Find an Accountant
Tax TipsVolume 9, Issue 13For distribution 12/16/19; publication 12/19/19Setting Up a Business
As 2020 rolls in right around the corner, you may be thinking of things like New Year’s resolutions and dreams you’ve had year after year. One big dream that a lot of people have is starting a business.
Deciding to start your own business is a big step, one that requires special planning and thought. But where do you start? The first step is to decide the type of entity that is best for you.
Choices, Choices (of Entity, That Is)
Here are the five most common choices of entity structure for businesses for profit and a few of their characteristics.
1. Sole Proprietorship
a. There must be only one owner of an unincorporated business by himself or herself. b. Business income or loss is reported on your personal income tax. c. The owner is personally liable for all debts of the business.
2. Partnership
a. There must be two or more persons who join to carry on a trade or business and expect to share in the profits and losses of the business. b. They must file an annual return (Form 1065) with the IRS although the partnership itself does not pay income tax. Income instead passes through to each partner via a form K-1 based on his or her share of the partnership’s income. The K-1 is then reported on their personal tax return.
3. Corporation
a. A C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders. b. The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders and shareholders cannot deduct any loss of the corporation.
4. S Corporation
a. S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. b. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. c. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.
5. Limited Liability Company
a. A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations, and you should check with your state if you are interested in starting a Limited Liability Company. b. Owners of an LLC are called members. Most states do not restrict ownership, and so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single-member” LLCs.
Register Your Business
Your location and business structure determine how you’ll need to register your business. For most small businesses, registering your business is as simple as registering your business name with state and local governments.
In some cases, you don’t need to register at all. If you conduct business as yourself using your legal name, you won’t need to register anywhere. But remember, if you don’t register your business, you could miss out on personal liability protection, legal benefits, and tax benefits.
Federal and State Tax IDs
Your Employer Identification Number (EIN) is your federal tax ID. You need it to pay federal taxes, hire employees, open a bank account, and apply for business and license permits.
It's free to apply for an EIN, and you should do it right after you register your business.
Apply for Licenses and Permits
Requirements and fees depend on your business activity and the agency issuing the license or permit. It's best to check with the issuing agency for details on the business license cost. You'll have to research your own state, county, and city regulations. Industry requirements often vary by state. Visit your state's website to find out which permits and licenses you need.
Open a Business Bank Account
As soon as you start accepting or spending money as your business, you should open a business bank account. Common business accounts include a checking account, savings account, credit card account, and a merchant services account.
Most business bank accounts offer perks that don't come with a standard personal bank account.
Staying organized while going through all of the above steps is key. Make sure to research each area carefully and how it applies to your business. Keep up with any fees or taxes associated with doing business, this includes excise and sales tax, employment taxes, income tax and estimated tax. And if we can help you navigate the maze of business startup requirements, please feel free to reach out any time.
***
Tweets
Insert a link to your newsletter, web site or blog before you post these:
Our latest blog: Setting Up a Business. Subscribe here: [link]
Starting a business? Do you know where to start? Find out more: [link]
Tax Tip: It’s free to apply for an Employer Identification Number (EIN), so you should do it right after your register your business. You’ll need it to pay federal taxes, hire employees, open a bank account, and apply for business and license permits. [link]
Did you know that most business bank accounts offer perks that don't come with a standard personal bank account? [link]
If you don’t register your business, you could miss out on personal liability protection, legal benefits, and tax benefits. Find out more here: [link]
What are the steps you need to take in order to start your own business? Find out here: [link]
Sign up for our newsletter: Setting Up a Business. [link]
Tax TipsVolume 9, Issue 12For distribution 12/2/19; publication 12/5/19Uh-Oh; I Got an Audit Notice from the IRS. Now What?
If you receive an audit notice from the IRS, do not panic. Just breathe! Read the letter in its entirety to see what they are auditing. In many cases, it’s a great idea to hire a tax representation professional to deal with the audit, especially if it’s a field audit (described below).
Why You
An audit can be triggered in any number of ways. It could be that the IRS computer randomly pulled your number. Certain amounts on the return can trigger this: high mortgage interest, high charitable contributions, high business expenses, business losses for many years, no W-2s for Officers, high travel expenses, etc. If you have the proof, then there will not be a problem.
Feel free to ask the auditor why your return was selected for an audit. Although the majority of returns that are audited are due to odd industry standards, other criteria for selection may include informants, your relationship to another taxpayer who is being audited, being part of a special group that has been singled out for auditing or being part of an IRS project such as the auditing of all employers who use contract labor. It will be good to know how your return got selected.
Types of Audits
There are many different types of audits, and each will have different requirements and goals.
1. Correspondence Audits are when you get a letter to confirm a specific deduction, like charitable contributions. The IRS will request that you mail in copies of your cancelled checks and/or receipts in order to verify certain deductions on the return. This type of audit is reserved for small/simple tax returns.
2. Some audits will require you to go to the nearest IRS office to show proof of your deductions rather than mail in the proof.
3. In a field audit, the IRS agent will want to meet with you at your home or office to look at the records. It is crucial that during a field audit, you have representation. The IRS agent is instructed to interview you and go to your business so that he/she can ask detailed questions about business operations and see the business facility first hand. This can look like a "fishing expedition." Your representative will attempt to buffer you from this type of questioning and probing. More than likely, your representative may attempt to have the audit conducted in his/her office rather than your business.
Dos and Don’ts:
The Audit Timeline
Here’s how your audit should progress:
Is the Decision Final?
When the IRS agent/auditor presents you with a bill, you have the option to agree and sign the document or disagree and request a hearing with an appeals officer. The IRS is supposed to inform you of your appeal rights, and your representative is well-versed in these matters. A part of the up-front planning of an audit is the discussion of the appeals process and how best to make it work for you.
Whether you prepared your return yourself or paid someone to do so, you are responsible for its contents. You need to review your tax returns closely before signing them and sending them to the IRS. Less than four percent of returns are audited and if your return is, the auditor is looking for:
If you hire a tax professional, yes, it will cost you money. However, that cost may be well worth the stress and time it takes to resolve the audit. Remember, the tax representative will handle the audit in such a manner that your "exposure" is decreased which means that the representative knows the areas where the auditor will probe and where your return is vulnerable. Therefore, seek counsel so you know what to expect.
Our latest blog: Uh-Oh; I Got an Audit Notice from the IRS. Now What? Subscribe here: [link]
Do you know what to do if you’ve received an IRS audit letter? Find out more: [link]
Tax Tip: Less than 4% of returns are audited. If your return gets audited, be cooperative, be timely, and make sure your records are in excellent order. [link]
Feel free to ask the auditor why your return was selected for an audit. [link]
Some audits will require you to go to the nearest IRS office to show proof of your deductions rather than mail in the proof. Others may require a home or office visit to conduct the audit. Find out more here: [link]
What are the do’s and don’ts when it comes to dealing with IRS audits? Find out here: [link]
Sign up for our newsletter: Uh-Oh; I Got an Audit Notice from the IRS. Now What? [link]
Tax Tips Volume 9, Issue 11 For distribution 11/18/19; publication 11/21/19 Complying with FBAR: Foreign Bank and Financial Accounts
If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, exceeding certain thresholds, the Bank Secrecy Act may require you to report the account yearly to the Department of Treasury by electronically filing a Financial Crimes Enforcement Network (FinCEN) 114, Report of Foreign Bank and Financial Accounts (FBAR).
Who Must File
United States persons are required to file an FBAR if:
1) The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States, and
2) The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
United States persons includes U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.
Reporting and Filing Information
A person who holds a foreign financial account may have a reporting obligation even when the account produces no taxable income. The reporting obligation is met by answering questions on a tax return about foreign accounts (for example, the questions about foreign accounts on Form 1040 Schedule B) and by filing an FBAR.
The FBAR is a calendar year report and is due April 15 of the year following the calendar year being reported, with a 6-month extension available. FinCEN will grant filers failing to meet the FBAR due date of April 15 an automatic extension to October 15 each year. A specific extension request is not required. The FBAR must be filed electronically through Fin-CEN’s BSA E-Filing System. The FBAR is not filed with a federal income tax return.
U.S. Taxpayers Holding Foreign Financial Assets May Also Need to File Form 8938
Taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets, which is filed with an income tax return. Those foreign financial assets could include foreign accounts reported on an FBAR. The Form 8938 filing requirement is in addition to the FBAR filing requirement. Form 8938 must be filed by certain U.S. taxpayers living in the U.S. and holding foreign financial assets with an aggregate value exceeding $50,000 ($100,000 married filing jointly) on the last day of the tax year, or more than $75,000 ($150,000 married filing jointly) at any time during the year.
If you need help with FBAR compliance, please reach out to us; we’re happy to help.
Our latest blog: Foreign Bank and Financial Accounts. Subscribe here: [link]
Are you required to file an FBAR? Find out more: [link]
Tax Tip: If you have a financial interest in or signature authority over a foreign financial account, you may be required to file a Report of Foreign Bank and Financial Accounts (FBAR). [link]
Taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS on Form 8938, in addition to filing their income tax return. [link]
If you are required to file Form 8938, don’t forget you still have to file the FBAR. [link]
A person who holds a foreign financial account may have a reporting obligation even when the account produces no taxable income. Find out more here: [link]
Do you have foreign financial accounts? Are you familiar with FBAR requirements? Find out here: [link]
Sign up for our newsletter: Foreign Bank and Financial Accounts. [link]
Tax Tips Volume 9, Issue 10 For distribution 11/4/19; publication 11/7/19 Due Diligence Requirements
As your tax professional, we may be asking you additional questions next year that are required by the Tax Cuts and Jobs Act. Tax preparers must collect new information from clients who qualify for any of the following tax credits:
In addition to interviewing you and gathering the required information needed to answer all of the due diligence questions on Form 8867, Paid Preparer’s Due Diligence Checklist, we are now required to ask additional questions if the information you provide seems incorrect, incomplete, or inconsistent. So please don’t think we got extra nosy! It’s the IRS’s way of cracking down on fraud.
As tax preparers, we must keep copies for three years (either paper or electronic) of any documents provided by you that were relied on to determine whether any child is a qualifying child. We must also keep all worksheets showing how the credit was computed.
Penalty for Failure to Perform Due Diligence
For returns filed in 2019, the penalty is $520 per failure to meet the due diligence requirements. This penalty applies to each credit that is subject to the due diligence requirements. As a result, a single return could contain more than one $520 penalty!
IRS Letter 5025
The IRS is sending letters to tax professionals who have submitted returns with questionable claims for refundable credits and head of household status errors. Letter 5025 is generated as an educational effort to notify preparers who submit a high number of returns containing these credits that they may not have met the due diligence requirements. While the letter is informational only, it serves to notify the tax professional that the IRS is monitoring returns prepared by them. The letter advises tax preparers to educate themselves on the due diligence requirements by taking an online training module.
Form 8867
If you’re curious about the list of question that we may have to ask you, you can view them on the due diligence checklist at this link: https://www.irs.gov/pub/irs-pdf/f8867.pdf
Our latest blog: Due Diligence Requirements. Subscribe here: [link]
Are you familiar with the due diligence requirements? Find out more: [link]
Tax Tip: Taxpayers who qualify for the Earned Income Tax Credit, Child Tax Credit, American Opportunity Tax Credit, and Head of House filing will be required to provide additional information to their tax preparer. [link]
For returns filed in 2019, the penalty is $520 per failure to meet the due diligence requirements. [link]
If you are a tax professional and have received Letter 5025 from the IRS, you should know that it is just an informational letter that serves to notify the tax professional that the IRS is monitoring returns prepared by them. [link]
Tax preparers must keep copies (either paper or electronic) of any documents provided by the taxpayer that were relied on to determine whether any child is a qualifying child for three years. Find out more here: [link]
For which credits must tax preparers receive additional information from qualifying taxpayers? Do you know the answer? Find out here: [link]
Sign up for our newsletter: Due Diligence Requirements. [link]
Tax Tips Volume 9, Issue 9 For distribution 10/21/19; publication 10/24/19
Tax Reform: What is the new “Other Dependent” Credit?
Under the 2018 Tax Cuts and Jobs Act guidelines, a taxpayer may be able to claim a $500 credit for household dependents that don’t meet the definition of a qualifying child or qualifying relative. Provided that the individual has income of less than $4,150 and meets the criteria listed below, you may be entitled to receive the non-refundable credit.
You may be able to take the new Other Dependent Credit if:
1. You are providing support for a dependent such as a family member, domestic partner, or friend. You can also claim this credit for your children who are 17 years of age or older, as they are not eligible for the Child Tax Credit once they turn 17.
2. A non-relative is a member of your household for the entire year. Relatives don’t need to live with you to qualify for the “other dependent” credit.
3. The relationship between you and the person you are seeking to receive a tax credit for does not violate the law. For example, you can’t be married to another person and receive the “other dependent” credit!
4. You provide more than half of their support.
5. The dependent must have a Social Security number—an ITIN or an ATIN is not acceptable.
Provided that a taxpayer’s adjusted gross income (AGI) doesn’t exceed $200,000 (or $400,000 if filing jointly), the full $500 credit will be granted. If income exceeds the limit, the credit will decrease by $50 for every $1,000 that the AGI exceeds the limit.
Our latest blog: Tax Reform: What is the new “Other Dependent” Credit? Subscribe here: [link]
Are you qualified to claim the Other Dependent Credit? Find out more: [link]
Tax Tip: A taxpayer may be able to claim a $500 credit for household dependents that don’t meet the definition of a qualifying child or qualifying relative. [link]
Children who are over the age of 17 are not eligible for the Child Tax Credit, but may be eligible for the Other Dependent Credit. [link]
If your adjusted gross income doesn’t exceed $200,000 ($400,00 if filing jointly) and fulfill all the requirements to claim the Other Dependent Credit, you should be granted the full $500. [link]
The qualifying dependent must be a U.S. citizen, U.S. national, or U.S. resident alien in order for a taxpayer to be able to claim the Other Dependent Credit. Find out more here: [link]
Do you know what the new Other Dependent Credit is and if you’re qualified to receive it? [link]
Sign up for our newsletter: Tax Reform: What is the new “Other Dependent” Credit? [link]
Tax Tips Volume 9, Issue 8 For distribution 10/7/19; publication 10/10/19
1099-NEC: A New Way to Report Non-Employee Compensation
In July 2019, the IRS released a draft of form 1099-NEC, which is designed to report non-employee compensation. While this may seem like a new form to many, it’s actually a revival of a form used until the early 1980’s, which was eventually replaced by form 1099-MISC.
What will be reported on the new 1099-NEC?
The 1099-NEC will only report non-employee compensation…nothing else. Instead of issuing a 1099-MISC with Box 7 completed, payers will report non-employee compensation using form 1099-NEC.
Why is this necessary?
The PATH Act of 2015 made changes to the due dates for form 1099-MISC. Certain types of compensation reported on the 1099-MISC were due by January 31st, whereas other types of compensation weren’t required to be reported until February 15th. The different due dates for the same form were confusing for employers, taxpayers, IRS computer systems, and IRS employees. By bringing back form 1099-NEC, payers will have a dedicated form to use for reporting non-employee compensation.
When will this take effect?
Even though the IRS has released the draft in 2019, notice that the form is marked 2020. That means it’s likely we won’t see the forms issued until the 2020 tax year. Visit the IRS website to view the draft form along with the current filing instructions here
Our latest blog: 1099-NEC: A New Way to Report Non-Employee Compensation. Subscribe here: [link]
What will be reported on the new 1099-NEC? Find out more: [link]
Biz Tip: Visit the IRS website to view the 1099-NEC draft form along with the current filing instructions. [link]
In July 2019, the IRS released a draft of form 1099-NEC, which is designed to report non-employee compensation. [link]
By bringing back form 1099-NEC, payers will have a dedicated form to use for reporting non-employee compensation. [link]
The 1099-NEC will only report non-employee compensation…nothing else. Find out more here: [link]
What is the new 1099-NEC? Why is this necessary? [link]
Sign up for our newsletter: 1099-NEC: A New Way to Report Non-Employee Compensation. [link]
Tax Tips Volume 9, Issue 7 For distribution 9/23/19; publication 9/26/19
Tax Treatment of Legal Settlements and Judgements for Individuals
If you’re involved in a lawsuit or a court case (except as a juror), you may want to get up to speed on how court settlements and judgements are taxed.
Settlements and judgements are taxed the same—if you win a judgement or settle a case, the same tax rules apply. In most cases, the IRS will consider the settlement/judgement as taxable income, unless it falls within certain guidelines.
1. If you successfully win or settle a claim for loss of business profits/income/wages, the amount will be taxed as ordinary income. If you were an employee, your former employer will most likely issue a paycheck with taxes withheld and generate a W-2 at the end of the year. If you were an independent contractor, you could expect to receive the full amount of the settlement up front with no taxes withheld, but be issued a 1099-MISC at the end of the year.
2. Physical injury damages are tax free, but personal damages (emotional distress, defamation, sexual harassment) are taxed. The IRS says that your injuries must be visible to be tax free!
3. Payments received for medical expenses are tax-free, even if your injuries were emotional.
4. Punitive damages and interest are always taxable. In situations such as an auto accident, part of your award may be punitive damages as well as compensatory damages for a physical injury. While the compensatory damages for the physical injury will be tax free, the punitive damages will be taxable as ordinary income.
5. If your recovery is taxable, there’s a good chance you’ll be paying taxes on the portion of your award that goes toward paying your attorney fees. For tax purposes, you will be treated as receiving 100 percent of the money recovered, even if the other party pays your attorney’s fees. Since the Tax Cuts and Jobs Act repealed the miscellaneous itemized deduction category, attorney’s fees are no longer deductible on a Schedule A.
Keep in mind that your settlement or judgement may involve multiple issues with different tax treatment. It’s best to have your disposition agreement clearly indicate what amount is allocated to each specific issue and, if possible, indicate how it should be treated at tax time.
If you’ve received a settlement or judgement, be sure to send us your agreement so we can help you classify it properly on your tax return.
Our latest blog: Tax Treatment of Legal Settlements and Judgements for Individuals. Subscribe here: [link]
Are you involved in a court case or lawsuit? You may want to get up to speed on how court settlements and judgements are taxed. Find out more: [link]
Tax Tip: Payments received for medical expenses are tax-free, even if your injuries were emotional. [link]
If you successfully win or settle a claim for loss of business profits/income/wages, the amount will be taxed as ordinary income. [link]
Settlements and judgements are taxed the same—if you win a judgement or settle a case, the same tax rules apply. [link]
Did you know that, according to the IRS, your injuries have to be visible to be tax free? Personal damages like defamation or sexual harassment are taxed. Find out more here: [link]
Do you know how your settlements and judgments should be treated at tax time? [link]
Tax Treatment of Legal Settlements and Judgements for Individuals. Sign up for our newsletter: [link]
Tax Tips Volume 9, Issue 6 For distribution 9/9/19; publication 9/12/19
Could You Save on Taxes with a QOZ Investment?
The Tax Cuts and Jobs Act created a new tax incentive to defer (and possibly even eliminate) capital gains taxes by investing in a Qualified Opportunity Zone (QOZ).
What is a Qualified Opportunity Zone?
A Qualified Opportunity Zone is an economically distressed community. For an area to be recognized as a Qualified Opportunity Zone, the state must nominate the area and the Secretary of the US Treasury must certify the nomination. An investment in a Qualified Opportunity Zone is expected to result in the creation of jobs and quality-of-life improvement for residents of low-income communities.
What is a Qualified Opportunity Zone Fund and Who Can Invest in One?
A Qualified Opportunity Zone fund invests in eligible property located within a Qualified Opportunity Zone. It is either a corporation or partnership for income tax purposes, must be in the United States, and must be at least 90% invested in Qualified Opportunity Zone businesses or property. Individual taxpayers, S and C corporations, partnerships, trusts, estates, RICs (regulated investment company), and REITs (real estate investment trust) are eligible to invest in a Qualified Opportunity Zone fund.
How Does the Program Work?
A taxpayer has 180 days from the date of sale of appreciated property (can be stocks, real estate, etc.) to invest the capital gain into a Qualified Opportunity Zone fund.
Example: John Smith sells stock for $100,000. His basis is $5,000, making his gain of $95,000 fully taxable. If he reinvests the sale proceeds into a Qualified Opportunity Zone fund within 180 days of the sale, he can elect to defer his $95,000 gain until he sells his interest in the Qualified Opportunity Zone fund or December 31, 2026 (IRC code 1400Z-2(b)(1)), whichever comes first.
What is the Benefit of Deferring Capital Gains?
After remaining in the fund for five years, the taxpayer receives a 10 percent reduction in the deferred gain that will be subject to tax. Then, he/she is eligible to receive an additional five percent deferred gain reduction after seven years of investment (for a total of 15 percent). To take advantage of the full 15 percent reduction, the taxpayer must invest in a Qualified Opportunity Zone fund by 12/31/2019. For example, a taxpayer who invests $100,000 of capital gains from a previous investment into a Qualified Opportunity Zone fund in 2019 would owe capital gains tax on only $90,000 if sold after five years and $85,000 if sold after seven years.
Although the gain can only be deferred until the earlier of the sale date of the interest in a Qualified Opportunity Zone fund and December 31, 2026, at which point tax must be paid on that original deferred gain regardless, there is another possible benefit. If a taxpayer remains in the Qualified Opportunity Zone fund for at least 10 years, 100 percent of any gain on his/her investment in the fund is tax-free. In other words, if the investment is held for at least 10 years, upon sale the taxpayer will pay NO tax on any capital gains produced through his or her investment in the Qualified Opportunity Zone fund! This is a great opportunity to achieve long-term, tax-free growth on your initial investment!
Does Your State Conform?
Not all states have incorporated the Opportunity Zone gain deferral provisions, and taxpayers may have to recognize the gain on their state tax return when the original investment is sold. If you would like to know more about Qualified Opportunity Zones, please reach out to us anytime.
Our latest blog: Qualified Opportunity Zone Investment. Subscribe here: [link]
What is a Qualified Opportunity Zone and why should you invest in one? Find out more: [link]
Tax Tip: Taxpayers must invest in a Qualified Opportunity Zone fund by 12/31/2019 to take advantage of the full 15% deferred gain tax reduction. [link]
An investment in a Qualified Opportunity Zone is expected to result in the creation of jobs and quality-of-life improvement for residents of low-income communities. [link]
Individual taxpayers, S and C corporations, partnerships, trusts, estates, RICs (regulated investment company), and REITs (real estate investment trust) are all eligible to invest in a Qualified Opportunity Zone fund. [link]
A taxpayer has 180 days from the date of sale of appreciated property (can be stocks, real estate, etc.) to invest the capital gain into a Qualified Opportunity Zone fund. Find out more here: [link]
Did you know that there is a new tax incentive to defer (and possibly even eliminate) capital gains taxes by investing in a Qualified Opportunity Zone? Find out more: [link]
Qualified Opportunity Zone Investment. Sign up for our newsletter: [link]
Tax Tips Volume 9, Issue 5 For distribution 8/26/19; publication 8/29/19 Due Diligence Requirements: Questions Tax Preparers Must Ask Taxpayers
Under the Tax Cuts and Jobs Act, tax preparers must receive additional information from clients who qualify for any of the following tax credits:
In addition to interviewing the client and gathering the required information needed to answer all of the due diligence questions on Form 8867, Paid Preparer’s Due Diligence Checklist, tax professionals also must ask additional questions when the information their client provides seems incorrect, incomplete, or inconsistent. Tax preparers must keep copies for three years (either paper or electronic) of any documents provided by the taxpayer that were relied on to determine whether any child is a qualifying child. Tax preparers must also keep all worksheets showing how the credit was computed.
As a taxpayer, you can view the form that tax professionals need to complete here:
https://www.irs.gov/pub/irs-pdf/f8867.pdf
So if you’re wondering why we might be asking for more information from you than in prior years, it’s because the IRS is requiring us to complete the due diligence checklist for taxpayers with these tax credits.
Our latest blog: Subscribe here: Due Diligence Requirements. [link]
What are the tax due diligence requirements? It means more questions from your tax professional. Find out more: [link]
Biz Tip: IRS Letter 5025 is generated to notify tax preparers that they may not have met the due diligence requirements. [link]
Under the Tax Cuts and Jobs Act, tax preparers must receive additional information from clients who qualify for tax credits. [link]
The IRS is sending letters to tax professionals who have submitted returns with questionable claims for refundable credits and head of household status errors. [link]
For returns filed in 2019, the penalty is $520 per failure to meet the due diligence requirements. Find out more here: [link]
What is the Penalty for Failure to Perform Due Diligence on Tax Returns? [link]
Sign up for our newsletter: Due Diligence Requirements: Potential Fines for Tax Pros and More Questions for Taxpayers. [link]
Tax Tips Volume 9, Issue 4 For distribution 8/12/19; publication 8/15/19 Is There Still a Marriage Tax Penalty?
The term “marriage penalty” in taxes refers to the situation that two people with the same income would pay more tax if they married and filed a joint return (MFJ) than if they stay single and file separately as single taxpayers.
In order to avoid a marriage penalty, the tax bracket income thresholds for married couples must be exactly double those for single taxpayers. With the tax bracket reorganization, taxpayers with a taxable income of $0 to $200,000 for filing single and $0 to $400,000 for MFJ pay the same percentage of tax at each level as you can see in the tables below.
Brackets* - Single TCJA (2018-2025)
$0 - 9,525 10% $9,525 - 38,700 12% $38,700 - 82,500 22% $82,500 - 157,500 24% $157,500 - 200,000 32% $200,000 - 500,000 35% $500,000** and up 37%
Brackets* – Married Filing Separately TCJA (2018-2025)
$0 – 9,525 10% $9,525 – 38,700 12% $38,700 – 82,500 22% $82,500 – 157,500 24% $157,500 - 200,000 32% $200,000 - 300,000 35% $300,000** and up 37%
Brackets* – Married Filing Jointly / SS TCJA (2018-2025)
$0 - 19,050 10% $19,050 - 77,400 12% $77,400 - 165,000 22% $165,000 - 315,000 24% $315,000 - 400,000 32% $400,000 - 600,000 35% $600,000** and up 37%
Under the TCJA, if a couple is married filing jointly and has the following attributes there is a very low chance of any marriage penalty:
Single filers receive an extra $200,000 each at the lower 35% rate while married couples filing jointly must pay tax at a 2% higher rate (37%) for the first combined $400,000 they make over $600,000 in taxable income. This is a maximum $8,000 marriage penalty, increasing income taxes for married couples by up to 2.59%.
The IRS published that the reason the marriage penalty was imposed at the top tax rate was to help raise more revenue and enable Congress to fund other tax reductions in the TCJA.
For married taxpayers, it makes sense every year to calculate tax liability both ways: MFS and MFJ to see what’s optimum for the couple.
Our latest blog: Is There Still a Marriage Tax Penalty? Subscribe here: [link]
What is the “Marriage Tax Penalty”? Find out more: [link]
Biz Tip: Taxpayers with a taxable income of $0 to $200,000 for filing single and $0 to $400,000 for MFJ pay the same percentage of tax at each level. [link]
“Marriage penalty,” is the term is used to indicate that two people with the same income would pay more tax if they married. [link]
The IRS published that the reason the marriage penalty was imposed at the top tax rate was to help raise more revenue. [link]
Under the TCJA, if a couple is married filing jointly and has the following attributes there is a very low chance of any marriage penalty. Find out more: [link]
How does the new tax bracket reorganization affect you? [link]
Is There Still a Marriage Tax Penalty? Sign up for our newsletter: [link]
