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04/09/2018

Alimony Tax Deduction Disappearing

Broken heart and dollarIn a change that could be costly for those who must pay alimony, tax reform will eliminate the alimony-payer’s ability to claim a tax deduction for the payments.  Changes are set to take effect for divorces and legal separations after 2018, causing a push-me pull-you effect on current divorce proceedings.

Under the current rules, an individual who pays alimony may deduct an amount equal to the alimony or separate maintenance payments paid during the year as an “above-the-line” deduction on their federal income tax return.   That is, the taxpayer does not need to itemize deductions to claim the amount of alimony paid, rather it can be deducted directly off the taxpayer’s taxable income.  The receiving spouse must pay income taxes on the alimony they receive as part of their annual gross income.

Note that this is different than tax laws governing child support.  The payer of child support cannot claim the child support as an income tax deduction.  The receiver of child support does not need to report the child support as income.

The Tax Cut and Jobs Act changes the tax law governing alimony beginning in 2019.  Under new rules, there is no allowable alimony income tax benefit for the payer.  Similarly, alimony will no longer be considered as income to the recipient.  To be clear, for divorces and legal separations legally effective due to a court order after 2018, the alimony-paying spouse may not deduct the payment and the alimony-receiving spouse need not report payments as gross income nor pay federal income tax on them.  The tax treatment of child support payments will not change.

The bottom line:  All payments related to divorces and legal separations effective beginning in 2019 will represent nondeductible personal expenses for the payer and tax-free money for the recipient.  The loss of a substantial tax deduction could be expensive for individuals who must pay alimony.

If you are involved in divorce proceedings and anticipate deducting the alimony you may have to pay, the new tax law gives you a major incentive for concluding the agreement by December 31, 2018.  On the other hand, if you will be receiving alimony, you have major incentive to postpone finalizing the agreement until 2019 to receive the payments tax free.  Make certain your divorce attorney is up-to-date on the new tax law that could cost you or save you thousands of dollars.

The new tax law will not apply to existing divorces or separations, so current rules will continue to apply for already-ordered divorces and separation agreements, as well as divorces and separations that have been executed before 2019.  In addition, the new rules will not apply to a modified decree of an agreement that was entered into prior to 2019 unless the decree specifically provides that they should.  This would benefit taxpayers requesting modified agreements due to a change in the income of either the alimony payer or the alimony recipient.

To learn how the new tax law may affect you should you be divorced, legally separated, or seeking a divorce or legal separation, contact one of our tax planning professionals at McRuer CPAs for information.

04/06/2018

When You Can't File by the Deadline: Facts on Filing an Extension

An unexpected IRS system "issue" caused a one day delay this tax season that has given taxpayers another day until the deadline, April 18, 2018, to file their completed 2017 individual income tax returns. Taxpayers who can't make the deadline may choose to request an automatic six-month extension.  

Deadline on stop watch picHere is information posted by the IRS on the alternatives available for taxpayers with a deadline dilemma.   Note: Even if you request an extension to file your tax return, you must still pay any estimated amount of income tax you may owe by the deadline or face penalties.

Facts about Filing for an Extension

This year’s tax-filing deadline is today. Taxpayers needing more time to file their taxes can get an automatic six-month extension from the IRS.

There are a few different ways taxpayers can file for an extension.

IRS Free File. While taxpayers may use IRS Free File e-file a free extension request. Midnight on April 18 is the deadline for the IRS to receive an e-filed extension request for 2017 individual federal income taxes.

Form 4868. Taxpayers may request an extension using the Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. The deadline for mailing the form to the IRS is April 18, 2018 for 2017 individual federal income tax returns.

Electronic Payment Options. The IRS will automatically process an extension of time to file when taxpayers pay all or part of their 2017 taxes electronically by April 18. They don’t need to file a paper or electronic Form 4868 when making a payment with IRS Direct Pay, the Electronic Federal Tax Payment System or with a debit or credit card.  When paying one of these ways, taxpayers will select Form 4868 as the payment type. Taxpayers should print out a confirmation as proof of payment and keep it with their records.

Here are a few more important things for taxpayers filing an extension to remember:

More Time to File is Not More Time to Pay. An extension to file gives taxpayers more time to file their return, but not more time to pay their taxes. Taxpayers should estimate and pay any owed taxes by April 18 to avoid a late-filing penalty. To avoid penalties and interest, they should pay the full amount owed by the April due date.

The IRS Can Help. The IRS offers payment options for taxpayers who can’t pay all the tax they owe. In most cases, they can apply for an installment agreement with the Online Payment Agreement application on IRS.gov. They may also file Form 9465, Installment Agreement Request. The IRS will also work with taxpayers who can’t make payments because of financial hardship.

If you have questions, please contact one of our tax preparation experts at McRuer CPAs.

04/02/2018

More New Business and Investor Tax Rules Released

The rules to calculate how new tax laws will impact business and investors are now being publicly released.  The Treasury Department and the Internal Revenue Service have announced updated guidance is ready for businesses and investors reflecting tax changes under the Tax Cuts and Jobs Act. 

Specifically, 2018 guidance on computing business interest expense limitations as well as withholding guidance on the transfer of non-publicly traded partnership interests will be released April 16th.  More updates are also expected in the weeks ahead as the changes and effects of tax reform are being confirmed and quantified.  Accountants and tax professionals now already have access to the information in order to help taxpayers determine the best tax planning strategies. Investor Business Manager working

A preliminary news release regarding business interest expense says the new tax law imposes a limitation on deductions for business interest incurred by certain large businesses.  For most large businesses, business interest expense is limited to any business interest income plus 30 percent of the business’ adjusted taxable income.

The IRS update will list new regulations that the Treasury Department and the IRS intend to enforce, including rules addressing how the business interest expense limitation is calculated at the level of a consolidated group of corporations as well as other rules. A notice on the new guidance makes it clear that partners in partnerships and S corporation shareholders cannot interpret newly amended sections inappropriately to “double count” the business interest income of a partnership or S corporation.

The announcement says that tax reform now interprets a foreign taxpayer’s gain or loss on the sale or exchange of a partnership interest as part of the conduct of a trade or business in the U.S. if the partnership sold all of its assets.  That means there is a tax due on the sale.  New guidance imposes a withholding tax on the disposition of a partnership interest by a foreign taxpayer.

Also, tax enforcement and collections authorities announce that they intend to issue more rules and procedures soon detailing how a business or individual may qualify for withholding exemptions or reductions in the amount of withholding under this section of the new tax law.  In addition, the notice suspends secondary partnership level withholding requirements.  See also our recent blog on the effects of the new "transition tax" affecting investors.

McRuer CPAs business tax planning experts will have the latest information about IRS guidance on these more complicated new business and investor-related tax laws.   If these provisions apply to you, or if you have questions about how the new tax act may affect you please contact us to schedule a meeting to review your tax plan to make certain it is updated to best benefit from the tax reform.  Call us for your appointment at 816.741.7882 or contact us online.

New Tax Withholding Calculator Reflects Tax Law Changes

It may be time for a "paycheck checkup" The new federal tax withholding calculator has been released reflecting changes under the Tax Cuts and Jobs Act.  The calculator helps taxpayers determine the correct amount of income tax that should be withheld from their paychecks.

The paycheck checkup can protect against having too little or too much tax withheld, which can lead to a balance due or a penalty when 2018 income tax returns are processed.  While tax reform includes lower tax rates for many working Americans, some changes may result in a higher tax bill for taxpayers with more complicated tax returns.

Click here to see information on the new withholding tables or click here for an interactive online version. Calculator and tax tables(The interactive version will need Javascript activation to work properly.)  The calculator will ask questions such as your estimated 2018 income, the number of children you may claim for the Child Tax Credit and Earned Income Tax Credit, and questions about other types of deductions.  You should have your most recent pay stubs and income tax return on hand to help you fill out the most accurate information.

Taxpayers with simpler tax filings may not need to make any changes as long as their current Form W-4 filed with their employer has the correct amount of claimed deductions.  Simple situations would include taxpayers who have only one job, have no dependents, and do not claim itemized deductions or tax credits.

Taxpayers who need to change the amount of tax withheld from their paychecks should complete a new Form W-4 and submit that to their employer.

Taxpayers who file more complex tax returns may need to use a different tool to calculate withholding amounts, including the IRS tax computation worksheet available in Publication 505 or should contact their tax planning advisor to ensure they are paying the correct amount of taxes on their income.  Taxpayers that may need this more advanced review include people who are self-employed, pay the alternative minimum tax, pay tax on unearned income from dependents or taxpayers reporting capital gains or dividends.

The paycheck checkup is encouraged for all taxpayers, but is especially important under the new tax laws for taxpayers who are part of two-income families, claim tax credits and itemized deductions, and who support older dependents.  Those who have two or more jobs or who work for only part of the year should also review their paycheck withholding to ensure the proper amount of tax is being withheld in total from all employers.

If you have questions about tax withholding or need the advice of tax planning professional, please contact us at McRuer CPAs online or call 816.741.7882.

03/29/2018

Fake Refund Checks Landing in Taxpayer Bank Accounts

So, you’re so excited to have received a surprise tax refund deposited directly into your checking account!  Oops.  Watch out…a new tax scam alert has been issued involving the deposit of fake refunds into bank accounts followed by telephone calls with threats from bogus collections officials.

An IRS Security Summit alert has been issued warning about this new scheme where it appears unsecured tax preparer computer files have been breached.  The number of reported taxpayer victims has jumped from a few hundred to several thousand in just a matter of days leading to the alert.

Tax scam alert fake tax refundsThe IRS Criminal Investigation Division reports that after stealing client data the scammers file fraudulent tax returns claiming tax refunds.  When the refund checks are deposited into the taxpayers’ real bank account, the thieves begin contacting the innocent taxpayers by telephone, claiming they are a debt collection agency hired by the IRS to collect the fraudulent tax refund dollars.  Investigators say the versions of this scam continue to evolve as the criminals come up with new ways to get cash from taxpayers.

In one version of the scam, a voice recording claims a refund was deposited in error and now the taxpayer must forward the money to a collection agency or face criminal fraud charges, an arrest warrant and a “blacklisting” of their Social Security Number.  The recording gives the taxpayer a case number and a telephone number to call to return the refund.

Taxpayers who may have received a refund they did not expect should contact their tax preparer immediately.  They must also contact their bank if a direct deposit was received and instruct the bank to issue a refund to the IRS as the taxpayer contacts the IRS to explain why the deposit is being returned.  Be mindful that both individuals and businesses have been victims of this scam, so deposits to business bank accounts should also be reviewed.

If a taxpayer has received an unexpected paper refund check, they should not deposit it nor cash it, but rather write “void” in the endorsement section on back of the check and contact tax authorities right away.

Be mindful that the IRS never uses an outside collection agency to collect any tax debt, and payments should never be made to any source other than the Treasury Department.

If you think you may have been a victim of this new scam and need more information you may review the IRS notice online or contact one of our tax preparation experts at McRuer CPAs for more information.

03/14/2018

IRS Raises Its Interest Rates on Unpaid Overpaid Taxes

The IRS has announced the interest rates it charges on unpaid, overpaid and underpaid income taxes are going up.  IRS interest rates are determined on a quarterly basis and are generally based on the federal short-term rate plus certain percentage points. IRS Interest Rates Going Up

Beginning April 1, 2018, the new interest rate the IRS will charge for underpayment of taxes will be 5% (up from 4.18% in 2017) for individual taxpayers and 7% for large corporate taxpayers.  The interest rate is charged on any unpaid tax from the original due date of the return until the date of payment.  It is compounded daily.

Also this April, the rate for overpayment of taxes will increase to 5% for individuals and 4% in the case of a corporation plus 2.5% for the portion of a corporate overpayment that exceeds $10,000.  It may be hard to imagine someone or a company paying more taxes than they owe, but this happens most often with individuals who must pay quarterly estimated taxes based on a guess of what their income may be.  Overpayments may also occur with  businesses that withhold the incorrect amount of income tax based on unrealized predictions.

If you owe tax and don’t file on time, penalties are assessed in addition to the interest on unpaid tax. The late-filing penalty is usually 5% of the tax owed for each month the return is late up to five months or no more than a total of 25% of the tax owed. If you file more than 60 days after the due date, the minimum penalty you face is $205 or 100% of your unpaid tax, whichever is less.

If you file on time, pay some of the tax you owe, but don’t pay all the tax that is owed, then you’ll generally have to pay a late-payment penalty of .5% (one-half of one percent) of the outstanding balance of tax you owe per month, until the tax is paid in full.  So, there is a benefit to paying as much as you can, if not all you owe, when you file your tax return.

If there are months in which both the late-filing and late-payment penalties apply, then the 0.5% late-payment penalty may be waived.

Interest rates on under- and over-paid taxes have ranged from a high of 9% in the 1995 and 2001 tax years, to a low of 3% from 2011 to 2016 tax years.

If you don’t pay the tax you owe when you file your tax return, you’ll receive a notice from the IRS in the form of a letter, basically a bill, for the amount you owe. The bill is the official start of the collection process.  It will include the amount of the tax, plus any penalties and interest accrued on your unpaid balance from the date the tax was due.

The IRS has the right to levy (seize) assets such as wages, bank accounts, social security benefits, and retirement income. The IRS may also seize your property (including your car, boat, or real estate) and sell the property to satisfy an outstanding tax debt. In addition, any future federal or state income tax refunds that you're due may be seized and applied to your federal tax liability.

In some cases, you may be able to work with the IRS to decrease what you owe in penalties and interest if you can prove a hardship, but your case will be subject to IRS discretion.

Because the unpaid balance is subject to interest that compounds daily and a monthly late payment penalty, it is in a taxpayer’s best interest to pay a tax liability in full as soon as possible. If you are not able to pay in full, you may qualify for an installment agreement with the IRS with several options to pay.

You may discover interest rates and any applicable fees charged by a credit card company or bank are lower than the combination of interest and penalties imposed by the Internal Revenue Code. So, you may consider exploring outside options to pay the IRS in full and make other arrangements to avoid ongoing penalties and interest.

If you have any questions about the issue of filing and paying taxes you owe on time and in full, please contact one of our tax preparation specialists at McRuer CPAS.

03/12/2018

Identity Theft Targets Business Data

Good news. Bad news. New data shows tax-related identity theft is declining rapidly as federal and state tax and law enforcement officials seek solutions together.  Unfortunately, thieves and scammers continue to develop new schemes targeting both individuals and businesses yielding more stolen data and dollars per incident.

Identity thief eyes personal online dataA business can hardly do business without collecting and holding clients’ private and identifying information, including names and addresses, phone numbers, and email addresses.   Many businesses also collect and maintain their clients’ birth dates, credit information, Social Security numbers and more.  If a data security breach occurs, these individuals are at risk for tax-related identity theft.  Their personal information is used to file fake tax returns requesting refunds.  In other schemes, scammers posing as IRS representatives, or federal or state authorities or creditors directly demand payments for taxes that are not owed.

Businesses are warned to keep up with current scam and phishing trends as well as take the necessary steps to secure systems and fix vulnerabilities.  The Federal Trade Commission provides updated online information about securing operations against data breaches, and a new business-focused Data Breach Response Guide.

If you own a business that has been a victim of a data security breach, authorities offer three important steps to take:  notify law enforcement, notify other businesses affected (such as banks, credit issuers and major credit bureaus), and notify individuals.  If Social Security numbers have been compromised, individuals should be alerted to take steps to avoid being a tax-related identity theft victim.

The most popular way to steal from individual taxpayers uses simple data including names, phone numbers, email addresses and home addresses stolen from businesses.  With this basic information, scammers send out emails and make threatening phone calls claiming to be IRS representatives, banks or credit card companies demanding payments on overdue taxes, overdrawn accounts or bills.  They even using text messages contacting innocent victims who are tricked into sharing even more private information.  Criminals will use the IRS logo and language in letters, emails or phone calls that seem legitimate.

Specifically, tax-related identity theft uses a stolen Social Security number to file a fraudulent tax return claiming a refund.  This particular type of scam is being reduced dramatically as new, more-secure information transfers between the IRS and banks track automatic taxpayer refund deposits and checks.

Businesses should also remember that their business identity may also be stolen.  A new type of business tax identity-theft is on the rise.  Cybercriminals are using stolen business information to file fraudulent Forms 1120 – U.S. Corporate Income Tax Returns to capture corporate income tax refunds.  They often obtain this private business information through the business’s website and by hacking into documents stored on unsecured computers.

Taxpayers, businesses and tax professionals should remain alert and ask more questions before sharing information.  If you have questions about tax-related identity theft as an individual or business, please contact one of our tax preparation specialists at McRuer CPAs

03/09/2018

College Students Reap Rewards of Tax Credit

College costs tax credits piggy bankNearly 10 million taxpayers have claimed the American Opportunity Tax Credit saving an average of $2,277 per family according to new IRS statistics.  To claim this popular tax credit, the taxpayer, their spouse or their dependent must have been a student who was enrolled at least half time for one academic period. The credit is available for four years of post-secondary education and can be worth up to $2,500 per eligible student.

AOTC is a tax credit that helps pay a taxpayer back for qualified education expenses for the first four years of higher education.  While $2,500 may seem like a drop in the bucket when considering the high price of a college education, taxpayers with college expenses find this tax credit is a big help.  Also, another bonus that is unusual for tax credits, if the credit brings the amount of overall income taxes owed to zero, 40% (up to $1,000) of any remaining amount of the credit may be refunded to the taxpayer.

Families with multiple qualifying students have the right to claim up to the full AOTC tax credit amount for each student.  Newly released data show roughly 775,000 taxpayers had two children that qualified for the credit in their household, and more than 60,000 families who qualified for the tax credit had three children in college.

Students and families who want to apply, are required to have a Form 1098-T Tuition Statement from the school they attend. Then the taxpayer would fill out a Form 8863 to request the education credit and file it with their tax return.

An qualifying academic period can be a semester, quarter, trimester or summer school session which is determined by the school.  For higher education schools that do not use clock or credit hours nor academic terms, the student’s required payment period may be treated as an academic period.

Warning: make certain when you claim this tax credit that you are qualified as well as understand the guidelines and the need for accuracy.  Keep copies of your documentation.  If you are audited and the IRS finds that the AOTC claim is incorrect or you don’t have proper documentation, you may have to pay back not only the amount of the tax credit you received, but also interest and a possible fraud penalty. You may also be banned from claiming the credit again for two to ten years.

To be eligible for AOTC, the student must:

  • be pursuing a degree or another recognized education credential,
  • be enrolled at least half time for at least one academic period beginning in the tax year,
  • not have finished the first four years of higher education at the beginning of the tax year,
  • not have claimed the AOTC (or the former Hope credit) for more than four tax years, and
  • not have a felony drug conviction at the end of the tax year (this was added as part of the national effort to cut drug abuse).

There are income limits based on a taxpayer’s modified adjusted gross income (MAGI) which must be no more than $80,000 (or $160,000 for married filing jointly).  You cannot claim the credit if your MAGI is over $90,000 (or $180,000 for joint filers).

Many students complete their higher education with degrees that cost tens of thousands of dollars and have major student loan debt. This kind of tax credit is bringing some relief to millions of Americans as they seek more ways to finance their or their dependent’s college education.

If you have any questions or need more information about the AOTC, please contact one of our tax preparation specialists at McRuer CPAs online or by calling 816.7431.7882.

03/05/2018

Tax Refund Roundup

When we file our tax return and expect a tax refund, it may seem like forever before we receive the refund check or deposit.  There are ways to track the progress of your tax refund as well as receive some updated general information about how refund payments are handled.

The IRS says it processes about nine out of 10 refunds in less than three weeks.  Processing a refund check doesn’t guarantee the check will be in a taxpayer’s hands in three weeks, but does say that, generally, it takes three weeks to receive a tax return, process it and confirm a refund check.  The check should then be mailed or auto-deposited in a taxpayer’s designated account.  The simpler the tax return, the faster the processing time.

Any taxpayer may use the fast “Where’s My Refund?” online tool to monitor a refund’s status.  E-Filers may use this tool within 24 hours of filing their return.  Paper filers must wait 4 weeks after mailing their tax return before this tool will begin showing their refund status.  There is also a mobile app taxpayers may use called IRS2Go, available in both English and Spanish.

Celebrate Tax Refund Experience shows several factors may slow down the processing of any tax return and refund check.  More complicated returns containing several pages of documents such as deduction and tax credit forms, and several Forms 1099 take longer to review and confirm.  Something as simple as failing to sign the tax return will cause delay as the IRS must contact the taxpayer by mail to request any updates, changes or information before a refund check may be issued.

You may be surprised at how many refunds are delayed by simple taxpayer mistakes like a missing signature, incorrect Social Security number, or a simple math error – especially on self-prepared tax returns.  These kinds of errors are significantly reduced when professional tax preparers are used to prepare and file even simple returns.

Sometimes taxpayers are victims of identity theft, but don’t realize it until they submit their tax return and the IRS informs them someone else has already used their Social Security number to request a refund.  The IRS will contact the legitimate taxpayer by mail about the suspected fraudulent tax return.  A taxpayer must then go through what may be several months of investigation and paperwork to verify their identity and Social Security number before receiving their refund.

Electronic receiving a refund through direct deposit is the easiest, fastest and safest way to receive a tax refund.  Each year more taxpayers choose direct deposit.  In the 2016 tax year, 8 out of 10 taxpayers requested their refunds be deposited this way.  Taxpayers may also request their refund check be split and auto-deposited in up to three different bank accounts.

If you need more information or would like to discuss your options for receiving your tax refund, please contact us online or call us at McRuer CPAs at 816.741.7882.

02/13/2018

Investors Eye Effects of New Transition Tax

International investingAs corporations determine the impact of the one-time new tax reform-mandated ‘transition tax’ on overseas earnings, it’s important for investors to consider how the tax may impact a public company’s cash flow when valuing its stock.

A Tax Cuts and Jobs Act (TCJA) provision assesses a one-time ‘transition tax’ on accumulated 2017 untaxed earnings held overseas by considering those earnings repatriated.  Generally, foreign earnings held as cash or cash equivalents are taxed at 15.5 percent.  Remaining earnings are taxed at 8 percent.

Many American corporations have held their foreign-earned profits overseas for years to escape the world’s-highest 35% U.S. corporate tax rate.  As the new tax reform package imposes this one-time tax, the U.S. will relinquish its right to tax foreign profits.  The U.S. will then switch its corporation taxation method to a “territorial tax” system.

Under a territorial tax system businesses must pay income taxes only on the income earned within the subject country’s boundaries.  The tax liability is determined by the subject country’s tax laws, and no other nation’s corporate tax may be charged.  European nations have followed this tax method for decades, and it avoids double taxation.  TCJA supporters say this tax change, coupled with the new flat 21% corporate tax rate, will return jobs and American investment dollars back home.

However, this TCJA tax payment may complicate traditional methods used to analyze a company’s financial statements and attractiveness as an investment.  Corporations may pay the new one-time tax in eight annual installments under a back-loaded schedule, with a maximum 25% tax payment expected in the 8th year.  While this TCJA provision offers corporate taxpayers a potential significant overall tax savings, The Wall Street Journal reports that huge household-name US corporations like Microsoft, McDonald’s and Johnson and Johnson may pay billions to repatriate these earnings they otherwise would not have.  Financial analysts advise investors that this change may impact these companies’ cash flow as a percentage of their earnings – which is an important measure of a stock’s market value.  Investors should consider the impact of the new lower US corporate tax rate on a subject business’s cash flow remembering that at the same time the subject company owes the final and largest one-time tax payment, which may also be partly offset by tax credits, deductions, deferred tax liabilities and more.

Tax reform and consumer confidence have lifted the stock market to record-breaking levels. Now investors and analysts following corporations with foreign profits must re-think how they value companies as they determine what to buy or sell.

If you have any questions or need more information, please contact one of our wealth accumulation experts at McRuer CPAs online, or call 816.741.7882.

02/09/2018

New Tax Law Cuts Personal Casualty Loss Deduction

Tax reform has eliminated a taxpayer’s deduction for personal casualty losses unless the loss occurs in a federally-declared disaster area.  Many taxpayers may consider contacting their insurance provider to determine they are adequately covered in the event of a loss.

House destroyed by fireIn the past, an individual could claim as an itemized deduction certain personal casualty losses that were not compensated by insurance or other means.  These casualty and theft losses must have been related to your home, household items or vehicles; and included losses from storms, fire, theft and even shipwreck.  Total casualty losses may be deducted if they exceeded 10% of adjusted gross income, and were more than $100 for each occurrence.

The new Tax Cuts and Jobs Act has eliminated the personal casualty and theft loss deduction for tax years 2018 through 2025, except for casualty losses incurred in a federally-declared disaster area.  The deduction for declared disaster area losses are subject to the former $100-per-casualty and 10%-of-AGI limitations.  The IRS describes a casualty loss as the damage, destruction or loss of your property resulting from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake or volcanic eruption.  It does not include normal wear and tear or progressive deterioration.

These tax deduction changes may motivate taxpayers to review homeowner, flood and auto insurance policies to determine whether they should add coverage knowing there will be no casualty deduction unless the precipitating event is so catastrophic and widespread that it prompts a federal declaration.  It may also be prudent to learn whether your policy pays replacement cost coverage or actual cash value.  Note that replacement cost coverage may pay only replacement value for your damaged items at their depreciated value.

If you have any questions about the ­­­changed personal casualty loss deduction, please contact one of our tax preparation experts at McRuer CPAs online or call 816.741.7882.

02/06/2018

New Business Tax Credit for Family and Medical Leave Approved

Daugher and elderly mom walkingA new federal tax credit is available for 2018 through the end of 2019 for eligible employers  providing their employees paid family and medical leave.  The new tax credit is part of the Tax Cuts and Jobs Act that has employers hoping the first version of the business tax credit will become permanent as more employers switch to paid time off (PTO) compensation as an employee benefit.

Full guidance regarding the credit has not yet been released, but a general review indicates eligible employers may claim a tax credit equal to a percentage of wages paid to qualifying employees on leave under the Family and Medical Leave Act (FMLA).  To receive the credit, employers must provide at least two weeks of FMLA leave and pay workers at least 50 percent of their regular earnings.  Both full-time and part-time workers, if employed for at least a year, must be offered paid leave for an employer to be able to claim the tax credit.  Part-time employee qualifying for paid leave must be determined on a prorated basis.

The credit will range from 12.5% to 25% of the cost of each hour of paid leave, depending on how much of a worker's regular earnings the benefit replaces.  The government will cover 12.5% of the benefit's costs if workers receive half of their regular earnings, increasing to 25% if workers receive their entire regular earnings while on leave.  So if the leave payment rate is 100% of the normal rate, then the credit is raised to 25% of the on-leave payment rate.  The maximum leave allowed for any employee during any tax year is 12 weeks.

Employers may only apply the credit toward workers they have employed for at least a year, and who were paid no more than $72,000 for 2017.  The wage ceiling will be inflation adjusted going forward.

As they await more specific guidance, Society for Human Resource (SHRM) members debate whether most company PTO policies qualify for the tax credit, as many do not offer paid ‘family and medical leave’ as a separate provision as the new tax law requires.  Instead, they say most companies designate their PTO benefits for vacation, personal, medical or sick leave; none of which are considered as ‘family and medical leave’ under FMLA.  The human resource professionals say that employers should review their paid-time-off policies to assure they are drafted to qualify them for the tax credit.

SHRM also points out the credit does not apply to paid leave mandated under state or local law.  Further, they suggest that policies may need to include nonretaliation provisions to assure employees won’t be penalized for taking the paid leave.

For more on the effect of the new tax credit on your business, please contact one of our business tax planning experts at McRuer CPAs online or call 816.741.7882.

02/01/2018

Child Tax Credit Doubles Under New Tax Law

Beginning in the 2018 tax year, under the Tax Cuts and Jobs Act, the tax credit available per qualifying child for taxpayers with children under age 17 will double.

Picture of mom with son in kitchenPreviously (including for 2017 tax returns), the child tax credit was $1,000 per qualifying child, but was subject to rules that made it complicated to figure.  For example, for married couples filing jointly the credit was reduced by $50 for every $1,000 by which their adjusted gross income (AGI) exceeded $110,000.  The threshold was $55,000 for married couples filing separately, and $75,000 for unmarried taxpayers.  To the extent the $1,000-per-child credit exceeded their tax liability, taxpayers received a refund of up to 15% of earned their income above $3,000.  An additional complication; for taxpayers with three or more qualifying children, the excess of the taxpayer's yearly social security taxes over the taxpayer's yearly earned income credit was refundable.  In all cases the refund was limited to $1,000 per qualifying child.

Starting in 2018, the child tax credit increases to $2,000 per qualifying child under 17.

There are six IRS tests that must be met to qualify for the child tax credit:

  1. Age Test:  The child claimed as your dependent must be under age 17 at the end of the tax year.
  2. Relationship Test:  The child must be your daughter, son, foster child or adopted child. The child may also be a grandchild or a descendant of one of your siblings and must meet the 5 other criteria to qualify.
  3. Support Test: The child must not have provided more than half of their own “support,” meaning the money they use for living expenses.
  4. Dependent Test: You must claim the child as your dependent on your federal income tax return.
  5. Citizenship Test: The child must be a U.S. citizen, a U.S. national or a U.S. resident alien.
  6. Resident Test: The child must have lived with you for more than half of the tax year.

Under the Tax Cuts and Jobs Act, the refundable portion of the credit is increased to a maximum of $1,400 per qualifying child.  In addition, the earned income threshold is decreased to $2,500 (from $3,000 under pre-Act law), which has the potential to result in a larger refund. The $500 credit for dependents other than qualifying children is nonrefundable.

The Act also substantially increases the credit’s "phase-out" thresholds.  Starting in 2018, the total credit amount allowed for a married couple filing jointly is reduced by $50 for every $1,000 (or part of a $1,000) by which their AGI exceeds $400,000.  The threshold is $200,000 for all other taxpayers.  So, if you were previously prohibited from taking the credit because your AGI was too high, you may now be eligible to claim the credit.

In order to claim the credit for a qualifying child, you must include that child's Social Security number (SSN) on your tax return.  Under pre-Act law you could also use an individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN).  If a qualifying child does not have an SSN, you will not be able to claim the $2,000 credit, but you can claim the $500 credit for that child using an ITIN or an ATIN.  The SSN requirement does not apply for non-qualifying-child dependents, but you must provide an ITIN or ATIN for each dependent for whom you are claiming a $500 credit.

Tax reform also allows a new $500 credit (per dependent) for any dependents who are not qualifying children under 17 beginning this year (2018).  There is no age limit for the $500 credit, but the tax tests for dependency must be met.

The changes made by the Act should make these credits more valuable and more widely available to many taxpayers.  If you have children or other qualifying dependents under age 17, and would like to learn if these changes can benefit you, please contact one of our tax preparation experts at McRuer CPAs online or call 816.741.7882.

01/17/2018

Online Sales Tax Debate Advances to Supreme Court

Interent Sales TaxThe U.S. Supreme Court has agreed to hear a case that may change the standard for how sales taxes are applied to online purchases.  In the case of South Dakota v. Wayfair Inc., the state will argue that all online sellers should be required to collect state sales taxes from South Dakota customers. It is one of only a few states that imposes taxes on all finished goods and services.  The case could set a precedent affecting all states and the District of Columbia.

Since 1992, a Supreme Court ruling (Quill v. North Dakota) has prevented states from collecting any sales tax from internet-related retail purchases unless the seller had a physical presence in the state where the sale transaction was conducted.  The case finding was based upon the idea that states should not interfere with interstate commerce.

The Tax Foundation’s Joe Bishop-Henchman writes that local businesses and states argue that they are unfairly losing revenues to retailers outside their jurisdiction.  He explains, “Traditional brick-and-mortar retailers that have to collect sales taxes feel they’re at a competitive disadvantage, and states are potentially losing out on billions of dollars in revenue annually.” 

On the other side of the issue, online retailers argue that each state may have different sales tax collection mandates that are often confusing, inefficiency in tracking collections, and expensive to comply with.

In this case, South Dakota is one of nearly two dozen states who are working together under the Streamlined Sales and Use Tax Agreement.  It is a voluntary governing board working to simplify and standardize sales tax rules.  At McRuer CPAs we have been helping clients navigate these issues since the advent of internet sales.  Unfortunately, their resolutions often reflect the one size fits all sales and use tax law requirements adopted years ago for a different time.

Arguments in the South Dakota v. Wayfair Inc. case are now set to be heard in April and may provide clarity on the constitutional limits of state taxing authorities and the scope and reach of the physical presence rule. 

8 Ways Tax Reform Affects You in 2018

Tax-ChangesAs we launch into the 2017 tax filing season we are receiving as many questions about the new Tax Cuts and Jobs Act and how it affects 2018 individual and business income taxes as we are about the best planning to file 2017 returns.  To that end, here we are highlighting the 8 most significant ways tax reform may affect you in 2018.  We will continue presenting additional information in the weeks ahead to help you best navigate your income tax planning.

Here are the eight tax change topics we receive the most questions about from both individual and business taxpayers:

  1. Individual income tax rates
  2. Personal exemptions
  3. Standard versus itemized deductions
  4. Child tax credits
  5. Mortgage interest
  6. Deducting state and local property taxes
  7. Estate tax
  8. Corporate income tax rate

Here is a short assessment of how tax reform has affected the eight tax topics compared to 2017 tax law.  These are generalized overviews of the tax law changes, so please keep in mind how they may apply your individual and/or business tax strategy may be different.

Individual income tax rates:  There were seven 2017 tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.  Though President Donald Trump had hoped for three tax brackets, the final 2018 tax reform law was passed with seven tax brackets:  10%, 12%, 22%, 24%, 32%, 35%, and 37%.  Businesses have received the new employee income tax withholding tables and the IRS is working on updating its online calculator for businesses and employees to estimate their income tax liability and how these changes affect their annual tax bill.

Personal exemptions:  The prior law allowed most taxpayers a $4,050 exemption for each household member.  Under the 2018 tax law, personal exemptions are eliminated.

Standard deduction:  The prior tax law allowed a standard deduction of up to $6,350 for single taxpayers and married couples filing separately, $12,700 for married couples filing jointly, and $9,350 for heads of households.  The new law increase the standard deduction to $12,000 for single taxpayers, $24,000 for married couples filing jointly, and $18,000 for heads of households.

Child tax credits:  The 2017 tax law allowed a $1,000 tax credit for each qualifying child under age 17.  Now that credit is increased to $2,000 per qualifying child, and up to $1,400 is refundable.  A $500 credit has been added temporarily for other qualifying dependents.

Mortgage interest:  The mortgage interest deduction formerly allowed homeowners to deduct interest on mortgages up to $1 million and home equity borrowing up to $100,000.  Under the new law, the borrowing threshold is $750,000 for mortgage borrowing after December 14, 2017.  Mortgages closed prior to that date still qualify for the $1 million limit.  Beginning in 2026 the $1 million limit will return, while the home equity borrowing interest deduction has been eliminated until 2026.

State and local property taxes:  Under the old law Taxpayers itemizing their deductions could deduct state and local real and personal property taxes, and either state and local income taxes or state and local sales taxes.  Under the new law, state and local taxes remain deductible but the combination of all state and local taxes are now capped at $10,000.

Estate tax:   Under the former rules, a 40% tax was levied on qualifying estates of more than $5.49 million per person, or nearly $11 million per married couple transferred upon their death.  The 2018 law increases the overall estate tax exemption to nearly $11 million per taxpayer.

Corporate tax rate:  Previously the tax rate charged on corporate income varied between 15% to 35% depending on the amount of annual taxable income for a flat rate of 35% on all corporate income beyond a certain income amount.  The new tax law simplifies the rate by reducing the maximum corporate income tax rate on all corporate income to 21%.

Though many taxpayers were disappointed that the tax code was not more significantly simplified, the Tax Cut and Jobs Act is the most significant tax reform this country has experienced in more than 30 years.

While these tax changes do NOT affect your current 2017 tax return, they will affect your 2018 tax plan.  Connecting with one of our experienced tax planning professionals will help you make the adjustments that may be needed in your overall tax strategy.  Contact us to learn more about how to make certain you pay only what you owe, no matter how tax reform may affect your bottom line.

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