Saturday, March 24, 2018

Does your child have to file?

For 2017, Dependents who are not 65 or older or blind, who have earned income more than $6,350, must file their own return. Income levels required to file a return for those 65 and over or blind are higher. You do not include their earned income on your taxes. If they earned less than $6,350 in 2017, they do not have to file a return, but may wish to do so to recover any withheld income taxes. You can still claim the dependent exemption, and the dependent will not be able to claim her personal exemption on her own return.
Dependents who have unearned income, such as interest, dividends or capital gains, will generally have to file their own tax return if that income is more than $1,050 for 2017 (income levels are higher for dependents 65 or older or blind).
A parent can elect to claim the child's unearned income on the parent's return if certain criteria are met. If the dependent child's 2017 unearned income is less than $10,500, he made no estimated tax payments during the year, and he had no income tax withheld at the source, parents can generally elect to claim his investment income on their own return.

Tuesday, March 13, 2018

Trump's tax plan

Trump's Tax Plan and How It Affects You

Expect More From Your Paycheck in February 

Trump signs tax act
••• President Trump signs tax reform legislation in the Oval Office December 22, 2017 in Washington, DC.  Photo by Chip Somodevilla/Getty Images

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act. It cuts the corporate tax rate from 35 percent to 21 percent beginning in 2018. The top individual tax rate will drop to 37 percent. It cuts income tax rates, doubles the standard deduction, and eliminates personal exemptions. The corporate cuts are permanent, while the individual changes expire at the end of 2025.
Here's a summary of how the Act changes income taxes, deductions for child and elder care, and business taxes.

Income Taxes

The Act keeps the seven income tax brackets but lowers tax rates. Employees will see changes reflected in their withholding in their February 2018 paychecks. These rates revert to the 2017 rates in 2026.
The Act creates the following chart. The income levels will rise each year with inflation. But they will rise more slowly than in the past because the Act uses the chained consumer price index. Over time, that will move more people into higher tax brackets.
Income Tax RateIncome Levels for Those Filing As:
20172018-2025 SingleMarried-Joint
25%22%$38,700-$82,500 $77,400-$165,000
33%32%$157,500-$200,000 $315,000-$400,000 
33%-35% 35%$200,000-$500,000$400,000-$600,000
Trump's tax plan doubles the standard deduction. A single filer's deduction increases from $6,350 to $12,000.

The deduction for Married and Joint Filers increases from $12,700 to $24,000. It reverts back to the current level in 2026. It's estimated that 94 percent of taxpayers will take the standard deduction. The National Association of Home Builders and the National Association of Realtors opposed this. As more taxpayers take a standard deduction, fewer would take advantage of the mortgage interest deduction. housing prices. But this could be a good time to do that. Many people are concerned that the real estate market is in a bubble that could lead to another collapse.
It eliminates personal exemptions. Before the Act, taxpayers subtracted $4,150 from income for each person claimed. As a result, some families with many children will pay higher taxes despite the Act's increased standard deductions.
The Act eliminates most itemized deductions. That includes moving expenses, except for members of the military. Those paying alimony can no longer deduct it, while those receiving it can. This change begins in 2019 for divorces signed in 2018.
It keeps deductions for charitable contributions, retirement savings, and student loan interest.
The  Act limits the deduction on mortgage interest to the first $750,000 of the loan. Interest on home equity lines of credit can no longer be deducted. Current mortgage-holders aren't affected.
Taxpayers can deduct up to $10,000 in state and local taxes. They must choose between property taxes and income or sales taxes. This will harm taxpayers in high-tax states like New York and California.
The Act expands the deduction for medical expenses for 2017 and 2018.

It allows taxpayers to deduct medical expenses that are 7.5 percent or more of income. Before the bill, the cutoff was 10 percent for those born after 1952. Seniors already had the 7.5 percent cutoff.  At least 8.8 million people used the deduction in 2015. 
The Act repeals the Obamacare tax on those without health insurance in 2019. Without the mandate, the Congressional Budget Office estimates 13 million people would drop their plans. The government would save $338 billion by not having to pay their subsidies. But health care costs will rise because fewer people will get the preventive care needed to avoid expensive emergency room visits. Senator Susan Collins, R-Maine, approved the bill only because Trump promised to reinstate subsidies to insurers as outlined in the Murray-Alexander bill.
The $7 billion in subsidies reimburse them for lowering costs for low-income Americans. But the CBO said it won't offset the higher health care prices created by the mandate repeal.
The Act doubles the estate tax exemption to $11.2 million for singles and $22.4 million for couples. That helps the top 1 percent of the population who pay it. These top 4,918 tax returns contribute $17 billion in taxes. The exemption reverts to pre-Act levels in 2026.
It keeps the Alternative Minimum Tax. It increases the exemption from $54,300 to $70,300 for singles and from $84,500 to $109,400 for joint. The exemptions phase out at $500,000 for singles and $1 million for joint. The exemption reverts to pre-Act levels in 2026.

Child and Elder Care 

The Act increases the Child Tax Credit from $1,000 to $2,000. Even parents who don't earn enough to pay taxes can claim the credit up to $1,400. It increases the income level from $110,000 to $400,000 for married tax filers.
It allows parents to use 529 savings plans for tuition at private and religious K-12 schools. They can also use the funds for expenses for home-schooled students.
It allows a $500 credit for each non-child dependent. The credit helps families caring for elderly parents.

Business Taxes

The Act lowers the maximum corporate tax rate from 35 percent to 21 percent, the lowest since 1939. The United States has one of the highest rates in the world. But most corporations don't pay the top rate. On average, the effective rate is 18 percent. Large corporations have tax attorneys who help them avoid paying more.
It raises the standard deduction to 20 percent for pass-through businesses. This deduction ends after 2025. Pass-through businesses include sole proprietorships, partnerships, limited liability companies, and S corporations. They also include real estate companies, hedge funds, and private equity funds. The deductions phase out for service professionals once their income reaches $157,500 for singles and $315,000 for joint filers.
The Act limits corporations' ability to deduct interest expense to 30 percent of income. For the first four years, income is based on EBITDA. Starting in the fifth year, it's based on earnings before interest and taxes. That makes it more expensive for financial firms to borrow. Companies would be less likely to issue bonds and buy back their stock. Stock prices could fall. But the limit generates revenue to pay for other tax breaks.
It allows businesses to deduct the cost of depreciable assets in one year instead of amortizing them over several years. It does not apply to structures. To qualify, the equipment must be purchased after September 27, 2017, and before January 1, 2023.
The Act stiffens the requirements on carried interest profits. Carried interest is taxed at 23.8 percent instead of the top 39.6 percent income rate. Firms must hold assets for a year to qualify for the lower rate. The Act extends that requirement to three years. That might hurt hedge funds that tend to trade frequently. It would not affect private equity funds that hold on to assets for around five years. The change would raise $1.2 billion in revenue.
The Act eliminates the corporate AMT.  The corporate AMT had a 20 percent tax rate that kicked in if tax credits pushed a firm's effective tax rate below 20 percent. Under the AMT, companies could not deduct research and development spending or investments in a low-income neighborhood. Elimination of the corporate AMT adds $40 billion to the deficit.
Trump's tax plan advocates a change from the current "worldwide" tax system to a "territorial" system. Under the worldwide system, multinationals are taxed on foreign income earned. They don't pay the tax until they bring the profits home. As a result, many corporations leave it parked overseas. Under the territorial system, they aren't taxed on that foreign profit. They would be more likely to reinvest it in the United States. This will benefit pharmaceutical and high tech companies the most.
The Act allows companies to repatriate the $2.6 trillion they hold in foreign cash stockpiles. They pay a one-time tax rate of 15.5 percent on cash and 8 percent on equipment. The Congressional Research Service found that a similar 2004 tax holiday didn't do much to boost the economy. Companies distributed repatriated cash to shareholders, not employees. As pf March 2018, the tax cut has spurred a record number of mergers.
The ​repatriation could also raise Treasury note yields. Corporations hold most of the cash in 10-year Treasury notes. When they sell them, the excess supply would send yields higher.
It allows oil drilling in the Arctic National Wildlife Refuge. That's estimated to add $1.1 billion in revenues over 10 years. But drilling in the refuge won't be profitable until oil prices are at least $70 a barrel.
It retains tax credits for electric vehicles and wind farms.
It cuts the deduction for orphan drug research from 50 percent to 25 percent. Orphan drugs target rare diseases.
The Act cuts sin taxes on beer, wine, and liquor. The Brookings Institute estimates that will lead to 1,550 more alcohol-related deaths each year. The study found that lower alcohol prices are directly correlated to more purchases and a higher death toll.

How It Affects You

The tax plan helps businesses more than individuals. Business tax cuts are permanent, while the individual cuts expire in 2025. But the nation's largest private employer, Walmart, said it will raise wages. It will also use the money saved by the tax cuts to give $1,000 bonuses and increase benefits.
Among individuals, it would help higher-income families the most. The Tax Foundation said those in the 95-99 percent range would receive a 2.2 percent increase in after-tax income.  Those in the 20-80 percent income range would receive a 1.7 percent increase.
The Tax Policy Center found broke it down a little more. Those in the lowest-earning fifth of the population would see their income increase by 0.4 percent. Those in the next-highest fifth would receive a 1.2 percent boost. The next two quintiles would see their income increase 1.6 percent and 1.9 percent, respectively. But the biggest increase, 2.9 percent, would go to those in the top-earning fifth.
The Act makes the U.S. progressive income tax more regressive. Tax rates are lowered for everyone, but they are lowered the most for the highest-income taxpayers.
The increase in the standard deduction would benefit 6 million taxpayers. That's 47.5 percent of all tax filers, according to Evercore ISI. But for many income brackets, that won't offset lost deductions.
The Act increases the deficit by $1 trillion over the next 10 years according to the Joint Committee on Taxation. It says the Act will increase growth by 0.7 percent annually, reducing some of the revenue loss from the $1.5 trillion in tax cuts.
The Tax Foundation made a slightly different estimate. It said the Act will add almost $448 billion to the deficit over the next 10 years. The tax cuts themselves would cost $1.47 billion. But that's offset by $700 billion in growth and savings from eliminating the ACA mandate. The plan would boost GDP by 1.7 percent a year. It would create 339,000 jobs and add 1.5 percent to wages.
The U.S. Treasury reported that the bill would bring in $1.8 trillion in new revenue. It projected economic growth of 2.9 percent a year on average. The Treasury report is so optimistic because it assumes the rest of Trump's plans will be implemented. These include infrastructure spending, deregulation, and welfare reform.
The increase to the debt means that budget-conscious Republicans have done an about-face. The party fought hard to pass sequestration. In 2011, some members even threatened to default on the debt rather than add to it. Now they say that the tax cuts would boost the economy so much that the additional revenues would offset the tax cuts. They ignore the reasons why Reaganomics would not work today.
The impact on the $20 trillion national debt will eventually be higher than projected. A future Congress will probably extend the tax cuts that expire in 2025.
Increase in sovereign debt dampens economic growth in the long run. Investors see it as a tax increase on future generations. That's especially true if the ratio of debt to gross domestic product is near 77 percent. That's the tipping point, according to a study by the World Bank. It found that every percentage point of debt above this level costs the country 1.7 percent in growth. The U.S. debt-to-GDP ratio was 104 percent before the tax cuts.
Supply-side economics is the theory that says tax cuts increase growth. The U.S. Treasury Department analyzed the impact of the Bush tax cuts. It found that they provided a short-term boost in an economy that was already weak. But the economy in 2017 is strong.
Also, supply-side economics worked during the Reagan administration because the highest tax rate was 70 percent. According to the Laffer Curve, that's in the prohibitive range. The range occurs at tax levels so high that cuts boost growth enough to offset ​any revenue loss. But trickle-down economics no longer works because the 2017 tax rates are half what they were in the 1980s.
Many large corporations confirmed they won't use the tax cuts to create jobs. Corporations are sitting on a record $2.3 trillion in cash reserves, double the level in 2001. The CEOs of Cisco, Pfizer, and Coca-Cola would instead use the extra cash to pay dividends to shareholders. The CEO of Amgen will use the proceeds to buy back shares of stock. In effect, the corporate tax cuts will boost stock prices, but won't create jobs.
The most significant tax cuts should go to the middle class who are more likely to spend every dollar they get. The wealthy use tax cuts to save or invest. It helps the stock market but doesn't drive demand. Once demand is there, then businesses create jobs to meet it. Middle-class tax cuts create more jobs. But the best unemployment solution is government spending to build infrastructure and directly create jobs.
The Act could help immigrants who were protected by Deferred Action for Childhood Arrivals. One of Trump's immigration policies is to end the program in March 2018. Senator Jeff Flake, R-Ariz., got Senate leaders to agree to make the program permanent in exchange for his vote.

Trump's Promises No Longer in the Plan

Trump's 2016 proposal allowed up to $2,000 to be deposited tax-free into a Dependent Care Savings Account. The account would grow tax-free to pay for a child's education. Taxpayers could also receive a rebate for the Earned Income Tax Credit and deposit it in the DCSA.
Trump promised to end the AMT for individuals.
Trump promised to increase taxes on carried interest profits, not just stiffen requirements. But lobbyists for those industries convinced Congress to ignore Trump's pledge.
Trump promised to end the Affordable Care Act tax on investment income. 
Trump's Other Policies: Health Care | Job Creation | Debt Reduction | NAFTA | Trump Versus Obama
Thanks to Kim Amaded for pulling together this information.

Monday, February 26, 2018

IRS considers Tax Payer rights!

The Right to Pay No More than the Correct Amount of Tax – Taxpayer Bill of Rights #3
Taxpayers have the right to pay no more than the correct amount of tax they owe. This is one of ten basic rights known collectively as the Taxpayer Bill of Rights. This tip is the third in a series outlining these rights.
Taxpayers have the right to pay only the amount of tax legally due. This includes interest and penalties. Additionally, taxpayers can expect to have the IRS apply all tax payments properly.
Here are some things taxpayers should know about the right to pay no more than the correct amount:
• Taxpayers who overpaid their taxes can file for a refund. Taxpayers must file a claim for a credit or refund by the later of these two dates:
  • Three years from the date they filed their original return.
  • Two years from the date they paid the tax.  
• Taxpayers who receive a letter from the IRS should review the information in it. The taxpayers who believe the information is incorrect should contact the office listed in the letter. The letter also provides a date by which the taxpayer should respond.  

• The IRS may automatically correct math errors on a return. Taxpayers who disagree with the adjustment must request that the IRS reverse the change. The taxpayer has 60 days to make this request from the time the IRS made the change, or otherwise the taxpayer will lose the right to dispute the adjustment in United States Tax Court before paying the tax.  

• Taxpayers may request that the IRS remove any interest from their account caused by unreasonable IRS errors or delays. For example, this could happen if the IRS delays issuing a late notice because an IRS employee was out of the office, and interest accrues during that time.  

• If a taxpayer believes they do not owe all or part of their bill, they can submit an offer in compromise. This offer asks the IRS to accept less than the full amount owed. To do this, taxpayers use Form 656-L, Offer in Compromise.  

• Some taxpayers enter a payment plan to pay their taxes. This plan is an installment agreement. The IRS must send these taxpayers an annual statement that provides how much the taxpayer:
  • Owes at the beginning of the year.
  • Paid during the year.
  • Still owes at the end of the year.

Tuesday, February 20, 2018

Tax Season, in full swing!

Avoid the Rush: Today Marks Busiest Phone Day of the Year; Taxpayers Get Answers Faster by Visiting
WASHINGTON – The Internal Revenue Service alerted taxpayers the day after Presidents Day marks the busiest day of the year for calls to the toll-free help line. The IRS reminded taxpayers that most answers to their tax questions can be quickly found on
Taxpayers who call the IRS the day after Presidents Day can expect longer than usual wait times. Those who need to call can avoid the rush by waiting a day or two or by using online options to get their tax questions answered immediately.
To help taxpayers, the IRS has redesigned its website to make it easier to use, whether with a computer, smart phone or tablet. A good first stop is the IRS Services Guide, which provides an overview of the many tools available to taxpayers and tax professionals. For fast answers to general tax questions, taxpayers can search the Interactive Tax Assistant, Tax Topics, Frequently Asked Questions, Tax Trails and IRS Tax Map.
Those who have already filed can use the "Where’s My Refund?" tool to track their refund. Alternatively, they can call 800-829-1954 for automated refund information.
“Where’s My Refund?” is the best way to check the status of a refund. The application displays progress through three stages: (1) Return Received, (2) Refund Approved, and (3) Refund Sent. Taxpayers get personalized information based on the processing of their tax return. The tool provides an actual refund date after the IRS has approved a refund.
The IRS reminded taxpayers about a common misconception that requesting a tax transcript will help a taxpayer determine the status of their refund. The information included on a transcript does not necessarily reflect the amount or timing of a refund. Transcripts are best used to validate past income and tax filing status for loan applications and to help with tax preparation.
Taxpayers visiting will also find answers to tax questions about filing requirements and credits and deductions that may be available to them and can download forms and instructions. Taxpayers who owe additional tax can learn about payment options or what steps they can take online to create a payment agreement if they can’t pay what they owe all at once.
Employees who did not receive a Form W-2 from their employer should first contact their employer. If they receive no response by the end of February, they can call the IRS and the agency will contact the employer by mail. Taxpayers may have to use Form 4852, Substitute for Form W-2, and estimate wages and withholding by using their pay statements and other records.
Taxpayers must file their 2017 tax returns by April 17, 2018, or request a six-month extension. Extensions can be requested using Free File, by filing Form 4868 or by paying all or part of  the estimated income tax due and indicating that the payment is for an extension using Direct Pay, the Electronic Federal Tax Payment System (EFTPS) or a credit or debit card. Taxpayers don’t have to file a separate extension form and they receive a confirmation number for their records.

Thursday, February 08, 2018

S Corp or C Corp, which is better under Trump's new tax law?

With the passage of the sweeping tax overhaul, small businesses and entrepreneurs are scrambling to understand how the changes will affect them. Much of 2018 will be spent figuring out all the implications, but that doesn’t stop anxious clients from turning to you now to figure out how to make the most of the changes.
For small businesses, the most pressing changes are the reduction in the tax rate for C corporations and the 20 percent tax deduction for pass-through entities. As such, we need to retool conventional thinking and help clients decide whether they should structure their business as a C Corp or a pass-through entity.
While the dust is still settling, here are some of the key considerations that small businesses should be thinking about in light of the new tax landscape:
What to know about the pass-through deduction
Before the new plan, people who owned small pass-through businesses typically paid income taxes based on their individual tax rate. For taxable years beginning after Dec. 31, 2017 and before Jan. 1, 2026, individuals can generally deduct 20 percent of their qualified business income from a pass-through entity (like an S Corp, partnership or sole proprietorship). This is a big change, and of course, the devil is in the details. Here are some of the key things your clients should know:
• There are limits. The deduction phases out beginning at $157,500 of income for single taxpayers and $315,000 for couples filing jointly.
• If your clients weren’t familiar with the term “qualified business income” before, they will be now. QBI is the net amount of income, gain, deduction and loss with respect to the trade or business. QBI does not include investment-related income or loss, such as capital gains or losses, dividend income or interest income.
• QBI also doesn’t include whatever is paid to the taxpayer as reasonable compensation for their services. In addition, QBI excludes certain service businesses, such as the fields of accounting, health, law, engineering, architecture, financial services, etc., where the principal asset of the business is the reputation or skill of one or more of its employees.
• And, QBI does not include any amount paid to the individual by an S corporation that is treated as reasonable compensation for their services. So if your client owns 50 percent of an S corporation that pays them $50,000 in wages and allocates $100,000 of income, then their QBI from the S Corp only includes the $100,000 of income (not the $50,000 of wages). Surely, there will be many who will want to shift their payments so there’s less in wages and more in income in order to increase the amount of their QBI and thus, increase the amount of the 20 percent deduction. However, everyone needs to keep in mind that the IRS expects reasonable compensation for the services performed and work done. And just as the IRS has monitored this closely to ensure that individuals weren’t improperly avoiding FICA or self-employment taxes, we can expect the IRS to look closely to ensure that individuals who conduct work for S corporations are reporting proper compensation for their services.
Corporation tax rates are attractive, but remember double taxation
One of the central tenets of the Tax Cuts and Jobs Act is the reduction of the C corporation tax rate from 35 to 21 percent. This may lead some pass-through entities to wonder if they’d be better off as a C Corp instead. While the corporate tax rate has been reduced to an attractive 21 percent, there still remains the concept of double taxation. When income is earned by the corporation, it’s first taxed at the business level. Then, when the corporation distributes its income to shareholders, the shareholder pays tax on the dividend.
With strategic planning and tax guidance, taxpayers may be able to reduce some of their tax liability by forming a C Corp now—but in many cases if an entrepreneur is looking to take the bulk of the profits out of the business (rather than re-investing it back into the business), a pass-through entity will be preferable.
The bottom line? The pass-through deduction is tricky business, and there are no standard guidelines yet. CPAs and financial professionals will most likely need to look at each client’s situation on a case by case basis. There will be no shortage of work for everyone in the coming year.
Here are some thoughts:
• S corporations are still advantageous in many situations, though are increasingly risky in others— particularly in passive income situations (such as rental real estate income).
• C corporations shouldn’t necessarily look to elect S Corp status just because of this tax bill, especially if the corporation isn’t contemplating a sale or closure in the foreseeable future. While the corporate tax rate is “permanent,” the deduction based on QBI is set to expire at the end of 2025 (it could also be eliminated by Congress after 2020).
• Business owners should continue to think about their business structure in terms of their specific business needs and practices, as opposed to focusing solely on the changes from the Tax Cuts and Jobs Act. It’s also smart to wait for the IRS to release additional guidance on abusive situations.
• And lastly, one of the key advantages in forming a corporation remains the ability to minimize the personal liability of the business owners. This advantage is unaltered by the new tax bill.
Thank you to Nelli Akap with Accounting Today for this information.