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4 posts from April 2018

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.

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