TAXGUIDE
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Business filing made easier with guidelines
Common tax return errors Tips for avoiding common scams
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Changes to 2018 taxes
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Taxes made easy
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The Durango Herald uses reasonable effort to include accurate and up-to-date information for its special magazine publications. However, all information comes from a variety of sources and may change at any time for any reason. To verify specific information, refer to the organization or business noted. To view the online version of this guide, visit www.durangoherald.com
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Changes to 2018 taxes In previous years, many individuals benefited from itemizing their deductions. This is the process of including expenses like sales tax, property tax and medical or dental costs you accrued. Under the new reform, many people will find advantages when taking a standard deduction, making the filing process easier. Here are some of the changes you should know about before preparing your taxes for 2018.
DEDUCTION CHANGES
A NEED FOR SIMPLICITY
2 Alimony payments, business entertainment expenses and losses from theft are no longer deductible.
Previous tax laws were costing the nation both time and money. In fact, the Tax Foundation, a think tank, reports that in 2016, people spent 2.6 billion hours complying with IRS requirements. The new bill makes a simple standard deduction more attractive to filers. Here are the new standard deduction amounts for 2018, according to the Internal Revenue Service: 2 Individuals: $12,000
2 Married filing jointly or qualifying widow(er): $24,000 2 Married filing separately: $12,000 2 Head of household: $18,000
Each category received an increase for this year — for most, an itemized deduction is no longer the most beneficial option. The new reform nearly doubled the standard deduction from previous years — it is up from $6,500 for individuals and $13,000 for families.
For those who are required to perform an itemized deduction, there are several changes to know about. Here are a few of the highlights from the TCJA. 2 Interest paid toward home equity debt may only be included if money is spent on acquiring, updating or constructing a primary or secondary structure.
2 Medical expenses may be deducted if they exceed 7.5 percent of your AGI.
CHILD TAX CREDIT INCREASE
Parents and legal guardians will also receive an additional bonus during tax time as the Child Tax Credit has been increased to $2,000 this year. The age cut-off for the credit is the same as in years past. Children under 17 at the end of the year qualify for the credit.
Rules for taxes are constantly changing. The Tax Cuts and Jobs Act was approved on Dec. 22, 2017, and will be effective for your 2018 filing. The reform is considered the largest overhaul to the American tax code since 1986. Do you know what it means for you?
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Business filing made easier W I T H
Tax professionals across the country breathed a sigh of relief when the IRS issued final regulations to govern one of the most complicated aspects of the Tax Cuts and Jobs Act, the Section 199A Qualified Business Income (QBI) deduction. The final regulations provided some guidance to interpret the provisions of the Act and they were issued just days before the beginning of the 2019 tax filing season.
G U I D E L I N E S
The QBI deduction is reported on the individual income tax return for the owner of one or more domestic businesses operated as a sole proprietorship or through a partnership, S corporation, trust or estate. The deduction can be taken in addition to your standard or itemized deduction. The final regulations establish a prerequisite whereby a business must first rise to the level of a “Section 162 trade or business” to be eligible for the QBI deduction. According to the Supreme Court, this means “the taxpayer must be involved in the activity with continuity and regularity … A sporadic activity, a hobby or an amusement does not qualify.” For most active, profit-seeking enterprises, satisfying this requirement hasn’t been difficult. The one category in which the Section 162 trade or business standard is problematic is for rental real estate. Fortunately, the IRS issued Revenue Procedure 2019-7 concurrently with the final regulations to clarify the matter by providing a safe harbor to determine if a rental activity will be treated as a trade or business for purposes of Section 199A. The safe harbor indicates that a rental activity (or multiple rentals if the taxpayer chooses to treat them as a combined enterprise) will rise to the level of a trade or business for purposes of Section 199A if: 2 Separate books and records are maintained for each rental activity (or the combined enterprise if grouped together), 2 250 hours or more of “rental services” are performed per year for the activity (or combined enterprise) and
2 the taxpayer maintains contemporaneous records, including time reports or similar documents, regarding 1) hours of all services performed, 2) description of all services performed, 3) dates on which such services are performed, and 4) who performed the services.
Failure to satisfy the requirements of the safe harbor does not preclude a taxpayer from otherwise establishing that a rental real estate enterprise is a trade or business for purposes of Section 199A. This is great news for a number of rentals, but it is important to note that there are some activities that are not eligible. Notably, the taxpayer cannot apply these rules for any residence that the taxpayer uses as a personal residence for more than 14 days during the year, nor for any property rented on a triple net basis. If you have a Section 162 trade or business as defined above, keep reading. The next step is to determine the QBI amount. The easiest way to think of QBI is as the normal, operating income the business was designed to generate. It does not include certain investment-related income. In addition, QBI does not include compensation paid to the shareholder of an S corporation or guaranteed payments paid to the partner for services rendered with respect to the trade of business. For many taxpayers, this is all the analysis that will be required. If the business owner’s taxable income (before the QBI deduction) is less than $157,500 ($315,000 if married filing jointly), then the deduction is simple. It’s equal to 20 percent of QBI, subject to an overall limitation equal to 20 percent of taxable income less net capital gain. That’s all. Enjoy your refund!
TAXTIPS TAXGUIDE 20 19 5 If the business owner’s taxable income is greater than $157,000 ($315,000 if married filing jointly), things become much more complicated. Above these income levels, we have to identify the type of business, deal with aggregation and netting rules, and apply W-2 and property-based limitations. For maximum complexity, there is a phase-in range from $157,500 to $207,500 ($315,000 and $415,000 if married filing jointly). At these higher income levels, a “specified service trade or business (SSTB)” does not qualify as a qualified business. A SSTB is defined as a trade or business involving the performance of services in the field of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade of business is the reputation or skill of one or more of its owners or employees. The final regulations provide muchneeded clarity on the definition of an SSTB.
In addition, the IRS chose to define the “reputation or skill” test very narrowly, as a trade or business in which a person receives fees, compensation, or other income for endorsing products or services, for use of an individual’s image, likeness, signature, voice, or trademark, or for appearing at an event or on radio, television, or another media format. The final regulations also provide a “de minimis” exception to the SSTB classification. For a business with gross receipts of less than $25 million, if 10 percent of the gross receipts are attributable to the performance of services in a disqualified field, the service income is ignored and the entire business is not an SSTB. For the remaining qualified business there are some additional calculations. The deduction for each business (or combined businesses, if aggregated) is limited to the greater of: 50 percent of the taxpayer’s share of the W-2 wages paid, or 25 percent of those same wages plus 2.5 percent of the taxpayer’s
share of the unadjusted basis immediately after acquisition (UBIA) of qualified property. The final regulations provide an elective aggregation regime to group together a taxpayer’s share of QBI, W-2 wages, and UBIA for the aggregated businesses before computing the deduction. If you don’t (or aren’t eligible to) aggregate everything together, you have to net losses from qualified businesses against any activities Reach Kelly Pritchard, with positive QBI. These calculations Senior Tax Accountant at can be very complex the Durango CPA firm of and we recommend you consult with R. Bell & Associates, P.C. your tax advisor in at 970-385-1002. this area. In summary, while there are still some questions and issues to be determined, the new final regulations have provided the necessary guidance to begin the first filing season under the most comprehensive change to the tax law in the past thirty years.
We’re here to help The Tax Cuts and Jobs Act passed late in 2017 and it initiates with the 2018 tax year. If you are confused by how this new law will impact you, you’re not alone. It’s time to identify and implement the tax savings opportunities this Act has on your tax return. “This is too difficult for a mathematician. It takes a philosopher.” – Albert Einstein, on filing tax returns
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Common tax return errors Even when you have a professional prepare your taxes, it’s important to review it yourself. Simple mistakes can mean long delays while you work to make corrections.
Avoid a lengthy process by ensuring your tax return is right before you submit it. If you do realize you made a mistake after you have filed, it’s possible to make an amendment. Typically, you will file an IRS Form 1040X. With this form, you can report changes to your income, deductions or credits and sometimes make changes to your filing status.
E-FILE
One of the easiest ways to expedite the process is to file electronically. Not only is it faster than regular mail, electronic programs can also check for accuracy and warn you of potential errors. Most professional services or
providers will send your completed taxes to the IRS through approved electronic channels, keeping your information secure.
DOUBLE CHECK INFORMATION
Before submitting your taxes to the IRS, ensure you have the information correct regarding yourself and others on a return. Reporting a wrong Social Security number, misspelled name or similar typos may lead to a long delay for your refund. If there are any name changes between filings, you should contact the Social Security Administration, this includes newlyweds who now share the same last name.
PAYING ON TIME
If you owe tax, there are a few different ways to pay. Your preparer can typically handle the payment by electronically sending it to the correct hands. However, if you choose to pay with a check or money order, it should be made to the United States Treasury. Other information required includes your name, address, Social Security number, daytime telephone number, tax form and a tax year for the payment. Ensuring your credentials are clearly visible and present is important to pay the fees on time and without delay.
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Tips for avoiding common scams Each year around tax time, Americans are warned to be on the lookout for scams targeting sensitive information. According to the Insurance Information Institute, 7.5 percent of all identity theft reports were related to tax fraud in 2017. It’s important to know that officials at the Internal Revenue Service will never reach out to you over email, text messages or social media channels. In most cases, initially, the Bureau will send regular mail through the United States Postal Service before attempting to contact by phone or personal visits.
SIGNS OF A SCAM
Most tax scams attempt to threaten you with legal action if a payment is not made. When an IRS official does contacts you, they will go through motions to ensure they are actual representatives. During physical visits, the agent will disclose two
forms of official credentials. Here are a few ways the agency will not act when discussing a tax issue.
2 You have rights as a taxpayer. The IRS will not demand you pay taxes without the opportunity to question or appeal the amount they claim you owe.
2 Agents will never demand immediate payment through a phone call. Commonly, scammers will insist you pay with prepaid debit cards or wire transfers.
2 The IRS will never threaten to revoke your driver’s or business license if a payment is not made. Also, threats to involve police are giveaways that the conversation is fraudulent. If an agent does require you to make a payment for past-due taxes, they will only demand an immediate payment being made to the United States Treasury.
POPULAR SCAM
One of the most popular scams to prepare yourself for is a surprise refund. Once a criminal has accessed sensitive information like your Social Security number and tax documents, it’s easy for them to file a fraudulent return. Once the money arrives in your bank account, they will contact you as an IRS collection agent and insist the deposit was made in error and must be returned. Typically, they will demand you send it to a different account. If you find yourself a victim of this scam, the Internal Revenue Service urges you to file a complaint with the Federal Trade Commission and contact major credit bureaus to put a fraud alert on your record. If you ever feel like someone is attempting fraudulent behavior in regards to your taxes, contact your local police and the IRS at (800) 908-4490.
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THIS YEAR’S IRS TAX FILING DEADLINE IS
APRIL 15TH, 2019
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Taxes made easy ANSWERS TO WORRIES ABOUT TAX REFORM, REFUND SIZE AND REFUND DELAYS
Ready or not, tax season is here, and this year is going to present unique challenges. From tax reform to refund delays and big swings in refund size, it’s going to take some work for people to untangle their tax situations. The good news is that H&R Block is ready to help and has been preparing since the moment tax reform passed.
TAX REFORM IMPACTS EVERYONE
Tax reform impacts everyone differently, depending entirely on their specific circumstances. It’s important for people to look at their unique situation to see what they should expect when they file. Tax reform impacts virtually everyone with new tax brackets and tax rates, but other changes especially impact families, homeowners, and the self-employed.
TAX REFORM AND WITHHOLDING CHANGES COULD MEAN SWINGS IN REFUND SIZE
While most people will come out ahead overall, it won’t feel that way for the people who will get a smaller tax refund, or will end up owing, because they got their tax reform benefit through bigger paychecks. The potential for surprises comes from updated IRS tables employers use to calculate tax Laura Corder is a Tax withheld from an employee’s paycheck. These changes generally resulted in bigger Analyst for H&R Block, paychecks and less tax withheld starting which has more ways in February or March, even if they took no action. to file than anyone Anyone who updated their withholding with their employer after the IRS made else. Laura has been its adjustments in February can expect providing expert tax the withholding outcome they planned advice and preparation for when completing their W-4. It is everyone who did not update their W-4 support for taxpayers who is most at risk of significant changes since 2007. to their refund or balance due. For those who don’t like what happened with their refund this year, they can make sure it doesn’t happen again next year by updating their withholding with their employer. H&R Block tax professionals will provide W-4 planning for clients when they file their 2018 tax return.