anyone who claims one of these credits. Please provide us with a copy of your children’s latest report card for those that are in school and some other support for those not in school such as daycare information with names, medical visit information, etc.
30. Payment of Expenses by Partners Personally – A partner may only reduce their proportionate share of income for expenses they paid personally and have not or will not be reimbursed by the partnership, if a written agreement by the partnership exists requiring the partners to make those payments.
31. Payment of Expenses by Shareholder for S-Corporation – Expenses paid for by a shareholder personally for the benefit of the S-Corporation are not deductible by the shareholder as a reduction of their proportionate share of income on Schedule E. They must be included in the S-Corporation’s tax return and the S-Corporation should reimburse the shareholder.
32. Purchase and/or Refinance of principal residence – Please bring associated documents when you bring in your 2018 information.
33. Principal Residence Mortgage Interest – The changes reduced the total amount of mortgages on 1st and 2nd homes from $1,000,000 plus $100,000 home equity loan to $750,000. There are some exceptions and grandfathering of old home equity loans. The interest on home equity loans entered into after January 1, 2018 is generally not deductible.
Self-Directed IRA’s – As in the past couple years, the form 5498 will identify self-directed IRA’s in box 15. This box will identify self –directed IRA’s with non-public stock and contain the value of realty belonging to the IRA. This box will be used to choose audits looking for prohibited transactions. The regulations state the “person owning the IRA may not receive compensation directly or indirectly”. In the court cases that came out in 2014, 2015, 2016 and 2017, the IRS is really looking at “compensation being paid indirectly.” Other transactions that can cause problems is: (1) when an individual guarantees debt owed by the IRA or, (2) not filing for 990-T when the IRA has debt-financed rental income. This is just a warning – if you have a self-directed IRA, make sure to follow all of the requirements.
Funding for the “Obamacare” is going to be paid for in part by penalties. This act requires/enforce the rules for filing of 1099’s. In simple terms, if you are a business (including landlords), you are required to get W-9’s from entities that perform any type of service for you. The W-9 is required to be obtained prior to you making the first payment. If you do not have a W-9 in hand, you are required to withhold 25% of the payment and remit it to the IRS. The information on the W-9 is to be used in preparing the 1099’s. The information on the 1099 will need to agree with the information that the IRS has. Failure to have a W-9 prior to making payment can cause your business to be subject to penalties relating to trust fund taxes. Other penalties can be assessed for incomplete or inaccurate 1099’s being remitted and for not filing them when they should have been. This should be taken seriously, the IRS is!! Again for 2018, these must be filed timely and accurately or penalties will be assessed.
Due Dates - New for 2018 – All partnership and S- Corp returns are now due March 15, 2019. They may be extended for 6 months – to September 15, 2019. Both copies of the 1099-Misc and W-2’s are due January 31, 2019.
Preparer Penalties - We are required to ask certain questions regarding deductions and expenses to make sure you have proper supporting documentation or the items are not to be included in the tax returns. You may be requested by us to sign forms stating that you have all required supporting documentation for deductions and expenses reported on tax returns.
As stated in the past, we continue to recommend that you have proper documentation for all deductions taken on your return. At the time the expense is incurred, you should document who, what, when, where and why it relates to a business purpose.
The changes are many and some returns will take longer to prepare than they have in the past, especially those where exceptions are available and those with deductions under the Section 199A.
Thank you for allowing us the opportunity to be of service. It is greatly appreciated.
Hope you had a Happy Thanksgiving. Have a Merry Christmas and a Happy New Year.
Ronald L. Goodrich, CPA, CGMA
President / Managing Shareholder
McPherson, Breyfogle, Daveline & Goodrich, PC