New Tax Rules for 2020

Here are several new tax laws passed this year to consider as you start planning your 2020 tax obligation.

Make up to $300 of charitable contributions. For the 2020 tax year only, an above-the-line deduction of $300 is available to all Americans who want to make a charitable contribution. You can donate to more than one charity, but the total amount of contributions must be $300 or less to be able to take an above-the-line deduction. While you will still need to itemize your deductions if you want a tax break for donations greater than $300, this above-the-line deduction for $300 or less helps alleviate the elimination of the charitable deduction for most taxpayers. (NOTE: $300 is the maximum above-the-line deduction per tax return, regardless of filing status.)

What you need to do. Donate $300 to your favorite charitable organization(s) by December 31, 2020. You must receive a written acknowledgment from the charitable organization(s) to which you made the $300 contribution before filing your 2020 tax return.

Donate up to 100% of your income. The normal contribution limit of 60% of your income is suspended for 2020, allowing you to contribute as much of your income as you want to various charities.

What you need to do. While only a tax break for a few taxpayers, this initiative is meant to help struggling charities during the pandemic. If you are considering additional giving, you must make your charitable contributions by December 31, 2020. Remember to obtain written acknowledgment from each charity you made a donation to before filing your 2020 tax return.

Use retirement savings to pay for birth or adoption expenses. Adding a child to your family is very expensive. To help with these costs, you can now cash out up to $5,000 per parent from your retirement accounts to pay for birth and/or adoption expenses. While the withdrawal won’t be hit with the 10% early withdrawal penalty, you’ll still have to pay income taxes.

What you need to do. Consult your financial advisor or benefits coordinator to find out how to withdraw the funds from your retirement accounts. Since this withdrawal will deplete your retirement savings, first consider whether you have other sources of cash to cover expenses.

No age limit for contributing to IRAs. You can now contribute to an IRA regardless of your age as long as you have earned income. The old rule prevented you from contributing to an IRA past age 70½. The IRA contribution limit for 2020 is $6,000 if you’re under age 50 and $7,000 if you’re over age 50.

What you need to do. Consider getting a part-time job or doing some consulting work if you project that you won’t have earned income by the end of 2020. You can then use this earned income to fund your traditional or Roth IRA.

NEW TRADE-IN RULES BEGIN IN 2018

One of the new rules under the Tax Cuts and Jobs Act (TCJA), that is effective for 2018 going forward, concerns 1031 exchanges, or more specifically, the trade-in of vehicles and equipment.

Under the prior tax law, trade-ins deferred the tax on any gain from the disposition of the vehicle or equipment. By deferring any gain, the tax basis of the new equipment was reduced by the deferred gain.

Under the NEW TAX LAW, 1031 exchanges are only allowed for real estate. Trade-ins of vehicles or equipment will be treated as a sale and any gain on the transaction will be recorded in the year of trade. This may not be all bad, as you may have the ability to use the special (bonus) depreciation and/or Section 179 rules to expense the new vehicle or equipment at a much faster rate or even all in the year of purchase.

Update on the Tax Cuts and Jobs Act (TCJA)

The Tax Cuts and Jobs Act (TCJA) was passed by Congress in a hurry late last year, and the IRS and tax preparers have been working to digest some of the issues created by the tax overhaul. Here are the latest answers to some of the most common questions:

1. Is home equity interest still deductible?

The short answer is: Not unless you’ve used the money to buy, build or substantially improve your home.

Before the TCJA, homeowners were able to take out a home equity loan and spend it on things other than their residence, such as to pay off credit card debt or to finance large consumer purchases. Under the old tax code, they could deduct interest on up to $100,000 of such home equity debt.

The TCJA effectively writes the concept of home equity indebtedness out of the tax code. Now you can only deduct interest on “acquisition indebtedness,” meaning a loan secured by a qualified residence that is used to buy, build or substantially improve it. If you have taken out a home equity loan before 2018 and used it for any other purpose, interest on it is no longer deductible.

2. I’m a small business owner. How do I use the new 20 percent qualified business expense deduction?

Short answer: It’s complicated and you should get help.

Certain small businesses structured as sole proprietors, S corporations and partnerships can deduct up to 20 percent of their qualified business income. But that percentage can be reduced after your taxable income reaches $157,500 (or $315,000 as a married couple filing jointly).

The amount of the reduction depends partly on the amount of wages paid and property acquired by your business during the year. Another complicating factor is that certain service industries including health, law, consulting, athletics, financial services and accounting are treated slightly differently.

The IRS is expected to issue more clarification on how these rules are applied, such as when your business is a mix of one of those service industries and some other kind of business.

3. What are the new rules about dependents and caregiving?

There are a few things that have changed regarding dependents and caregiving:

Deductions. Standard deductions are nearly doubled to $12,000 for single filers and $24,000 for married joint filers. The code still says dependents can claim a standard deduction limited to the greater of $1,050 or $350 plus earned income.
Kiddie Tax. Unearned income of children under age 19 (or 24 for full-time students) above a threshold of $2,100 is now taxed at a special rate for estates and trusts, rather than the parents’ top tax rate.
Family credit. If you have dependents who aren’t children under age 17 (and thus eligible for the Child Tax Credit), you can now claim $500 for each qualified dependent member of your household for whom you provide more than half of their financial support.
Medical expenses. For those who are itemizing their deductions, you can now deduct medical expenses in excess of 7.5 percent of your adjusted gross income for 2018 - the percentage increases to 10 percent for 2019 and future years. You can claim this for medical expenses you pay for a relative even if they aren’t a dependent (i.e., they live outside your household) as long as you provide more than half of their financial support.

Stay tuned for more guidance from the IRS on the new tax laws; and reach out if you’d like to set up a tax planning consultation for your 2018 tax year.

2018 Paid Sick Leave and Minimum Wage Increase

Starting January 1, 2018, employers in Washington will be required to provide their employees with paid sick leave.

Initiative 1433, which was approved by Washington State voters in fall 2016, contains 4 primary changes to state law:

Requires employers to provide paid sick leave to most employees beginning January 1, 2018.
Increases the minimum wage over the next several years. 01/01/2018 increase to $11.50/hr.
Ensuring tips and service charges are given to the appropriate staff and,
Protects employees from retaliation when exercising their rights under the Minimum Wage Requirements and Labor Standards Act.

Year-End Tax Checklist

As the year draws to a close, there are several tax-saving ideas you should consider. Use this checklist to make sure you don’t miss an opportunity before the year is out.

Retirement distributions and contributions. Make final contributions to your qualified retirement plan, and take any required minimum distributions from your retirement accounts. The penalty for not taking minimum distributions can be high.
Consider RMD donation. If you don’t need your required minimum distribution, consider donating it to charity. Ask us about how to accomplish this before year-end.
Investment management. Rebalance your investment portfolio, and take any final investment gains and losses. Capital losses can be used to net against your capital gains. You can also take up to $3,000 of capital losses in excess of capital gains each year and use it to lower your ordinary income.
Last-minute charitable giving. Make a late-year charitable donation. Even better, make the donation with appreciated stock you’ve owned more than a year. You often can make a larger donation – and get a larger deduction – without paying capital gains taxes.
Noncash contribution opportunity. Gather up noncash items for donation, document the items and give those in good condition to your favorite charity. Make sure you get a receipt from the charity, and take a photo of the items donated just in case.
Gifts to dependents and others. You may provide gifts to an individual of up to $14,000 this year, without needing to file a gift tax return. Remember that all gifts given (birthdays, holidays, etc.) count toward the total.
Organize records now. Start collecting and organizing your end-of-year tax records. Estimate your tax liability and make any required estimated tax payments.

Planning for 2016 Taxes

The Protecting Americans from Tax Hikes Act of 2015 made several tax incentives permanent. Among the most beneficial for businesses is the Section 179 expensing limitations and phase-outs. The new thresholds allow $500,000 of immediate expensing of qualified business equipment, with a phase out of $2,000,000. If you are planning on making some big equipment purchases by year end, you will be able to write-off the entire purchase (or any portion) on your 2016 income tax return.

A separate provision allows 50% of the cost of improvements to be written off under “bonus depreciation”. This provision was extended for five years.

And, another permanent change allows retailers and restaurants to depreciate remodeling and other improvements to their stores over 15 years, rather than the previous standard of 39 years.

Minimum Wage Increases Effective 1/01/2017

With the passage of Initiative 1433 in Washington State, minimum wage rates will take a big jump over the next few years. Beginning January 1, 2017, the minimum wage rate required to be paid to workers 18 years old and older will increase to $11.00 per hour from the current rate of $9.47 per hour.

The rate will increase to $11.50 per hour in 2018, $12.00 per hour in 2019, and $13.50 per hour in 2020. Subsequent increases will be inflation adjustments.

Starting in 2018, employers will be required to pay sick leave; earned at the rate of one hour per every 40 hours worked.

New W-2 and 1099 Reporting Rules

Beginning with 2016 returns, due dates for Forms W-2 and certain Forms 1099 have been moved up, and the penalties for late or inaccurate forms have substantially increased.

* Form W-2 is due to the Social Security Administration on January 31, 2017, instead of February 28, whether you file electronically or by paper. (If you file 250 or more forms, you must file electronically.)

* Form 1099 must be submitted by January 31, 2017 if you're reporting non-employee compensation in Box 7. Otherwise, the forms are due to the IRS on February 28, the same as in prior years, or March 31 if you file electronically.

In addition to filing on time, you need to make sure the information on the forms is accurate.

Penalties for Failure to File Correct Information Returns may apply if you:

don’t file a correct information return by the due date and a reasonable cause is not shown,
file on paper when you were required to file electronically,
fail to report a Taxpayer Identification Number (TIN),
report an incorrect TIN, or
fail to file paper forms that are machine readable.

Penalties for Failure to Furnish Correct Payee Statements may apply if:

you don’t provide a correct payee statement by the applicable date and a reasonable cause isn’t shown,
all required information isn’t shown on the statement, or
incorrect information is included on the statement.

How much are the penalties? If you fail to file on time and your business gross receipts are less than $5 million, penalties can range from $50 per return for up to 30 days late, to $260 per return for filing after August 1. The maximum dollar penalty can range from $186,000 to $1,064,000. If the IRS says you intentionally disregarded the rules, you can be fined $530 per return, with no maximum.

Start Planning for 2016 Income Taxes Using 2015 Tax Return

You have just filed your 2015 return and now you're ready to forget all about taxes until next year. But wait! Your 2015 tax return is a great tool to help you plan for 2016. Here's what to look at-

Review your withholding. If you paid additional tax in 2015 or received a large refund, consider adjusting your tax withholding. Underpaying your tax may result in interest and penalties. By overpaying you give the government an interest-free loan. To change your withholding you need to complete Form W-4 and submit it to your employer.

Consider changes in the coming year. Life's big events may affect your taxes. Are you moving for a new job, starting a business, buying a home, going back to school, or having a baby? You may be able to take advantage of certain deductions or tax credits. Look into the requirements for available deductions/credits so you'll have the documentation needed to take advantage of any tax savings.

Age Related in 2016
Age 65
Medicare
If you're not already getting benefits, you should contact Social Security about three months before your 65th birthday to sign up for Medicare, even if you don't plan to retire at age 65.

Hospital insurance Part A There is no premium to pay for Part A

Medical insurance Part B If eligible for free Medicare Part A, you may enroll in Part B by paying a monthly premium. Beneficiaries with higher incomes pay higher monthly Part B premiums.

Income Tax
Beginning at age 65, you generally receive a higher standard deduction.

Age 66
You have reached full retirement age and may receive social security benefits with no reduction in benefits if you continue to earn wages or self-employment income.

Delaying receipt of your social security benefits until age 70 increases your benefit amount by 8% for each year you delay. For example, at age 70, you would receive 32% more than at age 66.

Age 70 ½
After reaching age 70½ you are generally required to start withdrawing a minimum distribution from a 401(k) or traditional IRA (doesn't apply to Roth IRAs).

Reevaluate your retirement. Saving for retirement is one of the most effective ways to reduce your tax bill while keeping money in your own pocket. If you missed maxing out your retirement plan in 2015, look into increasing your 401(k) contribution or contributing to an IRA.

Add up itemized deductions. Will you have enough deductions to itemize in 2016? The standard deduction for 2016 is $6,300 for single, and $12,600 for married filing jointly. Think about changes during 2016 that may increase or decrease the itemized deductions you can claim, such as buying a home, prepaying your real estate taxes, or donating to charity.

Stay informed. Tax laws evolve and staying informed is important. If you need help, we're available year-round. It's never too late – or too early – to start planning for 2016 income tax.

HOME REFINANCING – Understanding the Tax Issues

Are you thinking of refinancing your home mortgage? The following are tax rules to keep in mind.

Refinanced home acquisition debt - Any secured debt you use to refinance home acquisition debt will only qualify as home acquisition debt up to the amount of the balance of the old mortgage principal just before the refinancing. Any additional debt not used to build, or substantially improve (add value, or prolong the useful life) of the home is not home acquisition debt, but it may qualify as home equity debt.

Track "points" - A point is a fee equal to 1% of the loan amount. While you can fully deduct the points you pay when buying your home (if $1 million or less), points paid on refinancing are generally amortized over the term of the new mortgage. The points related to the home improvement are deductible. If you refinance a loan for a second time, the undeducted points from the previous loan are deductible that year, which is also the case when you sell your home.

You can only deduct points on loans secured by your second home over the life of the loan.

Trace your use of funds - When you "cash out", or convert $100,000 or less of your home equity to cash during a refinance, the interest is tax deductible. If you take additional amounts, the interest may or may not be deductible depending on how the funds are used. When you use funds to expand your business, the interest may be deductible business interest. If you buy investments, the interest may be investment interest expense.

For more information on refinancing or mortgage interest tax deductions, give us a call.