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DOL expands retirement plan options for smaller businesses

The U.S. Department of Labor (DOL) has released a final rule which should make it easier for smaller businesses to provide retirement plans to their employees. According to the DOL, the rule will enable more small and midsize unrelated businesses to join forces in multiple employer plans (MEPs) that provide their employees a defined contribution plan such as a 401(k) plan or a SIMPLE IRA plan. Certain self-employed individuals also can participate in MEPs. In October 2018, the DOL issued a proposed rule to clarify when an employer group or association, or a professional employer organization (PEO), can sponsor a MEP. (A PEO is a company that contractually assumes some human resource responsibilities for its employer clients.) The final rule, effective September 30, 2019, is similar to the proposal, but not entirely. The appeal of MEPs According to the DOL, businesses that participate in a MEP can see lower retirement plan costs as a result of economies of scale. For example, investment companies may charge lower fund fees for plans with greater asset accumulations. By pooling plan participants and assets in one large plan, rather than multiple small plans, MEPs make it possible for small businesses to give their workers access to the same low-cost funds offered by large employers. MEPs also let participating employers avoid some of the burdens associated with sponsoring or administering their own plans. Employers retain fiduciary responsibility for selecting and monitoring the arrangement and forwarding required contributions to the MEP, but they can effectively transfer significant legal risk to professional fiduciaries who are responsible for managing the plan. Although many MEPs already exist, the DOL believes that previous guidance, as well as uncertainty about the ability of PEOs and associations to sponsor MEPs as “employers” under the Employee Retirement Income Security Act (ERISA), may have hindered the formation of plans by smaller employers. The final rule clarifies when an employer group or association or a PEO can sponsor a MEP. Permissible MEP sponsors Under the final rule, a group or association, a PEO, and self-employed people can qualify as employers under ERISA for purposes of sponsoring MEPs by satisfying different criteria. Groups and associations: Among other requirements, groups and associations of employers must have a “commonality of interest.” This means that the employers in a MEP must either: Be in the same trade, industry, line of business or profession, or Have a principal place of business in the same geographic region that doesn’t exceed the boundaries of a single state or metropolitan area. (A metropolitan area can include more than one state.) Thus, a MEP could, for example, comprise employers in a national trade group or a local chamber of commerce. But the rule prohibits an employer group or association from being a bank, trust company, insurance issuer, broker-dealer or other similar financial services firm (including a pension record keeper or a third-party administrator) and from being owned or controlled by such an entity or its subsidiary or affiliate. Such entities can, however, participate in their […]

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Uncle Sam may provide relief from college costs on your tax return

We all know the cost of college is expensive. The latest figures from the College Board show that the average annual cost of tuition and fees was $10,230 for in-state students at public four-year universities — and $35,830 for students at private not-for-profit four-year institutions. These amounts don’t include room and board, books, supplies, transportation and other expenses that a student may incur. Two tax credits Fortunately, the federal government offers two sizable tax credits for higher education costs that you may be able to claim: 1. The American Opportunity credit. This tax break generally provides the biggest benefit to most taxpayers. The American Opportunity credit provides a maximum benefit of $2,500. That is, you may qualify for a credit equal to 100% of the first $2,000 of expenses for the year and 25% of the next $2,000 of expenses. It applies only to the first four years of postsecondary education and is available only to students who attend at least half time. Basically, tuition, course materials and fees qualify for this credit. The credit is per eligible student and is subject to phaseouts based on modified adjusted gross income (MAGI). For 2019, the MAGI phaseout ranges are: Between $80,000 and $90,000 for unmarried individuals, and Between $160,000 and $180,000 for married joint filers. 2. The Lifetime Learning credit. This credit equals 20% of qualified education expenses for up to $2,000 per tax return. There are fewer restrictions to qualify for this credit than for the American Opportunity credit. The Lifetime Learning credit can be applied to education beyond the first four years, and qualifying students may attend school less than half time. The student doesn’t even need to be part of a degree program. So, the credit works well for graduate studies and part-time students who take a qualifying course at a local college to improve job skills. It applies to tuition, fees and materials. It’s also subject to phaseouts based on MAGI, however. For 2019, the MAGI phaseout ranges are: Between $58,000 and $68,000 for unmarried individuals, and Between $116,000 and $136,000 for married joint filers. Note: You can’t claim either the American Opportunity Credit or the Lifetime Learning Credit for the same student or for the same expense in the same year. Credit for what you’ve paid So which higher education tax credit is right for you? A number of factors need to be reviewed before determining the answer to that question. Contact us for more information about how to take advantage of tax-favored ways to save or pay for college. © 2019

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The next estimated tax deadline is September 16: Do you have to make a payment?

If you’re self-employed and don’t have withholding from paychecks, you probably have to make estimated tax payments. These payments must be sent to the IRS on a quarterly basis. The third 2019 estimated tax payment deadline for individuals is Monday, September 16. Even if you do have some withholding from paychecks or payments you receive, you may still have to make estimated payments if you receive other types of income such as Social Security, prizes, rent, interest, and dividends. Pay-as-you-go system You must make sufficient federal income tax payments long before the April filing deadline through withholding, estimated tax payments, or a combination of the two. If you fail to make the required payments, you may be subject to an underpayment penalty, as well as interest. In general, you must make estimated tax payments for 2019 if both of these statements apply: You expect to owe at least $1,000 in tax after subtracting tax withholding and credits, and You expect withholding and credits to be less than the smaller of 90% of your tax for 2019 or 100% of the tax on your 2018 return — 110% if your 2018 adjusted gross income was more than $150,000 ($75,000 for married couples filing separately). If you’re a sole proprietor, partner or S corporation shareholder, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return. Quarterly due dates Estimated tax payments are spread out through the year. The due dates are April 15, June 15, September 15 and January 15 of the following year. However, if the date falls on a weekend or holiday, the deadline is the next business day (which is why the third deadline is September 16 this year). Estimated tax is calculated by factoring in expected gross income, taxable income, deductions and credits for the year. The easiest way to pay estimated tax is electronically through the Electronic Federal Tax Payment System. You can also pay estimated tax by check or money order using the Estimated Tax Payment Voucher or by credit or debit card. Seasonal businesses Most individuals make estimated tax payments in four installments. In other words, you can determine the required annual payment, divide the number by four and make four equal payments by the due dates. But you may be able to make smaller payments under an “annualized income method.” This can be useful to people whose income isn’t uniform over the year, perhaps because of a seasonal business. For example, let’s say your income comes exclusively from a business that you operate in a beach town during June, July and August. In this case, with the annualized income method, no estimated payment would be required before the usual September 15 deadline. You may also want to use the annualized income method if a large portion of your income comes from capital gains on the sale of securities that you sell at various times during the year. Determining the correct amount Contact us […]

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Congress acts to reform the IRS, enhance taxpayer protections

The U.S. Senate has passed, and President Trump is expected to sign into law, a broad package of reforms aimed at the IRS. Among other things, the Taxpayer First Act contains several new protections for taxpayers, along with provisions intended to improve the IRS’s customer service. Stronger safeguards against identity theft Several of the bill’s provisions address tax-related identity theft. For example, the bill generally requires the IRS to notify a taxpayer as soon as practicable when it suspects or confirms an unauthorized use of the individual’s identity. The IRS also must: Provide the taxpayer instructions on how to file a report with law enforcement on the unauthorized use, Identify any steps the individual should take to permit law enforcement to access his or her personal information during the investigation, Provide information regarding the actions the taxpayer can take to protect him- or herself from harm, and Offer identity protection measures, such as the use of an “identity protection personal identification number” (IP PIN). The bill also requires the IRS to establish a program within five years that allows all taxpayers to request IP PINs to better secure their identity when filing their tax returns. This protection currently is available only to victims of tax-related identity theft. The IRS must provide a suspected victim with additional notifications regarding whether it has initiated an investigation into the unauthorized use and whether the investigation has substantiated such unauthorized use. It also must notify the individual of whether any action has been taken against someone relating to the unauthorized use or whether any referral for criminal prosecution has been made. And the IRS must ensure that victims of tax-related identity theft have a single point of contact at the agency throughout the processing of their cases. That contact must track the taxpayer’s case to completion and coordinate with other IRS employees to resolve the taxpayer’s issues as quickly as possible. Greater appeals rights The Taxpayer First Act codifies into law the IRS’s already-existing, independent Office of Appeals. It also expands taxpayers’ rights of appeal regarding tax matters. For example, under the law, the IRS must provide certain taxpayers who request a conference with the Office of Appeals with access to the non privileged portions of the case file on the disputed issues no later than 10 days before the scheduled conference date. Currently, taxpayers must file a Freedom of Information Act request to gain access to their case files. The resolution process available through the appeals office generally is available to all taxpayers. If a taxpayer’s request to appeal an IRS notice of deficiency is denied, the IRS must give the taxpayer a written notice with a detailed description of the facts involved, the basis for the denial and a detailed explanation of how the basis applies to the facts. The notice also must describe the procedures for protesting the denial. Customer service improvements The bill gives the IRS one year to develop and submit to Congress a comprehensive customer service strategy. The […]

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The “nanny tax” must be paid for more than just nannies

You may have heard of the “nanny tax.” But even if you don’t employ a nanny, it may apply to you. Hiring a housekeeper, gardener or other household employee (who isn’t an independent contractor) may make you liable for federal income and other taxes. You may also have state tax obligations. If you employ a household worker, you aren’t required to withhold federal income taxes from pay. But you may choose to withhold if the worker requests it. In that case, ask the worker to fill out a Form W-4. However, you may be required to withhold Social Security and Medicare (FICA) taxes and to pay federal unemployment (FUTA) tax. FICA and FUTA tax In 2019, you must withhold and pay FICA taxes if your household worker earns cash wages of $2,100 or more (excluding the value of food and lodging). If you reach the threshold, all the wages (not just the excess) are subject to FICA. However, if a nanny is under age 18 and child care isn’t his or her principal occupation, you don’t have to withhold FICA taxes. So, if you have a part-time babysitter who is a student, there’s no FICA tax liability. Both an employer and a household worker may have FICA tax obligations. As an employer, you’re responsible for withholding your worker’s FICA share. In addition, you must pay a matching amount. FICA tax is divided between Social Security and Medicare. The Social Security tax rate is 6.2% for the employer and 6.2% for the worker (12.4% total). Medicare tax is 1.45% each for both the employer and the worker (2.9% total). If you want, you can pay your worker’s share of Social Security and Medicare taxes. If you do, your payments aren’t counted as additional cash wages for Social Security and Medicare purposes. However, your payments are treated as additional income to the worker for federal tax purposes, so you must include them as wages on the W-2 form that you must provide. You also must pay FUTA tax if you pay $1,000 or more in cash wages (excluding food and lodging) to your worker in any calendar quarter. FUTA tax applies to the first $7,000 of wages paid and is only paid by the employer. Reporting and paying You pay household worker obligations by increasing your quarterly estimated tax payments or increasing withholding from wages, rather than making an annual lump-sum payment. As a household worker employer, you don’t have to file employment tax returns, even if you’re required to withhold or pay tax (unless you own your own business). Instead, employment taxes are reported on your tax return on Schedule H. When you report the taxes on your return, you include your employer identification number (not the same as your Social Security number). You must file Form SS-4 to get one. However, if you own a business as a sole proprietor, you include the taxes for a household worker on the FUTA and FICA forms (940 and 941) that you file for your […]

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Summer: A good time to review your investments

You may have heard about a proposal in Washington to cut the taxes paid on investments by indexing capital gains to inflation. Under the proposal, the purchase price of assets would be adjusted so that no tax is paid on the appreciation due to inflation. While the fate of such a proposal is unknown, the long-term capital gains tax rate is still historically low on appreciated securities that have been held for more than 12 months. And since we’re already in the second half of the year, it’s a good time to review your portfolio for possible tax-saving strategies. The federal income tax rate on long-term capital gains recognized in 2019 is 15% for most taxpayers. However, the maximum rate of 20% plus the 3.8% net investment income tax (NIIT) can apply at higher income levels. For 2019, the 20% rate applies to single taxpayers with taxable income exceeding $425,800 ($479,000 for joint filers or $452,400 for heads of households). You also may be able to plan for the NIIT. It can affect taxpayers with modified AGI (MAGI) over $200,000 for singles and heads of households, or $250,000 for joint filers. You may be able to lower your tax liability by reducing your MAGI, reducing net investment income or both. What about losing investments that you’d like to sell? Consider selling them and using the resulting capital losses to shelter capital gains, including high-taxed short-term gains, from other sales this year. You may want to repurchase those investments, so long as you wait at least 31 days to avoid the “wash sale” rule. If your capital losses exceed your capital gains, the result would be a net capital loss for the year. A net capital loss can also be used to shelter up to $3,000 of 2019 ordinary income (or up to $1,500 if you’re married and file separately). Ordinary income includes items including salaries, bonuses, self-employment income, interest income and royalties. Any excess net capital loss from 2019 can be carried forward to 2020 and later years. Consider gifting to young relatives While most taxpayers with long-term capital gains pay a 15% rate, those in the 0% federal income tax bracket only pay a 0% federal tax rate on gains from investments that were held for more than a year. Let’s say you’re feeling generous and want to give some money to your children, grandchildren, nieces, nephews, or others. Instead of making cash gifts to young relatives in lower federal tax brackets, give them appreciated investments. That way, they’ll pay less tax than you’d pay if you sold the same shares. (You can count your ownership period plus the gift recipient’s ownership period for purposes of meeting the more-than-one-year rule.) Even if the appreciated shares have been held for a year or less before being sold, your relative will probably pay a much lower tax rate on the gain than you would. Increase your return Paying capital gains taxes on your investment profits reduces your total return. Look for […]

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Considering an investment in a Qualified Opportunity Fund?

A Qualified Opportunity Fund (QOF) is an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.  These can be found via an internet search for state Qualified Opportunity Zones (QOZ). QOZ were added to the tax code by the Tax Cuts and Jobs Act on December 22, 2017. The Federal government created income tax incentives to enhance the taxpayer incentives to invest in QOZ which is meant to spur the economy and renovate these areas. So, let’s discuss the basics of a QOF. A QOF is a Corporation or a partnership which holds Qualified Opportunity property. The QOF would complete IRS Form 8996 to self-certify the QOF status. It is most beneficial to read the tax laws to understand the requirements. The income tax benefits of these QOF are getting a lot of attention from wealthy investors. Why? Because the law allows a taxpayer to defer gain on capital gains and provides the ability to exclude the gain ultimately, based on the rules and regulations. The gain would have to be invested into a QOF within 180 days from the date of the sale. Based on the current rules, the gain would be shown gross on the taxpayer’s tax return and then the amount invested in the QOF would be shown as a loss. This method allows the IRS to review the transaction and see the investment into the QOF. Thus, the net of the transaction invested in the QOF would be taxable. The tax benefits are: Investors can defer tax on any prior capital gains invested in a QOF until the earlier of the date on which the investment in the QOF is sold or exchanged, or December 31, 2026. If the investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain. If the investment is held for more than 7 years, the 10% exclusion becomes 15% of the deferred gain. If the investment is held for at least 10 years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value on the date of the QOF investment is sold or exchanged. This is the tax benefit that everyone is talking about. This part of the law allows for 100% gain exclusion. However, if someone invests in 2019, how will they get to a 10-year hold? The tax law is set to expire on December 31, 2026, and 10 years from 2019 is 2029. This means most taxpayers are not planning on being able to fully benefit from the 100% exclusion unless the tax law is revised.     Here is an example to review the application of the law: A taxpayer sells 1,000 shares of ABC stock. The shares were purchased in 2009 for $300,000. The sale of the stock is for $700,000 which results in a capital gain of $500,000. The Federal income tax on the gain would be $119,000 (23.8% which includes 20% federal […]

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Plan for Estate tax NOW!

What will happen if a different president is elected? Due to the Trump Administration, the estate tax exemption was increased as of 1/1/2018 – up to $10,000,000 per taxpayer.  This goes up annually and for 2019, the estate tax exemption is $11,400,000.   So, a married couple would get a combined total of $28,000,000.  Any estates above this amount are taxed at a Federal tax rate of 40%.  This is a LARGE amount, and one should seriously focus on utilizing the estate tax exemption before it changes.  The estate tax exemption amount is scheduled to expire at the end of 2025, after which it would be reduced to $5MM per taxpayer. Consider that even though the estate tax exemption is high, it expires AND it could change.  There seems to be more and more conversation about increasing tax on the wealthy, but we also have the United States national debt to consider.  If political parties change in power, there could be a push to increase taxes on the wealthy and thus lower the estate tax exemption.  Recently, the IRS issued the following Proposed Regulation https://www.federalregister.gov/documents/2018/11/23/2018-25538/estate-and-gift-taxes-difference-in-the-basic-exclusion-amount, which explains that if a taxpayer uses the larger estate tax exemption rules and when they die the estate tax exemption is lower, the estate tax calculation will not claw back or recalculate to the lower estate tax at death.  Thus, we recommend that wealthy individuals review using the larger estate tax exemption while it is still law. As always, income tax and estate tax can be very complex and individual taxpayers need to work with their tax adviser to customize an approach that will work for them.  There are many different strategies to consider, and each strategy should be reviewed in detail with the proper professionals. Vertical Advisors is a boutique CPA, Accounting, and Business Advisory firm that focuses primarily on privately held businesses and their owners.

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You may have to pay tax on Social Security benefits

During your working days, you pay Social Security tax in the form of withholding from your salary or self-employment tax. And when you start receiving Social Security benefits, you may be surprised to learn that some of the payments may be taxed. If you’re getting close to retirement age, you may be wondering if your benefits are going to be taxed. And if so, how much will you have to pay? The answer depends on your other income. If you are taxed, between 50% and 85% of your payments will be hit with federal income tax. (There could also be state tax.) Important: This doesn’t mean you pay 50% to 85% of your benefits back to the government in taxes. It means that you have to include 50% to 85% of them in your income subject to your regular tax rates. Calculate provisional income To determine how much of your benefits are taxed, you must calculate your provisional income. It starts with your adjusted gross income on your tax return. Then, you add certain amounts (for example, tax-exempt interest from municipal bonds). Add to that the income of your spouse, if you file jointly. To this, add half of the Social Security benefits you and your spouse received during the year. The figure you come up with is your provisional income. Now apply the following rules: If you file a joint tax return and your provisional income, plus half your benefits, isn’t above $32,000 ($25,000 for single taxpayers), none of your Social Security benefits are taxed. If your provisional income is between $32,001 and $44,000, and you file jointly with your spouse, you must report up to 50% of your Social Security benefits as income. For single taxpayers, if your provisional income is between $25,001 and $34,000, you must report up to 50% of your Social Security benefits as income. If your provisional income is more than $44,000, and you file jointly, you must report up to 85% of your Social Security benefits as income on Form 1040. For single taxpayers, if your provisional income is more than $34,000, the general rule is that you must report up to 85% of your Social Security benefits as income. Caution: If you aren’t paying tax on your Social Security benefits now because your income is below the floor, or you’re paying tax on only 50% of those benefits, an unplanned increase in your income can have a significant tax cost. You’ll have to pay tax on the additional income, you’ll also have to pay tax on (or on more of) your Social Security benefits, and you may get pushed into a higher tax bracket. For example, this might happen if you receive a large retirement plan distribution during the year or you receive large capital gains. With careful planning, you might be able to avoid this tax result. Avoid a large tax bill If you know your Social Security benefits will be taxed, you may want to voluntarily arrange to have tax […]

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Cryptocurrency US Tax laws and Foreign Reporting Requirements.

Is Cryptocurrency (i.e. Bitcoin) reportable if held in a foreign jurisdiction under the Foreign Bank and Financial accounts (FBAR) regulations? The quick answer is NOT CURRENTLY.  However, be prepared for possible changes. Ever since the creation of cryptocurrency, income tax and reporting laws have been confusing, changing and a lot of people might not want to accept the laws.  Internal Revenue Service (IRS) Notice 2014-21 stated that the following highlights: Virtual currency may be used to pay for good and services or held for investments but does not have legal tender status in any jurisdiction. Virtual currency that has an equivalent value in real currency or that acts as a substitute for real currency is referred to as “convertible” virtual currency. The sale or exchange of convertible virtual currency or the use of convertible virtual currency to pay for goods or services in a real-world economy has tax consequences that may result in a tax liability. The IRS treats virtual currency as property.  Thus, if property is mined, income should be reported at the FMV of the property less the mining expenses.  A mining operation may trigger income subject to self-employment tax. If virtual currency is received as payment for goods or services, the taxpayer must report the payment based on the FMV. Does a taxpayer have gain or loss upon the exchange of virtual currency for other property?  The IRS says yes. Do payments in virtual currency require information reporting using W-2’s and 1099’s?  Yes, if payment is considered wages or 1099 reportable, then those documents are required. Notice 2014-21 didn’t really take a position on the question about reporting virtual currency in a foreign account, so fortunately there is updated information. Just recently, the AICPA contacted the Treasury Financial Crimes Enforcement Network (FinCEN) to ask if virtual currency in a foreign account would need to be reported on form FATCA and 8938, Statement of Specified Foreign Financial Assets.  FinCEN informed the AICPA that currently, virtual currency held in an offshore account is not reportable pursuant to 31 C.F.R Reg. 1010.50(c).  FinCEN did state that the discussion with IRS on this issue continues to be evaluated. Vertical Advisors, LLP is a boutique accounting and tax firm, that has experience with virtual currency and taxation.  Please contact us if you have additional questions.

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