Category: Newsletters

Marilyn owns a business with 20 employees. For the past five years, she has awarded cash gifts to her employees of the month, but she is concerned that the new tax law will adversely affect her and her rewarded employees. What should she do?

Rewarding employees in this way has obviously worked for Marilyn and her business and she may decide to continue this practice, but her business can’t deduct the cost anymore. In the past, cash, gift cards and other non-tangible personal property used as employee achievement awards were deductible to the business and excluded from employees’ taxable income.

Certain tangible gifts are still allowed but, according to the IRS, they don’t include cash, cash equivalents, gift cards, gift coupons, certain gift certificates, tickets to theater or sporting events, vacations, meals, lodging, stocks, bonds, securities and similar items.

Other tangible gifts are both tax-deductible to the business and excluded from employees’ taxable income if awarded for length of service or safety achievements. They might include a plaque, watch or similar item up to the exclusion of $400 (and $1,600 for qualified plan awards).

Client Profile is based on a hypothetical situation. The solutions discussed here may or may not be appropriate for you.

If you sell your home and don’t buy another one, and you make a large profit on the sale, you could owe federal capital gains taxes on your profit.

BY THE NUMBERS

Typically, you can exclude up to $500,000 of the gain from your income if you file a joint tax return; up to $250,000 if you’re single. You must pass the ownership and use test, which states you must have owned and lived in the home for two of the five years preceding the sale.

In some high-priced real estate areas, you can easily exceed these exclusions if you’ve owned a home for a while. If you kept good records, you should be able to deduct selling and purchasing costs, including commissions and fees, from taxable gains, even if the latter occurred years ago.

You can also use capital improvements made to your home, including a deck, a room addition or a garage, to subtract from your gross gain. This, according to the IRS, will result in an adjusted basis, which is typically your cost in acquiring your home plus the cost of capital improvements, less casualty loss amounts and other decreases.

THAT’S NOT ALL

Even if you’re like most people and won’t have to pay federal capital gains tax, there’s a good chance you’ll pay a variety of transfer taxes, which most states levy. These taxes range from negligible to invasive. Some areas have multiple taxes, with states, counties and even towns and cities taking their share. Generally, most will tax a small percentage of the sale price.

While these taxes may surprise you, take solace knowing that they will also increase the adjusted cost basis on the home you just sold. Talk to your tax professional for more information.

Home Sweet Home

You could be eligible to deduct some costs of your home for business — if you follow strict rules. If you use part of your home or a detached structure like a garage “regularly and exclusively” for business purposes and it is your principal place of business, you can use one of two methods to take deductions.

Deduction Methods

Use the simplified option where you multiply $5 times up to 300 square feet of area in which you exclusively conduct business (up to $1,500). Or use the regular method, which is based on the percentage of your home devoted to business use. If your rent, or pay mortgage interest utilities and other related costs were, for instance, $20,000 and your home office was 20% of your home, you could deduct $4,000 from taxable income.

Other rules and restrictions apply, so talk to your tax professional to learn more.

Starting your first business as a self-employed individual may be exciting, but it can also be taxing. To make the best of it, you’ll need to understand and attend to your tax obligations.

SELF-EMPLOYMENT TAXES

While your previous employers paid half of the Social Security and Medicare taxes credited to you, you are now responsible for paying both halves. That’s 12.4% for Social Security (up to $128,400 in taxable income for 2018 and $132,900 for 2019) and 2.9% for Medicare taxes. There are different formulas for figuring the tax depending on your legal structure, so consult your tax professional.

QUARTERLY TAX PAYMENTS

If you are self-employed, you’ll have to pay quarterly taxes on your income. These payments include both your estimated income tax and projected Social Security and Medicare taxes. In 2019, quarterly payments are due on the 15th of April, June and September, or the first business day after, with the final quarterly payment for 2019 taxes due on January 15, 2020.

Needless to say, you have to stay on top of necessary paperwork, from copies of all tax returns to exact records of your income and expenses.

BUSINESS BENEFITS

There are benefits, too, of business ownership. The cost of doing business, whether from your home office or a rented space, is deductible. Depending on your business structure, you might also deduct premiums paid for you and your family for health and dental insurance.

One tax-advantaged benefit that may work for you now and later is a Simplified Employee Pension (SEP), which allows you to put away large amounts of money for your retirement. You can contribute to a SEP and deduct contributions from 2018 gross income up to your 2018 tax filing deadline, plus extensions. Talk to your tax professional to learn about this and other tax issues you might face.

A Taxing Situation – to make the best of your first business, understand and attend to your tax obligations.

Insights And Tips

Selling Your Home – you could owe federal capital gains taxes on the profit from selling your home.

Client Profile

Turbo-Charge Retirement Savings – if you aren’t saving enough, increase your retirement contributions by 1%.

Choosing The Right Retirement Plan – business owners need to explore the variety of employer-provided retirement plans.

Questions And Answers

Short Bits

Business Taxes

Business owners should keep an eye out for some tax features that may not last long.

Bon Voyage

Tax year 2019 is the last year to get a paid leave credit of between 12.5% and 25% of taxes for offering paid family or medical leave. There are a number of qualifiers and employers in states where mandated paid leave isn’t eligible, so talk to your advisor to learn more.

Bonjour

The Cadillac tax was delayed, for the second time, from 2020 to 2022 — unless Congress delays it further or repeals it altogether. You’ll pay what amounts to a penalty if you offer employees health insurance plans with premiums that exceed certain limits. Talk to your tax professional if you want to plan ahead.

In 2019, look for an increase in Section 179 expensing on qualified property to $1,020,000, phasing out at $2,550,000. ESOP limits also increase in 2019.

RETIREMENT ASSETS GROW.

The Investment Company Institute (ICI) estimated total U.S. retirement assets at $28.3 trillion as of the end of June 2018, accounting for almost one-third of household financial assets. Of that amount, about $9.26 trillion was in IRAs, making them the largest contributor. IRA assets grew $4.2 trillion since 2010. Where else are people investing for their retirement? Defined contribution plans like 401(k)s held more than $7.8 trillion in assets.

CONSISTENCY MATTERS.

When employees consistently contributed to their retirement plans — meaning actively in the same 401(k) plans from the beginning of 2011 to the end of 2016 — their balances more than doubled. The Employee Benefit Research Institute (EBRI) and Investment Company Institute (ICI) found that the average 401(k) plan account balance of these participants grew at 14.2% compounded annually to $167,330, more than double the average account balance of $75,358 among all participants during the same time.

IMPORTS COST MORE.

Trade uncertainty is causing a slight uptick in imports. Prices for U.S. imports rose 3.5% from October 2017 to October 2018, according to the Bureau of Labor Statistics. Prices rose 2.4% the year before. Fuel imports recorded the biggest increase at 30.2% while industrial supplies and materials import prices rose 14.2%.

BUSINESS CONFIDENCE HIGH.

The NFIB Research Foundation’s October 2018 Small Business Optimism Index maintained its recent strong performance, recording a 107.4, just off its record high. The report found that the percentage of small business members with one or more unfilled job openings is at a 45-year high.

Question:

I want to sell my annuity and buy another one with the proceeds on my own, but a friend told me this would be a bad tax move. Is that true?

Answer:

When you want to exchange your annuity or life insurance policy with cash value, you can make what’s known as a 1035 exchange: a direct swap to a new annuity without triggering a taxable event. Take possession of the funds and you’ll be taxed. Another caveat: Check with the provider of your current annuity for any surrender charges should you make the swap.

Question:

I recently started a new business, which I didn’t incorporate. Even if I don’t expect to make much money during the first six to 12 months, do I still have to file estimated quarterly tax returns?

Answer:

Your tax professional can talk to you about your specific situation, but generally anyone who earns more than $400 in self-employed income will have to file a return and potentially pay taxes. For example, you will have to pay income and self-employment taxes, the latter including Social Security and Medicare taxes. IRS form 1040-ES gives you an overview of the subject, a worksheet to figure your liability and blank vouchers to file quarterly. Use Schedule SE (Form 1040) to file self-employment taxes annually.

Individuals may have singular needs, but past history and a few surveys show many retirees have a few common ones, too. Here’s a look at two of them.

HEALTHCARE

Challenge: Most estimates put the cost of healthcare in retirement in the six-figure range. This isn’t as surprising as you might first think, considering soaring healthcare costs — even with insurance — and the likelihood of illness and injury as we age.

Solution: Prepare for this expense by having the right insurance, including Medicare Parts A, B and D once you reach age 65, unless you are covered by an employer-sponsored health plan. Part A covers hospital insurance, Part B covers outpatient health expenses and Part D is prescription drug coverage. You can combine all of these through Medicare Advantage plans or buy supplemental Medicare from an insurer to cover deductibles and other potential expenses.

TAXES

Challenge: Taxes can deplete your disposable income unless you know what to expect.

Solution: There are varied ways to limit the impact of taxes. Consider tax-free withdrawals from a Roth IRA. Invest to keep up with inflation and changes in your tax picture. Also make sure you don’t run afoul of minimum distribution rules, which apply to most retirement vehicles but not to the Roth. Move or downsize if property taxes are too high.

If a catastrophic event damages or disrupts your business, lost or destroyed tax records can add to your stress. The IRS suggests some steps you can take to deal with them if a disaster strikes.

1. Recreate your lost inventory by asking for invoices from suppliers going back at least one year.
2. Request copies of last year’s federal, state and local income tax returns. Also ask for copies of sales tax reports, payroll tax returns and any business licenses.
3. Check for pictures and videos from cell phones, camcorders and cameras of the building, equipment and inventory.
4. As a last resort, sketch where inside equipment, inventory and outside assets like signage were located.

You may want to work with an appraiser to get a fair market value of your business before and after the disaster. For more information and help reconstructing your tax records, talk to your tax professional.