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Tax Tips Volume 9, Issue 3 For distribution 7/29/19; publication 8/1/19 Do You Have Foreign Assets or Bank 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.
A United States person 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 MFJ) on the last day of the tax year, or more than $75,000 ($150,000 MFJ) at any time during the year.
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Our latest blog: Do You Have Foreign Assets or Bank Accounts? Subscribe here: [link]
Do you have foreign bank and financial accounts that you need to report? Find out more: [link]
Biz Tip: The Foreign Bank and Financial Accounts is a calendar year report and is due April 15 of the year following the calendar year being reported. [link]
If you have a financial interest in or signature authority over a foreign financial account, the Bank Secrecy Act may require you to report the account yearly. [link]
A person who holds a foreign financial account may have a reporting obligation even when the account produces no taxable income. [link]
U.S. Taxpayers Holding Foreign Financial Assets May Also Need to File Form 8938. Find out more here: [link]
Do you need to file FBAR? (Report of Foreign Bank and Financial Accounts) [link]
Reporting Foreign Bank and Financial Accounts. Sign up for our newsletter: [link]
Tax Tips Volume 9, Issue 2 For distribution 7/15/19; publication 7/18/19 Tax Scams – Protect Yourself
There are many tax scams out there with the purpose of stealing your identity, stealing your money, or filing fraudulent tax returns using your private information. Tax scammers work year-round, not just during tax season, and target virtually everyone. Stay alert to the ways criminals pose as the IRS to trick you out of your money or personal information.
IRS-Impersonation Telephone Scam
An aggressive and sophisticated telephone scam targeting taxpayers, including recent immigrants, has been making the rounds throughout the country. Callers claim to be employees of the IRS, but are not. These con artists can sound convincing when they call. They use fake names and bogus IRS identification badge numbers. They may know a lot about their targets from information gathered from online resources, and they usually alter the caller ID (caller ID spoofing) to make it look like the IRS is calling. Also, if the phone is not answered, the scammers often leave an urgent callback request. Victims are often told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation, or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting. Alternatively, victims may be told they have a refund due to try to trick them into sharing private financial information.
Phony IRS Emails — “Phishing”
Scammers copy official IRS letterhead to use in email they send to victims. Emails direct the consumer to a web link that requests personal and financial information, such as Social Security number, bank account, or credit card numbers. The practice of tricking victims into revealing private personal and financial information over the internet is known as “phishing” for information. The IRS does not notify taxpayers of refunds or payments due via email. Additionally, taxpayers do not have to complete a special form or provide detailed financial information to obtain a refund. Refunds are based on information contained on the federal income tax return filed by the taxpayer. The IRS never asks people for the PIN numbers, passwords, or similar secret access information for their credit card, bank, or other financial accounts. If you receive an email from someone claiming to be from the IRS and asking for money, take the following steps:
Ways to Protect Yourself from Scams
Our latest blog: Tax Scams – Protect Yourself. Subscribe here: [link]
Worried about IRS Tax Scams? Find out more: [link]
Biz Tip: Financial information should be protected. Do not give out any financial information over the phone or via email. [link]
Stay alert to the ways criminals pose as the IRS to trick you out of your money or personal information. [link]
There are many tax scams out there with the purpose of stealing your identity, stealing your money, or filing fraudulent tax returns. [link]
Tax scammers work year-round and target virtually everyone. Find out more here: [link]
What should you do to protect yourself from tax scams? [link]
Sign up for our newsletter: Tax Scams – Protect Yourself [link]
Tax Tips Volume 9, Issue 1 For distribution 7/1/19; publication 7/3/19 Depreciation Options Under the New Tax Law
When a business acquires an asset that will last longer than a year, the cost of the asset must be expensed over time to match the asset’s life instead of being deducted all at once. This treatment increases taxes in the short term, and the tax code has evolved to create many exceptions for the business owner to try to expense more of the asset’s cost sooner rather than later.
Depreciable Assets
An asset is technically defined as any qualifying property that a business acquires to help produce income. To be depreciable, the property must meet these requirements:
Common examples of depreciable assets are: tractors, computers, office equipment, cars, office furniture, and appliances.
New Options
There are different options as far as what type of depreciation business owners can take. In some cases, certain types of depreciation will speed up the process so the business can receive higher tax deductions faster.
Section 179 of the US Internal Revenue Code allows the taxpayer to elect to deduct the cost of certain assets in one year, rather than depreciating them over a longer period time. Note that in order to qualify for the Section 179 deduction, the equipment must have been purchased and placed into service in the year you are taking the deduction for.
The Tax Cuts and Jobs Act (TCJA) increased the Section 179 benefit for businesses. In previous years, the maximum deduction was $500,000 (adjusted for inflation) with a phase-out threshold of $2 million (also adjusted for inflation.) Under the new tax reform, the Section 179 deduction increased to $1 million and the phase-out threshold also increased to $2.5 million. The list of qualified Section 179 property expanded to include certain depreciable tangible personal property used primarily to furnish lodging (or in connection with furnishing lodging) and improvements made to nonresidential real property (e.g. roofs, heating, ventilation, fire protection and security systems.)
Another depreciation option to consider is bonus depreciation which was also affected by the TCJA. Like Section 179, bonus depreciation is another form of accelerated depreciation. Bonus depreciation allows the taxpayer to deduct 100% of the cost of qualifying property in addition to the regular depreciation allowance that is normally available. In previous years, the taxpayer could only deduct 50% of the cost of qualifying property. The definition of property eligible for 100% bonus depreciation was also expanded to include qualified property acquired and placed in service after Sept. 27, 2017, if all of the following characteristics apply:
Section 179 and first-year bonus depreciation are just some of the options business owners can evaluate to ensure they are taking full advantage of different tax provisions. There are also times when it’s best to defer tax deductions into future years and not take all the depreciation deductions you can.
Be sure to consult your tax professional to discuss how to leverage the different depreciation options to create the most beneficial tax outcome for your business.
Our latest blog: Depreciation Options. Subscribe here: [link]
What are your business depreciation options? Find out more: [link]
Biz Tip: An asset is defined as any qualifying property that a business acquires to help produce income. [link]
Make sure to consult your tax professional on how to leverage the different depreciation options to create the most beneficial tax outcome for your business. [link]
Common examples of depreciable assets are: tractors, computers, office equipment, cars, office furniture, and appliances. [link]
Many businesses own assets that are able to be depreciated. Find out more here: [link]
Bonus depreciation? Section 179 depreciation? What’s the best choice? [link]
Sign up for our newsletter: Depreciation Options. [link]
Tax Tips Volume 8, Issue 26 For distribution 6/17/19; publication 6/20/19 How to Avoid IRS “Red Flags”
Undergoing the scrutiny of an IRS audit is liable to put any taxpayer on edge. While it may seem like the IRS randomly hands out audit notices like candy to unlucky victims, there are some best practices you can put in place in order to avoid inadvertently putting up any red flags.
There are several myths you may have heard when it comes to triggering an audit, like you are more likely to be audited when you efile versus paper file. Or if you file an extension you are less likely to get audited and if you claim deductions, credits and expenses you are more likely to be audited. One of the most common worries is that IRS audits are everywhere and are always terrible and could destroy your life and finances.
IRS audit statistics show that audits are not as commonplace as they may seem. In March 2018, the IRS published its 2017 data book reporting that they received 149,919,416 individual tax returns for the 2017 tax year. Of those, only 933,785 were audited. That means that less than 1% of taxpayers who filed an individual return were audited – 0.6% to be exact. This is the lowest audit rate since 2003.
The IRS has ascribed this decrease in audits to its reduced budget and staff levels. With the limited number of audits, the IRS focuses on looking at certain inconsistencies. That is to say that the timing of when a taxpayer files, whether it be on extension or not, does not affect the likelihood of an audit so much as other hot topic items included on a return.
There are audit trends that manifest based on the feedback from tax professionals. One area that seems to be under more scrutiny is real estate professionals. There are two tests one must past in order to be deemed as a real estate professional. One must also materially participate in order to deduct any real estate losses against nonpassive income.
The IRS is also paying close attention to Schedule A medical expense deductions. Auditors will be looking for expenses that do not qualify as medically necessary such as cosmetic treatments or the installation of a swimming pool for someone whose doctor prescribed swimming as a form of exercise. It is predicted with the changes to Schedule A miscellaneous itemized deductions under the Tax Cuts and Jobs Act that this area could be another red flag to trigger an audit should the IRS suspect any incorrect deductions.
While an audit may seem overwhelming, make sure to communicate clearly with the IRS. Many times, an audit is to check if a taxpayer can substantiate their claims. Keep organized records and make sure to understand the numbers that are submitted to the IRS so you can explain your reasoning if needed.
Our latest blog: Avoiding IRS Red Flags. Subscribe here: [link]
Are you worried about triggering an IRS audit? Find out more: [link]
Biz Tip. Keep organized records and make sure to understand the numbers that are submitted to the IRS. [link]
Here are some best practices you can put in place in order to avoid inadvertently triggering red flags with the IRS. [link]
Many times, an IRS audit is to check if a taxpayer can substantiate their claims. [link]
While an audit may seem overwhelming, make sure to communicate clearly with the IRS. Find out more here: [link]
What can you do in order to avoid putting up any IRS red flags? [link]
Sign up for our newsletter: How to Avoid IRS Red Flags. [link]
Tax Tips Volume 8, Issue 25 For distribution 6/3/19; publication 6/6/19 TCJA Mortgage Interest Limitations
The Tax Cuts and Jobs Act of 2018 changed both the type of mortgage interest that can be deducted as well as the amount of interest that can be deducted.
Acquisition Debt vs. Equity Debt
The first step to untangling these new limitations is to distinguish between acquisition debt and equity debt.
Acquisition Debt is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer and must be secured by the taxpayer’s residence.
Equity Debt is all other debt secured by the taxpayer’s residence, such as home equity proceeds that are used to pay off credit card debt, purchase a vehicle, take a vacation, etc.
Under the TCJA, all equity debt is non-deductible, even if incurred prior to December 15, 2017. However, if the proceeds from home equity debt is used to buy, build, or substantially improve the property that secures the debt, the debt can be considered acquisition debt. Acquisition debt is deductible, but different rules apply depending on the date it was incurred.
New Limits
For mortgages acquired after December 15, 2017, taxpayers can write off interest paid on indebtedness of $750,000 or less. If mortgage indebtedness exceeds $750,000, only a percentage of the interest can be deducted.
Grandfathered Debt (Mortgages acquired on or before December 15, 2017)
A taxpayer can write off interest paid on mortgages that have an acquisition debt of up to $1 million dollars. Equity indebtedness is no longer allowed, even if incurred prior to December 15, 2017.
Refinancing Grandfathered Debt
A taxpayer can retain the grandfathered $1 million interest limitation, even if they refinance after 12/15/17. However, the refinanced debt can’t exceed the mortgage balance at the time of refinancing, unless the additional amount can be considered acquisition debt and the total indebtedness falls below $1 million.
Tax Planning Is Important
With these changes come new opportunities when it comes to property acquisition and securing a loan. We can help explain your options so that you can strive for the maximum deductibility when acquiring property or property-related debt. Feel free to give us a call if property or debt acquisition is in your future.
Our latest blog: TCJA Mortgage Interest Limitations. Subscribe here: [link]
Acquisition Debt vs. Equity Debt: A tax planning opportunity. Find out more: [link]
Biz Tip: A taxpayer can write off interest paid on mortgages that have an acquisition debt of up to $1 million dollars. [link]
The Tax Cuts and Jobs Act of 2018 changed the type of mortgage interest that can be deducted and the amount of interest that can be deducted. [link]
Taxpayers need to keep thorough records of refinances and equity debt that qualifies to be treated as acquisition debt. [link]
The complexity of the tax law changes brings new deduction opportunities in property and debt acquisition. Find out more here: [link]
What are the new TCJA Mortgage Interest Limitations? [link]
TCJA Mortgage Interest Limitations. Sign up for our newsletter: [link]
Tax TipsVolume 8, Issue 24For distribution 5/20/19; publication 5/23/19
Taxes and Retirement Income
While many taxpayers plan for retirement by investing in retirement savings accounts, it is important for taxpayers to also plan on how to handle income during retirement as well.
The timing of different retirement distributions could drastically affect the amount of taxes paid throughout retirement. To start, the various retirement accounts available have different tax treatments.
Withdrawals from traditional IRA accounts are taxed as ordinary income. If any portion was contributed on an after-tax basis, then it is not subject to taxes. Traditional 401(k) accounts are also taxed as ordinary income when funds are withdrawn. Both Roth IRA and Roth 401(k) account withdrawals are tax free, although the account holder must be older than 59½ and the first contribution must have been made at least five years prior to the withdrawal.
To time withdrawals to minimize tax liability, taxpayers must evaluate when they will stop working and when they will apply for Social Security. Social Security benefits are available at age 62 but if a taxpayer is still working, receiving Social Security may push the taxpayer into a higher tax bracket. The taxpayer could end up paying taxes on their W-2 income, Social Security income, and any additional withdrawals from a retirement plan.
Many advisors recommend taxpayers withdraw first from taxable accounts, then from tax deferred accounts and lastly, Roth accounts when withdrawals are tax free. This way, the taxable accounts are paid first and the tax-deferred accounts can grow longer. While this method does allow for less in taxes paid later on in a taxpayer’s life, it may mean the taxpayer is paying an increased amount of taxes for a few years with little to no taxes in other years. By taking stock of where retirement income is coming from and creating a proportional withdrawal strategy, a taxpayer can spread out their taxable income evenly over retirement and potentially reduce taxes paid on Social Security benefits.
Each situation is different, so it is essential to take a thorough look at your projected income for retirement and plan ahead. Periodic adjustments during retirement are also important as different tax rates and laws change.
Our latest blog: Taxes and Retirement Income. Subscribe here: [link]
How should you handle income during retirement? Find out more: [link]
Biz Tip: Withdrawals from traditional IRA accounts are taxed as ordinary income. [link]
The timing of different retirement distributions could drastically affect the amount of taxes paid throughout retirement. [link]
It is important for taxpayers to plan on how to handle income during retirement. [link]
It is essential to take a thorough look at your projected income for retirement and plan ahead. Find out more here: [link]
Periodic adjustments during retirement are also important as different tax rates and laws change. [link]
Taxes and Retirement Income. Sign up for our newsletter: [link]
Tax TipsVolume 8, Issue 23For distribution 5/6/19; publication 5/9/19
Setting Up a Business
Deciding to start your own business is a big step, one that requires special planning and thought. But where do you start?
There are many logistical steps to setting up a legal, operating business and it can be a daunting mountain to climb when first starting. We’ll take a look at some of the essential tasks you need to check off before you even make your first sale or create your first product. For the sake of this article, we’ll assume that you’ve done some research on the area of business you want to go into and you’ve decided that were you to start your own business, you could be profitable and successful.
Entity Type
You’ll want to start with the legal side of operating a business to make sure you’re complying with all federal and state laws. Decide what type of business entity you would like to establish. This will determine which income tax return form you will have to file and how you, the owner, will be taxed as well as your liability. The most common entity types are:
Sole Proprietorship – an individual who owns and operates a business. All income/expense is reported on the individual’s tax return.
Partnership – two or more persons who join to carry on a trade or business, each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business. Partnerships 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 based on his or her share of the partnership’s income. Partners do not receive a W-2 from the partnership but rather, a K-1 which is then reported on their personal tax return.
Corporation - For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity that exists separately from its owners. 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.
S Corporation - S corporations are corporations that elect to pass corporate income/losses through to their shareholders. 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.
Limited Liability Company - 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.
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, those having only one owner.
Choose a Name
Choosing a name for your business is an important step. A good business name will reflect your brand identity as well as what types of goods and services you offer. Once you decide on a name, you’ll want to register it and protect it. There are multiple ways to register your business name and some may be legally required.
Check with your state for rules about how to register your business name.
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.
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.
Starting a business?
If you’re starting a business, we’re happy to help. Please feel free to reach out any time.
Our latest blog: Setting Up a Business. Subscribe here: [link]
What type of business entity should you establish for your new business? Find out: [link]
Biz Tip: A good business name will reflect your brand identity as well as what types of goods and services you offer. [link]
Here are some of the essential tasks you need to check off before you start your own business. [link]
Your location and business structure determine how you’ll need to register your business. [link]
Starting your own business is a big step, one that requires special planning and thought. Find out more here: [link]
Deciding to start your own business is a big step but where do you start? [link]
Sign up for our newsletter: Setting Up a Business [link]
Tax TipsVol 8, Issue 22For distribution 4/22/19; publication 4/25/19
Identity Theft and the IRS
Identity theft happens when someone uses your personal information without your permission. While this can include credit cards, banking information, and passwords, it’s your Social Security number that’s the biggest IRS-related identity theft problem.
An estimated 4 to 5 million taxpayers are currently affected by identity theft with the IRS. When their Social Security numbers are stolen by an identity thief, the thief files for a tax refund early in the season. When you go to file your taxes, you receive a notice that you have already filed.
Here are some tips to prevent it from happening to you:
· Do not answer any emails from the IRS. The IRS does not send emails or text messages. If you receive suspicious IRS emails, report them to the IRS at phishing@irs.gov.
· Do not carry your Social Security number with you. Keep it in a secure location.
· Protect your computers with firewalls and anti-spam software.
· Change passwords for internet accounts.
· Do not give personal information on the phone or through email unless you are absolutely sure who you are giving it to.
· Shred all documents containing personal information.
· Check your credit report annually.
If you do happen to become a victim of this crime, here’s what you should do:
· If the IRS sends you a notice, respond immediately. Follow the instructions on the notice.
· File an Identity Theft Affidavit (IRS Form 14039).
· Call the IRS Identity Theft Specialized Unit at 1-800-908-4490.
· If your purse or wallet containing personal information is stolen, contact all credit cards to cancel.
· Report the theft to the police department.
· Contact the credit bureaus about a fraud alert at the following numbers:
Equifax: 1-800-525-6285
Experian: 1-888-397-3742
Trans Union: 1-800-680-7289
· If your Social Security number has been stolen, notify the Social Security office of Inspector General at 1-800-269-0271.
· The Federal Trade Commission has a toll-free Identification Theft helpline at 1-877-438-4338 or visit their website: www.ftc.gov.
We certainly hope it doesn’t happen to any of our clients, but if it does, this handy checklist will help you through it.
Our latest blog: Identity Theft and the IRS. Subscribe here: [link]
Have you taken preventative measures for identity theft? Find out more: [link]
Tax Tip: The IRS does not send emails or text messages. [link]
Identity thieves, in the most common scenario, steal Social Security numbers and file for tax
refunds early in the season. [link]
If you are a victim of identity theft and someone has filed a tax return using your personal
information, file an Identity Theft Affidavit (IRS Form 14039). [link]
An estimated 4 to 5 million taxpayers are affected by identity theft. Make sure you aren’t one of them. Find out more here: [link]
Do you know what steps to take if someone fraudulently files a tax return using your personal information? [link]
Identity Theft and the IRS. Sign up for our newsletter: [link]
TaxTips Volume 8, Issue 21 For distribution 4/8/19; publication 4/11/19
Kiddie Tax Changes
The Tax Cuts and Jobs Act (TCJA) overhauls the Kiddie Tax rules to tax a portion of a qualified child or young adult’s unearned income at the same tax rates paid by trusts and estates, which can be as high as 37%.
Prior to the TCJA, the Kiddie Tax rate was equal to the parent’s marginal rate. TCJA only changes the Kiddie Tax rate structure, the rest of the Kiddie Tax rules are the same as previous years.
The Kiddie Tax is easier to calculate than before, but it can be more expensive for a child or young adult with significant unearned income. The child can subtract his or her standard deduction amount. The allowable standard deduction for 2018 is the greater of: (1) $1,050 or (2) earned income + $350, not to exceed $12,000. For children who are age 19-23 at year-end, the Kiddie Tax can only apply if he or she is a student.
These requirements must be filled for the Kiddie Tax to apply:
Requirement 1: The child does not file a joint return
Requirement 2: One or both of the child’s parents are alive at year-end
Requirement 3: The child’s net unearned income exceeds the threshold for that year, and the child has positive taxable income after subtracting any applicable deductions, such as the standard deduction. The unearned income threshold for 2018 is $2,100. If the unearned income threshold is not exceeded, the Kiddie Tax does not apply. If the threshold is exceeded, only unearned income in excess of the threshold is taxable under the Kiddie Tax.
Requirement 4: The child (or young adult) falls under one of three age-related rules due to his or her age at year-end and the other factors mentioned below:
Here's an example: A child who is 16 at 2018 year-end and made $2,700 of earned income and $4,900 of unearned ordinary income from capital and gains and interest would have a standard deduction of $3,050 ($2,700 of earned income + $350).
The child’s taxable income would be $4,550 ($2,700 earned income + $4,900 unearned income - $3,050 standard deduction).
2018 Estate and Trust Income Tax Rates
If taxable income is:
The tax is:
Not over $2,550
10% of taxable income
Over $2,550 but not over $9,150
$255 plus 24% of the excess over $2,550
Over $9,150 but not over $12,500
$1,839 plus 35% of the excess over $9,150
Over $12,500
$3,011.50 plus 37% of the excess over $12,500
To calculate the amount of taxable income that is subject to the Kiddie tax, subtract the unearned income threshold from total income. In this case, $2,800 ($4,900 - $2,100) will be taxed at the trust and estate tax rates shown in the chart above.
The child’s Kiddie tax amount comes out to $255 + $250(.24)= $315. The remainder of taxable income ($4,550 - $2,800 = $1,750) is taxed at the 10% rate for a single taxpayer.
The total federal tax bill comes to $490 ($315 Kiddie Tax + $175 regular tax).
If you have questions about the kiddie tax or options related to passing your wealth to the next generation while reducing taxes as much as possible, please reach out any time.
Our latest blog: Kiddie Tax Changes Subscribe here: [link]
Curious about how the Tax Cuts and Jobs Act affected Kiddie Tax? Learn more: [link]
Tax Tip: To calculate the amount of taxable income that is subject to the Kiddie tax, subtract the unearned income threshold from total income. [link]
The Tax Cuts and Jobs Act (TCJA) overhauls the Kiddie Tax rules to tax a portion of a qualified child or young adult’s unearned income at the same tax rates paid by trusts and estates, which can be as high as 37%. [link]
For children who are age 19-23 at year-end, the Kiddie Tax can only apply if he or she is a student. [link]
The Kiddie Tax is easier to calculate than before, but it can be much more expensive for a child or young adult with significant unearned income. Find outmore here: [link]
Thinking about investing for your child? Kiddie Tax is no longer affected by the income of parents or siblings, which may result in children being taxed at a higher rate than their parents. Find out more: [link]
Kiddie Tax Changes Sign up for our newsletter: [link]
TaxTips Volume 8, Issue 20 For distribution 3/25/19; publication 3/28/19
Disasters and Taxes
While some may say that tax season in and of itself should be classified as a “federally declared disaster,” the phrase holds more weight this upcoming year as thousands of families have been devastated by the California wildfires and East Coast hurricanes.
Beginning in 2018, the personal casualty and theft loss deduction is limited to casualty losses incurred in a federally declared disaster area. The casualty and theft deduction is only available to those who itemize their deductions, not to those who take the standard deduction.
In the instructions for the 2018 Form 4684 (Casualties and Theft Loss Deductions), the IRS defines a disaster loss as “a loss that occurred in an area determined by the President of the United States to warrant federal disaster assistance and that is attributable to a federally declared disaster. It includes a major disaster or emergency declaration.” A list of federally declared disasters can be found at https://www.fema.gov/Disasters.
There are two limitations to qualify for the deduction:
You can still elect to deduct the casualty loss in the tax year immediately preceding the tax year in which you incurred the disaster loss. IRS Publication 976 provides information about personal casualty losses resulting from disasters that occurred in 2016 and certain 2017 disasters, including Hurricane Harvey, Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, and the California wildfires.
An exception to the rule above limiting the personal casualty and theft loss deduction to losses incurred in a federally declared disaster area applies if you have personal casualty gains for the tax year. In this case, you will reduce your personal casualty gains by any casualty losses not attributable to a federally declared disaster. Any federal disaster losses that remain are subject to the 10% AGI limitation.
In a recent publication clarifying some of the new tax reform laws (Publication 5307), the IRS touched on how some of the recent laws enacted in 2018 make it easier for retirement plan participants to access their retirement plan funds. This may allow affected taxpayers to:
We certainly hope you weren’t affected by a disaster last year, but if you were, we have you covered tax-wise.
Our latest blog: Disasters and Taxes Subscribe here: [link]
Are you qualified to receive the personal casualty and theft loss deduction? Find out here: [link]
Tax Tip: You can still elect to deduct the casualty loss in the tax year immediately preceding the tax year in which you incurred the disaster loss. [link]
Beginning in 2018, the personal casualty and theft loss deduction is limited to casualty losses incurred in a federally declared disaster area. [link]
To qualify for the personal casualty and theft loss deduction, a loss must exceed $100 per casualty and the net total loss must exceed 10% of your AGI.
The personal casualty and theft loss deduction is essentially eliminated for tax years 2018 through 2025, except for federally declared disasters. It is also only available to those who itemize their deductions, not to those who take the standard deductions. [link]
Unfortunately, if you suffered damage to your home or personal property last year, you won’t be able to deduct these losses unless they were due to a federally declared disaster. Find out more here: [link]
Were you affected by a federally declared disaster last year? Find out how you qualify for the personal casualty and theft loss deduction: [link]
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