All posts by Kaitlin.Gruenewald@VerticalAdvisors.com

URGENT MEMO FOR COMPANIES THAT SELL TANGIBLE PROPERTY INTO MULTIPLE STATES

Memo

To:        VA Tax Files / VA Clients
From:    Peter V. DeGregori, CPA MST CGMA
Date:     June 28, 2018
Re:        Change in Sales Tax: Supreme Court Ruling for South Dakota v. Wayfair


Summary:

On June 21, 2018, the U.S. Supreme court issued a decision in South Dakota v. Wayfair, overturning the physical presence standard explained in Quill v. North Dakota (Sup Ct 1992) 504 U.S. 298, and other related cases. Prior to this ruling, the Quill case was an important case, which required a physical presence standard for a company to be subject to sales tax if they sold tangible property (typically items you can touch).  In general, the “physical presence” standard is a requirement for a company to be subject to sales tax.  This law became a common case / item to review if an out of state company was subject to sales tax in another state.

As an example, if you have a company, located only in Florida, then generally that company would only be subject to sales tax in Florida based on sales to Florida consumers.  However, if the company shipped products into other states, then they generally they would not be subject to other states’ sales tax if they didn’t have any physical presence in that other state.   So, the outcome would be products sold outside of Florida didn’t have sales tax applied against them and this is the issue that has soured the change of this law.  If a business wasn’t subject to sales tax, then typically the consumer is responsible to pay use tax to their state.  But most consumers do not pay use tax, so the states want a method to subject out of state businesses to sales tax and this new court case has now removed the hurdle of the Quill doctrine.  States want more sales tax revenue, and they have been trying hard to collect sales tax from out of state businesses for a long time.  Now the law has changed based on this court case and states are going to be able to charge sales tax based on where the consumer resides regardless of “physical presence”.

Now, let’s look at what is meant by “physical presence”.  First, this is a generalization, as each state may, unfortunately, have a different set of guidelines, in general, physical presence means that the company had property (fixed assets, inventory, etc.), people, or some other physical connection in a state to subject them to sales tax.  So, this was the concern based on the example above, the company in FL could sell products to every other state and wouldn’t be subject to sales tax in any state other than FL.  This created an unfair playing field with companies in states in which out of state resellers sold into.  So, the US Supreme Court changed the law and now companies are subject to sales tax based on revenue that is generated from a state which is also called “economic nexus”.

Now this is a BIG change for business that sell products to multiple states.  Typically, this is going to affect internet companies but will also affect companies as in my example above.  Most states have not updated their laws to adjust for this Supreme Court ruling, but we are assuming they will soon, as this only allows the states to generate more revenue.

If we look at the current laws, about 29 states have an “economic nexus” already on the books.  So, with this Supreme Court ruling, sales tax would be owed to the state in which an out-of-state company generated an “economic” benefit from.  What is economic benefit? It is typically a generation of revenue or sales.  So, based on my example, if the FL company sold products into other states and those states have an “economic nexus” law, the FL company now needs to be concerned with registering in that state and begin charging, collecting and remitting sales tax.  I know it is a pain, but companies need to follow the laws as those states are allocating resources to find out of state companies that owe them money.

Any good news?  Well, yes.  Most states currently have a revenue or quantity threshold to exempt small businesses.  However, the states define small business differently.  For example, most states are not going to require an out of state retailer with only “economic nexus” to be subject to their sales tax if their gross sales in that state are under $100,000 and less than 200 transactions.  This is what is deemed to be the small business exclusion.  However, some other states have a threshold of $250,000 and 200 transactions, but the state of Washington currently has a threshold of $10,000.  Most of these threshold tests are based on prior year sales.  Be careful, please review the current law with us or your tax advisor to make sure you are applying the law correctly.

Based on the Supreme Court ruling, we would expect states to update their “economic nexus” laws and create one if they don’t have one.  So, a retailer should first look at sales by state for the prior year, and then work with us or their tax advisor to determine which state(s) the company is generating revenue from and those states have economic nexus rules.  These rules should not be ignored as most states have stiff penalties, and if needed, the state will have their department of justice file a lawsuit against the out of state business that they feel owe sales tax.

Actions to Consider:

If you are a retailer of tangible products, and you sell into multiple states, and you do not pay sales tax in those states, run a sales report by state for the prior year, and review the economic nexus rules by state with your tax advisor.  Contact us to work with you to minimize the headache.

If you have states in which your company should have been subject to sales tax, and you haven’t been contacted by the state, then consider looking into a voluntary disclosure program (VDP) to request acceptance into the states’ program and hopefully receive the benefit of only having to file sales tax returns for up to three years versus six to eight and be in a position to not have to pay penalties.

Also, if your company sells to resellers, typically you are still required to register and file sales tax returns and show the reduction of taxable sales as they are sold for resale.  This does give the state the right to audit you, so make sure you have annual copies of resell certificates.

Unfortunately, sales tax laws are specific to each state and company based on the transactions, so call us to discuss.

Other Considerations:

There are many other items to consider.  For example, if a company manufactures, resells and sells to consumers, perhaps there is a benefit to dividing up the company so that the manufacturer activity is separated from the reselling activity.  Also, you may need to consider state income tax.  So, to comply with these new sales tax rules, make sure you understand other items that may be related like sales tax, state registration, change in your sales software and invoicing, etc.

There is much to think about and Congress could again change the law, but I feel they are too busy with other things, so all one can do is to deal with the current laws, understand them and apply them accordingly. Please contact us at 949-756-8080 or Advisors@VerticalAdvisors.com if you would like to discuss.

Overview of Economic Nexus as of June 28, 2018

STATEECONOMIC NEXUSTHRESHOLD
AlabamaYes.$250,000
AlaskaN/AN/A
ArizonaNo.N/A
ArkansasNo.N/A
CaliforniaNo.N/A
ColoradoNo.$100,000
*Special Law, ask tax preparer for details
ConnecticutYes.$250,000 or 200 units
District of ColumbiaNo.N/A
DelawareN/AN/A
FloridaNo.N/A
GeorgiaYes.$250,000 or 200 units
HawaiiYes. $100,000 or 200 units
IdahoNo.N/A
IllinoisYes.$100,000 or 200 units
IndianaYes.$100,000 or 200 units
IowaYes.$100,000 or 200 units
KansasN/AN/A
KentuckyYes.$100,000 or 200 units
LouisianaYes.$100,000 or 200 units
MaineYes.$100,000 or 200 units
MarylandNo.N/A
MassachusettsYes.$500,000 or 100 units
MichiganNo.N/A
MinnesotaNo.Less than $100,000
*Special Law, ask tax preparer for details
MississippiYes.$250,000
MissouriNo.N/A
MontanaNo.N/A
NebraskaNo.N/A
NevadaNo.N/A
New HampshireN/AN/A
New JerseyNo.N/A
New MexicoNo.N/A
New YorkNo.N/A
North CarolinaNo.N/A
North DakotaNo.N/A
OhioYes.$500,000
OklahomaNo.N/A
OregonN/AN/A
PennsylvaniaYes.$10,000
Rhode IslandYes.$100,000 or 200 units
South CarolinaNo.N/A
South DakotaYes.$100,000 or 200 units
TennesseeYes.$500,000
TexasNo.N/A
UtahNo.N/A
VermontNo.$100,000 and notify purchasers who bought more than $500
*Special Law, ask tax preparer for details
VirginiaNo.N/A
WashingtonYes.$100,000 in gross receipts or referrers having at least $267,000 in gross income
*Special Law, ask tax preparer for details
West VirginiaNo.N/A
WisconsinNo.N/A
WyomingYes.$100,000 or 200 units
Note: this is very high level summary and laws do change, so please discuss with us or your tax advisor and we
recommend you review with our tax memo dated 6/28/2018

Watch out for tax-related identity theft scams all year long

With the filing date for 2017 in the rear-view mirror for most businesses and individuals, the last thing they probably want to think about is income taxes. Unfortunately, though, criminals who commit tax-related identity theft don’t work seasonally — they’re constantly devising and unleashing new schemes.

And even though the IRS has taken successful steps to reduce tax-related identity theft in 2017, it cautions taxpayers to stay alert for scams year round and especially right after the tax filing season ends.

What is tax-related identity theft?

According to the IRS, tax-related identity theft generally occurs when a thief uses a stolen Social Security number (SSN) to file a tax return claiming a fraudulent refund. The victimized taxpayer may not learn of the theft until he or she attempts to file a tax return and finds that a return has already been filed for that SSN. Alternatively, the taxpayer might discover the theft upon receipt of a letter from the IRS saying it has identified a suspicious return that uses the taxpayer’s SSN.

Thieves have devised a variety of methods to obtain the information they need to file a tax return under another person’s SSN. During the past several years, the IRS, Federal Trade Commission (FTC) and state tax agencies have issued warnings as new methods come to the forefront.

How does tax-related identity theft occur?

But filing fraudulent returns isn’t the only way that taxpayers are victimized. Scam artists are using multiple channels to conduct their tax-related identity theft schemes, including:

Phone schemes. This past April, less than 10 days after the tax return filing deadline, the IRS highlighted a new phone scam conducted by fraudsters who program their computers to display the phone number of the local IRS Taxpayer Assistance Center (TAC) on the taxpayer’s Caller ID. If the taxpayer questions the legitimacy of the caller’s demand for a tax payment, the caller directs him or her to IRS.gov to verify the local TAC phone number.

The perpetrator hangs up, calls back after a short period — again “spoofing” the TAC number — and resumes the demand for money. These scam artists generally require payment on a debit card, which allows them to directly access the victim’s bank account.

In another phone scheme, the criminals claim they’re calling from the IRS to verify tax return information. They tell taxpayers that the agency has received their returns and simply needs to confirm a few details to process them. The taxpayers are prompted to provide personal information such as an SSN and bank or credit card numbers.

Digital schemes. Emails that appear to be from the IRS are part of phishing schemes intended to trick the recipients into revealing sensitive information that can be used to steal their identities. The emails may seek information related to refunds, filing status, transcript orders or PIN information.

The scammers have developed twists on this approach, too. The emails might seem to come from an individual’s tax preparer and request information needed for an IRS filing. Or the information request could arrive via text messages. Whether by text or email, the communication states that “you are to update your IRS e-file immediately” and includes a link to a fake website that mirrors the official IRS site. Emails also could include links that cause the recipients to download malware that infects their computers and tracks their keystrokes or allows access to files stored on their computers.

Do businesses need to worry?

The short answer is yes — businesses have also been targeted by criminals intent on victimizing their employees or the businesses themselves.

For several years now, criminals have employed different spoofing techniques known as business email compromise (BEC) or business email spoofing (BES). They disguise an email to a company’s human resources or payroll department so it seems to come from an executive in the company. The email requests a list of all employees and their Forms W-2 — information that can be used to file returns in the employees’ names.

Scammers also are pursuing businesses’ Employer Identification Numbers (EINs). They then report false income and withholding and file for a refund in the companies’ names. Even worse for the companies, the IRS could go after them for payroll taxes reported as withheld but not remitted.

The IRS recently announced that it has seen a sharp increase in the number of fraudulent filings of certain business tax forms, including Schedule K-1 and those filed by corporations and partnerships. As a result, the IRS may ask businesses for additional information (such as the driver’s license numbers of owners) to help identify suspicious tax returns.

How does the IRS contact taxpayers?

The IRS has made it clear that it will not:

  • Threaten to bring in law enforcement to have someone arrested for nonpayment of taxes,
  • Revoke a driver’s license, business license or immigration status for nonpayment,
  • Demand a specific payment method, such as a prepaid debit card, gift card or wire transfer,
  • Request a debit or credit card number over the phone,
  • Demand the payment of taxes without the opportunity to question or appeal the amount owed (the IRS usually mails a bill when a taxpayer owes taxes),
  • Send unsolicited emails, texts or messages through social media channels suggesting taxpayers have refunds or need to update their accounts, or
  • Request any sensitive information online.

The IRS will call or visit a home or business in only very limited circumstances. It might do so, for example, if a taxpayer has a severely overdue tax bill, to secure an employment tax payment, or to tour a business as part of an audit or a criminal investigation. But even in those special situations, the IRS generally will first send several notices by mail.

What can victims and targets do?

If you know or suspect you’ve fallen prey to tax-related identity theft, you’ll need to file IRS Form 14039, “Identity Theft Affidavit.” The IRS and FTC recently announced a joint project that allows people to report such theft to the IRS online through the FTC’s IdentityTheft.gov website. Remember, though, that filing the affidavit doesn’t eliminate the need to pay your taxes.

In addition, the FTC advises victims of all types of identity theft to file a complaint on its website and contact one of the three major credit bureaus (TransUnion, Experian and Equifax) to place a fraud alert on their credit records. You also should contact your financial institutions and close any financial or credit accounts opened or tampered with by identity thieves.

If you received, but didn’t fall for, a scam email, you should still report it. The IRS urges individuals who receive unsolicited emails purporting to come from the IRS to forward the messages to phishing@irs.gov before deleting.

Stay alert

Don’t make the mistake of letting your guard down because tax season has passed. If you receive a suspicious communication from the IRS or other taxing authority, contact us for confirmation of its validity and advice on how to proceed.

© 2018

Tax Cuts and Jobs Act offers favorable tax breaks for businesses

The Tax Cuts and Jobs Act (TCJA), which was signed into law on December 22, 2017, contains a treasure trove of tax breaks for businesses. Overall, most companies and business owners will come out ahead under the new tax law, but there are a number of tax breaks that were eliminated or reduced to make room for other beneficial revisions. Here are the most important changes in the new law that will affect businesses and their owners.

New 21% corporate tax rate

Under pre-TCJA law, C corporations paid graduated federal income tax rates of 15% on taxable income of $0 to $50,000; 25% on taxable income of $50,001 to $75,000; 34% on taxable income of $75,001 to $10 million; and 35% on taxable income over $10 million. Personal service corporations (PSCs) paid a flat 35% rate.

For tax years beginning in 2018, the TCJA establishes a flat 21% corporate rate, and that rate also applies to PSCs.

Reduced corporate dividends deduction

Under pre-TCJA law, C corporations that received dividends from other corporations were entitled to partially deduct those dividends. If the corporation owned at least 20% of the stock of another corporation, an 80% deduction applied. Otherwise, the deduction was 70% of dividends received.

For tax years beginning in 2018, the TCJA reduces the 80% deduction to 65% and the 70% deduction to 50%. These reductions are part of the price businesses have to pay for the new 21% corporate rate.

Corporate alternative minimum tax repealed

Prior to the TCJA, the corporate alternative minimum tax (AMT) was imposed at a 20% rate. However, corporations with average annual gross receipts of less than $7.5 million for the preceding three tax years were exempt. For tax years beginning in 2018, the new law repeals the corporate AMT. For corporations that paid the corporate AMT in earlier years, an AMT credit was allowed under prior law. The new law allows corporations to fully use their AMT credit carryovers in their 2018–2021 tax years.

New deduction for pass-through businesses

Under prior law, net taxable income from pass-through business entities (such as sole proprietorships, partnerships, S corporations and LLCs that are treated as sole proprietorships or as partnerships for tax purposes) was simply passed through to owners. It was then taxed at the owners’ standard rates. In other words, no special treatment applied to pass-through income recognized by business owners.

For tax years beginning in 2018, the TCJA establishes a new deduction based on a noncorporate owner’s qualified business income (QBI). This new tax break is available to individuals, estates and trusts that own interests in pass-through business entities. The deduction generally equals 20% of QBI, subject to restrictions that can apply at higher income levels.

QBI is generally defined as the net amount of qualified items of income, gain, deduction and loss from any qualified business of the noncorporate owner. For this purpose, qualified items are income, gain, deduction and loss that are effectively connected with the conduct of a U.S. business. QBI doesn’t include certain investment items, reasonable compensation paid to an owner for services rendered to the business or any guaranteed payments to a partner or LLC member treated as a partner for services rendered to the partnership or LLC.

The QBI deduction isn’t allowed in calculating the noncorporate owner’s adjusted gross income (AGI), but it reduces taxable income. In effect, it’s treated the same as an allowable itemized deduction.

W-2 wage limitation. For pass-through entities other than sole proprietorships, the QBI deduction generally can’t exceed the greater of the noncorporate owner’s share of:

  • 50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or
  • The sum of 25% of W-2 wages plus 2.5% of the cost of qualified property.

Qualified property is the depreciable tangible property (including real estate) owned by a qualified business as of year end and used by the business at any point during the tax year for the production of qualified business income.

Under an exception, the W-2 wage limitation doesn’t apply until an individual owner’s taxable income exceeds $157,500 ($315,000 for joint filers). Above those income levels, the W-2 wage limitation is phased in over a $50,000 range ($100,000 range for joint filers).

Service business limitation. Finally, the QBI deduction generally isn’t available for income from specified service businesses (such as most professional practices other than engineering and architecture and businesses that involve investment-type services such as brokerage and investment advisory services). Under an exception, the service business limitation doesn’t apply until an individual owner’s taxable income exceeds $157,500 ($315,000 for joint filers). Above those income levels, the service business limitation is phased in over a $50,000 phase-in range ($100,000 range for joint filers).

The W-2 wage limitation and the service business limitation don’t apply as long as your taxable income is under the applicable threshold. In that case, you should qualify for the full 20% QBI deduction.

New limits on business interest deductions

Subject to some restrictions and exceptions, prior law stated that interest paid or accrued by a business generally is fully deductible. Under the TCJA, affected corporate and noncorporate businesses generally can’t deduct interest expenses in excess of 30% of “adjusted taxable income,” starting with tax years in 2018. For S corporations, partnerships and LLCs that are treated as partnerships for tax purposes, this limit is applied at the entity level rather than at the owner level.

For tax years beginning in 2018 through 2021, adjusted taxable income is calculated by adding back allowable deductions for depreciation, amortization and depletion. After that, these amounts aren’t added back in calculating adjusted taxable income.

Business interest expense that’s disallowed under this limitation is treated as business interest arising in the following taxable year. Amounts that cannot be deducted in the current year can generally be carried forward indefinitely.

Taxpayers (other than tax shelters) with average annual gross receipts of $25 million or less for the three previous tax years are exempt from the interest deduction limitation. Some other taxpayers are also exempt. For example, real property businesses that elect to use a slower depreciation method for their real property with a normal depreciation period of 10 years or more are exempt. Another exemption applies to interest expense from dealer floor plan financing (for example, financing by dealers to acquire motor vehicles, boats or farm machinery that will be sold or leased to customers).

Reduced or eliminated employer deductions for business-related meals and entertainment

Prior to the TCJA, taxpayers generally could deduct 50% of expenses for business-related meals and entertainment. Meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee. Various other employer-provided fringe benefits were also deductible by the employer and tax-free to the recipient employee.

Under the new law, for amounts paid or incurred after December 31, 2017, deductions for business-related entertainment expenses are disallowed. Meal expenses incurred while traveling on business are still 50% deductible, but the 50% disallowance rule will now also apply to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises will be nondeductible.

Changes to some employee fringe benefits

The new law disallows employer deductions for the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety.

It also eliminates employer deductions for the cost of providing qualified employee transportation fringe benefits (for example, parking allowances, mass transit passes and van pooling), but those benefits are still tax-free to recipient employees.

Foreign tax provisions

The TCJA includes a bevy of changes that will affect taxpayers who conduct foreign operations. In conjunction with the reduced corporate tax rate, the changes are intended to encourage multinational companies to conduct more operations in the United States, with the resulting increased investments and job creation in this country.
 
Other changes

Here are some of the other business-related changes in the TCJA:

  • For business net operating losses (NOLs) that arise in tax years ending after December 31, 2017, the maximum amount of taxable income that can be offset with NOL deductions is generally reduced from 100% to 80%. In addition, NOLs incurred in those years can no longer be carried back to an earlier tax year (except for certain farming losses). Affected NOLs can be carried forward indefinitely.
  • More generous business asset expensing and depreciation tax breaks are available. The maximum Section 179 deduction increases to $1 million, and the phaseout threshold amount is increased to $2.5 million (from $510,000 and $2.03 million respectively). There are also much better first-year bonus depreciation rules.
  • The Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction, is eliminated for tax years beginning after December 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018, for C corporation taxpayers.
  • A new limitation applies to deductions for “excess business losses” incurred by noncorporate taxpayers. Losses that are disallowed under this rule are carried forward to later tax years and can then be deducted under the rules that apply to NOLs. This new limit kicks in after applying the passive activity loss rules. However, it applies to an individual taxpayer only if the excess business loss exceeds the applicable threshold.
  • The eligibility rules to use the more-flexible cash method of accounting are liberalized to make them available to many more medium-size businesses. Also, eligible businesses are excused from the chore of doing inventory accounting for tax purposes.
  • The Section 1031 rules that allow tax-deferred exchanges of appreciated like-kind property is allowed only for real estate for exchanges completed after December 31, 2017. Beginning in 2018, there are no more like-kind exchanges for personal property assets. However, the prior-law rules still apply if one leg of an exchange has been completed as of December 31, 2017, but one leg remains open on that date.
  • Faster depreciation is allowed for eligible farming assets.
  • Compensation deductions for amounts paid to principal executive officers generally cannot exceed $1 million per year, subject to a transition rule for amounts paid under binding contracts that were in effect as of November 2, 2017.
  • Specified R&D expenses must be capitalized and amortized over five years, or 15 years if the R&D is conducted outside the United States instead of being deducted currently. This begins with tax years beginning after December 31, 2021.

Any questions?

The TCJA is the largest overhaul of the tax code in more than 30 years, and we’ve covered only the highlights of the business-related tax provisions here. Please contact us if you have questions about how they may affect your business.

© 2017

Sending Your Kids To Day Camp May Provide a Tax Break


When school lets out, kids participate in a wide variety of summer activities. If one of the activities your child is involved with is day camp, you might be eligible for a tax credit!

Dollar-for-dollar savings

Day camp (but not overnight camp) is a qualified expense under the child and dependent care credit, which is worth 20% of qualifying expenses (more if your adjusted gross income is less than $43,000), subject to a cap. For 2018, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more.

Remember that tax credits are particularly valuable because they reduce your tax liability dollar-for-dollar — $1 of tax credit saves you $1 of taxes. This differs from deductions, which simply reduce the amount of income subject to tax. For example, if you’re in the 24% tax bracket, $1 of deduction saves you only $0.24 of taxes. So it’s important to take maximum advantage of the tax credits available to you.

Qualifying for the credit

A qualifying child is generally a dependent under age 13. (There’s no age limit if the dependent child is unable physically or mentally to care for him- or herself.) Special rules apply if the child’s parents are divorced or separated or if the parents live apart.

Eligible costs for care must be work-related. This means that the child care is needed so that you can work or, if you’re currently unemployed, look for work.

If you participate in an employer-sponsored child and dependent care Flexible Spending Account (FSA), also sometimes referred to as a Dependent Care Assistance Program, you can’t use expenses paid from or reimbursed by the FSA to claim the credit.

Determining eligibility

Additional rules apply to the child and dependent care credit. If you’re not sure whether you’re eligible, contact us. We can help you determine your eligibility for this credit and other tax breaks for parents.

© 2018

Before Choosing an Annuity, Know the Tax Implications

Guaranteed payments.

That’s the allure of many annuities. But “guaranteed” doesn’t mean tax-free.

Annuities come in many flavors and can cost a lot to set up. So when figuring out if one is right for you, you have to consider many factors, including the tax implications. The last thing you want is to be surprised by your tax bill when your goal is to have adequate income in retirement.

“An annuity is a tool. You have to use it wisely,” said certified financial planner Mari Adam of Adam Financial Associates.

Qualified vs. non-qualified annuities

Although there are many types, annuities fall into one of two broad categories: qualified or non-qualified. And the payouts are taxed differently.

If you fund an annuity with pre-tax money, it’s considered a “qualified” annuity. Payments from qualified annuities are fully subject to income tax because you weren’t taxed on your contributions when they went in or on the growth of your money as it accrued, just like in a 401(k) or traditional IRA.

Qualified annuities are usually funded with money from an IRA, 401(k) or other tax-deferred account.

If you buy an annuity with after-tax money, that’s considered a non-qualified annuity. You’ll only owe income tax on a portion of your payments, because you’ve already been taxed on the principal you invested.

What part of your payments will be taxable is determined by a so-called “exclusion ratio,” said Mark Luscombe, principal federal tax analyst of Wolters Kluwer Tax & Accounting US.

The ratio is based on the principal you invested, the earnings on your principal and the length of your annuity. Your investment return may be fixed or variable, depending on which type of annuity you chose.

If your non-qualified annuity payments are based on your life expectancy and you happen to live longer than expected, that will affect the taxes you pay, too. Say you start collecting non-qualified annuity payments at 65 and your life expectancy is 85. Your payments from age 65 to 85 will be partially taxable based on your exclusion ratio. But if you end up living to 97, 100% of your payments from years 86 to 97 could be subject to tax, Luscombe noted.

There is one instance in which annuity payments could be tax free: if you bought an annuity within a Roth IRA or Roth 401(k). In that case, you use after-tax money to buy your annuity and, because it’s a Roth, the earnings will grow tax free, as opposed to just tax deferred the way they are in most other annuities.

“Roths would qualify for a 100% exclusion if the timing and age requirements are met,” Luscombe said.

Other tax issues to consider

There are plenty of other tax considerations that come into play with annuities.

For instance, depending on where you live, your state may tax annuity income somewhat differently than the federal government.

“It would probably be safest to check with the law of a particular state to see if annuities are treated in that state the same as for federal purposes,” Luscombe noted.

And don’t forget potential tax penalties. With any annuity, check the rules for when you may start taking withdrawals or receiving regular payments.

Also consider the estate tax consequences. Say you’re investing in a non-qualified annuity for the tax deferral on your investment gains, but you die before you start collecting payments. Your chosen heir will have to foot your tax bill, Adams said.

That’s because, unlike with stocks or other investments, there is no “step-up in basis” for those who inherit annuities, Adam noted. A step-up simply means a person would owe no tax on any of the unrealized capital gains that accrued on an investment before they inherited it.

Since annuity products can be very complicated and expensive to set up, talk to a tax adviser about the tax implications before agreeing to buy one.

“It is also important to discuss the overall financial and investment implications of the annuity with someone other than the person selling the annuity,” Luscombe said.

Young Entrepreneurs Are More Likely to Rely on a CPA at Tax Time

For self-employed individuals, getting a little help from an expert accountant can make filing taxes a lot easier. Just as teachers are the authority when it comes to education, CPAs are the authority on all things taxes. But who uses accountants today, and what purpose do you serve in the eyes of your clients?

In an effort to better understand how entrepreneurs interact with accountants and pay their taxes, we commissioned an independent survey of 500 self-employed workers ages 18 and up, in the US. What we found may be the key to helping you prioritize your client relationships in 2019.

Older and younger taxpayers use accountants differently

Would you believe self-employed workers aged 18-24 are more likely to use an accountant than those 55 and older? It’s true! While 28 percent of self-employed workers aged 18-24 rely on an accountant to do their taxes, the same can only be said for 21 percent of workers over the age of 54.

But these age groups also have different reasons for using an accountant. Fifty percent of self-employed taxpayers over the age of 55 view their accountant as an essential business advisor, while only 27 percent of those under 55 would say the same.

The biggest reason folks under 55 use an accountant, as opposed to just filing their taxes themselves? They don’t know how. In fact, 37 percent admit they’ve never done their taxes themselves and they never want to. Eighteen percent say doing it themselves is just a waste of time, while 17 percent claim they’ve tried and failed to do their own taxes in the past, prompting them to seek help.

With a new set of federal tax laws changing the game for everyone next year, there’s likely an even greater chance taxpayers will be relying on an accountant in 2019. That is, for those who’ve realized the tax reform took place. Out of our 500 survey respondents, 9 percent didn’t know there was a tax reform.

If they’re not using an accountant, what are they doing?

Overall, 32 percent of self-employed workers rely on an accountant to do their taxes, but that number begs the question: What about the remaining 68 percent?

As it turns out, the numbers are about even. Thirty-one percent of taxpayers say they’re doing their own taxes on paper, while the last third rely on a tax software like TurboTax.

Interestingly, younger self-employed workers are less inclined to use a tax software than their older counterparts. While 42 percent of self-employed workers aged 55 and over are most likely to file online or through another tax software option, only 33 percent of taxpayers aged 18-24 would say the same. Younger taxpayers are also more likely (but only by 1 percent) to file on paper. An interesting choice for the iGeneration.

 

Younger workers may be better for business

As an accountant, you should be heartened by these current trends. While you have yet to prove yourself an indispensable business resource in the eyes of young up-and-comers, your foot is well inside the door.

Many self-employed individuals aged 18-24 haven’t done their own taxes before, and they don’t want to start. Considering these young taxpayers are 23 percent more likely to be audited by the IRS than taxpayers 55 and older, they also have an incentive to invest in your services.

With this year’s tax season behind us, it’s a great time to look to the future. Continue to build a trusting relationship with your younger clients. They may not be your biggest customers yet, but soon enough, they could be.

5 Fun Ways to Teach Your Kids About Money

Here’s a list of five fun ways to teach kids about money, which will help them with financial literacy—and help parents so the kids aren’t living with us forever:

1. Toys

You can start very young teaching basics with toys such like these:

Piggy Bank

As early as age 2, there are toys like The Learning Journey Numbers and Colors Pig E Bank, which has colored coins the bank counts as you put them in the slot. You can get this toy for around $19.

Cash Register

Beginning with toddlers (around age 3), you can use a play cash register to let kids play “store” and understand the basics of money. This can help them learn how much money they have, how much they have left when they buy something, and how things add up when you buy multiple things. One popular cash register from Learning Resources costs about $30 on Amazon.

Checkbook

Made for kids 5 and up, this Learning Resources Pretend & Play Checkbook comes with a calculator, checkbook, deposit slips and guide to help kids learn about managing a bank account and writing checks. Even if checks aren’t often used much anymore, it’s still a fun way to help your kids learn about money and debiting accounts. It costs approximately $12.

2. Online Games

These games are available online for you to help your kids learn about money and finance:

Cash Puzzler

This simple money game on Visa’s Practical Money Skills site is made for ages 3-6 and involves putting together a “puzzle” from mixed up pieces of a bill ($1-$100).

Smart Money Commanders

Ruby’s Troupe is an organization that uses an interactive theatre with a fun-loving group of puppets to teach kids ages 3-10 (and their parents) about money and finance. The program was created by puppeteer Phyllis Mattson and Debbie Todd, a licensed CPA. It has online modules where children watch puppets, get coloring pages, and have access to games and activities.

“We have three purposes when it comes to teaching about managing money,” Todd explains. “First is for them to find out it’s fun. Second is to find out it’s practical. And third is that they can do it and be successful at it.”

They also focus lessons on the emotional and psychological aspects of money, because that is where a lot of mistakes can be made. They’ve also done live sessions and Todd says it’s amazing to see the “tall kids” (parents) sit in the back and learn with the kids: “By the end, we’ve provided the parents with the tools to have a non-confrontational, non-threatening conversation with their children.”

Ruby’s Troupe also donates 90% of its profits to charity, including nonprofits and foundations that promote financial literacy, which is critically lacking here in the U.S. Only 17 states offer financial literacy courses for high school students and a recent report card by Champlain College’s Center for Financial Literacy gave only five states—Alabama, Missouri, Tennessee, Utah, and Virginia—an ‘A’ grade for providing personal finance education.

Peter Pig’s Money Counter

Made for children from 5-8, this interactive game from Visa helps kids learn about counting and saving money along with U.S. currency.

Clay Piggy

Clay Piggy is an online game created for Kindergarten and above by a parent who didn’t find any fun options when trying to teach her own daughter about money. Students learn basic money management skills such as how to earn, spend, save, invest, and give.

There are different scenarios in the game where they have to take a job to earn money, create a budget, understand wants and needs, watch their credit scores, be a responsible investor by assessing credit profiles of other users who asking for loan, learn how to pay taxes, look at their paychecks and more.

“Parents need to talk to their children about savings and give them situations at an early age where they have to manage money,” explains Narinder Budhiraja, founder of Clay Piggy. “Lots of people learn about money by making mistakes and then spend lot of years fixing their mistakes. This bring lot of stress in their personal life. At Clay Piggy, we are determined to change that behavior.”

Currently Clay Piggy is currently only available for schools to use, but they’re planning to roll out an application for parents later this year.

Money Metropolis

Another game on Visa’s Practical Money Skills site, this one is created for 7-12 year olds to make life decisions that impact whether their virtual bank account will make or earn money.

Mt. Everest Money Simulation

This game is a choose-your-own-adventure simulation where kids help a backpacker plan a trip to Mt. Everest without going into debt. It’s available from Money Prodigy and is made for kids ages 8-13. You can learn more about it and join the wait list here.

Financial Football and Financial Soccer

Visa’s World Cup-themed soccer game is made for ages 11 and up to test financial management skills and the Financial Football game helps kids learn about money management.

Cash Crunch 101

Created for ages 13 and up, Cash Crunch 101 facilitates the conversation about money. It was created by a teacher for the classroom, but can be used by parents and kids as well.

3. Board Games

By keeping these around your house, your kids can play games with the family to learn more about money:

Monopoly Junior

Kids ages 5-8 can play a version of traditional Monopoly, learning how to count money and accumulate assets. It runs approximately $15.

Game of Life Junior

This version of Hasbro’s Game of Life is a version made for kids as young as 5 years old to go on various adventures and make money along the way. It costs about $25.

Cash Crunch Junior

This board game was created for children ages 7-12 and focuses on the value of money, denominations of money and making change. It’s a great way to help kids learn at home while having fun counting money. It costs $30 and is available on the Cash Crunch Games website.

Money Bags Coin Value Game

Kids ages 7 and older can play this board game from Learning Resources that teaches about collecting, counting and exchanging money. It costs about $16.

Pay Day

Originally launched in 1975, this board game was made for children 8 and older to play with their families. Created by Winning Moves Games, the object is to have the most money at the end of the game, which runs about 35-45 minutes long. Throughout the game, players can make deals on property to earn money, get a salary, pay off bills, take out loans, add to savings, and learn about paying fees. You can get it for approximately $15.

CASHFLOW

Ages 14 and up can learn more about financial skills, investing, and wealth building in a fun way with this interactive game. It was created by Robert Kiyosaki, author of the bestselling personal finance book of all time, Rich Dad Poor Dad, and comes with a PDF guide. The cost is approximately $80 on Amazon.

4. Activities & Outings

Money Museum

If you live in Chicago or are traveling there this summer, make sure to take your kids to the Chicago Fed’s Money Museum. It’s open Monday through Friday (except for Bank Holidays) and they offer exhibits such as the Alexander Hamilton Exhibit and interactive displays like the “Banker Challenge” game where kids play the role of a bank manager.

Summer Camps

While camps to get your kids outdoors are great, you may want to look into finance camps for a fun, educational experience for part of the summer. Even though finance summer camp may not sound exciting at first, these camps make money and entrepreneurship really fun for kids:

  • Camp BizSmartTM in Santa Clara, CA and Chattanooga, TN helps aspiring young entrepreneurs ages 11-15 learn how to solve business problems and defend their solution to executives and investors.
  • KidsCamps.com offers a directory of camps, showcasing availability in 18 states for business and finance camps.
  • Smart Money Commanders Fun Summer Money Games is launching its first online summer camp in mid-June 2018, which will run through August 2018.
  • Young Americans Center For Financial Education offers workshops in the Denver area both to teach about managing money and running a business.

Your Local Children’s Museums

Check out the children museum(s) in your area. Many of them have rotating exhibits and some of those cover business, money and finance in fun, interactive ways. You can find children’s museums here.

5. Charitable Activities

Teaching your kids how to give to others while on a budget is something that will help them learn various skills and allow them to feel a sense of purpose and pride. Here are some unique ways kids can learn about money and give back:

Kids Boost

There’s an organization in Atlanta, GA that not only encourages children to give back, but teaches them how to raise money. Kids Boost, which currently has a wait list of over 200 kids, is a 501(c)3 organization that gives children from third grade through high school $100 and they put together a fundraiser for a charity of their choice. In just a few years, they’ve given kids $6,000 and they have turned that into more than $110,000, supporting 48 non-profits.

“Fundraising comes with important life lessons such as money management, communication, planning, and accountability,” explains Kids Boost founder and executive director Kristen Wintzel. “This teaches kids so many things while boosting courage and self-esteem and supporting wonderful nonprofits around the world. Most kids go on to either compete another Kids Boost project or continue to get involved in philanthropy and civil engagement. Giving is powerful and giving is contagious!”

Birthday Gift Donations

Instead of adding to the never-ending supply of toys that your kids play with for five minutes, you can use your child’s birthday as an opportunity to give back. Some charities like St. Jude’s offer a birthday fundraising program where you can easily create a page to collect donations for your birthday. Also, Facebook lets you create a fundraiser for various organizations, letting you share and have people donate to anytime including your birthday.

You can also pick a charity that may need physical items and create an Amazon wish list. We did this with my daughter for her birthday—collected toys for the Aflac Cancer and Blood Disorders Center, an idea I borrowed from my cousin. You can deliver the items with your child and make them part of the experience.

This may not seem like its teaching kids how to manage money, but it helps them learn about wants vs. needs and the value of money—along with how it can be used to do good things for others.

Open Communication About Money

The bottom line is that you should get your kids involved in money conversations early on, and make sure it doesn’t become a taboo topic. That will benefit them (and you) in the long run because often times people get embarrassed when dealing with money challenges.

The unfortunate reality, though, is that many people deal with financial issues. A recent survey by the American Psychiatric Association shows that two-thirds of Americans are anxious about paying their bills, up from 56% last year. So the earlier you teach your kids about money and how to talk about it, the better they’ll be set up for success as they grow and have to make their own financial decisions.

For those who may not know where to start, Amanda Grossman, Certified Financial Education Instructor and founder of Money Prodigy says, “The best way parents can get started teaching their kids about money is to find out what your child is interested in, such as goals and what they want to be, do, and have in their lives. You can then tie any money lessons you teach or money conversations you have moving forward to their list of things that are important to them, meaning they’ll be more receptive in receiving the information instead of just thinking you’re babbling on about stuff that doesn’t relate to them.”

Learn more here on Experian.com about teaching your kids financial literacy.

IRS updates Priority Guidance Plan for new tax law

The Internal Revenue Service has released an updated Priority Guidance Plan to give tax professionals and taxpayers information about the areas of the Tax Cuts and Jobs Act and other matters where it plans to provide more clarity in the near future.

This third quarter update to the 2017-2018 plan that the IRS issued late Wednesday reflects 13 additional projects, along with information about guidance the IRS has already published during the period from Oct. 13, 2017 through March 31, 2018.

In its initial implementation of the Tax Cuts and Jobs Act, the IRS plans to provide guidance in areas such as the business credit for wages paid to qualifying employees during family and medical leave, along with guidance on reportable policy sales of life insurance contracts.

The IRS also plans to release guidance on the new Section 199A, the deduction of qualified business income of pass-through entities, a murky area of the tax reform law where many practitioners have been demanding guidance. The IRS said in the priority plan it would be issuing “computational, definitional, and anti-avoidance guidance” on Section 199A. The IRS also plans to issue guidance on adopting new small business accounting method changes in its initial implementation of the TCJA. It will also be providing guidance on computation of unrelated business taxable income for separate trades or businesses, as well as changes to electing small business trusts, and on computation of estate and gift taxes to reflect changes in the basic exclusion amount. There will also be guidance coming out on certain issues relating to the excise tax on excess remuneration paid by “applicable tax-exempt organizations.”

The IRS has already released guidance in several areas, including opportunity zones, dispositions of certain partnership interests, withholding and optional flat rate withholding, according to the document.

Another important set of items on the Priority Guidance Plan is President Trump’s executive order withdrawing some earlier Treasury regulations and proposed regulations on matters such as estate, gift and generation-skipping taxes and the definition of a political subdivision.

Last month, the IRS asked the public for input on other items that should be added to the Priority Guidance Plan (see IRS looks for recommendations on priority guidance on new tax law). The update to the plan will identify the guidance projects that the Treasury and the IRS intend to work on as priorities from July 1, 2018, through June 30, 2019.

Staffers on Congress’s Joint Committee on Taxation have also been working on a so-called “Blue Book” that will provide more details on various provisions of the new tax law, along with a set of technical corrections to the tax reform law that they hope to have it in legislative form by the end of the year (see Congressional staff aims to finish technical corrections to tax reform bill). The prospects for passing another tax law anytime soon in Congress are far from certain, although some lawmakers hope to introduce legislation extending the individual tax cuts beyond 2025.

4 New Ways You Can Avoid Fines For Not Having Health Insurance

There are already more than a dozen reasons people can use to avoid paying the penalty for not having health insurance. Now the federal government has added four more “hardship exemptions” that let people off the hook if they can’t find a marketplace plan that meets not only their coverage needs but also reflects their view if they are opposed to abortion.

It’s unclear how significant the impact will be, policy analysts said. That’s because the penalty for not having health insurance will be eliminated starting with tax year 2019, so the new exemptions will mostly apply to penalty payments this year and in the previous two years.

“I think the exemptions … may very marginally increase the number of healthy people who don’t buy health insurance on the individual market,” Timothy Jost, emeritus professor of law at Washington and Lee University in Virginia who is an expert on health law.

Under the new rules, people can apply for a hardship exemption that excuses them from having to have health insurance if they:

  1. Live in an area where there are no marketplace plans.
  2. Live in an area where there is just one insurer selling marketplace plans.
  3. Can’t find an affordable marketplace plan that doesn’t cover abortion.
  4. Experience “personal circumstances” that make it difficult for them to buy a marketplace plan, including not being able to find a plan in their area that gives them access to specialty care they need.

In California, two of those exemptions will be particularly relevant — the one related to abortion coverage and the one for people in counties where only one insurer sells through the state’s Affordable Care Act marketplace, Covered California.

The first new exemption, for people in areas with no marketplace plan, isn’t relevant for consumers anywhere in the United States this year. Since the Affordable Care Act’s marketplaces opened, there have been no “bare” counties.

However, in about half of U.S. counties — in which 26 percent of enrollees live — there is only one marketplace insurer this year, according to the Kaiser Family Foundation. (Kaiser Health News, which produces California Healthline, is an editorially independent program of the foundation.)

This includes California, where Anthem Blue Cross exited six counties and other communities this year, leaving an estimated 60,000 people with only one insurer.

The counties of Monterey, San Benito, San Luis Obispo, Santa Barbara, Inyo and Mono were left with only one insurance option: Blue Shield of California.

As for the abortion exemption, in many places it won’t be an issue either. Women in 31 states didn’t have access to a marketplace plan that covered abortion in 2016, according to a Kaiser Family Foundation analysis.

By California law, abortion services must be covered in marketplace plans as well as by Medi-Cal, the state’s Medicaid program, and by most private health plans outside of the marketplace — except employer-funded ones. That means women in the Golden State might have trouble finding insurance that excludes abortions, experts said. New York and Oregon also have similar laws.

The ACA established several different types of exemptions from the penalty for not having coverage. Among them are exemptions for not being able to find coverage that is considered affordable or being without insurance for less than three consecutive months in a year. People claim these more common exemptions when they file their tax returns.

Hardship exemptions that had already been on the books protected people who faced eviction, filed for bankruptcy or racked up medical debt, among other difficulties. Consumers apply for these exemptions by submitting an application to the ACA insurance marketplace.

The new hardship exemptions apply to people in all 50 states, according to an official at the federal Centers for Medicare & Medicaid Services, which oversees the health law’s insurance marketplaces. To apply, people generally need to provide a brief explanation of the circumstances that made it a hardship for them to buy a marketplace plan, along with any available documentation, when they submit their application to marketplace officials. They can apply for the current calendar year or going back two years, to 2016.

It’s difficult to gauge how many people will try to take advantage of the changes, said Tara Straw, a senior policy analyst at the Center on Budget and Policy Priorities.

“People aren’t sure how to apply or if they’re eligible, and that discourages them from applying,” Straw said.

The penalty for not having health insurance in 2018 is the greater of $695 or 2.5 percent of household income.

During the 2017 filing season, there were more than 106 million tax returns reporting that all family members had health insurance, and nearly 11 million tax returns that claimed an exemption from the requirement to have it, according to a report from the Treasury Department’s inspector general for tax administration. In addition, more than 4 million returns reported paying penalties totaling nearly $3 billion for not having health insurance.

People often don’t realize they may owe a penalty until it’s time to do their taxes, said Alison Flores, a principal tax research analyst at H&R Block’s Tax Institute. H&R tax preparers first work to see if clients can qualify for an exemption that can be claimed on their tax returns. If that doesn’t work, they move on to the hardship exemptions. The preparers help people get the hardship exemption application, but it’s up to consumers to send it to the marketplace and get the exemption certificate.

The federal guidance about the new exemptions was released April 9, shortly before the end of the income tax filing season. People who’ve already filed their taxes and qualify for the new exemptions for 2016 or 2017 and get marketplace approval can file an amended tax return to receive a refund of any penalty they paid, said Katie Keith, a health policy consultant who writes regularly about health reform.

10 Things To Consider If You Missed The Tax Day Deadline

Tax Day was Tuesday, April 17, for most taxpayers, though some folks took advantage of the extra day granted by the Internal Revenue Service (IRS) following computer system issues. Even with the extra day, not every taxpayer who needed to file made it on time. What about you? Maybe your hard drive died,maybe you ate some bad fish, or maybe your dog ate your return. I’m not judging. The question isn’t so much “what happened?” but rather “what happens next?”

Here’s what to do next if you didn’t get your return filed on time:

    1. Don’t panic. It won’t get you anywhere. Too many times, taxpayers completely freak out over a missed deadline and decide that there’s no point in filing now and decide to fix it later. Don’t be that taxpayer. Later might not come: Fix it now.
    2. Double-check whether you needed to file in the first place. We all think we need to file but not everyone needs to. If your income or other circumstances mean that you don’t need to file, you’re in the clear. But be careful: Whether you need to file can change from year to year so don’t assume that you won’t need to file next year if you get a free pass this year.
    3. File today. If you didn’t file on time, get your return together as soon as you can. If you are due a refund, there is no penalty for filing a late return after the tax deadline. But if you owe, penalties and interest are calculated based on the passage of time: The more time that goes by, the more you will owe.
    4. Use Free File. For those taxpayers who qualify (and the IRS estimates that about 70% of taxpayers do qualify), Free File is available through October 15. Just as it sounds, Free File allows taxpayers to prepare and file returns electronically for free. For more information, check out Free File on the IRS website here.
    5. Pay attention to available extensions and relief. The IRS has announced that taxpayers affected by natural disasters, including individuals and businesses affected by Hurricane Maria, have extra time to file this year. For more details or to see if you’re eligible, check the IRS website. Additionally, some taxpayers are automatically entitled to extra time, including those who are out of the country or on active duty in the military.
    6. File even if you can’t pay. A lot of taxpayers figure that if they can’t pay, they shouldn’t bother to file. No, no, no: Penalties are assessed both for failure to file and failure to pay if you will owe taxes. The failure-to-file penalty is usually 5% for each month or part of a month that your tax return is late; if your tax return is filed more than 60 days after the due date, the minimum penalty is the lesser of $210 or 100% of the unpaid tax. So don’t make a bad situation worse by failing to pay and failing to file.
    7. If the dog really ate your tax return, or if something else happened to prevent you from filing on time, tell the IRS. The IRS does have the ability to abate penalties for reasonable cause (the law, however, generally bars the ability to abate interest). If you file late – and you think you have reasonable cause for doing so – you can request an abatement using form 843, Claim for Refund and Request for Abatement (downloads as pdf).
    8. Find a good tax preparer. You can ease a lot of your stress by using a good tax preparer. Since it’s immediately after the tax season rush, you want someone who isn’t closing up shop tomorrow with no plans to reappear until next year. Call around. Ask for referrals. Find someone that you can trust. Make sure you feel comfortable (ask questions). And then follow through.
    9. Pay as much as you can. If you can pay something – anything – make a payment. If you can’t pay it all at once, there are alternatives, including setting up an installment agreement with IRS. But don’t use your lack of funds as an excuse to do nothing. See again #6.
    10. Plan for next year. Like Christmas, Tax Day comes at the same time every year (okay, maybe not every year, since considering those IRS glitches, you did get an extra day this year). But a lot of the stress associated with Tax Day – like shopping for Christmas – can be avoided with a little bit of planning. Maybe this is the year that you invest in a scanner for those receipts. Or you hire that tax pro (see again #8). Or you set up personal finance software to track your income and expenses for the year. Whatever you need to do to ensure that you file on time next year (or file with an extension), plan to do those things now.