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Individual Taxpayers: Recap for 2019
As we close out the year and get ready for tax season, here's what individuals and families need to know about tax provisions for 2019.
The additional standard deduction for blind people and senior citizens in 2019 is $1,300 for married individuals and $1,650 for singles and heads of household.
Income Tax Rates
Estate and Gift Taxes
Alternative Minimum Tax (AMT)
Pease and PEP (Personal Exemption Phaseout)
Flexible Spending Account (FSA)
Long-Term Capital Gains
Individuals - Tax Credits
Child and Dependent Care Credit
For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher-income earners, the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.
Child Tax Credit and Credit for Other Dependents
Under TCJA, a new tax credit - Credit for Other Dependents - is also available for dependents who do not qualify for the Child Tax Credit. The $500 credit is nonrefundable and covers children older than age 17 as well as parents or other qualifying relatives supported by a taxpayer.
Earned Income Tax Credit (EITC)
Individuals - Education Expenses
Coverdell Education Savings Account
American Opportunity Tax Credit
Lifetime Learning Credit
Employer-Provided Educational Assistance
Student Loan Interest
Individuals - Retirement
Retirement Savings Contributions Credit (Saver's Credit)
If you have any questions about these and other tax provisions that could affect your tax situation, don't hesitate to call.
Business Tax Provisions: The Year in Review
Here's what business owners need to know about tax changes for 2019.
Standard Mileage Rates
Health Care Tax Credit for Small Businesses
In 2019 (as in 2014-2018), the tax credit is worth up to 50 percent of your contribution toward employees' premium costs (up to 35 percent for tax-exempt employers.
Section 179 Expensing and 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. The standard business depreciation amount is 26 cents per mile (up from 25 cents per mile in 2018).
Please call if you have any questions about Section 179 expensing and the bonus depreciation.
Work Opportunity Tax Credit (WOTC)
SIMPLE IRA Plan Contributions
Please contact the office if you would like more information about these and other tax deductions and credits to which you are entitled.
Tax Breaks for Business: Charitable Giving
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:
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:
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.
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.
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 organizations 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.
Tax Benefits of Health Savings Accounts
While similar to FSAs (Flexible Savings Plans) in that both allow pretax contributions, Health Savings Accounts or HSAs offer taxpayers several additional tax benefits such as contributions that roll over from year to year (i.e., no "use it or lose it"), tax-free interest on earnings, and when used for qualified medical expenses, tax-free distributions.
What is a Health Savings Account?
A Health Savings Account is a type of savings account that allows you to set aside money pre-tax to pay for qualified medical expenses. Contributions that you make to a Health Savings Account (HSA) are used to pay current or future medical expenses (including after you've retired) of the account owner, his or her spouse, and any qualified dependent.
Medical expenses that are reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return are not eligible.
Insurance premiums for taxpayers younger than age 65 are generally not considered qualified medical expenses unless the premiums are for health care continuation coverage (such as coverage under COBRA), health care coverage while receiving unemployment compensation under federal or state law.
You cannot be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care and you cannot be claimed as a dependent on someone else's tax return. Spouses cannot open joint HSAs. Each spouse who is an eligible individual who wants an HSA must open a separate HSA.
An HSA can be opened through your bank or another financial institution. Contributions to an HSA must be made in cash. Contributions of stock or property are not allowed. As an employee may be able to elect to have money set aside and deposited directly into an HSA account; however, if this option is not offered by your employer, then you must wait until filing a tax return to claim the HSA contributions as a deduction.
High Deductible Health Plans
A Health Savings Account can only be used if you have a High Deductible Health Plan (HDHP). Typically, high-deductible health plans have lower monthly premiums than plans with lower deductibles, but you pay more health care costs yourself before the insurance company starts to pay its share (your deductible).
A high-deductible plan can be combined with a health savings account, allowing you to pay for certain medical expenses with tax-free money that you have set aside. By using the pre-tax funds in your HSA to pay for qualified medical expenses before you reach your deductible and other out-of-pocket costs such as copayments, you reduce your overall health care costs.
Calendar year 2019. For calendar year 2019, a qualifying HDHP must have a deductible of at least $1,350 for self-only coverage or $2,700 for family coverage. Annual out-of-pocket expenses (e.g., deductibles, copayments, and coinsurance) of the beneficiary are limited to $6,750 for self-only coverage and $13,500 for family coverage. This limit doesn't apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies.
Last month rule. Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers).
You can make contributions to your HSA for 2019 until April 15, 2020. Your employer can make contributions to your HSA between January 1, 2020, and April 15, 2020, that are allocated to 2019. The contribution will be reported on your 2020 Form W-2.
Summary of HSA Tax Advantages
Please contact the office if you have any questions about health savings accounts.
Updated Rules: Deductible Business & Other Expenses
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"):
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.
Take Retirement Plan Distributions by December 31
Taxpayers born before July 1, 1949, generally must receive payments from their individual retirement arrangements (IRAs) and workplace retirement plans by December 31.
Known as required minimum distributions (RMDs), typically these distributions must be made by the end of the tax year. The required distribution rules apply to owners of traditional, Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE) IRAs but not Roth IRAs while the original owner is alive. They also apply to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.
An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount on Form 5498 in Box 12b. For a 2019 RMD, this amount is shown on the 2018 Form 5498, IRA Contribution Information, which is normally issued to the owner during January 2019.
A special rule allows first-year recipients of these payments, those who reached age 70 1/2 during 2019, to wait until as late as April 1, 2020, to receive their first RMDs. What this means is that taxpayers born after June 30, 1948, and before July 1, 1949, are eligible. The advantage of this special rule is that although payments made to these taxpayers in early 2020 (up to April 1, 2020) and can be counted toward their 2019 RMD, they are taxable in 2020.
The special April 1 deadline only applies to the RMD for the first year, however. For all subsequent years, the RMD must be made by December 31. For example, a taxpayer who turned 70 1/2 in 2018 (born after June 30, 1947, and before July 1, 1948) and received the first RMD (for 2018) on April 1, 2019, must still receive a second RMD (for 2019) by December 31, 2019.
The RMD for 2019 is based on the taxpayer's life expectancy on December 31, 2019, and their account balance on December 31, 2018. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. For most taxpayers, the RMD is based on Table III (Uniform Lifetime Table) in IRS Publication 590-B. For example, for a taxpayer who turned 72 in 2019, the required distribution would be based on a life expectancy of 25.6 years. A separate table, Table II, applies to a taxpayer whose spouse is more than ten years younger and is the taxpayer's only beneficiary. If you need assistance with this, don't hesitate to call.
Though the RMD rules are mandatory for all owners of traditional, SEP and SIMPLE IRAs and participants in workplace retirement plans, some people in workplace plans can wait longer to receive their RMDs. Usually, if their plan allows it, employees who are still working can wait until April 1 of the year after they retire to start receiving these distributions. There may, however, be a tax on excess accumulations. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.
If you have any questions about RMDs, please don't hesitate to call.
Employer Benefits of Using the EFTPS
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.
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.
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.
For more information about IRS notices, bills, and payment options, please call the office and speak to a tax and accounting professional today.
Deferred Tax on Gains From Forced Sales of Livestock
Farmers and ranchers who were forced to sell livestock due to drought may get extra time to replace the livestock and defer tax on any gains from the forced sales. Here are some facts about this to help farmers understand how the deferral works and if they are eligible.
1. The one-year extension gives eligible farmers and ranchers until the end of the tax year after the first drought-free year to replace the sold livestock.
2. The farmer or rancher must be in an applicable region. An applicable region is a county-designated as eligible for federal assistance, as well as counties contiguous to that county.
3. The farmer's county, parish, city or district included in the applicable region must be listed as suffering exceptional, extreme or severe drought conditions by the National Drought Mitigation Center. All or part of 32 states, plus Guam, the U.S. Virgin Islands and the Commonwealths of Puerto Rico and the Northern Mariana Islands, are listed.
4. The relief applies to farmers who were affected by drought that happened between September 1, 2018, and August 31, 2019.
5. This relief generally applies to capital gains realized by eligible farmers and ranchers on sales of livestock held for draft, dairy or breeding purposes. Sales of other livestock, such as those raised for slaughter or held for sporting purposes, or poultry are not eligible.
6. To qualify, the sales must be solely due to drought, flooding or other severe weather causing the region to be designated as eligible for federal assistance.
7. Farmers generally must replace the livestock within a four-year period, instead of the usual two-year period. As a result, qualified farmers and ranchers whose drought-sale replacement period was scheduled to expire at the end of this tax year, Dec. 31, 2019, in most cases, now have until the end of their next tax year. Furthermore, because the normal drought sale replacement period is four years, this extension immediately impacts drought sales that occurred during 2015. But because of previous drought-related extensions affecting some of these areas, the replacement periods for some drought sales before 2015 are also affected.
For additional details or more information on reporting drought sales and other farm-related tax issues, please call the office.
Retirement Contributions Limits Announced for 2020
Cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for 2020 are as follows:
401(k), 403(b), 457 plans, and Thrift Savings Plan. Contribution limits for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan increase from $19,000 to $19,500. The catch-up contribution limit for employees aged 50 and over increases from $6,000 to $6,500.
SIMPLE retirement accounts. Contribution limits for SIMPLE retirement accounts for self-employed persons increase in 2020 as well - from $13,000 to $13,500.
Traditional IRAs. The limit on annual contributions to an IRA remains at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions; however, if during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. If a retirement plan at work covers neither the taxpayer nor their spouse, the phase-out amounts of the deduction do not apply.
The phase-out ranges for 2020 are as follows:
Roth IRAs. The income phase-out range for taxpayers making contributions to a Roth IRA is $124,000 to $139,000 for singles and heads of household, up from $122,000 to $137,000. For married couples filing jointly, the income phase-out range is $196,000 to $206,000, up from $193,000 to $203,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
Saver's Credit. The income limit for the Saver's Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $65,000 for married couples filing jointly, up from $64,000; $48,750 for heads of household, up from $48,000; and $32,500 for singles and married individuals filing separately, up from $32,000.
If you have any questions about retirement plan contributions, don't hesitate to call.
Tax Due Dates for December 2019
Employees who work for tips - If you received $20 or more in tips during November, report them to your employer. You can use Form 4070.
Corporations - Deposit the fourth installment of estimated income tax for 2019. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.
Employers Social Security, Medicare, and withheld income tax - If the monthly deposit rule applies, deposit the tax for payments in November.
Employers Nonpayroll withholding - If the monthly deposit rule applies, deposit the tax for payments in November.
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