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Tax Tips and Considerations For 2019

Social Security Benefits

The great debate of how to handle social security is one of personal choice as well as a puzzle that figures into your own personal planning and tax situation. Benefits are available to be paid generally as you approach eligibility. As you approach this age, you will continue to get information referencing the benefits you are due.

 The Social Security Act was passed in 1935. There have been 12 major legislative changes since inception. These changes have affected participation requirements, wages subject to Social Security withholding, benefits, and, most recently, efforts to sustain the program. The most recent change was the Bipartisan Budget Act of 2015 when they rescinded the file and suspend provisions and the restricted application for spousal benefits after achieving full retirement age for benefits. For those participants turning 66 years of age after April 30, 2016, file and suspend no longer applies.

 File and suspend allowed the participant to suspend receiving their benefits until age 70; yet the spouse and eligible children could receive benefits while the participant suspends collecting their benefits. The new law allows the suspension of benefits to age 70; but the spouse and children’s benefits are suspended as well.

The Bipartisan Act also eliminated the lump sum provision of, after suspending the benefit, the participant could elect to receive past benefits in a lump sum amount prior to achieving age 70. This provision as well is still available to those turning age 66 on or before April 30, 2016.

 Benefits from Social Security were never expected to supposed to be part of the platform, the other parts being retirement savings through employer provided plans and individual retirement plans as well as savings and investments accumulated over a lifetime.

 The earliest point to begin to receive retirement benefits is age 62. The year of birth is used to determine normal retirement age which ranges from 65 to 67 years of age. If benefits are drawn prematurely, then the amount received is less. If benefits are suspended, the amounts received each payment is higher. Theoretically the payments are designed to provide the same total benefit over the period the participant chooses to receive payments.

 So, the things to be mindful of in making this decision for your family are:

  • Necessary cash flow requirements
  • Health and family history of longevity
  • Earnings prior to normal retirement age
  • Possible changes in law

 Obviously, each situation is different. Please be sure to consider your situation and use your investment and tax advisors to help guide you.

 

 

Taxes on Social Security Benefits

Social Security benefits may be taxed for income tax purposes based upon each participant’s provisional income. Provisional income is your adjusted gross income increased by both tax-exempt income and 50% of your Social Security benefits to arrive at a modified adjusted gross income. The following table benefits to be reported, as well as the range modified adjusted gross income will affect taxability of your benefits. If you are beyond the upper end of the range, 85% of the benefits are taxable.

 

Filing status

Base

Additional

Single

$25,000

$34,000

Head of household

$25,000

$34,000

Married filing jointly

$32,000

$44,000

Married filing separately

$0

 

Qualifying widow(er)

$25,000

$34,000

 

Consideration needs to be provided in the year you are going to begin receiving benefits, and you should discuss this with your tax advisor along with any other changes expected in the year that you will begin to receive these benefits. The payment of taxes on Social Security benefits can be achieved through withholding on your Social Security benefits, increased withholding on other sources of income, as well as increased estimated tax payments. Social Security is not taxed by the State of Arkansas. 

 

 

New 0% Capital Gains Rate in 2018

Qualified individuals are eligible for a 0% rate on long-term capital gains and qualified dividends. The three potential rates on dividends and profits on the sale of assets owned for more than a year are: 0% which applies to individuals in the two lowest marginal tax brackets (10%, 15%); 15% for the next four brackets (25%, 28%, 33%, 35%); and 20% for the highest bracket (39.6%).

 In 2018, the 0% tax rate applies to married taxpayers with a taxable income of up to $77,200 and to single taxpayers with a taxable income of up to $38,600.

Here are 3 examples that illustrate the rules:

  1. For a married couple with $60,000 in taxable income which includes $10,000 of qualified dividends and long-term gains, the full $10,000 in gains is taxed at the 0% rate.
  1. For a married couple with $80,000 in taxable income which includes $10,000 of qualified dividends and long-term gains. $7,200 ($77,200 – ($80,000 – $10,000)) is taxable at the 0% rate, and the remaining $2,800 is taxed at the 15% marginal tax rate.
  1. For a married couple with $100,000 in taxable income which includes $10,000 of qualified dividends and long-term gains, the 0% rate does not apply.

  It is important to note that the zero-percent-rate gains and dividends increase adjusted gross income. This could cause more Social Security benefits to be taxed and can affect some itemized write-offs, such as charitable contributions. In addition, many states tax gains as ordinary income, so your state tax liability can rise.

Year End Capital Gains Tip

As the year end approaches, it is a good time to take a look at your investment portfolio. Consider the tax advantage of getting rid of poor performers: How risky is it? Does it fit into your long-term goals? Does it complement what you already have? The decision to sell and take a loss allows you to use the loss to offset other capital gains. Or you can deduct up to $3,000 in capital losses from other income if you do not have gains to offset. Any amount of loss exceeding $3,000 can be carried forward to future years to offset capital gains or income in those years.

 But be mindful of the wash-sale rule that bans taking a capital loss write-off if you reinvest in identical or similar stock or security within 30 days before or after the sale.

Business Meals Guidelines

The Tax Cuts and Jobs Act of 2017 set new guidelines for business-related entertainment and client business meals. Deductions for entertainment are now 100% not deductible. In the past these terms meals and entertainment were used somewhat interchangeably.  So when looking at the changes, business meals are still generally 50% deductible, providing: 1) the taxpayer or his employee is present and the food and beverage expenses are ordinary and necessary (not lavish or extravagant); 2) meals are provided to a current or potential customer, client, consultant, or similar business contact; 3) food and beverages purchased during an entertainment event, i.e. show tickets, golf fees, sporting events, etc. are purchased separately from entertainment or if the cost of food and beverages is stated separately from the  entertainment on bills, invoices or receipts. An interpretation that this suggests is that the cost of the sporting boxes, seating, etc., is not deductible for sure. However, if the food and beverages are required to be purchased from the University, for instance, then this is not meals and is not deductible. It is considered part of the package. If purchasing the food and beverage is optional as to who will supply food and beverage, then it is separate and eligible for the deduction. The same applies to hunting clubs used for entertainment, etc. Look to bifurcate the package(s).

To track these expenses on an ongoing basis, new account numbers should be set up so that your business takes the maximum allowed deductions. This may require you to go back and clean up the activity that previously occurred since December 31, 2017. The suggested categories are:

  • Entertainment – 0% deductible
  • Business and travel meals – 50% deductible
  • Meals for convenience of employer – 50% deductible – these become 0% deductible in 2025 so a separate account prevents having to change accounting and expense reporting in the future. This used to be 100% deductible.
  • Meals and entertainment – 100% deductible – includes expenses treated as compensation, reimbursed expenses, recreational, etc., expenses for employees for the benefit of employees, and other expenses as detailed in the rule.
  • All out of pocket business expenses not reimbursed to employee(s) are no longer deductible as Miscellaneous itemized deductions. So, if you have out of pocket expenses not being reimbursed and will continue to have these, we suggest meeting  with employees and refiguring compensation to net the same benefit for everyone based upon your existing circumstances. Do not leave money on the table.  An example of this is if your agreement was that you were to get $100.000 W-2, you are responsible for your own business expenses, and you have $10,000 in room, meals, and auto, then reduce your W-2 and have your employer pay you the expenses; and then if it is less, bonus out the difference. YOU do not lose part of the Miscellaneous itemized deduction on phase out, and you save related payroll taxes on the reimbursed business expenses.

Office picnic or holiday party

100% deductible

Food for general public benefit (e.g., hot dogs provided to the public by an automobile dealership)

100% deductible

Entertainment at business meetings of employees, stockholders, directors, etc.

100% deductible

Meals included as taxable income

100% deductible

Meals at business meetings of employees, stockholders, directors, etc.

50% deductible

Client business meals

50% deductible

Meals during business travel

50% deductible

Occasional overtime meals for employees

50% deductible through 2025, nondeductible after 2025

Meals for convenience of employer (e.g., catered lunches provided by a tech start-up, meals provided on nondiscriminatory basis on corporate business premises under Sec. 119

50% deductible through 2025, nondeductible after 2025

De minimis fringe benefits (e.g., office snacks)

Unclear—guidance from IRS is expected

Entertainment-related meals (e.g., meals with a client during a sporting event)

Unclear—guidance from IRS is expected

 

 

Client entertainment (e.g., sporting event tickets, regardless of whether a charitable event)

Nondeductible

Club memberships

Nondeductible

*Important to note: The State of Arkansas did not adopt the new tax law. Nothing has changed in Arkansas and possibly other states as well. This means deductions claimed on state returns in the past are still allowable. For Arkansas purposes, they still exist, so be sure to track these types of deductions.

Significant Changes in Law

Tax-deferred like-kind exchanges:

Tax-deferred like-kind exchanges refers to transactions that allow for the sale or disposal of an asset and the reinvestment of the proceeds in a similar asset of equal or greater value without creating a capital gains tax liability from the sale of the first asset. In the past this could include tangible personal assets. Since the new legislation in December 2017, however, a like-kind exchange refers only to the sale and purchase of a business or real estate property for another property. This is known as a 1031 exchange or a Starker exchange.

 

Small business losses on individual returns:

Congress has capped the amount of losses that individual non-corporate taxpayers can take on their returns. For a couple filing a joint tax return, the amount of trade or business losses that exceeds $500,000 is non-deductible. Single filers can deduct no more than $250,000 in business losses. But the trade or business loss excess that is nondeductible can be carried forward. Use new IRS Form 461 to determine whether business losses are limited. Taxpayers must first apply the at-risk rules; next, apply the passive activity loss rules; and then apply the excess business loss rules.

Arkansas Minimum Wage

Effective January 1, 2019, the Arkansas Hourly Minimum Wage will increase to $9.25. Arkansas voters elected to increase the minimum wage on January 1 for the next 3 years: to $9.25 in 2019, $10.00 in 2020 and $11.00 in 2021. Note: this increase does not affect Arkansas’ tip credit.

Charitable Contributions & New Tax Law

In the past, items eligible for itemized tax deductions were limited only by the Adjusted Gross Income limitation and/or alternative minimum tax. Under the new tax law, the deduction is capped at $10,000. Deductions for interest on mortgages and second mortgages were allowed at a higher level than is now allowed. Miscellaneous itemized deductions have been eliminated or reduced. Allowable charitable contributions deductions did not really change. The offset to these changes is an increased standard deduction. Beginning January 1, 2018 through December 31, 2026, the standard deduction for married filing jointly is $24,000, $18,000 for head of household, and $12,000 for all others. Additional standard deduction is $1,300 for each married person or surviving spouse and $1,600 for head of household or single taxpayer.

So, for taxpayers over 70-1/2 who are required to take minimum distributions from IRA’s or Rollover IRAs, you can make charitable contributions up to $100,000 which is offset on page one of the return and still utilizes your standard deduction on page two of the return. This is a computation which might benefit you by not losing part of the standard deduction, and it could affect other things as well. 

Let us know if you need to consider this.

Also, please do not forget: contributing appreciated assets to charities allows the deduction as well as avoidance of the gain.

Other Matters

The following are some random items related to the new tax law to be aware of; be sure to inquire if these matters affect you:

  1. $10,000 limit on taxes: be sure to identify property taxes on investment property separately from regular property taxes. This can be a deduction on your return for investment income purposes to the extent you have investment income.
  2. Moving expenses are no longer deductible, and if paid by your employer are to be included in taxable W-2 wages.
  3. Deductions are not allowed for transportation fringe benefits such as parking and transit passes.
  4. No deduction is allowed for dues or fees to any social, athletic, or sporting club.
  5. Except in limited circumstances, net operating losses will no longer be able to be carried back, but rather must be carried forward.
  6. Please remember if you purchase goods from out of state and sales tax is not collected; you have to file a use tax report to report and remit the taxes. This should not be a difficult process and will most likely require reviewing credit card transactions to identify potential reportable purchases.

Section 199 and Section 199(a) Qualified Business Income Deduction (QBID)

This section which originated in 2005 and was modified in 2009 was designed to allow a special deduction for businesses that created jobs through manufacturing, production, farming, mining, and other things. This was a computation limited to the lesser of 9% of the Qualified Production Activity Income or 50% wage expense allocated to these activities.

Section 199 was repealed after December 31, 2017 by the new tax law and replaced by 199(a). This new deduction is not available for C corporations; but it does allow a deduction based upon 20% Qualified Business Income (QBI) determined for each separate trade or business with limitations based upon wages and investment qualified property to compute the Qualified Business Income Amount (QBIA).

This is going to be a very complex area of tax law which, on the surface, appears to be very easy; but as you begin to pull back the layers, there are a lot of possible outcomes, and it creates exposure as well by reporting entities to their shareholders and partners  and/or members. There are threshold and limitations. There will be a need to identify the types of trade or business activities and possibly bifurcate some activities. Ownership structures and some methods of income distribution may need to be modified and documented as well.

This information is not an explanation of all this, but rather to alert you to the fact that there will be decisions to be made, and change should be expected. I will be following up with more on this shortly, but wanted to get this notice into your hands.

The Qualified Business Income Deduction (QBID) will be reflected on page 2 of the tax return where exemptions used to be taken.

2018 Tax Brackets

 

Married Filing Jointly

Single

Head of Household

Married Filing Separately

Estates, Trusts

10%

19,050

9,525

13,600

9,525

2,550

12%

77,400

38,700

51,800

38,700

n/a

22%

165,000

82,500

82,500

82,500

n/a

24%

315,000

157,500

157,500

157,500

9,150

32%

400,000

200,000

200,000

200,000

n/a

35%

600,000

500,000

500,000

300,000

12,500

37%

Excess

Excess

Excess

Excess

Excess