Individual Retirement Accounts: Traditional & Roth

In this series of four, we will look at various tax advantageous retirement and savings vehicles and their maximum contribution amounts for 2020. We hope that you check on your progress towards maxing it out.

Let’s start with the well-known retirement plans that many folks contribute to on their own – self-funded Individual Retirement Accounts: Traditional and Roth. Congress established these “tax breaks” to encourage us to save for our retirement. These are the vehicles you go out and purchase and drive on your own.

REINFORCING THE BASICS!

What is a Traditional IRA? Putting money in IS ALWAYS tax deductible. Taking money out IS ALWAYS taxable as ordinary income and sometimes there is a whopping punishment if you take it out before you are 59 ½ years old. A whopping punishment is an IRS “early withdrawal penalty” and it is 10% of the amount you take out while being too young (premature distribution).

What is a Roth IRA? Putting money in IS NEVER tax deductible. Taking that money out IS NEVER taxable but sometimes there is that whopping punishment if you take it out before you are 59 ½ years old.

HOW LONG HAVE THESE BEEN AROUND?

The Traditional IRA’s first public appearance was way, way back in 1975 and the initial maxing it out contribution was $1,500.

The Roth IRA’s first public appearance was way back in 1997 and the initial maxing it out
contribution was $2,000.

HOW MUCH CAN I CONTRIBUTE IN 2020?

For both Traditional and Roth IRAs, the maxing it out amount is $6,000 and add a $1,000 if you’re over age 50 and want to catch-up. There is no change from 2019.
If you haven’t maxed out by New Year’s Eve 2019 and you intend to contribute before Tax Deadline Day 2020, you have an opportunity to opt for the contribution going into 2019 or 2020.

IS THERE AN INCOME LIMIT FOR CONTRIBUTING TO AN IRA?

Not for Traditional IRAs.

But Roth IRA contributions are limited by Modified Adjusted Gross Income (MAGI). If you are not married yet,) for better or for worse, head of household or married filing separately: you can max it out if MAGI, (not MAGA!), is less than $124,000; contribute some if between $124,000 and $139,000; and, NO contributions at all if MAGI is more than $139,000. For married folks filing jointly and Qualifying Widow/er those amounts are: $196,000 and $206,000.

HOW MUCH OF MY 2020 CONTRIBUTION IS TAX DEDUCTIBLE?

For Traditional IRAs how much of the contribution being deductible is limited by how much you make and if you have a retirement plan through your employer.

If you are single, head of household or married filing separately and have a plan through work: the whole contribution is tax deductible if MAGI is less than $65,000; partly deductible between $65,000 and $75,000; and, not at all tax deductible if you make over $75,000; at which point you should consider contributing to a Roth IRA. For married folks filing jointly and Qualifying Widow/er those amounts are: $104,000 and $124,000.

If your spouse has a plan through work and you don’t, the amounts are a little bit higher: $196,000 and $206,000.

If you are self-funding an IRA on your own then the entire contribution up to maxing it out
is fully deductible.

Roth IRA contributions are never tax deductible and the account grows tax-free as well.

CAN I CONTRIBUTE AFTER I RETIRE?

It used to be no more contributing to your Traditional IRA after you turn 70 ½ even if you still haul yourself off to work instead of sleeping in or doing fun stuff. Starting in 2020, there is no more age cap on contributing to your Traditional IRA.

Contributions to Roth IRAs are not stopped when you turn 72. So, you can max it out.
no matter how old you are.

WHEN CAN I GET MY MONEY?

After age 59 ½: Traditional AND Roth. If you were hoping to hang onto it and leave it untouched for a while, you can. Until you are 72, then if you have Traditional IRAs government makes you start taking your money out annually as a Required Minimum Distribution (RMD). This age limit increased in December 2019. Look for our blog February 10, 2020 where we talk about the SECURE ACT. You can take out more than the RMD but not less. And if you don’t take out the minimum, the punishment can be HUUUGE!, as that RMD amount not withdrawn is taxed at a whopping 50%. Take it out and spend it or not spend it, or put it in a Roth IRA. Take it out even if it means sacrificing more earnings. Just Do It.

Just like being responsible for the accuracy of your tax returns, you are responsible for the accuracy of the RMD. There are folks who will help you though, namely the IRA custodian or plan administrator – The Mechanics.

There is no RMD with a Roth IRA. You are not forced to start withdrawing, not at 72, not at 82, not at 92, not even after you die because there is no RMD for your beneficiary either.

WHAT IF I NEED SOME CASH BEFORE I’M 59 1/2?

Sure, you can withdraw from the Traditional IRA. Remember the withdrawn amount will increase your income and possibly put you in a higher tax bracket AND THEN there is the punishment. There are times when you can take your money out of Traditional IRAs without being punished.

These are times of:

 ⇒ Paying for health insurance premiums when unemployed for at least 12 consecutive weeks;
 ⇒ Paying for medical expenses which total more than 10% of your adjusted gross income;
 ⇒ Paying for college for yourself, your spouse, your kids, and even your grandkids;
 ⇒ Permanent disability as defined by the IRS and backed up by a doctor’s verification;
 ⇒ Inheriting an IRA from your spouse and even folks you aren’t or were never married to;
 ⇒ Buying, building, or rebuilding a house for the first time for yourself, your spouse, both sets of parents and grandparents and all the kids and grandkids;
 ⇒ Serving your Country (Reserve and National Guard) for more than 179 days;
 ⇒ Withdrawing on a specific schedule (SEPP – Substantially Equal Periodic Payments);
 ⇒ And, there’s the time the IRS personally snatches unpaid taxes.

There are two kinds of money in Roth IRAs. 1. Principal – The money you put in/contributions and 2. Earnings – Interest, dividends, capital gains, and the like. Remember withdrawals are tax-free but if the money taken out is earnings, a 10% penalty will be blasted on your tax return.

WHAT OTHER THINGS SHOULD I KNOW ABOUT INDIVIDUAL RETIREMENT ACCOUNTS?

 ⇒ First, that they are individual and not joint. A married couple can’t open one together. And neither can your running club or drinking buddies.
 ⇒ If you are contributing to both a Traditional IRA AND a Roth IRA, the total amount of money you can contribute to both accounts can’t exceed the annual limit or earned income (money you make), whichever is the lesser.
 ⇒ If you do exceed it, with an ineligible contribution, the IRS might punish you with a 6% excessive-contribution penalty.
 You can never borrow and pay back money from any IRA. This is an absolute no-no. A no-no is an IRS “prohibited transaction”.

WRAPPING IT UP.

A Traditional IRA is the retirement vehicle to drive for those who: prefer immediate tax deductions lowering the out of pocket cost for the contribution or believe their tax bracket will be lower in those golden, retirement years.

A Roth IRA is the retirement vehicle to drive for those who: can afford to contribute the full $6,000/$7,000 without lowering the out of pocket cost or believe their tax bracket will be higher in those golden, retirement years.

There are exceptions to most rules and more than one way to cook an egg. So, if you are considering contributing or withdrawing funds, changing your contribution strategy, rolling over or transferring, converting or recharacterizing existing retirement accounts, or have recently inherited an IRA, it is super important to reach out to Carol McAtee and Associates for answers and guidance.  Call Carol First!

info@accpas.com OR 727-327-1999.

Be sure to check back here next week for the second of our four-part series, Employer-provided Plans and check us out on and Facebook and Twitter for whatever it is we’ll be posting.  And remember to max it out.

McAtee and Associates’ Disclaimer:

Our blog is intended for educational and awareness purposes. The general information provided about taxes, accounting, and business-related topics is by no means intended to provide or constitute professional advice. Reading our blog does not create a Client/CPA relationship between you and us. The blog, including all contents posted by the author(s) as well as comments posted by visitors, should not be used as a substitute for professional advice or as a substitute for communicating with a competent, human professional.

Our blog posts are written using current information and current or proposed rules and regulations. Information becomes old and outdated. Rules and regulations are frequently changed, added, amended, and/or left to expire. This is extremely true with most things tax and to a lesser and slower extent, most things accounting. We do not go back and update posted blogs. Always check with your CPA or accountant regarding not only rules and regulations but available options and how it all applies to your fact pattern and you.

Posted in Individual Taxes, Retirement Planning | Leave a comment

Happy New Year!

The Holidays are officially over.  Welcome to this week’s blog: Happy New Year!

REINFORCING THE BASICS.

All of us at McAtee & Associates wish all of you a Happy New Year filled with all the joys and successes, fun and good times that make the Memories of a Lifetime.

WHAT ELSE SHOULD I KNOW?

  • Shameless Plug. Our New Year is Happy when you make an appointment. Our New Year is Happy when you upload your tax docs into your piece of our client portal. Our New Year is Happy when you email us all your pdf’d tax info (especially the organizer). Our New Year is Happy when you drop stuff off and say hello. Make our New Year Happy!

info@accpas.com OR   727-327-1999.

Check back here next week when we write real blogs again. If there is anything you would like to know more about, leave a comment and we’ll blog it. And be sure to like us on Facebook and follow us on Twitter; for whatever it is we’ll be posting.

McAtee and Associates’ Disclaimer:

Our blog is intended for educational and awareness purposes.  The general information provided about taxes, accounting, and business-related topics is by no means intended to provide or constitute professional advice.  Reading our blog does not create a Client/CPA relationship between you and us.  The blog, including all contents posted by the author(s) as well as comments posted by visitors, should not be used as a substitute for professional advice or as a substitute for communicating with a competent, human professional.

Our blog posts are written using current information and current or proposed rules and regulations.  Information becomes old and outdated. Rules and regulations are frequently changed, added, amended, and/or left to expire.  This is extremely true with most things tax and to a lesser and slower extent, most things accounting.  We do not go back and update posted blogs.  Always check with your CPA or accountant regarding not only rules and regulations but available options and how it all applies to your fact pattern and you.

 

 

 

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Year-end To-do List.

Here’s a what to do before December 31st checklist to help you prepare for upcoming tax return preparation.

REINFORCING THE BASICS.

Keep in mind that the standard deduction is still increased resulting from the 2017 TCJA; therefore, you may or may not get a tax benefit.

Business.

Change of address. If you’ve moved, submit to IRS Form 8822-B, Change of Address or Responsible Party-Business. Or inform your tax preparer of the change. Form 8822-B

Count Count Count. Schedule and staff your year end periodic inventory. Timely, accurate inventory counts provide comparability between periods and enhance the decision-making process regarding purchasing and pricing levels.

Fixed Assets. Review the fixed asset detail listing for assets no longer owned. Inform your tax preparer which assets were abandoned, sold, stolen, or thrown out. This could make accounting records and tax returns more accurate and could even lower tangible taxes.

Independent contractors. Ensure you have on file properly completed Form W-9s for each independent contractor you paid $600 or more in calendar year 2019. For more information about W-9s, Ask and You Better Receive. What To Know About Form W-9.

Meals. It is crucial for 2018 and beyond to separate Meals and Entertainment. One Account “Meals” and one account “Entertainment”. If you have Travel, separate it as well. Write good descriptions and fill in the memo lines for all expenditures. If you eat at an entertainment event, separate the food and entertainment cost portions. Within meals it would be beneficial from a tax perspective to distinguish between 50% deductible and 100% deductible or from a management perspective have an account for each:

1. 50% deductible. Meals provided for employer convenience.
2. 50% deductible. Business and employee travel meals.
3. 50% deductible. Meals with clients.
4. 100% deductible. Office snacks and beverages and office parties.

Ensure these costs are separated by either deductibility or meal type, preferably meal type, BEFORE submitting to your tax preparer.  If you are claiming employer convenience be sure to have a company policy and data supporting the policy. Piling your workers into the back of the pick up truck for a Burger King trip is probably NOT employer convenience.

Phone use. Properly allocate business and personal use of cell phone to include purchases of apps and hardware. Paying from your business account does not make personal use a business expense.

S-Corp shareholders. Ensure you have reasonable compensation especially if you took loans and or distributions.
If you are a greater than two-percent shareholder: Any health, disability, or accident insurance premiums paid by the S-Corp on your behalf must be reported as taxable wages to you, subject to federal and state income tax withholdings.
If you have not been including in your paychecks the premiums paid throughout the calendar year 2019, be sure to add the whole amount to one of these last 2019 payroll checks.
Also, as a reminder – if you paid any of the premiums yourself, the corporation must reimburse you by December 31st, 2019.

Individual.

Change of address. If you’ve moved, submit to IRS Form 8822, Change of Address. Or inform your tax preparer of the change. Form 8822

Donations.  If you plan on itemizing, make your donation. Obtain written or digital receipts that include date and donee organization acknowledgement for amounts $250 and more. You’d be surprised how many Goodwill and Salvation Army receipts are missing this required information. If you received something in return, that something must be deducted from the amount contributed. Special rules apply to vehicles, inventory, and investments.

ITINs. ITINS expiring December 31st should be renewed before federal tax returns are filed: ITINs not used on a federal return in the last three years and ALL ITINs issued prior to 2013 with the middle numbers of 83, 84, 85, 86, and 87. How Do I Renew my ITIN?

Manage expectations. If you claim the Earned Income Tax or Additional Child Tax Credit, don’t expect a refund before mid-February 2020 and more than likely not until the end of the month. This is the 2015’s PATH Act attempt to reduce fraud.

Required Minimum Distributions. Taxpayers who are 70 and a 1/2 and over can still take a required minimum distribution from traditional IRA, SIMPLE IRA, SEP IRA, or retirement plan accounts. Taxpayers who reached 70 and a 1/2 in 2019 can wait until April 1, 2020, to receive their first required minimum distribution. If you do not take any distributions, or not enough distributions, you might have to pay a (punishment) 50% excise tax on the amount not distributed as required.

Salary deferrals. Maximize employee elective deferral to 401K: $19,000 in 2019 and $19,500 for 2020. Maximize employee elective deferral to SIMPLE 401K: $13,000 in 2019 and $13,500 in 2020.

info@accpas.com OR 727-327-1999.

If there is anything you would like to know more about, leave a comment and we’ll blog it. And be sure to like us on Facebook and follow us on Twitter; for whatever it is we’ll be posting.

McAtee and Associates’ Disclaimer:
Our blog is intended for educational and awareness purposes. The general information provided about taxes, accounting, and business-related topics is by no means intended to provide or constitute professional advice. Reading our blog does not create a Client/CPA relationship between you and us. The blog, including all contents posted by the author(s) as well as comments posted by visitors, should not be used as a substitute for professional advice or as a substitute for communicating with a competent, human professional.

Our blog posts are written using current information and current or proposed rules and regulations. Information becomes old and outdated. Rules and regulations are frequently changed, added, amended, and/or left to expire. This is extremely true with most things tax and to a lesser and slower extent, most things accounting. We do not go back and update posted blogs. Always check with your CPA or accountant regarding not only rules and regulations but available options and how it all applies to your fact pattern and you.

Posted in Accounting, Business Taxes, Individual Taxes, Taxes | Tagged , , | Leave a comment

Hitting Those Year-end Numbers-Business Taxpayers.

If you’re thinking 2019 profit has resulted in a bit more taxable income than you would like here are a few things you can do to do a bit of business tax planning. You can also call Carol and make an appointment. She’d love to see you. Hurry though, as appointment times are filling up quickly.

WHAT’S IMPORTANT.

Depreciation is super important from both book and tax perspectives primarily because it is a non cash deduction that reduces profit and taxable income. For tax purposes though it is possible to get the whole pie in one sitting and not just a piece of it.

100% First-year Bonus Depreciation. The TCJA took bonus depreciation from 50% all the way to 100% for big stuff (qualifying assets) you buy and start using (placed in service) between September 28, 2017, and December 31, 2022. A few even bigger ticket items that last longer, like airplanes and other transportation equipment have until December 31, 2023.

This is a great planning opportunity, three more years to purchase capital assets that can make your business better, faster, stronger and more profitable. Starting in 2023 the bonus depreciation percentage is reduced yearly by 20%, until it’s gone in 2026 (or 2027 for those longer lasting, bigger ticket items).

Bonus depreciation is allowed for both new and used qualifying assets. This means as long as an asset with a MACRS recovery period of 20 years or less is “new to you”, you can get the maximum allowable deduction. This pretty much includes tangible, personal property as long as you didn’t use it before you bought it. So, if you are in the market for a vehicle, office equipment, heavy equipment or machinery the current, estimated tax savings are huge. Even better, the TCJA threw in off the shelf computer and business software as qualifying assets.

Keep in mind that Bonus Depreciation cannot be taken when the depreciable item is purchased from a related person. There are quite a few related persons relationships. Common ones in small business transactions are:
1. An individual and a member of his/her family, including a spouse, child, parent, brother, sister, half-brother, half-sister, ancestor, and lineal descendant;
2. A corporation and an individual who directly or indirectly owns more than 10% of the value of the outstanding stock of that corporation;
3. Two corporations that are members of the same controlled group; and,
4. Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 10% of the value of the outstanding stock of each corporation.

Other related person relationships are found within and between partnerships, estates and trusts, and grantors and fiduciaries to name a few. We will be discussing related persons in a future blog.

Also, Bonus Depreciation is mandatory; you can, however, elect out of it. The opt out will apply to everything placed in service that year in that class of property.

Planning Tip. Bonus Depreciation is not limited to business income; it can be used to generate a net operating loss (NOL). The benefit here is NOLs can be carried forward.
Planning Tip. There is no Bonus Depreciation for HVAC items. If you make any HVAC purchases and installations, use Section 179.
Planning Tip. Generally, you can buy things from in-laws and step parents/children.

Expanded Section 179 First-Year Depreciation Deductions. The TCJA was also very good to Section 179 Depreciation Deductions. Section 179 is now HUUUUGE. The maximum first-year deduction has more than DOUBLED to a whopping $1,020,000 and is not completely phased out until $2.5 mil. Real property, though, is still NOT included!

The TCJA also made Section 179 even bigger by adding something new called Qualified Improvement Property (QIP). QIP makes the inside of real property you don’t live in or rent better unless it makes the building bigger, is inside structural framework, or is an elevator/escalator. QIP is also fire protection systems, alarm and security systems. And it gets better – roofs, even though they are on the outside, count as QIP.

And HVAC counts as QIP (and is not eligible for bonus depreciation). This will be a future blog topic.

The TCJA also provides a benefit to lodging entities, tangible personal property like beds, TVs and the usually ugly wall hangings – all can be “179’d”.

Keep in mind, that like all things tax, the deduction is subject to several limitations including taxpayer business income limitations and related person restrictions.

Planning Tip. When both 100% first-year bonus depreciation and the Sec. 179 deduction are available for the same asset, it’s generally more advantageous to claim 100% bonus depreciation, because there are no limitations on that break.
Planning Tip. Disallowed Section 179 Depreciation Deductions can be carried forward.

De Minimis Safe Harbor Election.  This really cool you don’t have to depreciate mechanism is continued under the TCJA as long as what you buy isn’t inventory related (UNICAP rules). Basically, as long as a single item doesn’t cost more than $5,000 if you’re an audit client and $2,500 if you’re not audited, the expenditure goes straight to the income statement. If you’re not audited there is no requirement for a written capitalization policy.

The election is properly made by attaching a statement to each year’s timely filed return.

Planning Tip. In addition to more immediate tax savings, this election has the added benefit of reduced record keeping time.

Passenger Vehicles Used for Business. This is the under 6,000 pounds category that includes car, light trucks and vans. Maximum depreciation deductions allowed for these vehicles placed in service in 2019:

Tax Year Less than 50% use OR Adopts out of Bonus Depreciation More than 50% use OR Bonus Depreciation
2019 $10,100 $18,100
2020 $16,100 $16,100
2021 $9,700 $9,700
Thereafter & Forever More $5,760 $5,760

There is a whole other separate list of rules for leased vehicles that are valued at greater than $50,000, the primary one being inclusion amounts. Inclusion amounts are nominal amounts that are added to the lessee’s personal income every year of the vehicle lease. Inclusion amounts also kick in with some other types of property when business use falls to below 50%.

Planning Tip. Keep business use over 50%.

Cash vs Accrual. The TCJA has made the cash method of accounting available to more small businesses than ever before by increasing annual gross receipts from 5 million to 25 million. This is a huge win for C-Corps and businesses with inventory.

Planning Tip. Cash basis makes it much easier to shift income by accelerating and deferring income and expense items.
Planning Tip. Cash basis defers revenue solely from the tax perspective with no impact on book earnings. When receivables are greater than payables, defer the revenue/taxable income to the next year.

Retirement Contributions.  SEP Plans. If you own a small business and haven’t yet set up a tax-favored retirement plan for yourself, you can establish a simplified employee pension (SEP). Unlike other types of small business retirement plans, a SEP can be created this year and still generate a deduction on last year’s return.

In fact, if you’re self-employed and timely extend your calendar-year 2019 personal tax return, you’ll have until October 15, 2020, to take care of the paperwork and make a deductible contribution for last year. The deductible contribution can be up to:

20% of your 2019 self-employment income, or
25% of your 2019 salary if you work for your own corporation.

The absolute maximum amount you can contribute for the 2019 tax year is $56,000.

Planning Tip. You may not want a SEP if your business has employee because you might have to cover them and make contributions to their accounts. That could be cost prohibitive.
Planning Tip. A lot of bang for this buck, not only less tax paid but more savings growth.

Christmas Wish List. Perhaps the very best way to lower 2019’s business income is to reward employees with a Holiday Bonus. Holiday bonuses are considered by the IRS to be discretionary so they are not subject to overtime pay rules. Nothing makes an employee feel appreciated like a bonus.
Planning Tip. There is much more bang in a buck that gives a bonus than a buck that pays income tax.

WHAT ELSE SHOULD I KNOW?

 → The last day to accomplish most 2019 planning goals is December 31.
 → Both Bonus Depreciation and Section 179 are not prorated, meaning if you buy it December 31st AND put it into play December 31st, you get 100% of the allowable deduction.
 → Estates and trusts cannot take (elect) Section 179.
 → Qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property are no longer separately defined and no longer have a 15-year recovery period under the new law. If you’re interested in this let us know and we can make it a future blog topic.

info@accpas.com OR 727-327-1999.

If there is anything you would like to know more about, leave a comment and we’ll blog it. And be sure to like us on Facebook and follow us on Twitter; for whatever it is we’ll be posting.

McAtee and Associates’ Disclaimer:
Our blog is intended for educational and awareness purposes. The general information provided about taxes, accounting, and business-related topics is by no means intended to provide or constitute professional advice. Reading our blog does not create a Client/CPA relationship between you and us. The blog, including all contents posted by the author(s) as well as comments posted by visitors, should not be used as a substitute for professional advice or as a substitute for communicating with a competent, human professional.

Our blog posts are written using current information and current or proposed rules and regulations. Information becomes old and outdated. Rules and regulations are frequently changed, added, amended, and/or left to expire. This is extremely true with most things tax and to a lesser and slower extent, most things accounting. We do not go back and update posted blogs. Always check with your CPA or accountant regarding not only rules and regulations but available options and how it all applies to your fact pattern and you.

Posted in Business Taxes, Christmas, IRS, Tax Planning, TCJA | Tagged , , , , , , | Leave a comment

Hitting Those Year-end Numbers-Individual Taxpayers.

It’s probably about time to start thinking about the 2019 income tax return especially if you want to do a bit of 1040 planning. You can also call Carol and make an appointment. She’d love to see you. And it would be even more informative and a lot less boring than reading this.

REINFORCING THE BASICS.
General information before you even get started: still no personal exemptions (through 2025); all three standard deductions increased: MFJ = $24,400 from $24,000; S and MFS = $12,200 from $12,000; and, HOH = $18,350 from $18,000. The additional standard deductions for being somewhat older (65) or blind = $1,650 if Single or HOH and $1,300 (each) if MFJ. The standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot be more than the greater of $1,100 OR the sum of $350 and the individual’s earned income (not to exceed the regular standard deduction amount).
Income tax rates remained the same but the brackets increased considerably. Here are the increased 2019 brackets:

Rate 2018-2025 Single $ HOH $ MFJ $ MFS $
10% 0 0 0 0
12% 9,700 13,850 19,400 9,700
22$ 39,475 52,850 78,950 39,475
24% 84,200 84,200 168,400 84,200
32% 160,275 160,700 321,450 160,725
35% 204,100 204,100 408,200 204,100
37% >510,300 >510,300 >612,350 >306,175

Planning Tip. Keep in mind that the various credits and deductions have different income eligibility amounts and thresholds. Postponing 2019 income like an employee bonus to 2020 and accelerating 2020 deductions to 2019, “the bunching strategy”, could possibly generate a tax benefit especially if you expect to be in a lower tax bracket in 2020. Keep in mind that you can pay deductible expenses on your credit card.

WHAT’S IMPORTANT.

Retirement Contributions. How much can I contribute in 2019? For both Traditional and Roth IRAs, the MaxOut amount is $6,000 and add a $1,000 if you’re over age 50 and want to catch-up.

How much of my 2019 contribution is tax deductible? Roth IRA contributions are never tax deductible and the account grows tax-free as well.

For Traditional IRAs how much of the contribution being deductible is limited by how much you make and if you have a retirement plan through your employer. If you are not married yet, for better or for worse, and have a plan through work: the whole contribution is tax deductible if MAGI is less than $64,000; partly deductible between $64,000 and $74,000; and, not at all tax deductible if you make over $74,000; at which point you should consider contributing to a Roth IRA. For married folks those amounts are: $103,000 and $123,000. If your spouse has a plan through work and you don’t, the amounts are $193,000 and $203,000. If you are self-funding an IRA on your own then the entire contribution up to the maximum amount is fully deductible. We’ll be sure to let you know the MaxOut 2020 amounts.

Planning Tip. If you are contemplating converting a traditional IRA to a Roth IRA, it may be beneficial to convert beaten down stocks sitting in a Traditional IRA especially if there is no predicted rally or bounce back in 2020.

For 401Ks, 403Bs, most 457Bs, and the TSP the 2019 elective deferral amount is $19,000 and add $6,000 if you’re over age 50 and want to catch-up. The deductible amounts are the same as for Traditional IRAs.

Required Minimum Distribution (RMD). If you are older than 70-1/2 double check that you took the annual RMD from the IRA, 401K or employer plan. There is no need to pay a possible penalty that is 50% of the RMD.

Saver’s Credit. The maximum credit amount remains unchanged at $2,000.

Credit Amount MFJ AGI HOH AGI All Other AGI
50% <$38,500 <$28,875 <$19,250
20% $41,500 $31,125 $20,750
10% $64,000 $48,000 $32,000
0% >$64,000 >$48,000 >$32,000

Education.  American Opportunity Tax Credit. For 2019, the maximum American Opportunity Tax Credit is $2,500 per student, and is phased out beginning at $160,000 AGI for joint filers and $80,000 for S & HOH. Note MFS is still not eligible to claim this credit.

Lifetime Learning Credit. A credit of up to $2,000 per return is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2019, the Lifetime Learning Credit phases out between $116,001-$135,999 for MFJ and $58,0001-$67,999 for S & HOH. The credit cannot be claimed if your MAGI is $67,999 or more ($135,999 for joint returns) or if you file MFS.

Coverdell Education Savings Account. The maximum contributed amount remains unchanged at $2,000 and the contribution remains non-deductible. The Coverdell account can be used to offset the cost of elementary and secondary education in addition to post-secondary education. The phaseout is between $190,001-$219,999 MFJ and $95,001-$109,999 all other filers.

Employer-Provided Educational Assistance. The 2019 exclusion amount remains unchanged at $5,250.

Student Loan Interest. No change in 2019. Maximum deduction is $2,500 as long as your MAGI is less than $70,000 S or $140,000 MFJ. NOTE MFS is not eligible for his credit. The deduction is phased out at higher income levels.

Tax Credits.  Adoption Credit. In 2019 a nonrefundable credit of up to $14,080 is available for qualified adoption expenses for each eligible child.

Child and Dependent Care Credit. The Child and Dependent Care Tax Credit was permanently extended a few years back and survived the TCJA. As such, if you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.
For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher-income earners, the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.

Child Tax Credit and Credit for Other Dependents. For tax years 2018 through 2025, the Child Tax Credit increases to $2,000 per child. The refundable portion of the credit increases from $1,000 to $1,400 – 15 percent of earned income above $2,500, up to a maximum of $1,400 – so that even if taxpayers do not owe any tax, they can still claim the credit. Phaseout begins at MAGI of $400,000 MFJ and $200,00 for all other filers.
Under TCJA, a new tax credit – Credit for Other Dependents – is also available for dependents who do not qualify for the Child Tax Credit. The $500 credit is nonrefundable and covers children older than age 17 as well as parents or other qualifying relatives supported by a taxpayer.

Earned Income Tax Credit (EITC). For tax year 2019, the maximum earned income tax credit (EITC) for low and moderate-income workers and working families increased to $6,557 (up from $6,431 in 2018). The maximum income limit for the EITC increased to $55,952 (up from $54,884 in 2018) for married filing jointly. The credit varies by family size, filing status, and other factors, with the maximum credit going to joint filers with three or more qualifying children.

Health. Health Savings Accounts. The maximum annual contribution for Individuals is $3,500; Families, $7,000 and catchup contribution an additional $1,000. Flexible Spending Arrangements. The voluntary employee salary reduction is $2,700.

Long-term Care (LTC) Insurance. The maximum LTC insurance premiums eligible for deductions by age group are:

Under 40 41-50 51-60 61-70 Over 70
$420 $790 $1,580 $4,420 $5,270

Other.  Long-term Capital Gains & Qualified Dividends Tax.

Filer 0% 15% 20%
MFJ $0-78,749 $77,750-488,849 $488,850 +
MFS $0-39,374 $39,375-244,424 $244,425 +
HOH $0-52,749 $52,750-$461,699 $461,700 +
Single $0-39,374 $39,375-434,549 434,550 +
Estate/Trust $0-2,649 $2,650-12,949 12,950 +

Planning Tip. If your taxable income (TI) is resting comfortably within one of the taxable income brackets above, accept the % rate and move on. It is not always advisable to sell for capital losses unless the offset moves TI into a lower percentage bracket.

Christmas Wish List. Gift Tax. You can be the best Santa Ever. The annual exclusion remains unchanged at $15,000. Cash, cars, jewelry, stocks (income-earning property).

Planning Tip. Overall tax liability can be reduced by gifting income-earning property to family members in lower tax brackets AND not subject to the kiddie tax.

Planning Tip. If you’re older than 70-1/2 and are charitable, consider making the donation straight from the IRA straight to the charity. This results in neither income nor a charitable deduction but most certainly reduces the amount of the RMD and may even result in tax savings.

WRAPPING IT UP.

 

 

WHAT ELSE SHOULD I KNOW?

 → Tax saving strategies employed this year may not be so tax saving next year.

info@accpas.com OR 727-327-1999.

Be sure to check back here next when we will blog about Hitting Those Year-end Numbers-Business Taxpayers. If there is anything you would like to know more about, leave a comment and we’ll blog it. And be sure to like us on Facebook and follow us on Twitter; for whatever it is we’ll be posting.

McAtee and Associates’ Disclaimer:  Our blog is intended for educational and awareness purposes. The general information provided about taxes, accounting, and business-related topics is by no means intended to provide or constitute professional advice. Reading our blog does not create a Client/CPA relationship between you and us. The blog, including all contents posted by the author(s) as well as comments posted by visitors, should not be used as a substitute for professional advice or as a substitute for communicating with a competent, human professional.

Our blog posts are written using current information and current or proposed rules and regulations. Information becomes old and outdated. Rules and regulations are frequently changed, added, amended, and/or left to expire. This is extremely true with most things tax and to a lesser and slower extent, most things accounting. We do not go back and update posted blogs. Always check with your CPA or accountant regarding not only rules and regulations but available options and how it all applies to your fact pattern and you.

Posted in Individual Taxes, Tax Planning, Taxes | Tagged , , , , , , , , | Leave a comment

Don’t Talk Trump II! Let’s Talk Turkey.

It really is unimpeachable. The holidays are here. Turkey. Football. Family. Santa Claus. Whoa! Let’s not get ahead of ourselves. Let’s get through Thanksgiving. This week we are not talking accounting, not even talking tax. Welcome to this week’s blog: Don’t Talk Trump, Let’s Talk Turkey II. Trivia for your Thanksgiving Day. And if you need to flip any, “Oh no, here we go” conversations we have included several table discussion topics to help you steer clear.

1. What meat did Native Americans bring to the First Thanksgiving? ANSWER – Venison.

2. What state grows the most turkeys? ANSWER – Minnesota.

3. What is the average lifespan of a wild turkey? ANSWER – 3 to 5 years.
NOT a suggested table discussion: How old was the turkey on your dinner plate.

4. The average turkey has how many feathers? ANSWER – 5,000 to 6,000.

5. Where do the feathers go? ANSWER – To the farm and to the zoo. Turkey feathers are ground up and used as protein for cattle, sheep, goats and giraffes.

6. In what year or at least what decade did Macy’s Thanksgiving Day Parade and America’s Thanksgiving Parade start? ANSWER – 1924. Did you know back in the 20’s the Macy’s Thanksgiving Day Parade was in Newark, NJ and we pretty much ripped off the America’s Thanksgiving Parade from the Canadians. Giving credit where credit is due. The Eaton’s Santa Claus Parade first marched in Toronto, back in 1905.

7. Which President was the first to officially give a turkey a presidential pardon? ANSWER – The first unofficial pardon was given by JFK in 1963. But it was Ronald Reagan, in 1987, who first officially pardoned a turkey, as a joke. The turkey trotted off to a petting zoo and in 1989 Bush SR made it an annual tradition. Truly, non-partisan politics at its best!

8. Just like some folks have wattles under their chins, so do turkeys, under their beaks. But what’s the wattle above the beak called? ANSWER – Snood.

NOT a suggested table discussion: Who at the table has the biggest wattle?
Suggested table discussion: Who, not at the table, has the biggest wattle?

9. Who invented that green bean casserole that Grandma makes every Thanksgiving? ANSWER – Dorcas Reilly in 1955. And Dorcas worked…… at the Campbell Soup Company. Cream of Mushroom soup had been invented some 20 years earlier and people used it a casserole filler. Rest in Power Dorcas, who passed away at the age of 92 last October.

Suggested table discussion: What is everyone’s favorite Campbell Soup?

10. Where did the cornucopia come from? ANSWER – There’s a couple of different rumors or legends in Greek mythology about the horn of plenty. One is Zeus’ mom after giving birth to him gave him to some nymph-nannies to take care of. They in turn hired a wet-nurse goat named Amalthea whose milk helped Zeus grow up to be the head honcho of Pagan Greece; King of Mount Olympus, God of Thunder and all that. When Zeus became boss, he put one horn in the heavens and filled the other horn with the magic of perpetually becoming filled with whatever sustenance the possessor of the horn might want and gave the horn to his nymph-nannies.

Another story is Zeus’ kid, one of them, he had like 92; Hercules got into a fight with the guy that was the River God. Of course, it was over a woman, not just any woman but the daughter of the God Dionysius. The River God guy shapeshifted into a bull. Heracles kicked his butt, tore off a horn, gave it to some water nymphs who filled it with flowers. The Goddess of Plenty liked the flower-filled horn and then made the horn her own and called it… Cornucopia.

Suggested table discussion: What would you fill the cornucopia with?

11. Who won the National Dog Show best in Show last year?

Whiskey, the Whippet.

Suggested table discussion: What is everyone’s favorite breed? Or less boring, who do you know that looks like their dog?

BONUS ROUND.

Wild Turkey is a brand of Kentucky Straight Bourbon Whiskey. How did it get its name? ANSWER – Thomas McCarthy, a hunter and an executive for Austin Nichols (a bourbon wholesaler), used to go hunting for wild turkeys with his friends every year. In 1940, he liberated some samples from the warehouse for the trip. The following year his friends were like you better bring some more of that wild turkey bourbon. He did and in 1942 Austin Nichols started bottling Wild Turkey.

Suggested table discussion: How do you like to liquor up your eggnog?

Have A Blessed and Bountiful Thanksgiving.

info@accpas.com OR 727-327-1999.

Check back here next week when we tackle yet another taxing topic. If there is anything you would like to know more about, leave a comment and we’ll blog it. And be sure to like us on Facebook and follow us on Twitter; for whatever it is we’ll be posting.

McAtee and Associates’ Disclaimer:

Our blog is intended for educational and awareness purposes. The general information provided about taxes, accounting, and business-related topics is by no means intended to provide or constitute professional advice. Reading our blog does not create a Client/CPA relationship between you and us. The blog, including all contents posted by the author(s) as well as comments posted by visitors, should not be used as a substitute for professional advice or as a substitute for communicating with a competent, human professional.

Our blog posts are written using current information and current or proposed rules and regulations. Information becomes old and outdated. Rules and regulations are frequently changed, added, amended, and/or left to expire. This is extremely true with most things tax and to a lesser and slower extent, most things accounting. We do not go back and update posted blogs. Always check with your CPA or accountant regarding not only rules and regulations but available options and how it all applies to your fact pattern and you.

Posted in Holiday, Thanksgiving | Leave a comment

Step by Step – The 2020 W-4

Updated 12/17/19.

The Tax Cuts and Jobs Act, enacted in late December of 2017, wreaked havoc on Form W-4, Employee’s Withholding Allowance Certificate. The TCJA radically changed employee withholding by doubling the standard deduction, modifying tax rates and tax brackets, and eliminating personal exemptions, all of which rendered the W-4, as we knew it, obsolete. Several changes were made with 2018 and 2019 revisions but major revisions were postponed until the forthcoming 2020 version.

Comment periods yielded that the form was too complex and recommendations for improvements and simplification were made by the American Payroll Association and the AICPA. IRS head honcho (Commissioner) says, “The primary goals of the new design are to provide simplicity, accuracy, and privacy for employees while minimizing the burden for employers and payroll processors. McAtee & Associates head honcho says since when has the IRS ever made anything simple? Share in a comment below if you know of anything.

REINFORCING THE BASICS.

Form W-4 is the tool employers use to withhold federal income tax from paychecks. And employers are the tool the IRS uses to get our money.

New and improved it is allegedly simple, accurate, and private with five easy, breezy steps:

Step 1.   Enter Personal information;
Step 2.  Multiple Jobs or Spouse Works;
Step 3.  Claim dependents;
Step 4.  Other adjustments (optional); and,
Step 5.  Sign here – (Under penalties of perjury).

Let’s start with a look: 2020 Form W-4.

Immediately, you can see there are no more withholding allowances which were previously tied to the amounts of personal and dependent exemptions. Since individuals can no longer claim personal or dependency exemptions on their tax returns there is no need to claim withholding allowances on the W-4. Which worked out good for everyone because some folks were confused by personal allowances and the related worksheet.

The concept of “Exempt” is still the same; $0 tax liability in the previous year and expected $0 tax liability in the present year. An example of this is refundable credits greater than the tax liability. The final thing that is still the same – It’s still not simple!

STEP BY STEP.

Step 1. Enter Personal information. Filling out your name, address, social security number (so much for privacy) hasn’t changed. Filing status has been tweaked to combine Single and Married Filing Separate and Head of Household makes its debut. Everyone who gets a W-2 has to complete this step.

Step 2. Multiple Jobs or Spouse Works. You really should fill this out if there is more than one job in the household. For best results, complete a W-4 for all jobs. Remember, you don’t have to.

Option 1. Calculator. Tax Withholding Estimator

     Pros. Most accurate option. Most private option.
     Cons. Somewhat of a pita to complete.

Option 2. Worksheets. What would a tax form be without worksheets!

     Pros. Good amount of accuracy if adjustment is put on the W-4 with the highest pay. The worksheet is completed with values from an accompanying table not actual salaries and wages. Worksheet is not filed with W-4 so some privacy is maintained.
     Cons. A lot more work to do if one job is more than $99,000 or there will be more than three W-2s on the tax return. If pay for any job changes a new W-4 should be filled out to maintain level of accuracy.

Option 3. Check the box. If there are only two jobs in the house it can be simple. Check the little box and that W-2 will get one half the standard deduction and one half the tax bracket. Make sure the other W-4’s Step 2 box is checked as well because it gets the other half. This compensates for the cold heart fact that all jobs together are taxed more than if taxed separate and withholding amounts should follow suit.

     Pros. Don’t have to do a new W-4 when you get a raise. Accurate if the two jobs have similar pay. Is the simplest-just check the box.
    Cons. Not the most accurate option overall. There will be disparity if one W-2 is a breadwinner and one is a cracker winner. Tells your employer he/she is not the only one in your house.

What if only one person works one job in my house and the rest are freeloaders? In this case – Complete Steps 1 and 5 and your withholding will be based on the appropriate standard deduction and tax rates.

Step 3. Claim dependents. Step 3 appears clean and simple, but it is not; however, it is supposed to yield a more accurate withholding amount. Step 3 has some simple multiplication with nice round dollar amounts. Count those (qualifying) kids living at home. Under the age of 17 is $,2000 each. Between 17 and 19 is $500 each. And 19 to 24 is $500 if he or she is a full-time student. There is no age limit for the $500 Other Dependent Credit/Family Credit if your child is permanently and totally disabled.

You may note that this is a dependent only section. But it is not! What is not obvious at all is that all other anticipated credits go here too. All your other credits also get put on that total line. Savers’, Education , Foreign Tax, Residential Energy, all of them.

     Pros. Easily provides the benefits of credits with bigger take-home paycheck. There is no requirement to put other credits here or even complete the step.
     Cons. Takes away the surprise of how awesome those credits are to the tax return bottom line of how much you still owe or how much you get back. This is information that employers weren’t privy to before and makes the step a privacy concern.

Remember, the more credits put on the W-4, the less withheld from the paycheck. Bigger paychecks mean less refund or more owed at tax time.

Step 4. Other adjustments (optional). Step 4 has three parts and an accompanying, relatively simple, five-line worksheet. We suggest using your prior year return as at least a starting point. 4(a) is Other income; you’ll need Schedule 1, Additional Income and Adjustments to Income. 4(b) is Deductions; you’ll need Schedule A, Itemized Deductions. 4(c) is Extra withholding; kind of like a Christmas Club Savings account. 4(c) probably sounds familiar, but read on. 4(c) is where Line 4 from the Multiple Jobs Worksheet (used in Step 2(b)) goes. See, not so simple.

     Pros. Not required to be completed. Worksheet is not filed with W-4 so some privacy is maintained.
    Cons. Not very private. Employers will now know how much other income you have that doesn’t come from them and they’ll know your write offs. At the end of this step, they have an idea of your tax return.

Step 5. Sign here – (Under penalties of perjury). Hasn’t changed. And everyone who gets a W-2 has to complete this step.

IF YOU ARE AN EMPLOYER.

All your new hires in 2020 must use the redesigned 2020 Form W-4. You can ask your employees hired before 2020 to submit a new Form W-4, but they don’t have to. Withholding should be computed based on the information from the employee’s most recently submitted Form W-4. If an employee hired prior to 2020 wishes to adjust withholding give them the 2020 Form W-4.

The 2020 Employers Only section allows for reporting of Employer name, address and employer identification number and a box to indicate the date of hire for new employees. This remains similar to what you saw in the 2018 and 2019 versions.

WHAT ELSE SHOULD I KNOW?

 You should increase federal withholding if the household has more than one job between the taxpayer and spouse.
 You should increase federal withholding if you have other than W-2 income such as rental, business, or gambling income.
 Your withholding can be reduced for any credits such as child tax and other dependent credits. Keep in mind this will also lower a refund or increase an amount owed.
 If you claim an exemption from withholding, you will need to submit a new Form W-4 by February 16, 2021.

info@accpas.com OR 727-327-1999.

Be sure to check back here next week for Thanksgiving Trivia and like us on Facebook and follow us on Twitter for whatever it is we’ll be posting.

McAtee and Associates’ Disclaimer:

Our blog is intended for educational and awareness purposes. The general information provided about taxes, accounting, and business-related topics is by no means intended to provide or constitute professional advice. Reading our blog does not create a Client/CPA relationship between you and us. The blog, including all contents posted by the author(s) as well as comments posted by visitors, should not be used as a substitute for professional advice or as a substitute for communicating with a competent, human professional.

Our blog posts are written using current information and current or proposed rules and regulations. Information becomes old and outdated. Rules and regulations are frequently changed, added, amended, and/or left to expire. This is extremely true with most things tax and to a lesser and slower extent, most things accounting. We do not go back and update posted blogs. Always check with your CPA or accountant regarding not only rules and regulations but available options and how it all applies to your fact pattern and you.

Posted in General Interest, Individual Taxes | Tagged , , | Leave a comment

Getting Schooled – Maximizing Education Tax Credits

Pay tuition. Get tax credits. $2,500 here; $2,000 there. Education credits are seemingly straightforward but are they as straightforward as they seem? Not really and not always. Shameless plug. We just make it look straightforward.

REINFORCING THE BASICS.
The American Opportunity Tax Credit (AOTC) offers a 100% credit of the first $2,000 in qualified education expenses and an additional 25% on the next $2,000, for a maximum tax credit of $2,500. The available credit is 40% or $1,000 refundable, meaning you might get some cash back after the tax liability is reduced away to $0. This is for 2018 and 2019. The AOTC is limited to a student’s first four years of higher education provided the student is enrolled at least half-time for at least one academic period during the tax year and is learning towards a degree, certificate, or other recognized educational credential. If you haven’t picked a major yet: Bagpiping (Carnegie Mellon), and Citrus (Florida Southern College).

The Lifetime Learning Credit (LLC) offers a credit for 20% of up to $10,000 in qualified education expenses. Thus, a maximum credit of $2,000 is available to qualifying students. This is for 2018 and 2019. The credit is non-refundable, meaning it only reduced tax liability. Eligible students enrolled in courses at an eligible college, university, vocational school, or other postsecondary institution can claim the LLC. There is no limit on the number of years the student can claim the credit and no restrictions on what classes you can take. This is a per-student, per-year credit. How about a course on politicizing Beyoncé or Advanced Producing: Script to Screen taught by Matthew McConaughey? America’s Next Top Professor teaches a course at Stanford about building a personal brand.

WHAT QUALIFIES FOR A CREDIT?
Tuition and qualified related expenses qualify. Tuition and student activity fees are qualified expenses when paid to an eligible educational institution as a condition of enrollment or attendance. But what are qualified related expenses? Books, supplies, computers, software and the like. For AOTC these items can be purchased from the school or elsewhere, like Amazon Prime.  The LLC requires these otherwise qualified expenses be bought from the school.

What are NOT expenses? Examples of nonqualified expenses include: dorm living; insurance; medical expenses; transportation; personal living or family expenses; education that involves sports, games or hobbies; and, any non-credit course unless it is part of the student’s degree program.

Even after the TCJA, students can claim the credit only if they provide more than half of their own support. And the credit can be claimed by the parent only if the parent claims the student as a dependent (there are no more dependency exemptions).

NOT SO STRAIGHTFORWARD.
Tax-free distributions from a Coverdell ESA or qualified tuition program (Section 529 plan) can be applied to either qualified education expenses or certain other expenses (such as room and board) without creating a tax liability for the student. An education credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA or qualified tuition program, as long as the same expenses aren’t used for both benefits.

It isn’t as simple as 1 + 1 when scholarships (merit-based) and grants (need-based) come into play. Some can only be used (restricted) for qualifying expenses and others can be used for both (unrestricted) qualified and non-qualified expenses. It is extremely important to know if the scholarship or grant is restricted or unrestricted. For a scholarship (education or athletic) to be completely tax-free, the whole amount of money must be used for qualified expenses. Congress brags that Veterans Benefits and need-based education grants like Pell Grants are tax-free but the same tax laws apply, so that isn’t necessarily always the case.

What usually happens is taxpayers’ look at the 1098-T and subtract the scholarship amount from the tuition paid amount and then claim a credit for remaining tuition on their return. Or the college arbitrarily applies scholarships and grants against tuition and related expenses. So, it appears there is no credit to be had when scholarships and grants received exceed tuition paid. Even worse, that excess is considered income. Schools are not required to issue 1098-Ts when this occurs.

The goal is to maximize the credit by determining the more beneficial credit, AOTC or LLC, and optimizing the scholarship and grant allocation between qualified and nonqualified expenses. Once the credit is maximized, has there been an adverse effect on other credits such as the Earned Income, Other Dependent, or Savers’ Credits? If income is increased does the increased tax credit exceed any increase in federal and state income taxes? To really complicate things, it’s not just a 1040 number’s game. Anytime scholarships and grants are included in income, regardless of whose, future need-based educational assistance could be affected.

WRAPPING IT UP.                                                                                                                              AOTC is partially refundable and phases out between $80,000/$160,000 and $90,000/$180,000 (Single/MFJ).

LLC is not refundable and phases out between $57,000/$114,000 and $67,000/$134,000 (Single/MFJ).

WHAT ELSE SHOULD I KNOW?

 √ The LLC can be used for courses to acquire or improve job skills.
 √ Bagpipes aren’t just for funerals and parades. The Chainsmokers.
 √ Both credits cannot be taken for the same student.
 √ If the IRS finds you incorrectly claimed the AOTC, you will have to pay it back with interest. And that’s not all, you could get an accuracy penalty or a fraud penalty. Then they might ban you from claiming it for two to ten years.
 √ America’s Next Top Professor is……. Tyra Banks!

Shameless Plug. Straight Forward! McAtee & Associates can optimize a 1098-T (or lack of) into maximum Education Credits. Speaking of maximizing, if you spent some money in 2019 for energy improvements, Getting Paid to Reduce Your Carbon Footprint – Residential Energy Credits, we can optimize that as well.

info@accpas.com OR 727-327-1999.

Be sure to check back here next when we will have blogged about something else. And like us on Facebook and follow us on Twitter; for whatever it is we’ll be posting.

McAtee and Associates’ Disclaimer:
Our blog is intended for educational and awareness purposes. The general information provided about taxes, accounting, and business-related topics is by no means intended to provide or constitute professional advice. Reading our blog does not create a Client/CPA relationship between you and us. The blog, including all contents posted by the author(s) as well as comments posted by visitors, should not be used as a substitute for professional advice or as a substitute for communicating with a competent, human professional.

Our blog posts are written using current information and current or proposed rules and regulations. Information becomes old and outdated. Rules and regulations are frequently changed, added, amended, and/or left to expire. This is extremely true with most things tax and to a lesser and slower extent, most things accounting. We do not go back and update posted blogs. Always check with your CPA or accountant regarding not only rules and regulations but available options and how it all applies to your fact pattern and you.

Posted in Individual Taxes | Tagged , , , , , , , , | Leave a comment

Getting Paid to Reduce Your Carbon Footprint – Residential Energy Credits.

Getting Paid to Reduce Your Carbon Footprint – Residential Energy Credits.

REINFORCING THE BASICS!

Nuclear, bad. Fossil fuels, bad. Big carbon footprints, bad.  Our government encourages renewable or sustainable energy as a means for energy security, job creation, climate control, and planet preservation.  Encouragement doesn’t go very far without incentives. Incentives = tax credits.  One of the first energy incentives dates back to 1789 when George Washington signed off on a tariff on British coal.

What is renewable energy?  It is energy that is collected from naturally replenishing resources, such as sunlight, wind, rain, tides, waves, and geothermal heat.  Think of it, wind has been used to generate power since the beginning of time!  Hydroelectric power, 71% of the Earth’s surface is water!  And in 2019 less than 12% of US energy production is from these renewable sources.

Remember credits reduce tax liability $ for $.  Basically, government pays your taxes for you.  Residential Energy Credits are nonrefundable meaning if you still have credit left after wiping out your 2019 tax liability, that credit will pay down your 2020 tax bill, and so on through at least the 2021 tax year.

The ultimate goal would be to replace non-renewable resources: nuclear energy and fossil fuels -“The Big Three”; coal, petroleum, and natural gas.  And yes, cows and planes could possibly go by the wayside.  Cows because renewable energy sources require a heck of a lot of land and planes because they don’t fly on wind alone.  Oh, and farting cows are really bad for the environment.

HOW LONG HAVE THESE CREDITS BEEN AROUND?

These particular credits were first established in the Energy Policy Act of 2005 as government’s way of boosting renewable energy and were initially capped at $2,000.  In 2009, The American Recovery and Reinvestment Act uncapped it, meaning with the exception of qualified fuel cell property there is no limit on what you can spend on installation and get a credit for.  There have been several extensions, the most recent in December 2015, this time extended through 2021.

HOW DOES IT WORK?

Tax Year % of Installed Cost
2019 30
2020 26
2021 22
2022 0

Your home located in the United States.  Your home is what you owned and where you lived most of the time.  Houses, houseboats, mobile homes, manufactured homes, coops, and condos.  With the exception of qualified fuel cell property, the home does NOT have to be your primary residence/main home.  If you have a vacation home or rental property, you can prorate the credit for the amount of time you lived there in the year of installation.

You claim the credit for costs of Qualified Energy Efficient Property in the year the energy efficient system is completely up and running.  As you can see from above – 2019 is the best year to get any energy improvement done.

What is Qualified Energy Efficient Property?  Qualified Energy Efficient Property can be solar electric property, solar water heating property, small wind energy property, geothermal heat pump property, and fuel cell property.

Qualified solar electric (photovoltaic) property uses solar energy to generate electricity for use in your home.  Panels on the roof count because structural components of a structure are not disqualified just because they are a piece of a whole.  You must own the property. Leases and power purchase agreements (PPA) are not eligible for a tax credit. A power purchase agreement is basically paying the solar panel provider a discounted rate for what you use and they sell what you don’t use.  Leases and PPAs are typically 20- 25 years in duration.

Qualified solar water heating property heats water for use with at least half of the energy used by coming from the sun. Again, panels and other such installed property are not disqualified just because they are a piece of a whole. To qualify for the credit, the property must be certified for performance by the nonprofit Solar Rating Certification Corporation or a comparable entity endorsed by the government of the state in which the property is installed.

Qualified small wind energy property uses a wind turbine to generate electricity.

Qualified geothermal heat pump property is any equipment that uses the ground or ground water as a thermal energy source to either heat your home or as a thermal energy sink to cool your home. The completely installed geothermal heat pump property must meet the requirements of the Energy Star program that are in effect at the time of purchase.

Qualified fuel cell property is an integrated system comprised of a fuel cell stack assembly and associated balance of plant components that converts a fuel into electricity by changing chemicals. Blahblahblah. To qualify for the credit, the fuel cell property must have a nameplate capacity of at least one-half kilowatt of electricity using an electrochemical process and an electricity-only generation efficiency greater than 30%. Blahblahblah. The home has to be your main home. The maximum tax credit for fuel cells is $500 for each half-kilowatt of power. For example, a fuel cell with a 5 kW capacity would qualify for 5 x 2 x $500 = $5000 tax credit.

What are costs? Costs are what we would normally assume they are: the equipment itself; building supplies like wiring and screws, nuts, and bolts; permits; debris removal; professional fees like architect, engineer, and electrician; tools; shipping; and, labor. Your own labor doesn’t count. Scan or shoebox these receipts!

WHAT OTHER THINGS SHOULD I KNOW ABOUT RESIDENTIAL ENERGY CREDITS?

 √  Costs to heat up the swimming pool and hot tub are not qualified costs.
 √  Energy storage for residential is eligible for the credit, as long as the battery is charged by the onsite solar energy system.
 √  Applicable electrical and fire code requirements must be met.
 √  The system must be placed into service — up and running — after 01/01/2006 and on, or before, 12/31/2021.
 √  Some states offer perks and bonuses as well.

WRAPPING IT UP.

If you’re contemplating embracing renewable energy for your home and have any questions about the dollar aspect reach out to McAtee and Associates for answers and guidance.  CallCarolFirst!

info@accpas.com OR 727-327-1999.

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Posted in Individual Taxes, Taxes | Tagged , , , , | Leave a comment

Getting To That 20%

Perhaps the biggest change to your business and individual taxes is the Section 199A, Qualified Business Income Deduction (QBID). Your complimentary trip down Memory Lane (aka link to a Carol McAtee archived blog) –  TCJA and What in the World is Section 199A

Today we are going a bit in depth on figuring out how much the QBD will be worth to you as a deduction on your 1040.

REINFORCING THE BASICS.

The Deduction. The gist of it is you may be able to deduct up to 20% of the qualified income of EACH AND EVERY of your qualified business(es) (QBI) earned depending on what your business is and how much taxable income (TI) you have sitting on your “Building Block” 1040 (last week’s blog). We highly recommend refreshing your memory of our blog from 10/31/18 by clicking the above link. Are you below the TI amount, in between TI amounts, or over the TI amount? You could get all, or some, or none of that 20%. Below the TI amount gets you a full 20% deduction. In between and over the amount requires calculating W-2 wages and qualified property.

THE AMOUNTS.

Full Deduction. If you’re married Filing Joint (MFJ) with TI less than $315,000 or All Other Taxpayers (AOT) with TI less than $157,500, you will be able to deduct the full 20% of qualified business income. When TI is below the Floor Amount it does not matter if you are a Specified Service or Trade Business (SSTB) or not.

Partial Deduction. The partial deduction comes in to play if you have TI BETWEEN $315,000 and $415,000 MFJ (Note the $100K range for TO BE FINISHED UP LATER section) and BETWEEN $157,500 and $207,500 (Note the $50K range for TO BE FINISHED UP LATER section) All Other Taxpayers (AOT). When TI is between the Floor and Ceiling amount it does not matter if you are a Specified Service or Trade Business (SSTB) or not. To be finished up later.

Limited Deduction. The subject to limitation comes in to play if you have taxable income MORE THAN the Ceiling amounts of $415,000 MFJ and $207,500 AOT. If you are an SSTB, no deduction for you. If you are not an SSTB, a limited deduction for you. To be finished up later.

THE QBID CALCULATIONS.

Both the partial deduction and the limited deduction require calculating THE GREATER OF: A. 50% of W-2 wages of the qualified trade/business OR B. 25% of those same W-2 wages + 2.5% of the unadjusted basis after acquisition of all qualified property.

A. 50% of W-2 wages of the qualified trade/business. After calculating wages IAW IRS Rev. Proc. 2019-11, IRS Rev. Proc. 2019-11, Determination of W-2 Wages, the calculated W-2 wage amount must be property allocable to the qualified business (or portion). W-2 wage amounts consist of the below and as filed with the Social Security Administration:

Box Description
1            Wages
5            Medicare Wages and Tips
12-D      Elective deferral to 401(k) and SIMPLE 401(k)
12-E      Elective deferral to 403(b) salary reduction agreement
12-F      Elective deferral to 408 (k) (6) salary reduction Simplified Employee Pension
12-G      Elective deferral & Employer contributions to any 457 (b0 plan
12-S       Employee salary reduction to 408 (p) SIMPLE
12-AA    Designated Roth contributions to a 401 (k)
12-BB    Designated Roth Contributions to a 403 (b) salary reduction agreement

The three methods of calculating wages are:

1. Unmodified Box Method. Straight off the W-3, Transmittal of Wage and Tax Statements, the lesser of Box 1 or Box 5.
2. Modified Box 1 Method. Total amount in Box 1 less those amounts in Box 1 that are not wages for Federal income tax withholding purposes. Examples include: employee business expense reimbursements under an accountable plan, insurance for employees, some annuity payments, any amounts paid to an employee of sick pay, salary-reduction contributions to retirement plans, and supplemental unemployment benefits. And then add Boxes 12-D, Box 12-E, Box 12-F, Box 12-G and Box 12-S. In most cases this gets you to Box 5.
3. Tracking Wages Method. Is practically exactly the same as the Modified Box 1 Method. We don’t anticipate many, if any, scenarios that would warrant using this method.

B. 25% of those same W-2 wages +2.5% of the unadjusted basis after acquisition of all qualified property. Basically, this is the day you start using it and how much it cost you.

Qualified property. Is things you can touch AND depreciate and whose depreciation period has not ended prior to the last day of the applicable tax year. The depreciation period begins the day the property is place in service and ends the LATER of 10 years OR the last day of the last year of the asset’s regular depreciation period. If you normally depreciate a vehicle for five years, you can QBID calculate it for 10 years. If you have that vehicle in year 11, it won’t count anymore. If you depreciate a piece of equipment for 15 years, you can QBID calculate it for 15 years.

FINISHED UP LATER.

Partial Deduction. For this range of TI between the Floor and Ceiling amounts, you first determine the “excess amount” and second, reduce that (excess) amount by a percentage. Excess amount: Calculate the tentative deduction which is QBI x 20% and then, do THE QBID CALCULATIONS. And remember to select THE GREATER OF A OR B for subtraction from the tentative QBID. You now have the excess amount.
Percentage: TI less the low end of the range divided by the range. For MFJ: ((taxable income – $315,000)/$100,000). For AOT: ((taxable income – $157,500)/$50,000).
Times the Excess Amount by the Percentage and subtract from the tentative QBID.

You’re single and had taxable income of $190,000 and QBI of $175,000. Your calculated amount of A. business W2 wages is 30,000. Your calculated amount of B. 25% wages and 2.5% property is $10,000.

Tentative QBID = $175,000 x 20% = $50,000
GREATER of A or B calculation = $30,000
Excess Amount = $50,000-$30,000 = $20,000
Percentage = $190,000 – $157,500 = $32,500; $32,500/$50,000 = 65%
Excess Amount x Percentage = $20,000 x 65% = $13,000
QBID = $50,000 – $13,000 = $37,000

Limited Deduction.

If you are an SSTB just stop here, you’re done; no deduction at all for you. Taxed on every penny of business income.
If you are NOT an SSTB, do THE QBID CALCULATIONS. QBID = quite simply THE GREATER OF A OR B.

WHAT ELSE SHOULD I KNOW?

1. If you have an S-Corp(s) or rental property(ies). Call Carol First and Soon.
2. For 2018, any asset that was fully depreciated prior to 2018 and placed in service before 2009 doesn’t count as qualified property.
3. It might be a good time to spring clean the fixed asset list.
4. If you were like WTH at the “EACH AND EVERY”, call Carol and ask about “aggregation.”

Reach out to McAtee & Associates for answers and guidance all things tax and accounting. Carol would enjoy doing some tax planning and advising with you and assisting you with tax preparation and filing.

info@accpas.com OR 727-327-1999.

Check back here next week for a new and entertaining blog. And be sure to like us on Facebook and follow us on Twitter; for whatever it is we’ll be posting.

Posted in Business Taxes, Section 199 A, Taxes, TCJA | Tagged , , , | 45 Comments