A new deduction is available to businesses with qualified business income (QBI). While that’s great news, new deductions (especially ones with lots of rules) can bring anxiety and confusion. Never fear! Ensuring you receive a maximum deduction will come down to providing the proper information. Here is some knowledge to help you cut through the confusion:
What is the QBI deduction?
In short, it’s a 20 percent deduction against ordinary income, taken on your personal tax return, that reduces qualified business income earned for most pass-through businesses (sole proprietorships, partnerships and S-corporations). It’s not an itemized deduction, so you can take it in addition to the standard deduction. To qualify without limitations, your total taxable income needs to be below $157,500 ($315,000 for married couples) for 2018. If your income exceeds the threshold, it gets complicated.
What you need to know:
- If your total taxable income is above the income threshold, your deduction may be limited or nullified. If your income is below the threshold, the calculation is pretty straightforward. If not, additional phaseouts, limitations and calculations come into play. The first limitation to consider is whether or not your business is qualified. Certain specified service trades or businesses (SSTBs) are excluded from the deduction altogether if taxable income is over the threshold. If your business is not an SSTB, other calculations related to W-2 wages and basis in qualified business property may be required.
- Schedule K-1s for S-corporations and partnerships have new codes. Businesses with partners and shareholders are now required to report information related to the QBI deduction on each Schedule K-1 they issue. Based on the draft versions of the forms, the new codes will be in Box 17 for S-corporations (V through Z) and Box 20 for partnerships (Z through AD). If you receive a Schedule K-1, check to see if the new codes have values associated with them. If not, contact the issuing business to correct the mistake. Schedule K-1s without the required data will delay your tax-return filing.
- Certain data needs to be collected. For the most part, the data required to calculate your deduction will be included on the normal forms needed to file your taxes. Here is list of common documentation to watch for that may be required to calculate your QBI deduction:
- Business financial statements
- Forms W-2 and W-3 issued by your business
- Purchase information related to business assets
- Schedule K-1s
- Forms 1099-B with cost/basis information
- The sooner you close your books, the better. The new deduction means more work. Knowing your final business net income as soon as possible gives you extra time to work through the additional necessary calculations. If your business is required to issue Schedule K-1s, even more time may be required.
- More guidance is expected from the IRS. In August, the IRS published guidance to clear up some of the confusion regarding the deduction, but it didn’t cover everything. The American Institute of CPAs (AICPA) responded with 11 specific items that still need to be addressed.
With proper planning and preparation, you can rest easy knowing that obtaining your shiny, new QBI deduction is in good hands.
According to Credit Karma, over $40 BILLION of unclaimed property is currently being held by state governments. That’s a staggering amount of money — enough to buy half of the National Football League franchises. Not included in that figure is property sitting with federal agencies and other organizations. So what exactly is unclaimed property and how do you find out if you have any? Here is what you need to know:
What is considered unclaimed property?
There are two main types of unclaimed property:
(1) IOUs. Money that is owed to you that you haven’t claimed.
(2) Forgotten funds. Money sitting untouched in an account for an extended amount of time.
Specific types of unclaimed property include back wages, life insurance, pensions, tax refunds, bank accounts, money orders, gift certificates and security deposits. For example, many states require banks to turn over funds from checking accounts that have been dormant for over three years.
Tips for managing unclaimed property
- Search state and federal databases.Unfortunately, there is no master database to search for unclaimed property. There is a website called Missing Money endorsed by the National Association of Unclaimed Property Administrators (NAUPA) that can search most states at once, but each state maintains their own database. Be sure to check all states where you have been a resident. More information is provided online by the US government to help track down additional types of unclaimed property.
- Don’t pay a company to search for you.Companies are willing to search for unclaimed property for you, but will charge a fee. All unclaimed property data is public information, so anything a search company can find, you can find as well. In most cases, it’s best to conduct the search yourself.
- Watch out for scams. Be wary of any notices alerting you to unclaimed property that can be yours for a fee. Often times these scams will ask you to send them money with the promise of more money in return. The Federal Trade Commission (FTC) has some tips to help you spot an imposter.
- Take steps to avoid having your property become unclaimed. The best way to keep your property is to prevent it from becoming unclaimed in the first place. Some ways to do this is to actively manage bank accounts, notify companies when you move, close old accounts, and read all of your mail so you don’t miss a claim notice.
- File your tax returns. Consider filing a tax return even if your income is below the requirements to file. Unclaimed refunds with the IRS usually happen when a tax return isn’t filed with one of two situations: your employer withheld income tax from your wages or you qualify for a refundable portion of the Earned Income Tax Credit. The only way to know for sure is by filing a tax return for the year in question. If you have past tax returns to file, don’t wait — overdue tax returns need to be filed within three years.
Any unclaimed property due to you is rightfully yours and should already be in your pocket. Perform regular searches to ensure that your funds aren’t sitting in a government account.
For the first time since 2013, the IRS is raising the contributions limits for IRAs. The maximum contribution for 401(k) accounts and IRAs is increasing by $500 for 2019. If you have not already done so, now is the time to plan for contributions into your retirement accounts in 2019. Check out the tables below for the new contribution limits and Social Security increases:
Don’t forget to account for any matching programs offered by your employer as you determine your various funding levels for next year.
As 2018 winds down, there is still time to reduce your potential tax obligation. Here are some ideas to make your 2018 tax return less of a burden on your wallet:
- Accelerate expenses. Individual taxpayers are on the cash basis for income tax purposes. This means your income is taxable when you receive it and expenses count when you pay them. Depending on your situation, shifting deductions between years can make a big difference on your tax bill. With this knowledge, making additional deductible payments prior to the end of the year may be a good idea. Examples include property tax payments, mortgage interest payments and charitable donations.
- Make effective use of capital losses. Up to $3,000 in capital losses can be claimed each year to reduce your ordinary income. This loss limitation is calculated after netting all your capital losses against any capital gains. When you have more losses than gains, up to $3,000 can be used to reduce your other income. With careful planning you can take advantage of this loss amount each year.
- Fund tax-deferred retirement accounts. An easy way to reduce your taxable income is to fully fund retirement accounts that have tax-deferred status. The most common accounts are 401(k)s, 403(b)s and various IRAs (traditional, SEP and SIMPLE).
- Take advantage of the annual gift exclusion. For 2018, you may provide gifts up to $15,000 to as many individuals as you wish without tax consequences. This could include gifts of cash or property, including investments. Taking advantage of the annual exclusion is a great way to lower your taxable estate.
- Give to charities. Consider making end-of-year donations to eligible charities. Donations of property in good or better condition and your charitable mileage are also deductible. Receiving proper documentation that acknowledges your contributions is important to ensure you obtain the full deduction. Have a plan by knowing your total deductions for the year to help you decide how much to donate. Pulling some donations planned for 2019 into 2018 may be a good strategy.
- Donate appreciated stock. By donating appreciated stock owned one year or longer to a favorite charity, you receive two benefits. First, you will not have to claim the capital gain on the appreciation of your investment. Second, you can claim the higher market value of the stock as your contribution amount. The procedure you need to follow to qualify your donation of appreciated stock is fairly strict. Ask for help from your broker and the charitable organization to ensure it is done correctly.
This is a short list of some of the ideas you can use to lower your tax obligation in 2018. If interested, please call for help with reviewing your situation.
Here is a quiz to test your turkey knowledge and provide some facts you can use to stump your friends and family:
- Where do wild turkeys sleep?
- In trees
- On the ground in brush or tall grass
- In burrows
- On large rocks
- 1. In trees. Turkeys spend their nights sleeping in trees mostly for protection from predators. The only exception is when female hens risk danger to stay with their eggs on the ground during the roughly 28 day incubation period.
- How far away can a turkey see movement?
- 20 feet
- 50 feet
- 50 yards
- 100 yards
- 4. 100 yards. Turkeys have excellent vision — maybe three or four times better than humans. Because their eyes are on the sides of their head, they have periscope vision and can see 360 degrees with the simple twist of their neck.
- Which U.S. president was the first to offer an official pardon to a Thanksgiving turkey?
- Abraham Lincoln
- Harry Truman
- John F. Kennedy
- George H.W. Bush
- 4. George H.W. Bush. While there were informal pardons and stories about turkeys spared by U.S. Presidents dating back to Abraham Lincoln, the White House records show the first official pardon was granted by George H.W. Bush in 1989.
- What is the specific name for a baby turkey?
- 2. Poult. Once a poult frees itself from the egg, it can start following its mother hen away from the nest within 12-24 hours.
- Approximately how many turkeys are consumed each year at Thanksgiving?
- 19 million
- 33 million
- 46 million
- 62 million
- 3. 46 million. According to the National Turkey Federation, Thanksgiving turkeys account for 18 percent of all turkeys raised on American farms this year.
Now you are in the know about some of the unique habits of our popular holiday centerpiece. Enjoy your Thanksgiving!
The IRS continues to focus their audit activities in key small business areas. The wise business owner is well advised to be able to defend the following five areas to keep the IRS at a comfortable distance:
- Business or hobby? Be ready to provide proof your business is truly a business and not a hobby. Those who fail in the eyes of the IRS can have their expense deductions severely limited, while still required to report the income. Make sure you can answer and provide documentation for these four questions:
- What is your profit motive?
- Are you an active participant in the business?
- Are you conducting the activity in a business-like manner?
- What expertise do you have in the service or products your business provides?
- Reasonable shareholder salary. S corporations are in the unique situation where some compensation is excluded from payroll taxes. Many businesses take this too far. The IRS is looking closely at businesses who avoid paying a reasonable salary in order to lower their Social Security and Medicare bills. When determining salaries for shareholders, consider their experience, duties, responsibilities and time devoted to the business. Once you have a picture of their ongoing contributions to the business, research comparable positions and salary ranges to pinpoint a fair salary. Save your findings and calculations as backup to provide in the event of an audit.
- Contractors or employees? Make sure consultants and other suppliers are not employees in disguise. The IRS looks at how much control you have over the work being done – the more control you exert the higher likelihood you may have an employee versus a contractor. Penalties can be very steep if the IRS decides your consultant is really your employee. If in doubt, ask for a review.
- Expenses for meals and entertainment. The IRS is now disallowing any entertainment deductions, even if there is business conducted before or after the event. That means business meal documentation is now more important than ever and should include receipts, who attended the meal, and the business purpose of the meal. Bringing food in for business lunches rather than going out is a safe way to show business intent. If you have an event with both entertainment and food included, get two receipts – one for the entertainment and one for the food.
- File your Forms W-2 and Forms 1099. Don’t forget to file all required 1099s and W-2s. Most of them are due on or before Jan. 31. The IRS is penalty crazy in this area with up to $270 per missing or incorrect form.
Knowing what the IRS is looking for helps you prepare should it turn its focus to your business.
According to a recent announcement by the IRS, retirees might not be withholding enough for taxes this year. This is due to vast tax changes in 2018, making old withholding levels obsolete. The IRS is urging retirees to check their withholdings now and make adjustments if needed to avoid penalties.
Could it be you?
How do you know if you are withholding enough? While the IRS offers a new withholding calculator online, it’s designed for employees who are paid wages – not a great option for retirees. The only good way to avoid a tax surprise is to conduct a projection based on your specific situation. You will need to consider taxes already paid, taxes yet to be paid, and estimate total income and deductions to come up with an accurate projection.
Steps to take
If the results of the projection show that you are lagging behind, you still have a bit of time to adjust withholdings or make estimated tax payments. Here are some ways to do this:
- Adjust pension withholding. In order to change your pension withholdings, you need to fill out Form W-4P and give it to your pension plan provider.
- Adjust IRA distribution withholding. To change IRA withholdings, typically you can go online or call the account provider to update the withholding amount or percentage.
- Adjust Social Security voluntary withholding. To adjust the voluntary withholding on your Social Security payments, you need to fill out Form W-4V and return it to your local Social Security office by mail or in person.
- Make an estimated payment to the IRS. If withholdings won’t be enough or you are worried about timing, you can make a payment to the IRS directly. Form 1040-ES has a voucher that can be sent with the payment and needs to be postmarked by Jan. 15, 2019 to be applied to your 2018 taxes.
Remember, penalties can be added to your taxes if you don’t pay enough during the year, so it’s important to review your withholdings as soon as possible to avoid a surprise when you file your taxes. Sound complicated? It can be. Please call if you want help evaluating your situation.
The more things change the more they stay the same. This is especially true when it comes to reviewing your tax situation. Mark your calendar to review these essential items each year to ensure you are not missing something that could cause tax trouble when you file your tax return:
- Required minimum distributions
If you are 70½ or older, you may need to take required minimum distributions (RMDs) from your retirement accounts. RMDs need to be completed by Dec. 31 every year after you turn the required age. Don’t forget to make all RMDs because the fines are extremely hefty if you don’t – 50 percent of the amount you should have withdrawn.
- Your IRS PIN
If you are a victim of IRS identity theft you will be mailed a one-time use personal identification number (PIN) as added security. You can expect to receive your PIN in the mail sometime in December. Save the PIN as it is required to file your Form 1040. If you would like to sign up for the PIN program, you can do so on the IRS website. Note that once you are enrolled in the program, there is no opt out. A PIN will be required for all future filings with the IRS.
- Retirement Contributions
You may wish to make some last-minute contributions to qualified retirement accounts like an IRA. This can be $5,500 for traditional or Roth IRAs plus an additional $1,000 if you are 50 or older. Contributions to traditional IRAs need to happen by April 15, 2019 to be deducted on your 2018 tax return.
- Harvest Gains and Losses
Profits and losses on investments have their own tax rates from 0 percent to as high as 37 percent. Knowing this, make plans to conduct an annual tax review of investment moves you wish to make. This includes:
- Understanding investments held longer than one year have lower tax rates as long-term capital gains.
- Trying to net ordinary income tax investment sales with long-term investment losses.
- Making full use of the annual $3,000 loss limit on investment sales
Timing matters with investment sales and income taxes, so having a year-end strategy can help lower your tax bill.
- Last-Minute Tax Moves
While your last-minute tax move opportunities may be limited, here are a few ideas worth considering:
- Make donations to your favorite charities to maximize your itemized deductions.
- Consider contributions of up to $100,000 from retirement accounts to qualified charities if you are older than 70½.
- Make tax efficient withdrawals from retirement accounts if you are over 59½.
- Delay receipt of income or accelerate expenses if you are a small business.
- Take advantage of the annual $15,000 gift-giving limit.
Understanding your current situation and having a plan will make for a smooth tax filing process and maximize your tax savings.
The IRS said that the limit on elective deferral contributions to 401(k) plans, 403(b) plans, most 457 plans, and the federal government’s Thrift Savings Plan will increase from $18,500 in 2018 to $19,000 in 2019. However, the catch-up contribution limit for those 50 and older remains $6,000 (Notice 2018-83). Most other inflation-adjusted amounts related to pensions increased from 2018 to 2019.
The maximum deductible individual retirement arrangement (IRA) contribution for 2019 will increase $500 to $6,000. The ability of taxpayers who are covered by workplace retirement plans to make a deductible IRA contribution is phased out for singles and heads of household who have adjusted gross incomes (AGIs) between $64,000 and $74,000, a slight increase from last year.
For taxpayers making contributions to Roth IRAs, the phaseout range for determining the maximum contribution is $193,000 to $203,000 for married couples filing jointly and $122,000 to $137,000 for singles and heads of household. These limits were all increased from 2018.
For married couples filing jointly, where the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phaseout range is $103,000 to $123,000 for 2019. These amounts also increased slightly from 2018. When an IRA contributor is not covered by a workplace retirement plan but is married to someone who is, the deduction is phased out if the couple’s income is between $193,000 and $203,000, also an increase from 2018.
The AGI limit for the saver’s credit is $64,000 for married couples filing jointly, $48,000 for heads of household, and $32,000 for single taxpayers and for married individuals filing separately, all increases from 2018.
Source (Journal Of Accountancy) Sally P. Schreiber, J.D.