You are not alone if your business is without a retirement plan, however that doesn't mean it is a good idea. You are paying more taxes then you need to be.
Owner's of profitable business operations have the potential to a really large annual deduction---Sweet!
With the proper retirement plan, you can exceed the traditional elective deferral contribution limit of $19,500 (indexed).
Under the right circumstances, we can help you create a great retirement plan. If you would like to discuss this with me, please call me at 262-358-8297.
In December 2017, Congress enacted the Tax Cuts and Jobs Act (TCJA) and changed how your children calculate their tax on their investment-type income. The TCJA changes led to much higher tax bills for many children.
On December 19, 2019, Congress passed a bill that the president signed into law on December 20, 2019 (Pub. L. 116-94). The new law repeals the kiddie tax changes from the TCJA and takes you back to the old kiddie tax rules, even retroactively if you so desire
Kiddie Tax Basics
When your children are subject to the kiddie tax, it forces them to pay taxes at a higher rate than the rate they would usually pay.
Here’s the key: the kiddie tax does not apply to all of a child’s income, only to his or her “unearned” income, which means income from:
For 2019, your child pays the kiddie tax only on unearned income above $2,100.
Congress passed some meaningful tax legislation as it recessed for the holidays. In one of the new meaningful laws, enacted on December 20, you will find the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act).
The SECURE Act made many changes to how you save money for your retirement, how you use your money in retirement, and how you can better use your Section 529 plans. Whether you are age 35 or age 75, these changes affect you.
Here are eight of the changes.
Most of these apply to any event that occurred after December 31, 2018.
This strategies allow you to start thinking about your future while optimizing your tax options. If this sounds like something you will benefit from, contact us at 262-358-8297.
It is important to understand that tax planning will save you money, you don't have to commit a crime by trying your luck with Tax Evasion!
January 14, 2016 a South Dakota woman age 33 was convicted of Making and Subscribing a False Tax Return. She was sentenced to 5 years of probation, and ordered to pay a $100 special assessment to the Federal Crime Victims Fund and $14,792 in restitution to the Internal Revenue Service. She charged on September 17, 2015, and pleaded guilty on October 2, 2015.
The conviction stems from her falsely subscribing to her 2013 tax return by underreporting her income tax liability.
This is known as tax evasion and it is a crime. It is illegal to attempt to lower your tax liability by being deceitful and concealing your income or over reporting expenses.
It is imperative that you inform your tax provider of all income received, even if you have not formed a legally entity and have earned income outside of your W-2 employment. i.e if you decided to embezzle money from your company that money is taxable. You will need to include that as income on your tax return.
To legally reduce or eliminate your tax liability requires effective tax planning and evaluation. I will assist you with lowering your tax bill by structuring your transactions so that you reap the largest tax benefits.
Giving to your church, school, or other 501(c)(3) charity is a noble act no matter how you choose to give.
But for the purposes of tax savings, some forms of giving are much more beneficial to you than are others. As a business owner, you can use some business strategies to get the money to these institutions as business expenses.
While this does not change anything from the institution’s perspective, it hugely increases your tax savings. The Tax Cuts and Jobs Act (TCJA) makes it harder to benefit from your personal donations.
Let’s say you donate $10,000 to a church, school, or other 501(c)(3) charity:
1. Will you get a tax deduction—in other words, will you itemize?
2. Will you benefit from the entire $10,000 as an itemized deduction? In other words, did the $10,000 simply put you over the hump that beat the standard deduction?
3. Say you can deduct all $10,000 as an itemized deduction. Would making it a business deduction increase the tax benefit value to you?
The simple maneuver of converting your personal residence to a rental property brings with it many tax rules, mostly good when you know how they work.
The first question that arises when you convert a personal residence into a rental is how to determine the property’s tax basis for depreciation purposes during the rental period and for gain/loss purposes when you eventually sell.
Weirdly enough, two different basis rules apply:
Once you’ve converted a former personal residence into a rental, you must follow the tax rules for landlords. Here is a quick summary of the most important things to know:
If your rental property throws off a tax loss, things can get complicated.
The so-called passive activity loss (PAL) rules will usually apply. In general, the PAL rules allow you to deduct passive losses only to the extent you have passive income from other sources, such as positive income from other rental properties or gains from selling them.
Eventually your rental property should start throwing off positive taxable income instead of losses because escalating rents will surpass your deductible expenses. Of course, you must pay income taxes on those profits. But if you piled up suspended passive losses in earlier years, you now get to use them to offset your passive profits.
Another nice thing: positive taxable income from rental real estate is not hit with the dreaded self-employment (SE) tax, which applies to most other unincorporated profit-making ventures. The SE tax rate can be up to 15.3 percent, so it’s a wonderful thing when you don’t have to pay it.
One other good thing is that your net rental profits may qualify for the Section 199A deduction.
When you sell a rental property that you’ve owned for more than one year, the profit (the difference between the net sales proceeds and the tax basis of the property after subtracting depreciation deductions during the rental period) is generally treated as a long-term capital gain.
Always keep in mind the good news here. You don’t pay the taxes on the property appreciation until you sell.
Remember those suspended passive losses we mentioned above? The suspended losses are ordinary losses. When you sell a rental, you can find two great benefits:
And always keep this in mind: rental real estate owners can avoid taxes indefinitely using Section 1031 exchanges (named after the applicable section of our beloved Internal Revenue Code).
The tax code totally mislabeled the 1031 exchange. It’s absolutely not an exchange or a swap. It works like this:
Watch your wallet: the median cost in 2018 for an assisted living facility was $48,000 and over $100,000 for nursing home care.
If you could deduct these expenses, you’d substantially reduce your income tax liability—possibly down to $0—and dramatically reduce your financial burden from these costs. As you might expect, the rules are complicated as to when you can deduct these expenses. But I’m going to give you some tips to help you understand the rules.
Medical Expenses in General
You can deduct expenses paid for the medical care of yourself, your spouse, and your dependents, but only to the extent the total expenses exceed 10 percent of your adjusted gross income.
Medical care includes qualified long-term care services. Assisted living and nursing home expenses can be qualified long-term care expenses, depending on the health status of the person living in the facility.
If you operate a business, with the right circumstances, through your business we can help you turn the medical expenses into deductions.
Qualified Long-Term Care Services
The term “qualified long-term care services” means necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services, which:
The IRS recently issued new cryptocurrency guidance and is hot on your trail if you bought and sold cryptocurrency and didn’t report it on your tax return.
Here are the tax basics. You’ll treat cryptocurrency as property for tax purposes.
Cryptocurrency is a capital asset (provided you aren’t a trader). Therefore,
In the cryptocurrency world, a fork occurs when the digital register that logs transactions of a particular cryptocurrency diverges into a new digital register. There are two types of forks:
The IRS ruled that:
rIf you are self-employed, you have much to think about as you enter your senior years, and that includes retirement savings and Medicare. Here a few tips that will help and questions you should think about.
There are many more factors to consider. Spencer Accounting Group, consults with you to understand your goals and puts a plan in place.
The Hope credit which is now the American Opportunity credit and the Lifetime Learning credit are tax credits for taxpayers who pay certain higher education costs. These credits depend on the amount of qualified tuition and related expenses you paid in a given year, as well as the level of your modified adjusted gross income (MAGI). The credits are available for qualified education expenses that you, your spouse, or your dependent incur at an eligible educational institution. The IRS has provided specific guidance regarding the definitions of eligible educational institution and qualified expenses.
The American Opportunity credit is worth up to $2,500 per student for qualified tuition and related expenses incurred during the first four years of post-secondary education. The credit does not apply to graduate or professional-level courses. To qualify, you must be enrolled in a degree or certificate program at least half-time, and you must not have a felony drug conviction. The credit is available for each eligible student in the household. The credit is calculated as 100 percent of the first $2,000 of qualified tuition and related expenses, plus 25 percent of the next $2,000 of such expenses. A portion of the credit may be refundable, which means you may be able to have a portion of the credit refunded to you if total tax credits exceed total tax liability.
The Lifetime Learning credit is worth up to $2,000 per year for qualified tuition and related expenses incurred for course work at eligible educational institutions. You need only be enrolled in one or more courses to qualify. The credit is also available for graduate and professional-level courses. Furthermore, courses related to sports, games, or hobbies may qualify if they are part of a course of instruction to acquire or improve job skills. The Lifetime Learning credit is equal to 20 percent of the first $10,000 of your qualified tuition and related expenses, up to a maximum credit of $2,000 per tax return.
The maximum American Opportunity tax credit is available to single filers with a MAGI below $80,000 and to joint filers with a MAGI below $160,000. A partial credit is available to single filers with a MAGI between $80,000 and $90,000 and to joint filers with a MAGI between $160,000 and $180,000. For 2019, the maximum Lifetime Learning tax credit is available to single filers with a MAGI below $58,000 and to joint filers with a MAGI below $116,000. A partial credit is available to single filers with a MAGI between $58,000 and $68,000 and to joint filers with a MAGI between $116,000 and $136,000. These credits are not available to you if your filing status is married filing separately.
For additional information, see IRS Publication 970 or consult a tax professional.
At Spencer Accounting Group, we focus on tax planning for small business owners more than anything else. You could say we are obsessed with finding ways for our clients to pay less tax.
We are fixated on relieving business owner's frustration over missed opportunities regarding leaving tax deductions on the table. If you are missing opportunities, you need to stop what you are doing and make plans. Schedule a meeting.
You may be. There are two education tax credits — the American Opportunity credit, worth up to $2,500, and the Lifetime Learning credit, worth up to $2,000. To claim either credit in a given year, you must list your child as a dependent on your tax return. In addition, you must meet income limits.
For 2020, the maximum American Opportunity credit is available to single filers with a modified adjusted gross income (MAGI) below $80,000 and joint filers with a MAGI below $160,000. A partial credit is available to single filers with a MAGI between $80,000 and $90,000 and joint filers with a MAGI between $160,000 and $180,000. For 2020, the maximum Lifetime Learning credit is available to single filers with a MAGI below $59,000 and joint filers with a MAGI below $118,000. A partial credit is available to single filers with a MAGI between $59,000 and $69,000 and joint filers with a MAGI between $118,000 and $138,000.
Now, what credit might you be eligible for? The American Opportunity credit applies to the first four years of undergraduate education and is worth a maximum of $2,500. It is calculated as 100% of the first $2,000 of your child's annual tuition and related expenses, plus 25% of the next $2,000 of such expenses. To qualify for the credit, your child must be attending college on at least a half-time basis.
The Lifetime Learning credit is worth a maximum of $2,000 per year. It is calculated as 20% of the first $10,000 of your child's annual tuition and related expenses.
You will need to determine which credit offers you the most benefit in a given year. Proactive Tax Planning will minimize your tax liability thru educational planning.
FAQ 2: Can I use 529 plan funds to pay my child's college expenses in the same year I claim an education tax credit?
Yes. You can use 529 plan funds to pay for your child's college expenses in the same year you claim an education tax credit such as the American Opportunity credit or Lifetime Learning credit. But there's a caveat. You can't use the same college expenses to qualify for the federal tax-free 529 withdrawal and the tax credit; the expenses you use to qualify for each must be different. Otherwise your 529 withdrawal will not be free from federal income tax.
For purposes of your 529 plan, your qualified education expenses are first reduced by expenses used to compute your American Opportunity credit or Lifetime Learning credit. The remaining expenses may be paid with the funds you withdraw from the 529 plan (and you won't pay any federal income taxes on those funds). You will pay federal income tax (and, in most cases, a penalty and maybe some state income taxes) on any part of your 529 plan withdrawal that remains after paying these expenses.
Another option is to waive the American Opportunity credit or Lifetime Learning credit. This waiver may make sense if the value of the education credit is less than the value of federal income tax-free (and penalty-free) withdrawals from your 529 account.
For more information, see IRS Publication 970, Tax Benefits of Education.
Note: Before investing in a 529 plan, please consider that there are investment objectives, risks, charges, and expenses. Contact us for more information on financial planning.
Your actual student loan payments aren't deductible, but the interest portion might be, thanks to the student loan interest deduction. In 2020, the maximum deduction is $2,500. You don't need to itemize to claim this deduction.
To qualify, you must meet a few requirements:
First, the student loan on which you're paying interest must be one that you incurred to pay college expenses when you were at least a half-time student. This requirement excludes part-time adult learners or other nontraditional students.
Second, you must meet income limits. In 2020, to take the full student loan interest deduction, single filers must have a modified adjusted gross income (MAGI) below $70,000 and joint filers below $140,000. A partial deduction is available for single filers with an MAGI between $70,000 and $85,000 and joint filers with a MAGI between $140,000 and $170,000.
Third, if you are claimed as a dependent on someone else's return, you can't take the deduction. If you are a dependent and your parent borrows money to pay for your college tuition, he or she may claim the student loan interest deduction.
You should receive Form 1098-E from your lender showing the total amount of interest you paid for the year. If not, contact your lender to request this information.
For more information on the student loan interest deduction, see IRS Publication 970, then contact us.
Roth IRA versus traditional IRA: which is better for you?
Roth IRAs tend to get a lot of hype, and for good reason: Because you pay the taxes upfront, your eventual withdrawals (assuming you meet the age and holding-period requirements—more on these below) are completely tax-free.
While we like “tax-free” as much as the next person, there are more times than you would imagine when a traditional IRA will put more money in your pocket than a Roth would.
Making the Decision on What’s Best
Example. Say that your tax rate is 32 percent and that you will invest $5,500 a year in an IRA and earn 6 percent interest. Should you put the $5,500 a year into a Roth or a traditional IRA?
Say further that neither you nor your spouse is covered by a workplace retirement plan, so you can contribute the $5,500 a year without worry because it’s under the contribution limits.
If you invest the $5,500 in a traditional IRA, you create a side fund of $1,760 ($5,500 x 32 percent).
On the side fund, you pay taxes each year at 32 percent, making your side fund grow.
Roth contributions are not deductible; this means no side fund, so your annual investment remains at $5,500.
For the Roth, your marginal tax rate at the time of your payout doesn’t matter because you paid your taxes before the money went into the account. The whole amount is now yours, with no additional taxes due.
But for the traditional IRA, your current tax bracket matters a great deal. You have taken care of the taxes on the side fund annually along the way, but the traditional IRA (both growth and contributions) is taxed at your current marginal tax rate at the time you cash out.
The table below shows you how this looks with tax rates
On April 11, likely after you filed your tax return, the IRS updated its Section 199A frequently asked questions (FAQs) by increasing the number of questions and answers from 12 to 33. The IRS often publishes FAQs on its website to help educate you on various tax law provisions. Section 199A is no different: the IRS has been updating its FAQ website with additional questions and answers on the new qualified business income (QBI) tax deduction.
We noted three of the FAQs that help fill in some holes in the final Section 199A regulations but will cause problems for many taxpayers. In fact, there will be taxpayers who will need to file amended tax returns because of the FAQs.
FAQ 29: QBI Subtractions for Partnerships
In this FAQ on partnerships, the IRS hints at the following:
FAQ 32: QBI in Final vs. Proposed Regulations
In FAQ 32, the IRS clearly states that the definition of QBI is the same in both the proposed and the final regulations. Since the definition was clarified in the final regulations, this was a surprise to many.
And what this means is that you reduce QBI by the self-employed health insurance deduction, the one-half of self-employment tax deduction, and the qualified retirement plan deductions.
FAQ 33 Has to Be Wrong
FAQ 33 states that an S corporation shareholder who owns more than 2 percent may have to reduce QBI at both the entity (S corporation) and the shareholder (1040 tax return) levels.
We don’t agree with the double subtraction indicated in IRS FAQ 33, for three reasons:
Website Is Not an Authority
If you don’t like the positions taken on the IRS’s FAQ website, then there’s one silver lining: FAQs don’t constitute an authority for tax return positions.
If you need further assistance with the IRS FAQs, don't hesitate to contact us. Book your Business Consultation Today.
What rules apply for purposes of the new 20 percent deduction under Section 199A when you rent an office or other building to your personally owned C corporation?
Neither the IRS nor lawmakers specifically address self-rental to a C corporation.
But the Section 199A regulations are clear: rental activities that rise to the level of a Section 162 trade or business qualify for the Section 199A deduction.
The new Section 199A tax deduction can be confusing. If you would like to discuss your rentals with me, click the link below to schedule an appointment for a Business Consultation
When you rent a bedroom or two or 20, you first examine Section 280A of the tax code to determine whether your bedroom rental is:
When exempt from Section 280A, your bedroom rental faces four tax code sections:
As you can see, bedroom rentals travel a torturous path. Contact us, we will set a time to review your bedroom rentals to achieve the best results.
It’s common to consider making your S corporation a partner in your partnership: since it can save you self-employment taxes.
Does this affect your Section 199A deduction? It does.
Certain payments are not qualified business income (QBI) for the Section 199A deduction. The non-QBI payment rule applies whether the partner receives the payment as an individual or as pass-through income from an S corporation.
Keep the S corporation self-employment tax savings in mind when considering your partnership activity. It is possible that the self-employment tax savings can make the S-corporation-as-a-partner strategy well worth it. We have to look at your total tax and financial situation and align them with your goals to find out if this strategy will work for you.
You have an option if you want your Section 199A deduction (psssst it's an extra 20% deduction). We will be happy to explore that option with you. Take a look at our blog on Tax Strategies or book with us now.
Is your last payment of payroll taxes in the hands of the IRS or in the hands of an embezzler?
How would you know?
There’s one easy way to know: simply use the IRS’s online service to check. But that’s a bit of trouble, so why bother?
Because if the money has been stolen, you (1) are out the original money and (2) now have to pay a duplicate amount to the IRS. If you have to pay twice, you are going to be furious. Don’t let this happen.
Here’s a totally underutilized trick to checking on your payroll monies: simply log in to your IRS tax account to see whether the IRS got the payroll tax money.
That’s right, the IRS makes your tax payments available to you online with its Electronic Federal Tax Payment System (EFTPS). You can log in to the EFTPS system and see whether the IRS has your payroll money.
I am happy to review with you this system and others that can protect you. If you would like my help.
Lincoln imposes the first federal income tax on this day in 1861 by signing the Revenue Act. Almost Penniless during the Civil War, Lincoln and Congress agreed to impose a 3% annual income tax of more than $ 800.
Revenue was defined as any income in the form of a gain, from any professional trade, employment or vocation carried in the United States or elsewhere, derived from any kind of property or from any source whatever, According to the U.S. Treasury Department. Lincoln defined Revenue as this due to his concern with maintaining Federal Authority over collecting the Revenue. Our ForeFather!
Wow 3% of $801 is about $24, so they were at least guaranteed to get about $24 per household.
Many IRA and retirement plan limits are indexed for inflation each year. On November 6, 2019, the IRS (Notice 2019-59) announced the inflation-adjusted numbers for 2020.
The maximum IRA contribution for 2020 is $6,000, unchanged from 2019 (the catch-up limit for those 50 and older also remains unchanged at $1,000). However, certain phaseout ranges for determining the deductibility of traditional IRA contributions, and for determining whether an individual can contribute to a Roth IRA, have increased for 2020.
For employer-sponsored retirement plans, the elective deferral limit for 401(k), 403(b), and 457(b) plans increases to $19,500 for 2020, and the catch-up limit increases to $6,500. The maximum amount that can be contributed to a defined contribution plan for 2020 increases to $57,000, and the maximum amount of compensation that can be taken into account in determining benefits for most plans for 2020 increases to $285,000.
We'll continue to pass along timely, relevant information -- providing fresh and interesting ways for you to engage and motivate your clients.
Broadridge Financial Solutions, Inc. • 33 Boston Post Road W • Marlborough, MA 01752 • t: (800) 233-2834 • f: (508) 630-1164
You’ll find much beauty and little beast in using a single-member LLC for your real estate ownership.
Should you use a single-member LLC as a real estate ownership vehicle?
That might be a very good idea.
Under the so-called check-the-box regulations put out years ago by the IRS, you can generally ignore the existence of a single-member LLC for federal tax purposes.
The exceptions are
When you choose not to treat a single-member LLC as a corporation for federal income tax purposes, the single-member LLC has disregarded entity status for those purposes, and we will call it a “disregarded single-member LLC.”
The federal income tax treatment of a disregarded single-member LLC is super-simple because its activities are considered to be conducted directly by the single-member LLC’s sole member (owner).
For instance: When an individual (like you) uses a disregarded single-member LLC to own rental real estate, you simply report the federal income tax results on Schedule E of Form 1040. You need not file a separate federal income tax return for the single-member LLC.
You get the idea. This is easy!
Although you ignore a disregarded single-member LLC for federal income tax purposes, it is not ignored for general state-law purposes.
Therefore, a disregarded single-member LLC will deliver to its sole member (owner) the liability protection benefits specified by the applicable state LLC statute. The liability protection benefits are usually similar to those offered by a corporation.
The bottom line. With a disregarded single-member LLC, you get super-simple tax treatment combined with corporation-like liability protection. This happy set of circumstances opens up planning opportunities in the real estate arena.
If you would like to learn more about how the single-member LLC for your real estate investments can work to your advantage, book a Business Consultation today!
Marriage, Kids, and Family!
If you are thinking of getting married or divorced, you need to consider December 31, 2019, in your tax planning.
Here’s another planning question: Do you give money to family or friends (other than your children who are subject to the kiddie tax)? If so, you need to consider the zero-taxes planning strategy.
And now, consider your children who are under age 18. Have you paid them for work they’ve done for your business? Have you paid them the right way?
Here are five strategies to consider that you can put in play before the end of 2019.
1. Payroll Tax Strategy
2. Even Strategies around Divorces
3. Strategies around Mortgage Interest and relationship status
4. Even Strategies around getting Married
5. Make Use of the 0 Percent Tax Bracket
We know that taxes can cause confusion. Remember, that’s why you have us, and I’m always here to be of service. If you want to discuss any of the strategies above, please book your consultation today. You can also contact us at 833-438-2937.
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Spencer Accounting Group, LLC does not provide investment, tax, legal, or retirement advice or recommendations in these blogs. The information presented here is not specific to any individual's personal circumstances.
Keana Spencer is an Accountant, Entrepreneur, and Educator to her clients, with a strong passion. Keana has over 10 years of experience and through her practice, she is a source of knowledge and strategies to her clients.