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More tax law changes coming (when will it ever stop?)
The rules for IRAs and company retirement plans may be changing. Nothing has been turned into law yet, but we expect something to pass soon. The most likely will be the SECURE act that will allow you to wait until age 72 before you have to start taking IRA distributions, and will allow contributions up to age 72 also. But, it may not allow you to stretch the distributions for your heirs. The person inheriting your retirement account may have to pull it all out within 10 years. Stay tuned....
There are also proposals to index capital gains. Talk about making things complicated!
In October, Virginia will be sending rebate checks of $110 per person for those that had a 2018 VA tax and filed by July 1, 2019.
The IRS is also recomputing the underpayment penalty for about 400,000 taxpayers. Because of the new law, they are being more lenient and actually refunding people. If you get a strange check from the IRS be sure to let us know.
Have huge capital gains? You have up to 180 days to completely shelter those gains using an investment in a Qualified Opportunity Zone. See the note below relating to QOZs.
Use our secure portal to upload your data and documents to us. It's safe (fully encrypted) and easy. Click on the File Share box at the bottom of this page.
We are currently scheduling tax planning appointments. Please give us a call and we will set you up.
The IRS is expanding to seven additional states its voluntary program for taxpayers who wish to obtain identity protection personal identification numbers (IP PINs) and are not currently victims of tax return identity theft. The pilot program originally involved Washington, D.C., Florida, and Georgia. IP PINs will now be available in seven more states: California, Delaware, Illinois, Maryland, Michigan, Nevada, and Rhode Island. Those states report the highest number of identity thefts to the Federal Trade Commission.
An IP PIN is a six-digit number assigned to eligible taxpayers to prevent their Social Security number (SSN) from being used on fraudulent federal income tax returns. It allows the IRS to verify taxpayers’ identities when they file their return. This prevents a criminal from filing a tax return using the IP PIN holder’s SSN. For more info, visit
The three magic words for 2019 are 199A, QCDs and QOZs.
Section 199A is the 20% deduction for business income. Details are below.
QCDs-For those over age 70 1/2, you can make your charitable contributions directly out of your IRA. These Qualified Charitable Distributions do not add to your Gross Income and are not limited as far as your deductions go. So you get the full benefit of the contribution even if you are taking the standard deduction on your return. The max QCD is $100,000 per year.
QOZs-The hot new topic for 2018 is Qualified Opportunity Zones. You can defer capital gains if you invest the money into a QOZ. The new code section 1400Z-
If investors realize a gain from the sale or exchange of a capital asset to an unrelated party, they have 180 days from the date of disposition to reinvest the gain amount with a cash investment into a Qualified Opportunity Fund. A Qualified Opportunity Fund is an investment vehicle that must hold at least 90 percent of its assets in "Qualified Opportunity Zone Property," defined below. There are lots of Qualified Opportunity Zones in the DC area. If investors hold the interest in the fund for at least five years, they receive a basis increase in the investment that equals 10 percent of the deferred gain they invested in the fund.
If investors hold their interest in the fund for an additional two years (or seven years total), they receive an additional increase in their basis that equals 5 percent of the deferred gain invested in the fund. If investors are still holding their interest in the fund on Dec. 31, 2026 then, regardless of whether they continue to hold the interest in the fund, they are required to recognize and pay taxes on the deferred gain on that day, subject to any increases in basis they may have received for holding the property for five years or more. So in year eight there is a big tax hit of about 90% of what your tax would have been if you did not defer the gain in year one. If investors continue to hold the interest in the fund after Dec. 31, 2026, for at least a total of 10 years, they receive a step up in basis in the interest so their basis equals the fair market value; therefore, they are not taxed on any appreciation in their interest. In order to receive a 10 percent increase in basis, the investor must invest in a fund by 2021 and in order to receive an additional 5 percent increase in basis, the investor must make an investment in a fund by 2019.
Because the regulations on these are not finalized, the Opportunity Funds are off to a slow start, but we are sure there will be many of them by year end. Remember that a bad investment with a tax break is still a bad investment, so we need to be careful of what funds may spring forth.
The highlights of the new 2018 tax law are-
Top tax bracket drops from 39.6 to 37%. But the Medicare surtax of .9% and the Net Investment Income Tax of 3.8% continue.
The medical deduction remains as does the charitable contribution deduction, but with minor limitation differences.
SALT (State and Local Tax Deductions) will be limited to $10,000 per return. This is probably the biggest change for most of our clients. However, those that were in AMT (Alternative Minimum Tax) were already losing some of their SALT deductions. Those joint returns in the $200k to $400k were almost always in AMT. The AMT will continue with higher thresholds.
With the changes in the itemized deductions, those over age 70 1/2 will want to consider making their charitable contributions directly out of their IRA accounts (the QCDs mentioned above). Gives you more bang for the buck, and helps keep your AGI down for the purposes of calculating your Medicare premiums. As your AGI increases, so do your Medicare premiums (both Part B & D).
Personal exemptions are gone, but replaced with child credits and a higher standard deduction.
The tax rates decrease somewhat. There are still 7 rate brackets, but there is a shift in the rates somewhat downward.
The "kiddie tax" on your dependents (up to age 24) has been increased. Instead of using the parent's tax rates, we will use the Trust tax rates, which get to the top bracket at just $12,500 of taxable income.
Mortgage interest continues, but interest on new mortgages over $750,000 will not be allowed. Applies to personal residences and 2nd homes. Does not apply to rental properties. Home Equity interest will not be deductible unless the proceeds are used for home improvements.
Planning Point-If you have little mortgage interest and if you don't do a lot of charitable contributions or medical expenses, you may be using the standard deduction instead of itemizing. You may want to group your deductions to get a better effect. For example, you have your full $10,000 of State and local taxes, so if you are a joint return, you need $14,000 of medical or charitable deductions to start itemizing. If you normally do $10k of charitable contributions each year, you should bundle those within years, doing zero one year and $20k in the following year, and alternate as such through the years. On a single return, your standard deduction is $12,000, so if you have your $10k of SALT, you only need $2,000 of deductions to start itemizing.
Employees no longer are able to write off un-reimbursed business expenses since all Miscellaneous Deduction on the Individual Tax returns are gone. Make sure you work up a reimbursement plan with your employer for your business expenses. Investment fees and expenses are also not deductible anymore.
SECTION 199A- 20% business income deduction-
The most complex part of the new law for us is the idea of Pass thru Income. The following is our basic simplistic take on the law-
The Pass Thru Deduction is a deduction on the personal income tax return after AGI but before Taxable income of 20% of Qualified Business Income. QBI is basically the taxable income of the Sch C, partnership or S Corp.
For a simple, non-service type business, you will get a deduction of 20% of the business income limited to 20% of your taxable income, as adjusted (generally reduced by any capital gains you have).
You make widgets, and have $100,000 net profit on your Schedule C.
The deduction computation will be $20,000, but would be limited to 20% of the net adjusted taxable income on your tax return.
If your adjusted taxable income is higher than $315,000 joint return, $157,500 other returns, then you have to go to a different calculation based on the business W-2 expense and the assets of the business. This is phased in so that only the W-2 and assets calculation is used for those with income of over $415,000 ($207,500) and the straight 20% of business income cannot be used.
The W-2 and asset calculation is:
You can take the greater of
50% of the W-2 wage expense in the business
25% of the W-2 wages plus 2.5% of the unadjusted basis of depreciable property* in the business
If you are a 25% owner of the company, you get allocated 25% of the wages and property for the purpose of this computation.
The individual's W-2 or Guaranteed Payment to Partner (GPP) does not count as part of his QBI. GPPs also don't count as wages for the purposes of the limitation.
So our widget business makes $100,000, and the initial computation of the deduction is $20,000. But out taxable income, as adjusted, is $500,000, so we have to do the W-2 + asset calculation. If the business had wages paid of $20,000 and assets of $50,000 (based on original cost) we compute the HIGHER of 50% of wages ($20,000 x 50%= $10,000) OR 25% of wages ($5,000) plus 2.5% of the fixed assets ($50,000 x 2.5% =$1,250) for $6,250 We get the higher of the $10,000 or $6,250, still limited to no more than 20% of the net business income.
If it is a SPECIFIED SERVICE TRADE or BUSINESS (SSTB) the rules are tighter.
The deduction for all SSTB businesses starts to phase out when your income exceeds $157,500 single, $315,000 MFJ. Phase out is complete at $207,500 single and $415,000 joint. High income people with income coming from most professional services will not get a Section 199A deduction.
Specified Service businesses are defined as any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services. Apparently engineering and architecture are not considered a service business for the purpose of this deduction (they had good lobbyists) and they would fall under the normal business rules.
*The definition of depreciable property for this purpose is anything depreciable up to the later of being fully depreciated OR over 10 yrs old. So a 7 year old truck fully depreciated would still count, and we would use its original basis before depreciation.
For S Corps, the planning will be whether to take smaller W-2s in order to increase the QBI from the K-1, keeping in mind that the limitations are based on the corporate W-2 expense. Whether higher W-2s are better or not depends on the individual owners' personal tax situations and if the S corp is a SSTB or not.
An high income (<$415k, $207.5K) owner of a non-SSTB S corp with $100,000 income and no assets would not get a deduction if there were no wages. If he or she took $50,000 in wages, we could compute a deduction of the LESSER of 50% of wages ($50,000 x 50% = $25,000) or 20% of the net business income ($100,000 - $50,000 wages paid = $50,000 x 20% =$10,000). Deduction is the $10,000.
If wages were $25,000 so the S Corp profit would be $75,000, we would compute a deduction of $15,000 (20% of net business income), but limited to 50% of wages $12,500. As you can see, planning is required to get to the proper spot to maximize the deduction.
For a partnership, every dollar we pay out as a GPP reduces the QBI and does not increase the W-2 wages for the purposes of the limitation. So if we have a partnership with $25,000 wages to employees, $100,000 net income and no assets, we would get a deduction of $20,000, but limited to 50% of wages, or $12,500. If we pay out $50,000 as GPP, the partnership income is now $50,000, so the max deduction would be $10,000. It appears that we do not want GPPs if we have partners that might be eligible for the deduction.
The Corporate income tax rate drops to 21%.
Miscellaneous itemized deductions are gone for 2018. Your unreimbursed employee expenses and brokerage fees will not be deductible.
The Federal Estate Tax exclusion jumps to over $11 million a person. But some states, such as Maryland and DC still have much lower thresholds for when the estate tax starts. The annual gift tax exclusion amount goes from $14,000 to $15,000 in 2018.
Section 529 Tuition Plans will be able to be used for pre-college educational expenses, up to $10,000 a year, starting in 2018.
Virginia is moving towards almost all payments to the state having to be electronic. For businesses, everything has to be paid electronically, and individuals with high Virginia estimated payments must pay electronically. You can make these payments through the VA Dept of Taxation web site. (https://tax.virginia.gov/).
You can upload your investment information directly into your tax return by using our Intuit Link system. Let us know that you want to have your interest, dividends and stock sales imported directly in, and we will send you an invite to register with Intuit and select the accounts you want to upload.
Starting a business? We can help. Generally we recommend that most businesses start as an LLC (Limited Liability Company). If there is only one owner, it will be a single member LLC and the income and expenses will just be reported on the owner's tax returns. If there is more than one owner, the LLC will be taxed as a partnership and will file a partnership income tax return. The entity itself does not pay income taxes, in that the income flows through to the owners on their tax returns.
The LLC form of business helps protect you from legal liability if done correctly. Most businesses can benefit from that, especially high risk activities such as real estate (rentals, construction and flipping), restaurants and services.
LLCs generally have to register with the State and you want to obtain a Federal Employer ID number (EIN) from the IRS. That way you do not need to use your Social Security Number.
The IRS does NOT call you to say they are suing you, taking you to court or demanding you make a payment to them today. These are scams. The IRS warns that there are now scam IRS CP-2000 notices (tax adjustments) being emailed out. The IRS also does NOT send out emails regarding a tax refunds or rebates or request that you set up a PIN number in order to get your refund. These are phishing schemes and phone scams, and you should not respond to them and NEVER, NEVER, NEVER click on a link from one of those emails. Never make a payment to the I.R.S., in that all payments to the government are paid to the U.S. Treasury. If your notice or call says anything different, it is fake. PLEASE REPORT THESE TO http://www.treasury.gov/tigta/contact_report_scam.shtml
A wonderful video on this is
Setting up a 529 Plan for your kids or grandchildren? While there is not a Federal tax deduction, there are state tax deductions available if set up with your state of residence or its approved plan. You can maximize your state tax deductions by splitting the accounts between husband and wife (Virginia) or by the different type of plans (Maryland).
Transmit your data to us safely and securely. Use our File Share Portal. The File Share link is at the bottom of this page.
With the increase in Capital Gains Rates, Sec 1031 Exchanges are coming back in style. If you have a planned sale of Real Estate that will generate large capital gains, give us a call and we can discuss how you can defer the tax on those gains to a later date.
Virginia Employers, including individuals with rental properties, must file a BPOL license with their county or city by March 1. Landlords with properties in DC must file a Franchise Tax return. Every jurisdiction has its own rules on this. Fairfax County requires a business license if you rent three or more residential properties or one commercial property.
Get a heads up on the new laws-subscribe to our NEWSLETTER. Our monthly newsletter will be emailed to you each and every month. Click on the Subscribe button at the bottom of the page. This is a free client service that we want you to take advantage of. There are always a lot of good tax planning ideas in each monthly newsletter.
Thinking about using a Tax Relief company to reduce your balance due to the IRS? Check out the news article, in Links on the top menu line, then in News.
Are you (personally or your business) subject to the Use Tax to your state? Check out our article on this in the Newsletter section.
Are you maximizing your retirement plan deductions? Is all of your estate planning (wills, trusts and medical directives) up to date? Please make sure that we have the current version of your Will and Trust documents.
Are you selling your investment real estate? Don't pay taxes on the gain-do a Section 1031 Exchange. Never think about selling your real estate without talking to us first.
Be sure to catch our monthly newsletter, updated on the first of each month. Clicking on the Newsletter tab above can access the newsletter. We provide this newsletter service for you to keep up with the latest changes in the tax laws and newest ideas for tax and financial planning.
Need Tax Information? We have the complete CCH TAX GUIDE accessible at the INFO CENTER tab above. This complete tax book has information on individual, business and even non-for-profit taxes, with a full search feature.
We have many calculators in our FINANCIAL TOOLS section (tab above) including a full 1040 tax calculator, estate planning and mortgage loan calculators, including refinance savings computations and amortization schedules. There are so many powerful calculators; you will be able to calculate things that you never thought existed!
Driving directions to our office can be found in the CONTACTS section.
In addition to providing you with a profile of our firm and the services we provide, this Website has been designed to become a helpful resource tool to you, our valued clients and visitors. Our dedication to superior client service has brought us to the Internet as we endeavor to continue to provide the highest quality professional service and guidance.
As you browse through our Website, you will see that not only have we highlighted background information on our firm and the services we provide, but have also included useful resources such as informative articles (in our Newsletter section) and interactive financial calculators (in our Financial Tools section). Check out the nifty refinancing calculators to determine if you should refinance now, and how much it may save you.
In addition, we have taken the time to gather many links to external Websites that we felt would be of interest to our clients and visitors (in our Internet Links section).
While browsing through our Website, please feel free to contact us with any questions or comments you may have - we'd love to hear from you. We pride ourselves on being proactive and responsive to our clients' inquiries and suggestions.
NEW EXPANDED FTP SIZE! UP TO 1 gig. Need to send us a large QuickBooks or other file? Use our File Share program. Click on the File Share logo below and click on the New User Registration button. Please be sure to remember your sign in name and password that you set up. You will then be able to send up any file up to 1gig in size. If you try to upload something and you get a "not enough space" message, please give us a call. On some days we get a large amount of data in and the box overflows.
Special note to our File Share users. To improve security, the portal requires a fairly current browser version. If your browser is IE 10 or prior, you will get a "cannot find page" error message. If you do, please update your browser (they are free, and you should not be using an older version anyway).
If you are uploading your QuickBooks file, we suggest that you send a Portable Copy (.QBM) in that it is smaller and contains less data than a regular Backup file (.QBB). It also does not contain your sensitive customer data. Please note that you also need to send us your current QB password.