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With summer almost here, many students will turn their attention to making money from a summer job. Whether it’s flipping burgers or filing documents, the IRS wants student workers to know some facts about their summer jobs and taxes.

Not all the money they earn will make it to their pocket because employers must withhold taxes from their paycheck. Here are some tax tips young individuals should know when starting a summer job.

New employees:  Employees – including those who are students – normally have taxes withheld from their paychecks by their employer. When anyone gets a new job, they need to fill out a Form W-4, Employee’s Withholding Allowance Certificate. Employers use this form to calculate how much federal income tax to withhold from the new employee’s pay. The Withholding Calculator on IRS.gov can help a taxpayer fill out this form.

If your total income from all sources for the year will be less than $12,000 you will likely not be required to file a tax return. Therefore, you should indicate “Exempt” on your Form W4 so that your employer does not withhold federal and state income taxes from your pay. Otherwise, you would need to file a return to get that money refunded to you.

Self-employment: Students who do odd jobs over the summer to make extra cash are self-employed. This include jobs like baby-sitting or lawn care. Money earned from self-employment is taxable, and self-employed workers may be responsible for paying taxes directly to the IRS. One way they can do this is by making estimated tax payments on a quarterly basis during the year. Read up on this at www.irs.gov or check with your tax pro to determine when and how much you should pay in. In addition to income tax, payment in the form of Self-employment tax  which funds your Social Security and Medicare accounts is required.

Tip income: Students working as waiters or camp counselors who earn tips as part of their summer income should know tip income is taxable. They should keep a daily log to accurately report tips. They must report cash tips to their employer for any month that totals $20 or more.

Payroll taxes: This tax pays for benefits under the Social Security system. While students may earn too little from their summer job to owe income tax, employers usually must still withhold Social Security and Medicare taxes from their pay. If a student is self-employed, Social Security and Medicare taxes may still be due and are generally paid by the student.

Reserve Officers’ Training Corps pay: If a student is in an ROTC program, and receives pay for activities such as summer advanced camp, it is taxable. Other allowances the student may receive – like food and lodging – may not be taxable. The Armed Forces’ Tax Guide on IRS.gov provides details.

More Information:
Tax rules for students
Is My Tip Income Taxable?
Do I Have Income Subject to Self-Employment Tax?

 

For 2018 a complicated tax reform bill the “Tax Cuts and Jobs Act (TCJA) took effect promising to help the middle and lower classes enjoy bigger take home pay and lower tax liabilities. Tax rates dropped, the standard deduction doubled. This was major stuff. The biggest tax reform act since 1986.

So how is it shaking out? The IRS reported today, February 28, 2019, that the average refund at this point in the filing season is now up 1.3 percent over last year based on 47.7 million individual returns processed thus far in 2019 compared 49.2 million returns processed in 2018. Not a significant leap but still, it’s something positive.

On the other hand, there have been a lot of complaints. For many the new tax law isn’t working out as anticipated and many taxpayers are experiencing much smaller refunds and they wonder why. People are confused and angry.

Let’s examine some of the reasons. As with all tax reform, the new bill involved a lot of giving with one hand and slapping across the face with the other. Explained below are various reasons that your refund is much lower than expected:

  1. Compare your 2018 income and withholdings against your 2017 income tax return. For some the reason is simply that income has increased but insufficient tax was withheld or paid in the form of estimates to cover the additional liability.
  2. The standard deduction has essentially doubled. However, personal exemptions have been removed ($4,050 for each person listed on the tax return) making the benefit of the increased standard deduction negligible or completely insignificant or worse yet, throwing you into a higher liability.
  3. For those who itemize with totals above the standard deduction for their filing status, it doesn’t matter to them that the standard deduction has doubled. But it definitely hurts to lose the personal exemption. For those in the middle class, this could be an increase in tax liability of nearly $1,000 or in some cases substantially more.
  4. Itemized deductions have also been trimmed. No longer can you deduct employee business expenses, tax preparation software or tax preparation fees, portfolio management advisory fees, safe deposit rental fees among other miscellaneous itemized deductions. Also, the amount of taxes you can deduct in 2018 (real estate taxes, state income taxes, DMV fees, etc.) has been capped at $10,000. If you are a high earner, you likely have a large state tax liability. Say bye bye to any deduction greater than $10,000.
  5. Even though tax rates decreased, your refund may be less because you elected to take home a larger net pay. Your withholding was adjusted downward so could enjoy a bigger paycheck throughout the year. This action will reduce your refund or put you in the position of owing Uncle Sam.
  6. There may have been other taxable events this year that are out of the norm. Perhaps you sold investments or collected unemployment or began receiving Social Security benefits. Or you may have experienced other taxable transactions that increased your liability.
  7. Here’s a strange one: your income decreased but it caused a reduction in the Earned Income Credit and therefore a lower refund.

These are the main causes. The best idea is to review your 2017 tax return and compare it to your 2018 data to see if you can find any other reason(s) why your refund is lower. Your tax pro can assist you with this process.

Happy Holidays! And Beware! It’s a little bit of Halloween mixed in with gingerbread and spice. But in today’s world we must always be on guard. Identity thieves thrive on the holidays.

Here are some shopping tips direct from the IRS along with seven steps to help with online safety and protecting tax returns and refunds:

  • Avoid unprotected Wi-Fi. Unprotected public Wi-Fi hotspots in malls or at holiday events also may allow thieves to view transactions. Do not engage in online financial transactions if using unprotected public Wi-Fi.
  • Shop at familiar online retailers. Generally, sites using the “s” designation in “https” at the start of the URL are secure. Look for the “lock” icon in the browser’s URL bar. But remember, even bad actors may obtain a security certificate so the “s” may not vouch for the site’s legitimacy. Beware of purchases at unfamiliar sites or clicks on links from pop-up ads.
  • Learn to recognize and avoid phishing emails that pose as a trusted source such as those from financial institutions or the IRS. The IRS has seen an increase in these schemes this year. These emails may suggest a password is expiring or an account update is needed. The criminal’s goal is to entice users to open a link or attachment. The link may take users to a fake website that will steal usernames and passwords. An attachment may download malware that tracks keystrokes — putting personal information at risk.
  • Keep a clean machine. This applies to all devices – computers, phones and tablets. Use security software to protect against malware that may steal data and viruses that may damage files. Set it to update automatically so that it always has the latest security defenses. Make sure firewalls and browser defenses are always active. Avoid “free” security scans or pop-up advertisements for security software.
  • Use passwords that are strong, long and unique. Experts suggest a minimum of 10 characters but longer is better. Avoid using a specific word; longer phrases are better. Use a combination of letters, numbers and special characters. Use a different password for each account. Use a password manager, if necessary.
  • Use multi-factor authentication. Some financial institutions, email providers and social media sites allow users to set accounts for multi-factor authentication. This means users may need a security code, usually sent as a text to a mobile phone, in addition to usernames and passwords.
  • Encrypt and password-protect sensitive data. If keeping financial records, tax returns or any personally identifiable information on computers, this data should be encrypted and protected by a strong password. Also, back-up important data to an external source such as an external hard drive. And, when disposing of computers, mobile phones or tablets, make sure to wipe the hard drive of all information before trashing.

The IRS, state tax agencies and the tax industry are committed to working together to fight against tax-related identity theft and to protect taxpayers. But the Security Summit needs help. With the steps listed above, people can take steps to protect themselves online.

Taxpayers can also visit the “Taxes. Security. Together.” awareness campaign or review Publication 4524, Security Awareness for Taxpayers, to see what can be done.Tax professionals can also get more information through the Protect Your Clients; Protect Yourself campaign as well as the Tax Security 101 series.

AND FINALLY: To protect against porch thieves, fill an Amazon box with spiders or garbage or stuff you no longer want and leave it at your front door!

 

Late last year Congress signed into law the most massive changes in tax reform (Tax Cuts and Job Act – TCJA) since 1986. It is important to take a quick break from holiday festivities to analyze your tax picture so you are not surprised or terrified next April 15. If your return is prepared by a tax professional, it would behoove you to set up a meeting before year end to see how the tax law changes affect your 2018 tax return and beyond.

Standard Deduction Increases

No matter your filing status, the standard deduction pretty much doubles in 2018. If your itemized deductions don’t exceed the amount indicated below for your filing status (To determine, check your 2017 Schedule A total if you itemized), your taxes will be simplified. You will no longer have to compile all that extraneous data – medical, charitable, property taxes, DMV fees, employee business expenses, investment fees, etc); you will simply take the standard deduction as allowed below:

  • Single and Married Filing Separately: $12,000
  • Married Filing Jointly: $24,000
  • Head of Household: $18,000

Personal Exemption Eliminated

Under tax reform, taxpayers can no longer claim the $4,050 personal exemption for themselves or each of their dependents. The government gives with one hand and slaps with the other. But read on for some more good news.

Child Tax Credit Rises

The Child Tax Credit increases in value from $1,000 to $2,000. The tax reform bill also introduces a new $500 credit for non-child dependents. This takes some of the sting out of the removal of the personal exemption.

State and Local Taxes Capped

Taxpayers can deduct up to $10,000 in state and local income taxes. Previously there was no cap. This affects taxpayers who pay significant amounts in state income taxes and/or property taxes. Check your 2017 Schedule A total for state tax deductions to determine if you are affected by this change.

ACA Individual Mandate Repealed

Beginning in 2019, individuals who choose to go without healthcare coverage for the year will not have to pay tax penalties. The penalty is still in play for 2018, so prepare to pay if you did not have health insurance and if you did not qualify for the exemption.

Mortgage Interest Deduction Drops

Individuals who purchase a home in 2018 can only deduct interest up to $750,000 in mortgage debt (previously $1 million). The interest deduction on home-equity loans is eliminated.

Elimination of Employee Business Expenses, Tax Prep Fees, Investment Fees as Deductions

Effective for 2018, you may no longer deduct these expenses on Schedule A Itemized Deductions. If you have a large amount of unreimbursed employee business expenses that you normally deduct, you may want to negotiate with your employer. If the employer can restructure your pay to include payment for these expenses, they can take the deduction and you may be able to enjoy some of these expenses as a tax-free fringe benefit. It could be a bit tricky, so I would suggest discussing it with your tax pro as well as your employer.

 

There were many other huge changes enacted that apply to alimony, self-employed business expenses, self employed business income, rental income, fringe benefits, etc. Some take effect in 2018 some in 2019. Consult with your tax professional to determine how these changes will be reflected on your 2018 tax return and beyond.

Other than that, All of us here at Taxpertise wish you a Happy Holiday Season! Enjoy!

 

Monday, October 15, 2018, is the extension deadline for most taxpayers who requested an extra six months to file their 2017 tax return.

For taxpayers who have not yet filed, here are a few tips to keep in mind about the extension deadline and taxes:

  • Try IRS Free File or e-file. Taxpayers can still e-file returns for free using IRS Free File. The program is available only on IRS.gov. Filing electronically is the easiest, safest and most accurate way to file taxes.
  • Use direct deposit. For taxpayers getting a refund, the fastest way to get it is to combine direct deposit and e-file.
  • Use IRS online payment options. Taxpayers who owe taxes should consider using IRS Direct Pay. It’s a simple, quick and free way to pay from a checking or savings account. There are other online payment options.
  • Don’t overlook tax benefits. Taxpayers should be sure to claim all entitled tax credits and deductions. These may include income and savings credits and education credits.
  • Keep a copy of the tax return. Taxpayers should keep copies of tax returns and all supporting documents for at least three years. This will help when adjusting withholding, making estimated tax payments and filing next year’s return.
  • File by October 15. File on time to avoid a potential late filing penalty.
  • More time for the military. Military members and those serving in a combat zone generally get more time to file. Military members typically have until at least 180 days after leaving a combat zone to both file returns and pay any tax due.

With a straight face, the IRS recently released the 2018 Form 1040. The form has shrunk from a two-sided 8 x 11.5 sheet to post card sized, just as Trump promised. As if size matters. Everyone electronically files these days so it’s not like you will save a few bucks in postage.

Those who shy away from anything pertaining to taxes likely jumped up and down with joy in anticipation of tax simplification. Thing is, it’s a big fat joke. And I’m here to tell you that taxes got more complicated not simpler.

What the IRS accomplished was the butchering of Form 1040 to fit several line items on a two-sided postcard. The previous line items not included on the new Form 1040 have been added to six, count ‘em, six pages of additional schedules to attach to the “postcard.” When you do the math, you realize that the two-page form is now expanded to eight pages. Simplification indeed.

I was attending the California Society of Enrolled Agents Super Seminar in Reno when the new form was announced on June 27. The collective roar of disappointment and disapproval was followed by many snarky remarks and eventually laughter and plenty of eye rolling.

Just because Congress doubled the standard deduction does not mean we are headed into a new era of tax simplification. In any case, I agree with this move. After all, those who can’t itemize are generally renters because they don’t have the mortgage interest write off. I always felt this was unfair.  Doubling the standard deduction levels the playing field and opens up an increased  tax savings for those who cannot itemize.  But the savings is not as grand as you might think. Sure, if you’re married filing joint you will enjoy an extra $12,000 deduction from income, $6,000 if single, before tax is calculated. However, the IRS gives with one hand and smacks you across the face with the other. How did they do that? They yanked personal exemptions – that’s roughly $4,100 per person. So married filing joint, you net a reduction in income of only $3,800 ($12,000-$8,200) not the twelve grand you may have thought you would enjoy. It gets worse if you have kids because you previously received the $4,100 exemption for each dependent declared on the tax return as well. Now that’s gone. To make up for pulling the rug out from under for those with children, the IRS introduced a new and improved child tax credit to make up for the lack of personal exemption. Give, take, give, take, slap, without missing a beat.

I picture some malevolent nerd with nothing better to do creating all these complex moves and formulas and “if’s, and’s, and but’s” in some dank basement office. Maybe he’s just trying to keep us tax professionals in business. Keep our heads spinning is more like it. Thank you very much.

And as if things aren’t complicated enough, California does not conform to the new federal regulations. So we all get to memorize another set of tax code in order to comply with state tax law. Part of it is a good thing. For example, the deductions for employee business expenses, investment expenses, tax preparation software costs and preparer fees have been abolished by the IRS. But they are still deductible for CA purposes. so be sure to track those and report them next April 15. These deductions will decrease the amount of state tax you will owe.

Taxpertise

As you may have heard the Tax Reform Act has passed both the House and the Senate. It will be a little while before we can nail down the exact changes as there is quite a large discrepancy between the two bills. But change will come. All the fine points are expected to be discussed, debated, hammered out and forced into law before the end of the year. This, as usual, allows for very little tax planning. Nor does it allow for much time for consideration and discussion by our legislators.

Here is our advice for this month, December 2017.

  • Pay your property taxes for 2018 now if you are able. The deduction will either be eliminated or reduced to $10,000. Even if it’s lowered to $10,000 your tax benefit will be greater in 2017 because your tax rate is higher
  • Make your Q4 2017 estimated tax payment for California before the end of the year instead of on its due date of January 15, 2018. That deduction is going away permanently, so it would behoove you to pay it now while you can still enjoy the write off.
  • If you’re planning to buy a new car, do so in December rather than waiting. The new vehicle registration fee will not be deductible in 2018.
  • Prepay your tax preparation fee by December 31. That deduction is set to go away as well.

Listed below is a summary of the major changes that will likely affect you:

  • The top rate on the income earned by owners of “flow through” businesses — S corporations and partnerships — is reduced from 39.6% to a shade below 30%.
  • The standard deduction is doubled from $6,350 for a single/ $12,700 if married to $12,000/$24,000.
  • Deductions for personal exemptions are repealed, but the child tax credit is increased from $1,000 to $2,000.
  • Many popular itemized deductions — state and local income taxes, casualty losses, and unreimbursed employee expenses, among others — are eliminated.
  • The estate tax exemption is doubled, to $11 million for a single taxpayer and $22 million for married taxpayers.
  • The alternative minimum tax remains intact, although with a higher exemption amount.
  • The corporate rate is reduced from 35% to 20%.
  • Businesses will be able to immediately expense many asset purchases; after five years of 100% expensing, the rate will phase out at 80%/60%/40%/20% rates over the ensuing four years.
  • If you own rental property, your maximum tax rate on profits from rentals will be 25%. This is great news for wealthy landlords.
  • All of these changes will expire in 2025. Tax law will revert back to what we now know.

My feelings about all this are reflected by Tony Nitti, a respected journalist for Forbes Magazine: “As an American taxpayer, I’m saddened by the way the process played out. A tax bill needs to be carefully considered, available to the public for review and contemplation well in advance of a vote, and—in a perfect world—bipartisan. That way, we can reap the benefit of the most valuable product of tax reform: permanence. Certainty of where the tax law will be in years 3 and 5 and 7 and 10, so that we can plan accordingly. With a Republican-led bill, however, the tax law is only as certain as Republican control; should things flip in 2020, the Code will be revamped again, and it will be taxpayers left struggling to respond to the changes.”

As you will soon learn, this whole business about being able to “file taxes on a postcard,” is incorrect.  Schedule A will be trimmed down possibly eliminating its use for many taxpayers but that’s pretty much it. You must still use all other applicable schedules and line items as well as complete the information regarding health care coverage.

If you have any questions or concerns, please contact either Bonnie or Amanda at  bonnie@taxpertise.com or amanda@taxpertise.com.

Happy Holidays to you and yours.

I received this press release from Clark Gascoigne of The Fact Coalition, an organization that acts as a watchdog and taxpayer advocate. His articles and statements have appeared in Fortune Magazine, The Huffington Post, and various other prestigious publications. If this upsets you, please contact your Congressperson. If we all make our voices heard, we can accomplish change.

 

FOR IMMEDIATE RELEASE
NOVEMBER 9, 2017

House Advances Tax Bill that Increases Offshoring of Jobs & Profits

WASHINGTON, D.C. — The U.S. House Ways and Means Committee’s voted 24-16 to advance proposed tax legislation (H.R.1) Thursday afternoon, after making some last-minute amendments.  The bill, which now moves to the House floor next week, maintains measures that grant multinational corporations a discounted tax rate on the profits they currently hold offshore, while exempting many profits booked offshore from future taxation, according to the Financial Accountability and Corporate Transparency (FACT) Coalition.

Clark Gascoigne, the deputy director of the FACT Coalition, issued the following statement:

“Today’s changes to the House tax bill did little to address the incentives for companies to offshore profits and jobs.  The differences in tax rates still favor overseas profits to those booked at home. And, it still entirely exempts oil and gas companies, mining companies, and financial services firms from all taxes on their profits booked offshore.

“We are still reviewing the changes to the excise tax on profit-shifting but, after gutting the provision earlier this week, the most recent changes appear only to restore a portion of the anti-gaming measure.

“Despite minor changes to the rates on repatriated profits, the tax break is still worth hundreds of billions of dollars on profits already earned.  There is simply no economic case for discounted tax rates on economic activity that’s already happened.

“This legislation remains out of step with the American people, who overwhelmingly oppose these types of tax giveaways to tax dodgers.”

 

The Department of the Treasury today provided a brief outline of Trump’s proposed tax plan. It’s pretty much the same thing he talked about back in February. And mind you, it’s just a framework for Congress to work on and does not provide details of how this plan might work in conjunction with budget reconciliation. It’s fine to cut taxes but from where will the monies be found to provide infrastructure  and other government programs? See below:

Repeals the Death Tax and Alternative Minimum Tax (AMT)
The framework repeals the unfair Death Tax and substantially simplifies the tax code by repealing the existing individual AMT, which requires taxpayers to do their taxes twice.
Creates a New Lower Tax Rate and Structure for Small Businesses
The framework limits the maximum tax rate for small and family-owned businesses to 25% – significantly lower than the top rate that these businesses pay today.
To Create Jobs and Promote Competitiveness, Lowers the Corporate Tax Rate
So that America can compete on level playing field, the framework reduces the corporate tax rate to 20% – below the 22.5% average of the industrialized world.
To Boost the Economy, Allows “Expensing” of Capital Investments
The framework allows, for at least five years, businesses to immediately write off (or “expense”) the cost of new investments, giving a much-needed lift to the economy.
Moves to an American Model for Competitiveness
The framework ends the perverse incentive to offshore jobs and keep foreign profits overseas. It levels the playing field for American companies and workers.
Brings Profits Back Home
The framework brings home profits by imposing a one-time, low tax rate on wealth that has already accumulated overseas so there is no tax incentive to keeping the money offshore.

This is a direct quote from a Press Release I received from the IRS today:

Washington – U.S. Treasury Secretary Steven T. Mnuchin issued the following statement today in response to comments he has received from his Yale Classmates and others.

“I am writing in response to my Yale Classmates and many other comments I have received urging me to “speak out”. I believe that your letter and these comments raise several important issues and misconceptions that I am prepared to address.

“First, I am proud to serve my country as the 77th Treasury Secretary at this critical time in our history, and I do so with a goal of taking actions to improve the economy for the benefit of all of our citizens. I believe that there is a great opportunity to simplify regulations, reform taxes, and generate millions of jobs through higher growth. Additionally I will use all the powers and resources of the Department of the Treasury’s Terrorism and Financial Intelligence units to combat and stop terrorist financing domestically and internationally. These are my most important priorities as Treasury Secretary. I was honored to travel to all parts of the country with the President during his campaign, be chosen by the President to be Treasury Secretary, and will continue to pursue his agenda.

“Second, with regard to the recent, horrible events in Charlottesville, I strongly condemn the actions of those filled with hate and with the intent to harm others. They have no defense from me nor do they have any defense from the President or this administration. As the President said in his very first comment on the events that were unfolding in Charlottesville, “[w]e all must be united and condemn all that hate stands for. There is no place for this kind of violence in America. Let’s come together as one.”

“Third, as someone who is Jewish, I believe I understand the long history of violence and hatred against the Jews (and other minorities) and circumstances that give rise to these sentiments and actions. While I find it hard to believe I should have to defend myself on this, or the President, I feel compelled to let you know that the President in no way, shape or form, believes that neo-Nazi and other hate groups who endorse violence are equivalent to groups that demonstrate in peaceful and lawful ways.

“Finally, as a Yale graduate and a member of what used to be known as Calhoun College (prior to its name change), I am familiar with the culture wars being fought in our country and the impact it is having on many people, with different views of how history should be remembered. Some of these issues are far more complicated than we are led to believe by the mass media, and if it were so simple, such actions would have been taken by other presidents, governors, and mayors, long before President Trump was elected by the American people.

“Our President deserves the opportunity to propose his agenda and to do so without the attempts by those who opposed him in the primaries, in the general election and beyond to distract the administration and the American people from these most important policy issues – jobs, economic growth, and national security.

“I hope you have a better perspective on my feelings on these issues. I don’t believe the allegations against the President are accurate, and I believe that having highly talented men and women in our country surrounding the President in his administration should be reassuring to you and all the American people. As long as I am Treasury Secretary I will do the best job I can for the American people and provide the best advice I can to the President.”
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