Busy Season 2019 Just Around the Corner, and, less chance of underpayment penalties being imposed this year
Busy season is just around the corner and it promises to be one of the most interesting tax preparation seasons ever. I know that "tax" and "interesting" are words that are hard to imagine hearing in the same sentence, but in the years I've had my tax practice, I've never seen a more radical change to the tax code and the returns I'll be filing for 2018.
Any time the tax code changes substantially as it did for the 2018 tax returns I'll be preparing, there is a greater chance of taxpayers did not properly estimate their tax liability during the year, and potentially face underpayment interest. Typically, you would be required to have paid 90% of your liability for 2018 by January 15, 2019, and self-employed individuals would be required to have made earlier quarterly payments in April, June and September, covering 25%, 50% and 75% of the tax liability, respectively. Any underpaid portion would be subject to a 4% annualized interest rate, the amount imposed based on the number of days between the payment deadline and the date of the payment.
However, given the complicated changes in our tax code this year, particularly for self-employed persons, the Internal Revenue Service has "thrown us a bone" and now requires only 85% of tax liability to have been paid by January 15, 2019, provided you specifically request a waiver of the penalty on the Form 2210 and specifically have the language "85% Waiver" in the explanation statement. This waiver, as far as I am aware, only applies for the 2018 return and will likely not be renewed for the 2019 return, given that the tax rules are not changing so dramatically from this year to the next.
Some relief is better than none, but in light of how complicated the tax rules have become for self-employed individuals, it seems that more relief from penalties should be given to them, while persons working regular jobs generally don't need to worry as much, given that they have taxes withheld all throughout the year.
Busy season is slowly beginning, conveniently at the same time that the government shutdown has just ended, so tax returns will theoretically be processed as normal, as the Internal Revenue Service had already announced (before the shutdown) it would not be processing any returns until January 28th anyway. If you have your tax documents available, now is the time to submit them to your tax professional, as they will likely be able to complete and file your return in a much shorter period of time before the heavy backup begins in late February and the wait for your completed returns can be several weeks. Don't delay if you don't have to, and the earlier you file, the earlier you can take advantage of your tax professional's advice for reducing your federal and state taxes during the rest of the year.
Last Minute Year-End Moves that could Reduce Your 2018 Federal Taxes
Hope everyone enjoyed the Christmas holiday, and plans on having a fun New Year's. I've tried to relax as much as possible with the onslaught of the oncoming tax season, just a few weeks away, which promises to be one of the most interesting seasons, possibly the most interesting, tax season ever. I know that "interesting" is not a word that usually comes to mind about taxes for people who are not tax professionals but the Tax Cuts and Jobs Act that was passed at the end of 2017 has radically changed the individual and business tax codes more than ever before, and with 2018 being the first year it was in effect, my next tax preparation season promises to be both busy and interesting.
Before you uncork that champagne, there are a few last-minute moves you can make that could reduce your 2018 tax liability, although not all of them may apply to your situation.
1. Max out your 401k/403b plans. Whether you itemize deductions or not, you have the option to exclude up to $ 18,500 from your taxable income ($ 24,500 if you are 50 or older) in your workplace's 401k or 403b plans. Money put into these plans is excluded from federal (and usually state) taxation and grows tax-deferred until you begin withdrawing in your retirement years.
2. Max out your Individual Retirement Account (IRA) or Self-Employed Individual Retirement Account (SEP-IRA). Depending on your income level and whether you have access to a 401k plan at your job, you may also be able to contribute up to $ 5500 to a traditional or Roth IRA ($ 6500 if you are 50 or older), or up to $ 55,000 in a SEP-IRA if you are self-employed. Funds contributed to traditional IRAs and SEP-IRAs reduce your taxable income and put away money that grows tax deferred for retirement. You can actually make these contributions after December 31, 2018; contributions to all kinds of IRAs for 2018 can be made up until the April 15, 2019 filing deadline.
3. Charitable Donations. If your total itemized deductions (generally state & local taxes up to $ 10,000, mortgage interest and charity) add up to an amount greater than the standard deduction ($ 12,000 for individuals, $ 18,000 for single parents, $ 24,000 for married couples, higher amounts for persons over age 65), making donations of cash, collectibles or investments to charity can reduce your taxable income. When you donate a collectible or investment that has increased in value since you purchased it, you may deduct the fair market value of it, giving you the benefit of a deduction that was more than you paid for the collectible or investment and avoid paying any capital gains tax on the increased value. Be sure to get a receipt for every donation! The IRS will want to see receipts in the event you are audited.
4. Paying Ahead on Your College or Graduate School Courses. If you haven't made a payment toward your next semester's bursar bill (whether it is for you or a student in your family), making an advance payment can result in you receiving up to a $ 2000 Lifetime Learning Credit or a $ 2500 American Opportunity Tax Credit depending on your income level.
5. Student Loan Interest. If you have any student loans in repayment, you likely have already made your monthly payment for December. Some added interest has accrued between then and now; making an extra payment could result in an extra deduction, up to $ 2500 depending on your income level and regardless of whether you itemize your deductions or not.
6. Selling off Losing Investments to Offset Capital Gains. As a tax professional, I cannot offer any investment advice whatsoever (and neither this nor any other part of this blog should be construed as such), but if you own an investment that has lost considerable value, and don't see it coming back anytime soon, now would be the time to sell it. Any loss that is generated gets deducted against any investment gains you have realized during 2018, and up to $ 3000 can be deducted against your other income. If there is still an investment loss left over after both of these deductions, the loss is carried forward to the next tax year. This potential tax savings applies whether you itemize your deductions or not.
7. 529 College Savings Plan Contributions. Some states (not all) give you a deduction on their returns for funds contributed to your childrens' college savings plans. You have until December 31 to make a contribution to the college savings plans that can be deducted on your state returns (if the states allow such a deduction). The amount you can contribute is unlimited, although all states that allow you to deduct these contributions have a limit on the amount you can deduct, and contributing over $ 15,000 per child in a year could result in you having to pay the federal gift tax.
8. Medical Expenses and Medical Debt. It is extremely rare for my clients to be able to deduct un-reimbursed medical expenses, as only the portion that exceeds 7.5% of your income can be deducted as an itemized deduction (and is irrelevant if you do not itemize). But if you have any outstanding medical bills or need to pick up and pay for a drug prescription, and the total amounts exceed 7.5% of your income, you may receive an additional deduction to reduce your taxable income if you pay these off before December 31. This applies only to those who itemize their deductions and if the expenses are not high enough, it will not make a difference.
As always, do not make any of these moves without consulting your tax professional as they may not end up being beneficial in your situation. As always, I'm an easy phone call or email away. Enjoy your New Year's Eve and see you in 2019!
Hot Off the Presses - New Tax Forms
The holiday season is in full swing with the stores full of shoppers and the usual madness. I prefer to do most of my holiday shopping online, though I usually end up in the stores at some point or another because of my procrastinating and don't have time to wait for everything to ship. Hopefully you are less of a procrastinator than I am.
The Internal Revenue Service has given us an early Christmas present - the new tax forms and schedules for 2018! They are looking deceptively simple compared to prior years by being much shorter - the proudly touted "postcard size" return that so many politicians like to say. The reality is that a lot of lines from the original Form 1040 have been pulled off and put into Schedules 1, 2, 3, 4, 5 & 6, and we still have the common Schedules A, B, C, D & E. Many of my clients will likely have the new Schedule 1, where state tax refund and capital gain income are declared, while all my self-employed clients (including myself) will have the Schedule 4, where the calculated self-employment tax is listed, along with Investment Income and Additional Medicare taxes are also listed. The calculations behind the numbers shown on these new schedules are on other forms (i.e. Schedules D & SE, Forms 8959 & 8960) that will also still need to be filed. As a result, for most of my clientele, they'll just have their returns spread out over more pages than before, with less data being shown on each page.
It doesn't seem any more efficient to me, but the masses always love the idea of a "postcard size" return - I remember during the 1996 presidential election, Republican candidate Steve Forbes had a vision for an extremely simplified and flat income tax where everyone would file their taxes on a return the size of a postcard (filing electronically was generally not available back then) - but in reality, his proposal to revamp the tax code and make it so much easier was vague on a lot of important details, not well thought out and never came to fruition. Still, like so many other politicians, he had a great gimmick and for a while was a serious threat to the eventual Republican nominee Robert Dole, being a serious contender before his campaign fizzled out just a few months before the GOP had its annual convention.
While political campaigns are built on a lot of gimmicks, our tax code and policy have to be built on the reality that our country and its economy are a complicated one with a lot of different interests at stake. Take a look at the new Form 1040 and the new schedules 1 through 6, available at this link or for download below:
https://www.irs.gov/forms-pubs/about-form-1040
Tax season will be upon us soon... until then, Happy Holidays!
Election Day is on November 6. Will you be there?
By now, you've put away your Halloween decorations and the Christmas advertising campaigns will be plastering our airwaves soon. Whether we want to or not, many of us will start thinking about the holiday season and going through the various annual rituals of extra cooking, shopping and decorating. But before you start rummaging through your closets for those lights you plan on stringing up, it's important to plan on voting in the mid-term elections on November 6. It's not just a privilege, it's your responsibility. I don't particularly remember how quickly I filled out a voter registration card after my 18th birthday but I still remember the first election in which I voted and how happy and excited I was to do so.
It was just a minor school board election, and I might not have even gone to vote had my Economics teacher not mentioned it in class during the day (I was focused more on the upcoming Presidential that would be taking place when I was to enter college that fall) but after an early dinner that evening, I jumped on my bike and rushed right over to the polling place to exercise my newly-acquired right as a citizen. Being a relatively minor school board election, turnout was probably low but I truly felt a sense of privilege as I went into the voting booth.I am not normally one to get political on this blog, and I am not here to endorse or criticize any particular candidate. But it's our Congress that draws up and passes the various laws that reflect the policies proposed and enforced by our President.
Every member of our House of Representatives is up for re-election while one third of our Senate also must be evaluated by the constituents in their states to determine if they will keep their jobs. We've had some of the most radical changes to our tax system that I've ever seen as a tax professional since I entered the field from my time at the Internal Revenue Service. If you don't like the tax scheme then it's up to you to vote out the politicians that allowed it to happen as they are the ones that wrote the law our President signed. If you are happy about the new system, then it's up to you keep the people that wrote it in office. Either way, these elections are designed to bring what we the people want as a country, both for ourselves and for everyone.
Our country isn't perfect and the election process itself is no exception, but simply talking about what is wrong or what is right about our government does not have anywhere near the effect that voting out or re-electing the politicians that created the system we have. Admittedly, some states make it easier than others, with early and/or mail-in voting, but on November 6, all states have their polls open early in the morning and don't close until late in the evening. I know it can be a hassle, but it's important to find your way over to the polls, whether it's before work, during lunch or after work. It shouldn't take you long. As they've been saying for decades... Get Out and Vote!