Updated Tax Deductions for the Self-Employed

With a new year and a few changes to rules/rates, here is an updated version of my pamphlet Tax Deductions for the Self-Employed.

Tax Deductions for the Self-Employed

Also, if you have questions about the many changes to the deduction for meals & entertainment under the new tax law for 2018, here is a great reference.

New Withholding Forms & Calculator

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2017 tax returns have been filed or will be soon (April 17th will be here before you know it) and many are wondering what 2018 taxes will look like with the new tax law changes.  You may have seen a change in your tax withholdings in January and February when the IRS released revised withholding tables for your employers.  Will this change be good enough for what is expected in 2018? The IRS recently released an updated version of Form W-4 for withholdings and a withholding calculator.  This calculator can be a good tool to estimate if there is too much/not enough taken out of your paycheck for federal taxes (don’t forget state may be impacted too).  If you are married and both spouses work, when using the calculator enter both jobs in to get a more accurate picture of your total household income.

 

2018 Tax Season Calendar (for 2017 tax year preparation)

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It’s that time again to gather up all your W-2s, 1099s, and other tax documents for 2017 tax year income tax preparation.  Here are a few dates to keep in mind:

January 16, 2018 4th Quarter 2017 estimated tax payments due

January 29, 2018 IRS officially opens up e-filing for 2017 returns

January 31, 2018 Deadline for all 1099-MISC  (with amount in box 7 nonemployee income) & W-2s to be processed and mailed out

February 15, 2018 Returns already filed with refunds including earned income tax credit (EITC) and the additional child tax credit (ACTC) are released for deposit.  According to the IRS, deposits should be available in taxpayers bank accounts around February 27.

February 15, 2018 Most financial institution 1099s (1099-B, 1099-S) should be mailed out

March 15, 2018 All calendar year S-corp (1120S) and partnership (1065) tax returns due

April 17, 2018 All Individual (1040) and calendar year C corporation (1120) tax returns due or file an extension

April 17, 2018 1st Quarter 2018 estimated tax payments due (other quarter dates are June 15, 2018, September 17, 2018, January 15, 2019)

October 15, 2018 Due date for extended individual income tax returns.  This extended deadline is only for filing.  If an amount is due, the deadline is April 17 and any amount not paid can incur penalties and fines.

2018 Mileage Rates & More

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If a new tax law wasn’t enough to remember, a few other rates are changing for 2018 taxes.

  • Mileage Rates: Business mileage rate moves up to 54.5 cents/mile, Medical mileage rate moves up to 18 cents/mile, Charitable mileage rate remains unchanged at 14 cents/mile.
  • Deferral Contribution limits for employees moves up $500 to $18,500 in 2018.
  • Social Security Wage base (the amount of your wage or self-employed income subject to the 6.2%/12.4% tax) is up to $128,400 from $127,200

Small Business and Pass-through Tax Deduction-New Law

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My last post focused solely on individuals and the tax law changes impacting their tax return.  This post deals with small business owners operating under one of the following business structures:

  • Sole proprietor (Schedule C)
  • LLCs–can be taxed as sole proprietor, partnership, or S-Corporation
  • Partnership
  • S-Corporation
  • Potentially rental real estate “businesses” (Schedule E).  I say potentially because this is somewhat of a gray area with more guidance needed.

After much back and forth of tax plans, the law that came down for taxation of these pass-through entities (business income taxed at individual rates and not corporate tax rates) was to give a straight-up 20% deduction of qualified business income.  Sounds good, right? Here comes some nitty-gritty fine details with more regulations sure to come in the future.

  • Below the line deductionThe QBI deduction will be below the line, or after adjusted gross income on page 2 of the 1040 but will not be part of itemized deductions.
  • Qualified Business Income (QBI)–Basically the net income from your business.  If you are an S-corp it is net income without regard of reasonable wages paid to you.  If a partnership this is net income before guaranteed payments.  QBI does not include investment income such as short/long term capital gains, dividends, or interest. QBI is figured on a per business and not per taxpayer basis.
  • Overall Limitation–The deduction is limited to the lesser of 1) 20% of the combined QBI of the taxpayer or 2) 20% of taxable income minus net capital gain.  This provision is included since capital gains are taxed at a favorable rate and the QBI deduction is intended to get your tax rate similar to the favorable new corporate rate.
  • W-2 Limitations–If your taxable income is under $315,000 MFJ or $157,500 (all other filers) there is no limit to your 20% QBI deduction.  If taxable income is above this threshold, then the deduction is the lesser of: 1) 20% of QBI or 2) the greater of 2A) 50% of allocable W-2 wages or 2B) 25% of allocable W-2 wages plus 2.5% unadjusted basis of property.  For more complexity, this limitation is phased in for the first $100,000/$50,000 above the threshold.
  • Specified Service Businesses–If your business is a service business (ie law, accounting, finance, etc but NOT engineers or architects) then you are subject to the W-2 limitations above for your QBI deduction if your taxable income is above $315,000/$157,500 and then the deduction completely phases out above taxable income of $415,000/$207,500.
  • QBI Loss–If you generate a loss in your business and have net income the next year, the prior year loss combines with the current year QBI for computing the QBI deduction.

The take away from this QBI deduction is if your taxable income is under the $315,000/$157,500 threshold the 20% calculation is easy if you don’t have a ton of capital gains.  If above the income threshold, please consult a tax professional for calculations.

New Tax Law Effective 2018

Merry Christmas to us, we have a new tax law!  The big question you are probably asking is how does this new tax law impact me?  First of all, remember that most of these changes will not go into effect until the 2018 tax year, starting January 1, 2018 for individuals.  Here are a few key parts of the law that might be of importance to you.

New Tax Brackets (Individuals)–10%, 12%, 22%, 24%,32%, 35%, 37%

These brackets are only for regular taxable income.  There is no change to long-term capital gain and dividend brackets with rates of 0%, 15%, 20%.

Standard Deductions/Exemptions

The standard deduction amount has nearly doubled: single $12,000, head of household $18,000, MFJ $24,000.  With this higher standard deduction, personal exemptions for you, spouse, children, and other dependents has been eliminated.  Many taxpayers will find they will not itemize their deductions on schedule A anymore, simplifying their tax return to some extent. One tax planning strategy for 2017 if you don’t think you will be itemizing in 2018 is to bunch your deductions (prepay charitable contributions, real estate taxes, state taxes) before December 31.

State Tax/Real Estate Tax 

If you do find yourself itemizing in 2018 and subsequent years, state/local income taxes and real estate taxes will be capped at $10,000 combined ($5,000 if MFS).  You may still opt for state sales tax instead of income tax.  This cap is only for Schedule A real estate taxes for primary and second homes.  If you have a for-profit rental property (Schedule E), real estate taxes are deductible in full. A 2017 tax planning strategy for this category like bunching itemized deductions above, if you plan to go over the $10,000 combined cap in future years and will not be subject to AMT in 2017, prepay any 2017 income or real estate tax liability before year end (ex: pay 4th quarter state income tax quarterly estimate before December 31 instead of waiting until January 15, 2018).

Other Itemized Deductions

Medical expenses on Schedule A currently have a 10% threshold of AGI (meaning qualifying out-of-pocket medical expenses have to exceed 10% of AGI to be deductible) but the new tax law decreases this back to the 7.5% AGI threshold for 2017 & 2018.  In 2019 the threshold moves back up to 10%.  All miscellaneous itemized deductions subject to the 2% AGI threshold have been eliminated.  This includes tax preparation fees, unreimbursed employee expenses, investment expenses, safe deposit box, and more.  The personal theft and personal casualty losses have also been eliminated as deduction except for certain casualty losses in federally declared disaster areas.  If you are not subject to AMT in 2017 and have significant miscellaneous itemized deductions, you may look into prepaying expenses like unreimbursed employee expenses in 2017.

The Schedule A mortgage interest deduction will be limited to debt of $750,000 for homes placed under contract after 12/16/17 (must close before 4/1/18).  If you purchased a home under the old $1 million/$500,000 cap those rules still apply and if you refinance but the amount refinanced does not exceed the original loan you can stay under those rules.  Starting in 2018 the Schedule A interest on HELOC loans will no longer be deductible.

Child Tax Credits

With personal and dependent exemptions now gone, the child tax credit has been doubled to $2,000 for dependent children under the age of 17. Up to $1,400 of this credit per child can be refundable, replacing the additional child tax credit. The tax law also gives a $500 non-refundable credit for other non-child dependents (think parents, children over 17 or disabled, etc). Both credits start phasing out at incomes of $200,000 (single) or $400,000 (MFJ) which is significantly higher than current phase-out rules ($110,000 MFJ).

Alternative Minimum Tax (AMT)

Even though it wasn’t completely eliminated, many of the income preference items that go into the AMT calculation have been (dependent exemptions, state & local income taxes, miscellaneous itemized, etc).  Also the AMT exemption limits have been increased to $54,300 single and $84,500 MFJ. This change should make it so less taxpayers will be subject to AMT.

Other Changes

  • Moving Expenses will not be deductible after 2017.
  • Alimony for divorce settlements after December 31, 2018 will no longer be tax deductible (payor) or included in income (payee).
  • The estate tax exemption has doubled to $10.98 million for married couples.
  • No individual tax mandate for health insurance after 2017.

Tax Law Remaining the Same (even after significant talk of changing)

  • Home Exclusion laws stay the same–live in and own the home 2 out of 5 years as a primary residence and exclude $500,000 (MFJ) of gain from taxable income.
  • Student Loan interest is still deductible up to $2,500 with income limitations.
  • Unreimbursed Teacher Expenses are still deductible up to $250.
  • Electric Car Tax Credit is still valid.
  • Education Credits like the American Opportunity Tax Credit are the same.  529 plan money can now be used to pay for up to $10,000 of expenses for public, private, or religious elementary or secondary schools.

As the saying goes, “the only things that is constant is change”, above are the biggest points of the new tax law as it stands right now but we will more than likely see changes/addendum come out in the coming months and years.  For most taxpayers, the biggest change on their tax return will be taking the standard deduction instead of itemizing, not claiming dependent exemptions but instead utilizing the expanded child tax credit, and having lower taxes with the new tax brackets. For self-employed individuals or rental property owners, no change to income and expense items or self-employed taxes.

If you have specific questions about how your tax bill will be changed in 2018, please contact a tax professional.

Year End Tax Planning 2017

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When December and the holiday season rolls around it’s very easy to get caught up in all the holiday preparation.  The last thing you want to think about is year-end tax planning but it might save you big money come April if you can sit down and review your 2017 tax situation and look ahead a little to 2018.  This year might be a little more complex to do tax planning as the tax laws will likely be changing but we don’t know for sure what they will look like in 2018.

A few tax planning strategies that never seem to change:

  • Review your investments and balance capital gains by potentially selling investments at a loss
  • Review your wage withholdings–to high, too low?
  • Consider contributing the max to your retirement fund (SEP, traditional, & IRA contributions for 2017 can be made up until filing deadline 2018)
  • Spend money in flexible spending accounts that don’t rollover
  • Make those last minute charitable donations (cash or non-cash) and save receipts!

In light of the tax law changing, the biggest thing that will impact many of my tax clients is the doubling of the standard deduction.  If you don’t think you will hit the $24,000 (ish) itemized deduction floor in 2018, accelerating some deductions before December 31,2017 may give you the best of both world.  Look at your cash flow and consider accelerating the following:

  • Charitable contributions–if you normally give monthly make the January payment in December
  • Mortgage Interest–pay your January mortgage bill in December
  • State taxes–if you pay quarterly estimated taxes, don’t wait until January 15 to pay the state portion.  Send the check by December 31 to take the deduction in 2017 as this itemized deduction is slated to be chopped entirely in 2018.
  • Have a lot of unreimbursed employee expenses or other miscellaneous itemized deductions?  Bunch them before year end

Happy Holidays and Happy Tax Planning!

The Equifax Data Breach & Taxes

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The Equifax data breach is said to impact nearly half the US population.  Sensitive information such as social security numbers, birthdates, addresses, and drivers license numbers have been compromised.  Financial advisors recommend credit freezes, credit monitoring, and other avenues to watch out for identity theft due to the breach. This breach might also impact the 2018 tax filing season for tax year 2017 as the sensitive information obtained is exactly what is needed to file a fraudulent return for a fraudulent refund causing you a major headache when filing your actual return.  Here are a few ways to mitigate this potential fraudulent use of sensitive tax information:

  • File Early: The first to e-file (quickest mode) or paper file a return makes it an automatic reject for anyone else trying to e-file a return with your social security number. Don’t rush to file with incomplete or inaccurate information but gather and organize as many documents as you can during 2017 and look for online options to receive the rest.
  • Change Withholdings: If you are one that expects a windfall tax return in February or March, if another return is filed in your name it may be up to 8 months before you will see the return.  Changing withholdings to more exemptions on your paycheck means you will see the money now.  It may be a good idea to talk about a tax estimate with your tax advisor to make you the proper exemptions are taken on the form W4 so you don’t end up owing come tax time or the amount is very minimal.
  • Consider a PIN: Those who have been a victim of tax identity theft have been issued a PIN number to use on future tax returns.  A few states (Florida, Georgia, Washington DC) offer an option to apply for a PIN before tax identity theft has occurred so if you live in those areas, it may be an option.
  • Monitor fraud: Don’t throw out any tax notices, especially CP2000 ones showing unreported income from employers you never worked for.

Unfortunately, none of the above measures are fail safe against a fraudulent return being returned using your information but can potentially help mitigate the situation.

Loaning Money to Family

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To loan money to family members or not, that is the question.  Some say any money “lent” should be considered a gift since things get sticky when you combine money and family and the likelihood of ever seeing the money again is slim.  If you are going to legitimately loan money to family members, keep the following in mind.

  1. Figure out what you can truly afford.  Before saying yes to a loan, figure out if you can afford to lose the money that is meant for a loan. Don’t put your own financial security in jeopardy.
  2. Make sure your spouse/significant other is on board. This should go without saying that if you are married or share accounts with another person, both should be on board to make the loan.  This will help save your finances and marriage/relationship.
  3. Charge interest. If you don’t want the loan to be potentially re-categorized as a gift, the IRS will want to see interest charged, at least at the applicable federal rate.  As of August 2017 this rate is set at 1.29% short-term loans (up to 3 years), 1.95% mid-term loans (3-9 years), 2.85% (over 9 years)long-term loans.  If you end up forgiving the loan with principal and accrued interest in excess of the gift tax exclusion of $14,000/$28,000 (joint gift) you may be liable for gift taxes.
  4. Put the Loan in Writing. Drawing up an official loan document will be extra assurance to the IRS that you are loaning money and not just making a gift.  This also helps everyone involved in the transaction understand expectations. Sample promissory notes are available online if you don’t want to involve a lawyer.  If you are making a loan to family for a home mortgage, make sure the loan/promissory note is written up correctly so your interests are secure.  Draw up a mortgage or deed of trust to put the home up as collateral on the loan.  Make an amortization schedule that shows the breakdown of principal and interest over the life of the loan.
  5. Provide assistance in another way. Besides making a loan to a family member, other ways you can help financially are: give a small gift of money or goods (remember the $14,000 gift tax exclusion/$28,000 joint gift), co-sign on a bank loan, create a budget and help them get finances in order, provide employment, help them find financial assistance and local resources.

 

Summer, Teen Jobs, & Taxes

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Remember back at the start of summer when you told your teen to get a job and they actually did?  Did you know the tax ramifications of a summer job for your teen?  Don’t worry, it’s not that complicated so here’s the run down.

Summer Job – Employee

Chances are your teen got a job as an employee lifeguarding, making sandwiches at a restaurant, working as a counselor at daycamp, or other summer opportunities. As an employee, the employer  asked them to fill out a W-4 which basically tells what level federal & state taxes to take out of the paycheck.  If you still consider your teen a dependent (you’re still paying for the roof over their head and most expenses because teens are expensive!) if they don’t plan to make over $6,350 they can put exempt on the W-4 and not have any taxes withheld.  This $6,350 amount is the standard deduction limit for 2017 meaning no federal taxes are assessed up to that amount of earned income, or wages.  If your teen’s total earned income is under $6,350 for the whole year and no income tax was withheld, no tax return needs to be filed (win-win!).  If your teen had taxes withheld or earned over $6,350 they will have to file an income tax return come January 2018 to get any potential refund back or pay any taxes owed. Usually a 1040-EZ is all they need and there are many free online software programs you can use.

Summer Job – Independent Contractor

If your teen went out on their own for work, created a business, or was classified as an independent contractor by the person they worked for, chances are they will need to file a tax return and owe taxes.  Instead of filling out a W-4, they should have been asked to fill out a W-9.  In January instead of being issued a W-2 like a traditional employee, they will receive a 1099-MISC from the business that paid them money for their services.   All income and expenses associated with that income (mileage, supplies, equipment, etc) are put on a Schedule C.  Self-employment tax  on net income (income – expenses) is assessed at 15.3%.  A return is required to be filed on self-employment income over $400.  As an employee, you don’t really notice employment taxes as half of the full amount–7.65%–is automatically withdrawn (employee portion) and the employer pays the other half separately from the paycheck.  Even if your teen earned less than $6,350 and has no federal income tax assessed, self-employment tax is still assessed.

Summer Job – Family Business

Have a family business that you or your spouse owns and want to give your teen the opportunity to work with you?  If that business is a sole proprietorship or partnership, no FICA taxes are required to be withheld for child employees under 18.  Under 21, no FUTA taxes are required.

Dependency Exemption

As mentioned above, if you provide over half the financial support for your teen and they live with you at least half the year (or are students at college aged 19-23), you can claim the dependency exemption for them on your tax return.  The dependency exemption for 2017 is $4,050 and can mean tax savings estimated at $1,000 for you (depending on your marginal tax rate).  If you claim your teen as a dependent, make sure that if they are required to file a tax return they don’t accidentally claim the exemption also.

Enjoy the rest of summer and I hope your teen made some money at their summer job!

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