Quarterly estimated tax payment is coming up

For those who make quarterly estimated tax payments, September 17 is your deadline to make your tax payment for the quarter comprised of June, July and August. Your final quarterly estimated tax payment for September, October, November and December is due January 15, 2019.

For Federal taxes use form 1040-ES. Your state will have its own form. Whenever you send a check to any taxing agency you should always legally assign that payment. You can accomplish legal assignment by writing your SSN and what the payment is for in the memo section of your check. For this quarter write, “SSN: XXX-XX-XXXX, 2018 Form 1040-ES.” This action will assure that your payment goes where you want it and not to any other unpaid balances.

Whenever you owe Federal taxes for multiple years or periods and the IRS receives an unassigned payment, they will try to apply that payment to your oldest balance. If you fail to assign your payment, generally you will first receive a Notice asking you where you want your payment applied but IRS notices are, for some reason, often ignored until the time allowed to respond has passed. Assign your payments and you won’t have to worry about it.

You can also pay on-line. We recommend using the IRS’ Direct Pay because there are no fees. The other online method uses a credit/debit card service provider that charges a fee. Be sure to choose the correct form and year; that will assign your online payment.

There are other ways you can pay like by phone, or in person using cash, but these methods are out of the ordinary and not recommended. Many states now have online portals where you can manage your tax account and make payments. The IRS has also begun using similar account portals.

We have a pay-as-you-go tax system and if you wait until April 15 of every year you will be penalized for not paying as you earn. If you need help in projecting your taxes, proper planning, and paying for a consultation with your tax accountant generally costs less than the late payment penalties. And if you are in business, it’s an expense.

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Proposed IRS rules affecting SALT limitations

To counteract the $10,000 State And Local Tax (SALT) limitation, some states are drafting plans for a work-around to allow their citizens to continue to enjoy the overall tax deductions they are accustomed to. They are doing it by allowing a charitable contribution in lieu of paying state and local taxes, thus shifting a portion of federal deductions from the line for State and Local Tax deductions to the line for Charitable deductions. Proposed IRS regulations would allow a charitable deduction for the transfers to a state agency or charitable organization, but only if the taxpayer did not receive anything in return.

Charitable contributions have to be free and clear in order to be deducted on your federal tax return. The rule for charitable contributions where you receive something in return, like a DVD in exchange for your contribution to PBS, is that you have to reduce the amount of your schedule A deduction by the value of whatever it is you received.

Some states are proposing awarding tax credits to taxpayers who make donations to certain funds. The IRS rules say that if a taxpayer receives or expects to receive something in return for their contribution, like tax credits, then their federal charitable donation must be reduced by the value of the received benefit. Credits are considered to be a received benefit. The proposed rules do however allow for a dollar-for-dollar state or local tax deduction. So it appears that the states will need to fine tune their mechanisms.

The rules would apply to contributions made after the TCJA and any preexisting programs crated before the TCJA. If SALT a material part of your tax planning strategy, a consultation with your licensed tax professional would be cost-effective.

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Contract soldiers now qualify for the foreign earned income exclusion

If you are a U.S. citizen, and your tax home is in a foreign country during 2018, and you meet all the other rules, you can exclude up to $104,100 of your foreign earned income from being taxed in the U.S. However, the foreign earned income exclusion was not available to U.S. Military contractors.

The Bipartisan Budget act of 2018 changed the tax home requirement, and now eligible taxpayers can claim the earned income exclusion even if their tax home is within the United States. Eligible taxpayers consist of certain U.S. citizens or resident aliens working as contractors or employees of contractors supporting the U.S. Armed Forces in designated combat zones.

See your licensed tax professional for further guidance.

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Check your 2018 withholding

With so many changes to the tax laws, we have had a lot of recent requests for tax planning. Every projection I have made this year has resulted in a lower total tax amount for 2018 compared to 2017. Despite losing some deductions, the lower tax rates and other areas of the equation have resulted in a lower total tax. That is lower, “Total tax;” I said nothing about refunds.

These projections can be flawed unless our client provides us with a current pay stub so that we can measure current withholding to compare to the projected total tax amount. Because of the expected lower 2018 tax, standardized withholding table amounts are lower this year and most employees are having lower amounts withheld from their paychecks. If your take-home pay went up around February, then this applies to you. I can only speculate as to the government’s intention, but it probably has to do with Parkinson’s Law, which says that expenses always rise to meet income. So if people have more money in hand, they are likely to spend it, thus adding fuel to the economy.

Think of it like this, the government wants to aid the economy so it lowers the income tax. But it wants results now, not on April 17 of next year, so how do you get results now? By decreasing the withholding from people’s paychecks and putting a fraction of their usual refund into their hands now instead of later.

If you are one of those people who expect or rely on your annual refund, you do not want to break even, or worse, have to pay in. You need to review your 2018 withholding now so that you can overpay now in order to get that refund come April 17, 2019. For us accountant’s this is an illogical way to save, but we understand why some folks do it this way.

If you are already used to living without it, and you rely on your refund, you should immediately inform your employer to increase your withholding to previous levels. That will fix your refund for the long term but you will have a shortfall for the months February through now, so plan for that and save money using your bank account rather then doing it as part of your payroll function. You can use the new IRS withholding calculator here: https://www.irs.gov/individuals/irs-withholding-calculator to see if you are going to have a shortfall. Contact your licensed tax professional for tax planning if your situation is complicated by a business, or you expect a major taxable event such as selling capital assets.

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Update on the 20% pass-through/qualified business income deduction

The IRS recently released proposed regulations aimed at setting out the rules and regulations for the new Section 199A 20% business deduction; https://www.irs.gov/newsroom/irs-issues-proposed-regulations-on-new-20-percent-deduction-for-passthrough-businesses , all 184 pages of them.

The new laws and regulations pertain to domestic businesses operated as sole proprietorships, partnerships, S corporations, trusts, and estates; corporations do not qualify. The rules are effective for tax years after 2017 and before 2026. One reason for pressing ahead on the release was to set out procedures for taxpayers who need to aggregate separate business activities for the calculation. There are a great number of specific rules and ownership percentage tests, so meet with your tax professional for guidance that is appropriate for your business structure as you plan.

The deduction is for the lesser of the “Combined qualified business income amount” of the taxpayer, or 20% of the excess of taxable income for the tax year over the sum of net capital gains and aggregated amounts of qualified cooperative dividends. Again, there are a number of qualifications, especially for the trusts and estates, and you will want to consult with your licensed tax professional when making planning decisions.

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2018 Long-term capital gains rates

The TCJA keeps the 0%, 15%, and 20% LTCG rates for capital gains and qualified dividends but these rates now have their own brackets that you need to be aware of. The LTCG rates used to be tied to the tax bracket for your taxable income. Now the LTCG rates have their very own brackets. The new LTCG brackets are:

The columns are for      1. Single,   2. Joint, and  3. Head of household

0% bracket                          $0-$38,600      $0-$77,200      $0-$51,700

15% bracket begins at        $38,601              $77,201             $51,701

20% bracket begins at        $425,801            $479,001           $452,401

Trusts, estates and kiddie tax computations are different and you should contact your tax practitioner for guidance as these calculations have their own peculiarities. Those brackets are:

0% bracket covers $0-$2,600

15% bracket starts at $2,600

20% bracket starts at $12,701

Short-term capital gains are taxed at ordinary income rates just like wages or interest income. If you are an investor, understanding your average level of income and remembering the LTCG brackets above will keep you abreast of your estimates of the related tax liabilities. Contact your licensed tax practitioner for further guidance.

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Your business needs its own bank account

If you have a business then that business needs its own bank account. Often times, when I meet a new business owner, I have to explain the importance of having a separate bank account. Not only does it make your bookkeeping easier, it creates a legal distinction between you and the operations of the business. Once you have separate accounts you need to insure that they are never co-mingled. What belongs to the business stays in the business and only legal distributions and wages end up in your personal account. If you have your own corporation, which is an individual person in the eyes of the law, don’t you thing that person would want their own bank account?

In a recent tax court memo an S corporation with one owner was skewered by the IRS because they co-mingled business income with personal funds by making deposits of gross receipts into their corporate account as well as their two personal bank accounts. That is called co-mingling and is not allowed. The IRS takes a very dim view of co-mingling because it is a tactic used by people who are trying to hide nefarious activities.

To make things worse, the owner substantially omitted greater than 25% of his corporate gross earnings from his business return. This omission gave the IRS the legal authority to use the six year look-back period for audits instead of the usual three years. Normally the IRS has three years after a tax return has been filed to open up the books for an audit, but if you break certain rules, they can go back an additional three, which is what they did in this case.

The owner gave three separate sets of bank statements to their accountant; the corporate account and two personal accounts. The owner had deposited business income to all three accounts effectively co-mingling gross receipts. The accountant only reported the gross receipts from the business bank account in their bookkeeping calculations. One might deduce that willful blindness played a part but the IRS tends to focus on facts it can prove; that the business owner failed to report the correct amount of gross income to his corporation. Chasing a charge of fraud is difficult because proving intent is an uphill battle. So the IRS appears to have taken the bird in the hand and ignored what may have been lurking in the bush.

Keep your business activities separate from your personal dealings and never co-mingle the two. A first step for any new businesses is to get a separate bank account. If you do not fully understand these concepts then seek out a consultation from your friendly licensed tax practitioner. Using a licensed practitioner is important as it is unlawful for an unlicensed tax preparer to advise in any matter that is not directly connected to the tax returns they work on.

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Veteran’s disability severance refunds

If you are a veteran who received disability severance payments after January 17, 1991, the DOD withheld taxes on those payments, and you reported the payments on your tax return, you are due a refund. You are supposed to receive detailed information from the DOD as to how to file for the refund.

If you have not received your information packet and believe that this situation pertains to you, you need to contact DFAS to obtain the necessary proof. You can file without the DOD letter but there will be some extra hoops to jump through. You can find more information from the IRS here: https://www.irs.gov/newsroom/veterans-owed-refunds-for-overpayments-attributable-to-disability-severance-payments-should-file-amended-returns-to-claim-tax-refunds

You only have one year from the date of your DOD letter to claim your refund. This time period is critical so do not put off filing. Follow all instructions and you should get your refund.

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Summertime child care credits

If your kids are under the age of 13 and they go to day camp during the summer, you can get a credit on your tax return for your costs. The Child and Dependent Care Credit is for the care of your child or qualifying person so you can work or look for work, so if you want to claim these expenses the kids absolutely can not stay at camp overnight. Save your receipts because the credit can max out at $2,100 for two or more children depending on the amount of your adjusted gross income.

Contact your licensed tax professional for advice.

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Three Tax Takeaways for Friday, July 06, 2018

First: consider that taxes are levied in three general categories; taxes on wages, taxes on spending, and taxes on income. All of your taxes touch one or two of these categories.

Second: the TCJA eliminates the alimony deduction for divorces that are finalized after December 31, 2018. This can be a sizable adjustment to income for those paying out large alimonies. On the other hand, alimony received is no longer included in the income of the recipient.

Third: an individual owner of an S Corporation was found to be liable for the Tax Preparer penalty. The owner prepared and signed their own S Corporation tax returns and as the result of an audit, they were found guilty of Tax Preparer infractions, in addition to the other penalties. The court noted that, “Congress intended the definition of tax return preparer to encompass those contributing to the material decisions regarding tax returns.” They were guilty of disregarding reasonable and appropriate review procedures through willfulness, recklessness, and gross indifference.

Don’t make the mistake of thinking S Corporations have special insulation from being audited by the IRS. The pass-through nature of the S Corporation ties it to where it is passing through to: the shareholder’s form 1040. The IRS algorithms follow the trail from the S Corporation right onto the personal tax returns of the shareholders. The last two S Corporation audits I worked examined both the S Corporation tax returns as well as the associated personal tax returns; for two consecutive years.

Separation of duties should compel any informed business person to seek out an independent and licensed tax return preparer to review your books and prepare the tax return.

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