Do I Have to File a Tax Return?

Article Highlights:

  • When You Are Required to File
  • Self-Employed Taxpayers
  • Filing Thresholds
  • Benefits of Filing Even When Not Required to File
  • Refundable Tax Credits

This is a question many taxpayers ask during this time of year, and the question is far more complicated than people believe. To fully understand, we need to consider that there are times when individuals are REQUIRED to file a tax return, and then there are times when it is to the individuals’ BENEFIT to file a return even if they are not required to file.

When individuals are required to file:

  • Generally, individuals are required to file a return if their income exceeds their filing threshold, as shown in the table below. The filing thresholds generally are the same amount as the standard deduction for individual(s).
  • Taxpayers are required to file if they have net self-employment income in excess of $400, since they are required to file self-employment taxes (the equivalent to payroll taxes for an employee) when their net self-employment income exceeds $400.
  • Taxpayers are also required to file when they are required to repay a credit or benefit. For example, taxpayers who underestimated their income when signing up for health insurance through a government Marketplace and received a higher advance premium tax credit (APTC) than they were entitled to, are required to repay part of it. Therefore, all individuals who received an APTC must file a return to reconcile the advance payments with the actual credit amount, even if their income is less than the filing threshold amount and even if they don’t need to repay any of the advance credit.
  • Filing is also required when a taxpayer owes a penalty, even though the taxpayer’s income is below the filing threshold. This can occur, for example, when a taxpayer has an IRA 6% early withdrawal penalty or the 50% penalty for not taking a required IRA distribution.
2019 – Filing Thresholds

Filing Status Age Threshold
Single Under Age 65
Age 65 or Older
Married Filing Jointly Both Spouses Under 65
One Spouse 65 or Older
Both Spouses 65 or Older
Married Filing Separate Any Age $5
Head of Household Under 65
65 or Older
Qualifying Widow(er)
with Dependent Child
Under 65
65 or Older

When it is beneficial for individuals to file:
There are a number of benefits available when filing a tax return that can produce refunds even for a taxpayer who is not required to file:

  • Withholding refund – A substantial number of taxpayers fail to file their return even when the tax they owe is less than their prepayments, such as payroll withholding, estimates, or a prior overpayment. The only way to recover the excess is to file a return.
  • Earned Income Tax Credit (EITC) – If you worked and did not make a lot of money, you may qualify for the EITC. The EITC is a refundable tax credit, which means you could qualify for a tax refund. The refund could be as high as several thousand dollars even when you are not required to file.
  • Child Tax Credit – This is a $2,000 credit for each qualifying child, a portion of which may be refundable for lower income taxpayers, and phases out for higher income taxpayers.
  • American Opportunity Credit – The maximum for this credit for college tuition paid per student is $2,500, and the first four years of postsecondary education qualify. Up to 40% of the credit is refundable when you have no tax liability, even if you are not required to file.
  • Premium Tax Credit – Lower-income families are entitled to a refundable tax credit to supplement the cost of health insurance purchased through a government Marketplace. To the extent the credit is greater than the supplement provided by the Marketplace, it is refundable even if there is no other reason to file.

DON’T PROCRASTINATE! There is a three-year statute of limitations on refunds, and after it runs out, any refund due is forfeited. The statute is three years from the due date of the tax return. So, the refund period expires for 2019 returns, which were due in April of 2020, on April 15, 2023.

For more information about filing requirements and your eligibility to receive tax credits, please contact our office.

Congress Passes Last-minute Tax Changes

Article Highlights:

  • Discharge of Qualified Principal Residence Indebtedness
  • Mortgage Insurance Premiums
  • Above-the-Line Deduction for Qualified Tuition and Related Expenses
  • Medical AGI Limits
  • Residential Energy (Efficient) Property Credit
  • Employer Credit for Paid Family and Medical Leave
  • Maximum Age Limit for Traditional IRA Contributions
  • Penalty-Free Pension Withdrawals in Case of Childbirth or Adoption
  • Increase in Age for Required Minimum Pension Distributions
  • Difficulty of Care Payments Qualifying for IRA Contributions
  • Expansion of Sec. 529 Plan Uses
  • Required Distributions Modified for Inherited IRAs and Retirement Plans
  • Increase in Penalty for Failure to File
  • Major Change to Kiddie Tax Rules

Congress, at almost the last minute, has passed a large number of tax changes, including retirement plan issues that will become effective in 2020, as well as extensions through 2020 of a number of tax provisions that had expired or were about to end. The list of changes is quite large, so we have only included those that are most likely to affect individual tax returns. Here is a run-down on some of the new tax provisions:


The tax changes retroactively revive a number of provisions that had previously expired or were going to at the end of 2019, and extend them through 2020. So, review them carefully to see if any of them provide you with an opportunity to amend your return for a refund.

Discharge of Qualified Principal Residence Indebtedness – When an individual loses his or her principal residence to foreclosure, abandonment, or short sale or has a portion of their loan forgiven under the HAMP mortgage-reduction plan, they will generally end up with cancellation-of-debt (COD) income. COD income is equal to the amount of debt on the home that is forgiven by the lender. To the extent that the mortgage debt becomes COD income, it is taxable income unless the taxpayer can exclude it based on specific provisions in the tax code.

After the housing market crash a few years back, Congress added the qualified principal residence COD exclusion, which allowed taxpayers to exclude up to $2 million ($1 million if married filing separately) of COD income, to the extent it was discharged debt used to acquire the home, termed acquisition debt. Equity debt was not eligible for the exclusion. However, equity debt is deemed to be discharged first, thus limiting the exclusion if both equity and acquisition debt are involved in the transaction.

This COD exclusion was temporarily added in 2007, was extended, and then expired at the end of 2017. Under the current legislation, the exclusion for qualified principal residence indebtedness is retroactively extended through 2020. Thus, if you paid taxes on principal residence COD income in 2018, be sure to call attention to that fact so your return can be amended for a refund.

Mortgage Insurance Premiums – For tax years 2007 through 2017, taxpayers could deduct the cost of premiums for mortgage insurance on a qualified personal residence as an itemized deduction. The premiums were deducted as home mortgage interest on Schedule A. To be deductible:

  • The premiums must have been paid in connection with acquisition debt (note: acquisition debt includes refinanced acquisition debt).
  • The mortgage insurance contract must have been issued after Dec. 31, 2006.
  • It must be for a qualified residence (first and second homes).
  • The deductible amount of the premiums phases out ratably by 10% for each $1,000 by which the taxpayer’s adjusted gross income (AGI) exceeds $100,000 (10% for each $500 by which a married separate taxpayer’s AGI exceeds $50,000).

Qualified mortgage insurance means mortgage insurance provided by the:

  • Dept. of Veterans Affairs (VA),
  • Federal Housing Administration (FHA), or
  • Rural Housing Services (RHS), as well as
  • Private mortgage insurance.

This deduction was previously allowed through 2017 and has retroactively been extended through 2020.

Above-the-Line Deduction for Qualified Tuition and Related Expenses – An above-the-line deduction for qualified tuition and related expenses for higher education has been available since 2002 and was previously extended through 2017. For purposes of the higher education expense deduction, “qualified tuition and related expenses” has the same definition as for the American Opportunity and Lifetime Learning credits for higher education expenses – that is, with certain exceptions, tuition and fees paid for an eligible student (the taxpayer, the taxpayer’s spouse, or a dependent) at an eligible higher education institution. The deduction – up to $2,000 or $4,000, depending on AGI – is not allowed for joint filers with an AGI of $160,000 or more ($80,000 for other filing statuses), except no deduction is allowed for taxpayers using the married filing separate status. The phase-out amounts are not inflation-adjusted. The same expenses can’t be used for both an education credit and the tuition and fees deduction.

This deduction was previously allowed through 2017 and has retroactively been extended through 2020.

Medical AGI Limits – For 2017 and 2018, individuals could claim an itemized deduction for unreimbursed medical expenses, to the extent that such expenses exceeded 7.5% of their AGI. For post-2018 years, the percent of AGI has been increased to 10%. The provision retroactively extends the lower threshold of 7.5% through 2020.

Residential Energy (Efficient) Property Credit – This non-refundable credit has been available in one form or another since 2006 and through 2017, with credit amounts varying from 10% to 30% and the maximum credit ranging from $500 to $1,500. Most recently, the credit percentage was 10%, with a lifetime credit amount limited to $500. This credit is best described as an energy-saving credit since it applies to improvements to the taxpayer’s existing primary home to make it more energy efficient. Generally, it applies to insulation, storm windows and doors, and certain types of energy-efficient roofing materials, energy-efficient central air-conditioning systems, water heaters, heat pumps, hot water systems, circulating fans, etc., but the expenses eligible for the credit do not include installation costs.

The recent legislation extends this credit through 2020, with a lifetime credit cap of $500.
Caution: The lifetime credit extends to returns going all the way back to 2006.

Employer Credit for Paid Family and Medical Leave – This credit provides an employer with credit for paid family and medical leave, which permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. The maximum amount of family and medical leave that may be taken into account for any qualifying employee is 12 weeks per taxable year. The credit is variable and only applies if the leave wages are at least 50% of the individual’s normal wages. The credit percentage is 12.5% and increases by 0.5%, up to a maximum of 25%, for each percentage point that the payment rate exceeds 50%.

The credit was originally only for 2018 and 2019 but has been extended through 2020.


Maximum Age Limit for Traditional IRA Contributions – The legislation repeals the maximum age for making traditional IRA contributions, which, prior to this legislation, prohibited traditional IRA contributions after an individual reached the age of 70½. The provision is effective for contributions made for taxable years beginning after December 31, 2019.

Penalty-Free Pension Withdrawals in Case of Childbirth or Adoption – The legislation allows a penalty free but taxable distribution of up to $5,000 from a qualified plan made within one year of birth or in the case of a finalized adoption of an individual aged 18 or younger or an individual who is physically or mentally incapable of self-support. Distributions can later be repaid to avoid the tax on the distribution.

Increase in Age for RMDs – For decades, individuals were required to begin taking distributions from their traditional IRAs and qualified plans once they reached age 70½. These distributions, commonly referred to as a required minimum distribution or RMD, have never been adjusted to account for increases in life expectancy. The legislation changes the required beginning date for mandatory distributions to age 72, effective for distributions required to be made after December 31, 2019, with respect to individuals who attain the age of 72 after this date.

Special Rule – Difficulty of Care Payments – Many home health-care workers do not have a taxable income because their only compensation comes from “difficulty of care” payments that are exempt from taxation under Code Section 131. Because such workers do not have taxable income, they cannot save for retirement in a defined contribution plan or IRA. This provision will allow home health-care workers to contribute to a qualified plan or IRA by amending the tax code so that tax-exempt difficulty of care payments are treated as compensation, for purposes of calculating the contribution limits to defined contribution plans and IRAs. This is effective for plan years after December 31, 2015, and IRA contributions after the act’s date of enactment (December 20, 2019).

Sec. 529 Plan Modifications – Sec. 529 plans (also referred to as qualified state tuition plans) were originally created to allow tax-free accumulation saving accounts for a child’s education but generally limited the funds’ use to post-secondary education tuition and certain college fees. Since then, Congress has continued to expand the use of funds to include supplies, books, equipment, and reasonable room and board expenses for attending college. With the passage of the tax reform at the end of 2017, Congress allowed up to $10,000 a year to be used for elementary and secondary school tuition expenses. This new legislation adds the following to the list of qualified expenses:

  • Qualified higher education expenses associated with registered apprenticeship programs certified by the Secretary of Labor under Sec. 1 of the National Apprenticeship Act
  • Payment of education loans, up to a maximum of $10,000 (reduced by the amount of distributions so treated for all prior taxable years), including those for siblings

These changes are effective for distributions made after December 31, 2018.

RMDs for Designated Beneficiaries – The legislation modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the account owner’s death. Under the legislation, distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or a child of the employee (or IRA owner) who has not reached the age of majority must generally be distributed by the end of the tenth calendar year following the year of the employee’s or IRA owner’s death. A special rule for children requires any remaining undistributed funds to be distributed within 10 years after they reach the age of maturity.

This is a major change since beneficiaries previously had options to take certain lifetime payouts. This will require careful planning to minimize the tax on the distributions. The change applies to distributions with respect to employees or IRA owners who die after December 31, 2019.

Penalty for Failure to File – The legislation increased the minimum penalty for failure to file a tax return within 60 days of the return’s due date to $435, up from $330, for returns with a due date (including extensions) after December 31, 2019. Thus, the $435 penalty will apply to 2019 returns and will be inflation adjusted for future years.

Kiddie Tax – The tax reform enacted late in 2017 changed how the income of dependent children is taxed, causing a child’s unearned income to be taxed at fiduciary rates that very quickly reach the maximum tax rate of 37%. That change created an unintentional tax increase for survivors of service members and first responders who died in the line duty. This last-minute change reverts the kiddie tax computation to the pre–tax reform method for years beginning in 2020. It also allows taxpayers to choose whichever method provides the lowest tax for 2018 and 2019. Taxpayers can amend their 2018 return if doing so will provide a better outcome.

The changes are extensive and, in many cases, open the door to amending prior years’ returns. If you have any questions or think any of these changes might benefit you for a prior year, please give contact us.

California Bill AB 1482 – Tenant Protection Act of 2019

We aim to keep you up-to-date on the ever-changing legislative landscape. Earlier this year, Governor Gavin Newsom signed the bill into law California Bill AB 1482, also known as the Tenant Protection Act of 2019. This new law will limit rent increases across the state of California to 5% per year plus the local rate of inflation (CPI). The cities in California that already have rent-control laws on the books will be affected differently by AB 1482.

California Bill AB 1482will go into full effect as of January 1, 2020. The law is expected to affect 8 million tax payers.

If you have a residential property that serves as a rental property, you will be subject to follow this new law unless your property falls under another rent stabilization ordinance or if your property is exempt.

Properties that can find themselves exempt from this law are single family homes, townhomes and condominiums (the statue will apply though if title is held in a corporation or a real estate investment trust). LLC’s or property held in a trust are also exempt from the statute unless one of the managing members of the LLC is a corporation.

In general, if your property is subject to a local rent control ordinance, you would not be subject to the statewide statue. There is an exception which relates to “good cause” to evict. If the local rent control ordinance is less restrictive than the statewide statute, then the state law would control.

On the other hand, if you have always been exempt from your local rent stabilization ordinance, it does not automatically mean that you will also be exempt from this statewide law. The State Legislature did exempt property where a certificate of occupancy has been issued within the last 15 years.

Landlords need to be careful when determining if the property is subject to the statute. If your property received a certificate of occupancy 15 years ago, it would not be under rent control. However, in the following year it would be subject to the Tenant Welfare Statute.

Under AB-1482, property owners will still be able to evict tenants for the following reasons:

  • Nonpayment of rent
  • A breach of a material term of the lease
  • Nuisance, waste, unlawful, or criminal activity
  • Refusal to sign a written extension or renewal of the lease
  • Assigning or subletting without the owner’s consent
  • Refusal to allow the owner to enter the unit
  • The owner moving themselves or family into a unit
  • The owner plans to substantially renovate
  • The owner is going out of business altogether

Read the complete bill here:

Understanding Your Annual Social Security Letter

Article Highlights:

  • Medicare B Premiums
  • Medicare D Premiums
  • Modified AGI
  • 2020 Premiums Table
  • Effect of Recreational Gambling
  • Appealing the Social Security Administration’s Decision

If you are receiving Social Security, then you have just recently received your annual letter from the Social Security Administration letting you know that your Social Security benefits for 2020 have increased by 1.6 percent as a result of a rise in the cost of living. The letter also lets you know how much will be withheld from your monthly retirement benefit for Medicare Parts B (medical insurance) and D (Prescription Drug Plan).

Not everyone realizes their Part B and Part D benefits are based upon their modified adjusted gross income (MAGI) from two years prior. This means the premiums for 2020 are actually based on your MAGI for 2018. The MAGI for making the adjustment is the federal AGI plus the following:

  • Tax-exempt interest income;
  • United States savings bonds interest used to pay higher education tuition and fees, if the interest was excluded from income;
  • Excluded foreign earned income and housing costs;
  • Income derived from sources within Guam, American Samoa, or the Northern Mariana Islands; and
  • Income from sources within Puerto Rico.


TAXPAYER FILING STATUS Medicare Part B Monthly Premiums Medicare Part D**
Individual* Married Filing Joint MAGI Increase Total Surcharge
2018 MAGI less than or equal to $87,000 2018 MAGI less than or equal to $174,000 $0.00 $144.60 $0.00
2018 MAGI greater than $87,000 and up to $109,000 2018 MAGI greater than $174,000 and up to $218,000 $57.80 $202.40 $12.20
2018 MAGI greater than $109,000 and up to $136,000 2018 MAGI greater than $218,000 and up to $272,000 $144.60 $289.20 $31.50
2018 MAGI greater than $136,000 and up to $163,000 2018 MAGI greater than $272,000 and up to $326,000 $231.40 $376.00 $50.70
2018 MAGI greater than $163,000 and less than $500,000 2018 MAGI greater than $326,000 and less than $750,000 $318.10 $462.70 $70.00
2018 MAGI greater than or equal to $500,000 2018 MAGI greater than or equal to $7500,000 $347.00 $491.60 $76.40
*The increases for a married taxpayer who lived with his or her spouse at any time during the year and files a separate return are:

  • If 2018 MAGI was $87,000 or less: no surcharge for either Part B or Part D
  • If 2018 MAGI was $87,001 to $412,999: Part B $462.70 and Part D $70.00
  • If 2018 MAGI was $413,000 or above: Part B $491.60 and Part D $76.40

**The monthly Part D surcharge is in addition to the drug plan’s premium.

So, you might discover that even though your monthly Social Security benefits increased because of inflation, the net amount you receive may actually be less per month because of increases in Medicare Part B and D premiums. Such increases are attributable to increased MAGI in 2018, but one might encounter a hidden source of income. This applies to recreational gamblers whose winnings are included in their MAGI but whose losses are an itemized deduction. Thus, even though the overall result may be a loss, the MAGI is increased by the full amount of the gambling winnings, thus possibly causing increases in the Medicare Part B and D premiums.

On the other hand, if 2017 had been a high-income year and your income in 2018 was substantially less, your 2020 Medicare Part B and D premiums may be less than they were in 2019, resulting in a larger net monthly check.

The letter you received from the Social Security Administration does include an appeal process if you disagree with the Social Security Administration’s decision to increase your premiums. However, this appeal must generally be made within 60 days after receipt of the letter. Unfortunately, an increase in your 2018 MAGI that put you into the surcharge range for 2020 and was a result of capital gains due to a one-time sale of real property or stock isn’t a valid reason for an appeal.

If you have questions related to your Social Security benefits and their taxation, please give us a call. There are often planning strategies that may lessen the tax bite and premium costs.

How to Cut Your Tax Bill in the Final Weeks of 2019

The main goal of any year-end strategy is to increase the number of tax credits and deductions you can claim, while lowering the amount of income that is subject to tax. Here are some last-minute strategies to cut your tax bill that will come due in April.

Maximize the Small Business Tax Break

If you’re self-employed or a small business owner you may be eligible for a 20% deduction off your business income. But it can be subject to lots of limitations depending on your field, the amount you invest in equipment, or how much you pay employees. If you’re below certain thresholds — $321,400 for a couple or $160,700 for an individual in 2019 — you automatically get the tax break.

For people above those limits, there are several ways to legally reduce your taxable income to get under the caps, which is particularly important for doctors, lawyers and accountants who can’t claim the deduction at all if they are above those levels.

Of course, make sure you’re maxing out any tax-deferred retirement accounts and health savings accounts, if possible.

Self-employed individuals can also reduce their taxable income by as much as $225,000 if they make contributions to a defined benefit retirement plan.

“The next three weeks are really, really key to getting those plans drafted,” said Ed Reitmeyer, a regional partner at accounting firm Marcum.

Business owners could also increase employee wages by paying one-time bonuses to boost their payroll levels enough to qualify for the 20% deduction, said Grethell Anasagasti, a principal at accounting firm MBAF. If the company is structured as an S corporation, a closely held company, those bonuses can also be paid to the officers (or owners) of the company, she said.

Tax professionals are seeing a large uptick in the use of donor advised funds — tools that allow people to give money, deduct the donation up front, and distribute the funds to charity later.

The 2017 tax law increased the standard deduction to about $24,000 for a couple and limited some deductions, including one for state and local taxes. The result is that many people have to donate much more than in the past to get above that $24,000 limit and file an itemized return. But the right timing of the donations can lead to big tax savings.

“It’s really tough for people to get over that $24,000 hurdle,” said Brad Sprong, head of Family Office and Private Client Services at accounting firm KPMG. He’s advising clients to bunch all their donations to a donor-advised fund in one year to get the tax benefit for those contributions, and then take the standard deduction for the next few years.

What you donate also matters, Sprong says. He advises clients to look for alternatives to cash, such as appreciated securities, because the deduction amount is what the asset is worth, not necessarily what you paid for it. And in a low-interest rate environment, donating borrowed money can also have

benefits if the tax breaks outweigh the loan costs.

Those who are 70 1/2 and older must start taking distributions from their individual retirement accounts, which generate a tax bill for the recipient. However, those taxpayers can donate as much as $100,000 directly from their IRAs in lieu of a distribution — avoiding the tax on that money.

Estate Tax Preparation

The 2017 tax law approximately doubled the estate tax exemption, which gives wealthy taxpayers some time to make plans for their assets when they die. The lifetime exclusion for 2019 is $11.4 million for an individual or twice that for a married couple, and the annual gift tax limit is $15,000.

The IRS has said it won’t make those gifts taxable if a future Congress votes to lower the estate tax limit. But still, it’s smart to make those gifts now, said Karen Goldberg, a principal in the Private Wealth Advisory Group at EisnerAmper. This doesn’t have to be done by the end of 2019, but waiting beyond the 2020 election risks the political mood shifting in favor of estate taxes.

“If a new administration comes in and changes the law, you don’t want to wait until the last minute,” she said.

 Mortgage Tax Break Workaround

The 2017 tax law also restricted the mortgage interest deduction to loans equal to or less than $750,000. The result is that some taxpayers buying expensive homes are finding other ways to finance their purchases, Sprong said.

Instead of taking out a mortgage for the full amount, some taxpayers are taking out a mortgage up to the $750,000 limit, and then in a separate transaction borrowing the additional funds through a regular loan.

Taxpayers can still get some benefits from this deal, especially if interest rates remain low, Sprong said. The interest from that loan can be deducted against investment income. If that financing was part of the mortgage, there wouldn’t be any tax breaks for that interest.


Tips to Avoid 2019 Tax Penalties

Article Highlights:

  • Underpayment Penalties
  • Withholding
  • Under-distribution Penalty
  • Required Minimum Distributions
  • IRA-to-Charity Distributions

The holiday season is upon us, complete with family gatherings, over-indulging in food and beverages, and gift shopping and giving, and the last thing most of us want to think about right now is what faces us after the New Year is rung in: tax season! But taking some time now to get in the tax-season spirit may help you to avoid or reduce certain penalties on your 2019 tax return.

Underpayment Penalty – Have you prepaid enough taxes to cover your 2019 liability? If you are an employee, you will have had income tax withheld from your paychecks, but has that withholding been sufficient? This is an especially important question if you have a second job or a side business, or if you are married and your spouse is also employed. Many times in these circumstances, your withholding for the year may not be enough to cover your 2019 tax liability. Further complicating the issue is that many individuals still haven’t adjusted their withholding with their employers to account for the numerous tax reform changes, which mostly became effective starting in 2018.

You will be hit with an underpayment penalty if your advance payments toward your 2019 tax liability, through withholding and estimated tax payments, are less than 90% of your 2019 tax or 100% (110% for high-income taxpayers) of your 2018 tax. But the good news is there is no penalty if you owe less than $1,000 in tax.

When the underpayment penalty does apply, it is figured on a quarterly basis, so making an estimated tax payment late in the year will not reduce the penalties from earlier periods. However, wage withholding is treated as being paid evenly throughout the year, allowing you to mitigate underpayments earlier in the year by increasing your withholding late in the year. Does your state have an income tax? If so, then also be sure to adjust your state income tax withholding, if needed, to offset under-withholding earlier in the year to avoid or reduce a state underpayment penalty.

Under-Distribution Penalty – Tax law doesn’t allow money to indefinitely remain untaxed in your traditional IRA, a self-employed retirement plan, or your employer’s qualified plan. Thus, you are required to annually withdraw a minimum amount from the IRA or plan (referred to as the minimum required distribution or RMD) once you reach 70 1/2 years of age*. Did you turn age 70 1/2 in 2019 or reach 70 1/2 in an earlier year? If so, and if you haven’t already, be sure to take your RMD for 2019 or face a potential penalty (additional tax) equal to a whopping 50% of the amount you should have withdrawn for 2019.

The minimum distribution for any year is based upon an annuity factor for your age divided into your account balance on December 31 of the prior year. Most IRA custodians or trustees will advise their clients of the RMD for the specific accounts they oversee, but if you need help figuring out your RMD amount, especially if you have multiple accounts, please call this office for assistance.

With one exception (see next paragraph), when you are required to make an RMD, you must withdraw the funds for the year from your traditional IRA or a qualified plan by December 31. While there’s no penalty for withdrawing more than the minimum required amount, you can’t use the excess withdrawal as a credit toward the next year’s required distribution.

Delayed First-Year Distribution – A special rule allows you to delay your first RMD, for the year when you turn 70 1/2, until the first quarter of the next year. This means if you became 70 1/2 in 2019, you could delay your 2019 withdrawal until no later than April 1, 2020. But if you do that, you will have two years’ worth of distributions to include in your 2020 income because you must still take your 2020 RMD by December 31, 2020. Delaying the 2019 distribution may or may not be beneficial taxwise, depending on your tax bracket for each year. If 2019 was your retirement year, then your income tax bracket may be higher than it will be for 2020, so in that case, delaying the 2019 distribution until 2020 may make tax sense.

Special IRA-to-Charity Provision – A special provision applies to taxpayers age 70 1/2 and older who directly transfer up to $100,000 a year from their IRA to a qualified charity. If you are 70 1/2 or older and make an IRA-to-charity transfer, you won’t get a charity deduction for the amount transferred; instead—and even better—you will not have to pay taxes on the distribution, and because your adjusted gross income (AGI) will be lower, you can benefit from other tax provisions that are pegged to AGI, such as the amount of taxable Social Security income and the cost of Medicare B insurance premiums for higher-income taxpayers. As an additional bonus, the transfer also counts toward your annual RMD. You can make the IRA charitable distribution to multiple charities, but the $100,000 yearly limit applies in total and not to each charity. Contact your IRA trustee to initiate the transfer, which must be done by December 31 to count for 2019. In addition, for each qualified charitable distribution, you need to obtain an acknowledgment for it from the charitable organization.

If you have questions about making up withholding shortfalls or retirement distributions as they relate to your particular circumstances, please give this office a call.

*Exception: Distributions from qualified plans such as 401(k)s, but not IRAs, do not have to begin until the year of retirement.

Finalized Employee’s Withholding Certificate 2020

The IRS on Dec. 5 released a significantly revised Form W-4 for employees’ use when calculating their 2020 federal income tax withholding. The finalized form follows a draft version the IRS issued in May seeking comments from tax preparers and payroll companies.

For the 2019 tax year, there are no withholding allowances, and “allowances” was removed from the title of the form to reflect this change. Instead of claiming a certain amount of allowances based on exemptions, employees will now be asked to input the annual dollar amounts for:

  • Non wage income, such as interest and dividends
  • Itemized and other deductions
  • Income tax credits expected for the tax year
  • Total annual taxable wages for all lower-paying jobs in the household (applies to employees with multiple jobs)

According to the IRS, “Employees who have submitted Form W-4 in any year before 2020 are not required to submit a new form. Employers will continue to compute withholding based on the information from the employee’s most recently submitted Form W-4.” However, employees hired after 2019 or employees wanting to make changes after 2019 must use the new form. Employers will have to adjust their systems accordingly.

The purpose of the new Form W-4 is to improve the accuracy of withholding and to incorporate the changes created by the Tax Cuts and Jobs Act of 2017. The IRS indicated that the form will make it easier for employees to simply and accurately calculate how much income tax they should set aside each paycheck.

Only minor language changes were made to the W-4 since the prior draft issued in May, most notably, according to the IRS, more language under “Your Privacy” on page 2 “to help the taxpayer understand exactly what checking the box in step 2(c) may do to withholdings.”

Tax Benefits for Holiday Family Employment

Article Highlights:

  • Employing a Child
  • Child Payroll Taxes
  • FUTA Tax for a Child
  • Child IRA Contributions
  • Child Tax-Free Income
  • Spouses Working in the Same Business
  • Partnership
  • Spousal Joint Venture
  • Spouse Employee

Along with the holidays comes a lot of extra work for many family-run businesses, which may require putting the kids to work and having a spouse help out over the busy time. There are special tax rules when hiring your children and also for your spouse, depending on whether he or she is a business partner or an employee.

Employing Your Child – Tax reform provided a more taxpayer-friendly tax treatment for children with earned income. Generally, when a child under the age of 19 or a student under the age of 24 without any investment income is claimed as a dependent of the parents, the child can earn up to $12,200 in 2019 without incurring any tax liability. If they earn more, then the next $9,700 is taxed at 10%. A reasonable salary paid to a child reduces the parents’ self-employment income and tax (business owners) by shifting income to the child.

Example: You are in the 22% tax bracket and own an unincorporated business. You hire your 17-year-old child (who has no investment income) and pay the child $14,000 for 2019. You reduce your income by $14,000, which saves you $3,080 in income tax (22% of $14,000), and your child has a taxable income of $1,800 ($14,000 less the $12,200 standard deduction), on which the tax is $180 (10% of $1,800). Thus, the net income tax saved by the family is $2,900 ($3,080 − $180).

If the business is unincorporated and the wages are paid to a child under age 18, the wages will not be subject to FICA – Social Security and hospital insurance (HI, aka Medicare) – taxes since for FICA tax purposes, employment doesn’t include services performed by a child under the age of 18 while employed by a parent. Thus, the child will not be required to pay the employee’s share of the FICA taxes, and the business won’t have to pay its half either. In addition, by paying the child and thus reducing the business’s net income, the parent’s self-employment tax payable on net self-employment income will also be reduced.

Example: Expanding on the previous example and assuming your business profits are $130,000, by paying your child $14,000, you will reduce not only your self-employment income for income tax purposes but also your self-employment tax (the HI portion) by $375 (2.9% of $14,000 times the SE factor of 92.35%). But if your net profits for the year were less than the maximum SE income ($132,900 for 2019) subject to Social Security tax, then the savings would include the 12.4% Social Security portion in addition to the 2.9% HI portion.

A similar but more liberal exemption applies for FUTA, which exempts the earnings paid to a child under age 21 while employed by his or her parent from federal unemployment tax. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his or her parents. However, the exemptions do not apply to businesses that are incorporated or a partnership that includes non-parent partners. Even so, there’s no extra cost to your business if you pay a child for work that you would pay someone else to do anyway.

Additional savings are possible if the child is paid more or worked part-time during the year or in the summer and deposits the extra earnings into a traditional IRA. For 2019, the child can make a tax-deductible contribution of up to $6,000 to his or her own IRA. The business may also be able to provide the child with retirement plan benefits, depending on the type of plan it uses, its terms, the child’s age, and the number of hours worked. By combining the standard deduction ($12,200) and the maximum deductible IRA contribution ($6,000) for 2019, a child could earn $18,200 in wages and pay no income tax.

Example: Referring back to the original example, making a $6,000 traditional IRA contribution will only save the child $600 in tax, so it might be appropriate to make a Roth IRA contribution instead, especially since the child has so many years before retirement and the future tax-free retirement benefits will far outweigh the current $600 savings. Contributions to Roth IRAs aren’t deductible, but distributions are generally tax-free.

A child can benefit from the standard deduction and earn $12,200 tax-free (except FICA withholding) when working for someone else and still take advantage of an IRA deduction if his or her income exceeds the standard deduction.

For 2020, the standard deduction of a single person will increase to $12,400.

Note that if the child has unearned income, such as interest, dividends, or capital gains, and is under the age of 19 or is a student under the age of 24, the child may be subject to the “kiddie tax” rules, under which the tax on the unearned income is figured using a different tax rate schedule. This situation is not covered in this article.

Husband and Wife Working in the Same Businesses – A spouse is considered an employee if there is an employer/employee type of relationship, i.e., the first spouse substantially controls the business in terms of management decisions and the second spouse is under the first spouse’s direction and control. If such a relationship exists, then the second spouse is an employee subject to income tax and FICA (Social Security and Medicare) withholding. However, if the second spouse has an equal say in the business’s affairs, provides substantially equal services to the business, and contributes capital to the business, then a partnership type of relationship exists and the business’s income should be reported as a partnership on IRS Form 1065 or as a qualified joint venture (see below).

While the income and expenses of a partnership activity are reported on Form 1065, the net income or loss of the business, as shown on Schedule K-1 from the 1065, will still end up on the partners’ individual 1040 return(s), to be combined with any other income the couple has for the year. Partnerships are sometimes referred to as flow-through entities.

A provision of the tax code generally permits a qualified joint venture whose only members are a husband and wife filing a joint return to not to be treated as a partnership for federal tax purposes. A qualified joint venture is a joint venture involving the conduct of a trade or business if:

(1) the only members of the joint venture are a husband and wife,
(2) both spouses materially participate in the trade or business, and
(3) both spouses elect to have the provision apply.

Under the provision, a qualified joint venture conducted by a husband and wife who file a joint return is not treated as a partnership for federal tax purposes. Instead, all income, gain, loss, deduction, and credit items are divided between the spouses in accordance with their respective interests in the venture. Each spouse takes into account his or her respective share of these items as a sole proprietor. Thus, it is anticipated that each spouse will account for his or her respective share on the appropriate form, such as Schedule C. When determining net earnings from self-employment for computing self-employment tax, each spouse’s share of income or loss from a qualified joint venture is taken into account, just as it is for federal income tax purposes under the provision (i.e., in accordance with their respective interests in the venture).
This generally does not increase the total tax on the return, but it does give each spouse credit for Social Security earnings, on which retirement benefits are based. However, this may not be true if either spouse exceeds the Social Security tax limitation.

If your spouse is your employee and not your partner, then you must make Social Security and Medicare tax payments to the government for him or her – half the amount comes from the employee via withholding from his or her wages, and half comes from the employer. The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and Social Security and Medicare taxes but not to FUTA tax. In addition, state taxes may also have to be withheld and remitted to the state government. The employer-spouse must issue a Form W-2 for the employee-spouse.

If you have questions about the information provided here and other possible tax benefits or issues related to hiring your child or your spouse, please give us a call.

Helpful Tax Tips For 2019

Article Highlights:

  • Education Credit
  • Avoiding Underpayment Penalties Strategy
  • Spouse IRA Strategy
  • Qualified Charitable Distributions
  • Medical Expenses
  • Election to Deduct Start-Up Costs
  • State and Local Tax (SALT) Deductions
  • Electric Car Credit
  • Alimony
  • Heath Insurance Penalty
  • Cryptocurrency Transactions
  • Qualified Opportunity Funds
  • Solar Credit

As the year draws to a close, we have pulled together a number of tax tips that may be beneficial, some of which need to be acted on before the end the of the year to be useful for 2019.

Education Credit – Since the American Opportunity credit for higher education expenses is only allowed in the first four calendar years for each eligible student, taxpayers may benefit from prepaying the education expenses for an academic period beginning in the first three months of the next year. This is especially important when you consider that most students enter college in the last half of the first eligible tax (calendar) year and qualify for the credit with only half a year’s expenses during the first year. Working out a payment plan where the tuition is prepaid under the three-month rule in each of the eligible years would more evenly spread the tuition over the four years.

Avoiding Underpayment Penalties Strategy – Most high-income taxpayers and those who might end up with higher-than-normal income because they are likely to receive extraordinary taxable income should consider paying 110% of their prior year’s tax to meet the safe harbor for avoiding an underpayment penalty. And then, no matter how much they end up owing for the year, they will not need to pay up until the April due date. However, this exception requires the prepayments to be made evenly and to be paid in a timely manner by quarter; underpayments generally can’t be made up later and still qualify for the safe harbor. But, since withholding is treated as being paid evenly throughout the year (unless the taxpayer elects actual withholding amounts), the estimated tax shortfall of the even-payments-by-quarter requirement can be made up by having extra withholding at the end of the year.

Spousal IRA Strategy –If one spouse works and the other does not, tax law allows the non-working spouse to base his or her contribution to an IRA on the working spouse’s income. This tax benefit is frequently overlooked when spouses have been working and basing their individual contributions on their own income for years and then one of the spouses retires. Even if the working spouse has a pension plan at work and his or her income precludes making an IRA contribution, the non-working retired spouse can still make a contribution based on the working spouse’s income. However, be careful since traditional IRA contributions, both deductible and non-deductible, are not allowed in the year when an individual turns 70½ or any subsequent years. This restriction does not apply to Roth IRA contributions.

Qualified Charitable Distributions – With the tax reform’s substantial increase in the standard deduction, many taxpayers no longer itemize their deductions and thus get no tax benefit from making charitable contributions. However, individuals age 70½ or older—who must withdraw annual required minimum distributions (RMDs) from their IRAs—can annually transfer up to $100,000 from their IRAs to qualified charities. Here is how this provision, if utilized, works:

(1) The IRA distribution is excluded from income;
(2) The distribution counts toward the taxpayer’s RMD for the year; and
(3) The distribution does NOT count as a charitable contribution deduction.

At first glance, this may not appear to provide a tax benefit. However, by excluding the distribution, a taxpayer lowers his or her adjusted gross income (AGI), which helps for other tax breaks (or punishments) that are pegged at AGI levels, such as medical expenses when itemizing deductions, passive losses, and taxable Social Security income. In addition, non-itemizers essentially receive the benefit of a charitable contribution to offset the IRA distribution.
Medical Expenses – Self-employed taxpayers can deduct health insurance premiums they pay for themselves and their dependents above the line, which is helpful when taking the standard deduction or when the medical expenses do not exceed the 10% of AGI threshold for itemized deductions. Also, don’t overlook including long-term care and Medicare B and D premiums.

Election to Deduct Start-Up Costs – Many taxpayers overlook that they can elect to deduct up to $5,000 of start-up and $5,000 of organizational expenses in the first year of a business. Each of these $5,000 amounts is reduced by the amount by which the total start-up expense or organizational expense exceeds $50,000. Expenses not deductible in the first year of the business must be amortized over 15 years.

State and Local Tax (SALT) Deductions – The IRS has released final regulations related to the state and local taxes (SALT) deduction limitation imposed by the 2017 tax reform legislation and the attempts by various states, most notably NY, NJ, and CT, to skirt the $10,000 ($5,000 MFS) limitation. These attempts to bypass the limitation offered the states’ residents the ability to make a charitable contribution in return for a credit against their state or local taxes, thus converting a limited tax deduction into a fully deductible charitable contribution. The final regulations only allow a charitable deduction for the difference between the contribution amount and the tax credit provided by the state.

The proposed regulations also include an exception for if the tax credit does not exceed 15% of the taxpayer’s payment or 15% of the fair market value of the property transferred by the taxpayer.

Electric Car Credit – There is a non-refundable tax credit for as much $7,500 when purchasing a plug-in electric motor vehicle. However, that credit begins to phase out once each manufacturer’s sales reach 200,000 vehicles. Three of the more popular plug-in electric vehicles have reached the phaseout, and Tesla vehicles purchased in the last quarter of 2019 still qualify for a $1,875 credit but purchases after 2019 will no longer qualify for the credit in 2020. In addition, the credit for Chevrolet and Cadillac vehicles is being phased out, and only $1,875 of credit will be allowed for purchases in the last quarter of 2019 and the first quarter of 2020, after which the credit will no longer apply. The credit amount is based on the year that you place the vehicle in service (i.e., begin driving the vehicle) even if you bought the vehicle in an earlier year.

Alimony – As a reminder, for divorce decrees finalized after 2018, alimony is no longer deductible by the payer or taxable to the recipient. This change has no effect on divorce decrees entered into before 2019 that are unmodified, for which alimony continues to be deductible by the payer and taxable to the recipient.

Heath Insurance Penalty – The ACA penalty for not being insured no longer applies at the federal level. But some states, including California, have instituted a penalty, and residents of states that have a penalty should be sure to get their 2020 coverage in place by the end of 2019 to avoid a penalty for 2020.

Cryptocurrency Transactions – Beware! The IRS has cryptocurrency on its radar and is ramping up enforcement programs. Cryptocurrency (virtual currency) is treated as property, and every time it is sold or used, the gain or loss from the transaction must be computed and reported in the same manner as a stock transaction.

Qualified Opportunity Funds (QOFs) – Taxpayers can defer capital gains into QOFs, with tax on the gain deferred until 12/31/26 or when the QOF is sold, whichever is earlier.

Solar Credit – A federal credit for the purchase and installation costs of a residential solar system is fading away. After being 30% of the cost for several years through 2019, the credit amount will drop to 26% in 2020 and then 22% in 2021, the final year of the credit.

If you have questions related to these or other tax issues, please give our office a call at 562-404-7996.

Tax Benefits for People With Disabilities

Article Highlights:

  • ABLE Accounts
  • Disabled Spouse or Dependent Care Credit
  • Medical Deductions
  • Home Modifications
  • Special Schooling
  • Nursing Services

Individuals with disabilities as well as parents of disabled children are eligible for a number of income tax benefits. This article explains some of these tax breaks.

ABLE Accounts – A federal law allows states to offer specially designed, tax-favored ABLE accounts to people with disabilities. Qualified ABLE programs provide the means for individuals and families to contribute and save to support individuals who became blind or severely disabled before turning age 26 in maintaining their health, independence, and quality of life. The 2017 tax reform, known as the Tax Cuts and Jobs Act (TCJA), added some additional features to the ABLE accounts.

The states run the ABLE programs authorized by the federal tax statute. A state that has established an ABLE account program can offer its residents the option of setting up one of these accounts or contract with another state that offers ABLE accounts. Contributions totaling up to the annual gift tax exclusion amount, currently $15,000, can be made to an ABLE account each year, and distributions are tax-free if used to pay qualified disability expenses.

Beginning in 2018 and through 2025, a TCJA provision allows the beneficiary of the ABLE account (i.e., the disabled person) to contribute a maximum additional amount each year, equal to the lesser of:

  • The beneficiary’s taxable compensation for the year, or
  • The prior year’s poverty level ($12,140 for 2019) for a one-person household.

However, the extra contribution isn’t allowed if the beneficiary’s employer contributes to a qualified retirement plan on the beneficiary’s behalf.

The beneficiary’s additional contribution qualifies for the non-refundable saver’s tax credit, which, depending on the beneficiary’s actual income, can be 10%, 20%, or even as much as 50% of up to the first $2,000 contributed, for a maximum credit of $1,000.

Disabled Spouse or Dependent Care Credit – A tax credit is available to individuals who incur childcare expenses for children under the age of 13 at the time the care is provided. This credit is also available for the care of the taxpayer’s spouse or of a dependent who is physically or mentally unable to care for himself or herself and lived with the taxpayer for more than half the year. This is also true for individuals who would have been dependents except for the fact that they earned $4,200 or more (2019) or filed a joint return with their spouse. The credit ranges from 20% to 35%, with lower-income taxpayers benefiting from the higher percentage and those with an adjusted gross income of $43,000 or more receiving only 20%. The care expenses qualifying for the credit are limited to $3,000 for one and $6,000 for two or more qualifying individuals.

Medical Expense Deductions – In addition to the “normal” medical expenses, individuals with disabilities can incur other unusual deductible expenses. However, to gain a tax benefit, an eligible taxpayer must itemize his or her deductions on Schedule A, and the taxpayer’s total medical expenses must exceed 10% of his or her adjusted gross income. Eligible expenses include:

  • Prostheses
  • Vision Aids – Contact lenses and eyeglasses
  • Hearing Aids – Including the costs and repair of special telephone equipment for people who are deaf or hard of hearing
  • Wheelchair – Costs and maintenance
  • Service Dog – Costs and care of a guide dog or service animal
  • Transportation – Modifications or special equipment added to vehicles to accommodate a disability
  • Impairment-Related Capital Expenses – Amounts paid for special equipment installed in the home or for improvements may be included as medical expenses, if their main purpose is medical care for the taxpayer, the spouse, or a dependent. The costs of permanent improvements that increase the property’s value may be partly included as a medical expense. The costs of the improvement are reduced by the increase in the property’s value. The difference is a medical expense. If the improvement does not increase the property’s value, the entire cost is included as a medical expense. Certain improvements made to accommodate a home to a taxpayer’s disabled condition, or to that of the spouse or dependents who live with the taxpayer, do not usually increase the home’s value, so the costs can be included in full as medical expenses. A few examples of full-cost medical expenses include constructing entrance or exit ramps for the home; widening entrance and exit doorways, hallways, and interior doorways; installing railings, support bars, or other modifications; and adding handrails or grab bars.
  • Learning Disability – Tuition fees paid to a special school for a child who has severe learning disabilities caused by mental or physical impairments, including nervous system disorders, can be included as medical expenses. A doctor must recommend that the child attend the school. Fees for tutoring recommended by a doctor from a teacher who is specially trained and qualified to work with children with severe learning disabilities may also be included.
  • Special Schooling – Medical care includes the costs of attending a special school designed to compensate for or overcome a physical handicap in order to qualify the individual for future normal education or for normal living. This includes a school that teaches braille or lip reading. The principal reason for attending the school must be its special resources for alleviating the student’s handicap. The tuition for ordinary education that is incidental to the special services provided at the school as well as the costs of meals and lodging supplied by the school are also included as medical expenses.
  • Nursing Services – Wages and other amounts paid for nursing services can be included as medical expenses. Services need not be performed by a nurse as long as the services are of a kind generally performed by a nurse. This includes services connected with caring for the patient’s condition, such as giving medication, changing dressings, and bathing and grooming the patient. These services can be provided in the home or another care facility. Generally, only the amount spent for nursing services is a medical expense. If the attendant also provides personal and household services, these amounts must be divided between the time spent performing household and personal services and the time spent on nursing services.

If you have questions about any of the disability-related tax benefits discussed in this article, or if you have questions concerning potential medical expenses not discussed above, please give this office a call at 562-404-7996.