The Tax Cuts and Jobs Act (TCJA), enacted in December 2017, limited the itemized deduction for state and local taxes to $5,000 for a married person filing a separate return and $10,000 for all other tax filers. The limit applies to tax years 2018 to 2025.
As in prior years, if a taxpayer chose the standard deduction then state and local tax refunds are not subject to tax. However, if a taxpayer itemizes deductions for that year on Schedule A, Itemized Deductions, part or all of the refund may be subject to tax – but only to the extent that the taxpayer received a tax benefit from the deduction.
Taxpayers who are impacted by the SALT limit may not be required to include the entire state or local tax refund in income in the following year. As a reminder, state or local tax refunds received in 2018 that were reported on 2018 tax returns are not affected.
How much to include is figured by determining the amount the taxpayer would have deducted had the taxpayer only paid the actual state and local tax liability – that is, no refund and no balance due.
Here’s an example:
A single taxpayer itemizes on Schedule A and claims deductions totaling $15,000 on their 2018 federal tax return. Of that amount, $12,000 is for state and local taxes, $7,000 of which is for state and local income taxes. The SALT deduction is limited to $10,000, however.
In 2019, the taxpayer received a refund of $750 for state income tax paid in 2018. This means that the actual state income liability for 2018 was $6,250 ($7,000 paid minus the $750 refund). As such, the taxpayer’s SALT deduction for 2018 would still have been $10,000 even if it had been figured on the actual state and local tax paid.
Because there was no tax benefit received on their 2018 tax return from the overpayment of state income tax the taxpayer is not required to include the state income tax refund received in 2019 on their 2019 tax return.
If you have any questions about the tax treatment of state and local tax refunds, help is just a phone call away.
The Tax Cuts and Jobs Act has resulted in questions from taxpayers about many tax provisions including whether interest paid on home equity loans is still deductible. The good news is that despite newly enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC) or second mortgage, regardless of how the loan is labeled.
Background
The Tax Cuts and Jobs Act of 2017, enacted December 22, 2017, suspends the deduction for interest paid on home equity loans and lines of credit unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan. This suspension is in effect from 2018 through 2025.
Under the new law, for example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not. As under prior law, the loan must be secured by the taxpayer’s main home or second home (known as a qualified residence), not exceed the cost of the home and meet other requirements.
New dollar limit on total qualified residence loan balance
For anyone considering taking out a mortgage, the new law imposes a lower dollar limit on mortgages qualifying for the home mortgage interest deduction. Beginning in 2018, taxpayers may only deduct interest on $750,000 of qualified residence loans. The limit is $375,000 for a married taxpayer filing a separate return. These are down from the prior limits of $1 million, or $500,000 for a married taxpayer filing a separate return. The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home.
For more information about deducting interest on home equity loans or the new tax law, please call.
As part of final guidance issued that pertains to the Tax Cuts and Jobs Act of 2017, new rules and limitations are in effect for taxpayers who deduct depreciation for qualified property acquired and placed in service after September 27, 2017, and, as a business owner, they could affect your tax situation. Let’s take a closer look:
A taxpayer may elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. These changes apply to property placed in service in taxable years beginning after December 31, 2017.
As a reminder, the new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million. For taxable years beginning after 2018, these amounts of $1 million and $2.5 million will be adjusted for inflation. As such, for tax year 2019, the Section 179 expense deduction increases to a maximum deduction of $1,020,000 of the first $2,550,000 of qualifying equipment placed in service during the current tax year. For 2020, the maximum deduction is $1,040,000 and $2,590,000, respectively.
The new law also expands the definition of section 179 property to allow the taxpayer to elect to include the following improvements made to nonresidential real property after the date when the property was first placed in service:
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- Qualified improvement property, which means any improvement to a building’s interior.
Improvements do not qualify if they are attributable to the enlargement of the building, any elevator or escalator or the internal structural framework of the building.
- Roofs, HVAC, fire protection systems, alarm systems and security systems.
Temporary 100 percent expensing for certain business assets
The new law increases the bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023, and is sometimes referred to as the first-year bonus depreciation.
As a reminder, the bonus depreciation percentage for qualified property that a taxpayer acquired before September 28, 2017, and placed in service before January 1, 2018, remains at 50 percent. Special rules apply for longer production period property and certain aircraft.
The definition of property eligible for 100 percent bonus depreciation was expanded to include used qualified property acquired and placed in service after September 27, 2017, if all the following factors apply:
- The taxpayer or its predecessor didn’t use the property at any time before acquiring it.
- The taxpayer didn’t acquire the property from a related party.
- The taxpayer didn’t acquire the property from a component member of a controlled group of corporations.
- The taxpayer’s basis of the used property is not figured in whole or in part by reference to the adjusted basis of the property in the hands of the seller or transferor.
- The taxpayer’s basis of the used property is not figured under the provision for deciding basis of property acquired from a decedent.
- Also, the cost of the used property eligible for bonus depreciation doesn’t include the basis of property determined by reference to the basis of other property held at any time by the taxpayer (for example, in a like-kind exchange or involuntary conversion).
Furthermore, qualified film, television, and live theatrical productions also qualify as qualified property that may be eligible for 100 percent bonus depreciation. This provision applies to property acquired and placed in service after September 27, 2017.
Certain types of property, however, are not eligible for bonus depreciation in any taxable year beginning after December 31, 2017. One such exclusion from qualified property is for property primarily used in the trade or business of the furnishing or sale of the following:
- Electrical energy, water or sewage disposal services,
- Gas or steam through a local distribution system or
- Transportation of gas or steam by pipeline.
This exclusion applies if the rates for the furnishing or sale have to be approved by a federal, state or local government agency, a public service or public utility commission, or an electric cooperative.
The new law also adds an exclusion for any property used in a trade or business that has had floor-plan financing indebtedness if the floor-plan financing interest was taken into account under section 163(j)(1)(C). Floor-plan financing indebtedness is secured by motor vehicle inventory that in a business that sells or leases motor vehicles to retail customers.
The new law eliminated qualified improvement property acquired and placed in service after December 31, 2017, as a specific category of qualified property.
Depreciation limitations on luxury automobiles and personal use property
Depreciation limits for passenger vehicles placed in service after December 31, 2017, have also changed. If the taxpayer doesn’t claim bonus depreciation, the greatest allowable depreciation deduction is:
- $10,000 for the first year,
- $16,000 for the second year,
- $9,600 for the third year, and
- $5,760 for each later taxable year in the recovery period.
If a taxpayer claims 100 percent bonus depreciation, the greatest allowable depreciation deduction is:
- $18,000 for the first year,
- $16,000 for the second year,
- $9,600 for the third year, and
- $5,760 for each later taxable year in the recovery period.
Computers or peripheral equipment have been removed from the definition of listed property. This change applies to property placed in service after December 31, 2017.
Treatment of certain farm property
The new law shortens the recovery period for machinery and equipment used in a farming business from seven to five years. This shorter recovery period, however, doesn’t apply to grain bins, cotton ginning assets, fences or other land improvements. The original use of the property must occur after December 31, 2017. This recovery period is effective for eligible property placed in service after December 31, 2017.
Also, property used in a farming business and placed in service after December 31, 2017, is not required to use the 150 percent declining balance method. However, if the property is 15-year or 20-year property, the taxpayer should continue to use the 150 percent declining balance method.
Applicable recovery period for real property
The new law keeps the general recovery periods of 39 years for nonresidential real property and 27.5 years for residential rental property. The new law changes the alternative depreciation system recovery period for residential rental property from 40 years to 30 years.
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. These changes affect property placed in service after December 31, 2017.
Under the new law, a real property trade or business electing out of the interest deduction limit must use the alternative depreciation system to depreciate any of its nonresidential real property, residential rental property, and qualified improvement property. This change applies to taxable years beginning after December 31, 2017.
Alternative depreciation system for farming businesses
Farming businesses that elect out of the interest deduction limit must use the alternative depreciation system to depreciate any property with a recovery period of 10 years or more, such as single-purpose agricultural or horticultural structures, trees or vines bearing fruit or nuts, farm buildings, and certain land improvements. This provision applies to taxable years beginning after December 31, 2017.
Questions?
Tax law can be confusing. If you’re a small to medium-sized business owner with questions about depreciation and expensing, help is just a phone call away.
If you haven’t contributed funds to an Individual Retirement Account (IRA) for tax year 2019, or if you’ve put in less than the maximum allowed, you still have time to do so. You can contribute to either a traditional or Roth IRA until the April 15th due date, not including extensions.
Be sure to tell the IRA trustee that the contribution is for 2019. Otherwise, the trustee may report the contribution as being for 2020 when they get your funds.
Generally, you can contribute up to $6,000 of your earnings for tax year 2019 (up to $7,000 if you are age 50 or older in 2019). You can fund a traditional IRA, a Roth IRA (if you qualify), or both, but your total contributions cannot be more than these amounts.
Traditional IRA: You may be able to take a tax deduction for the contributions to a traditional IRA, depending on your income and whether you or your spouse, if filing jointly, are covered by an employer’s pension plan.
Roth IRA: You cannot deduct Roth IRA contributions, but the earnings on a Roth IRA may be tax-free if you meet the conditions for a qualified distribution.
Each year, the IRS announces the cost of living adjustments and limitations for retirement savings plans.
Saving for retirement should be part of everyone’s financial plan and it’s important to review your retirement goals every year in order to maximize savings. If you need help with your retirement plans, give the office a call.
If you hire someone for a long-term, full-time project or a series of projects that are likely to last for an extended period, you must pay special attention to the difference between independent contractors and employees.
Why It Matters
The Internal Revenue Service and state regulators scrutinize the distinction between employees and independent contractors because many business owners try to categorize as many of their workers as possible as independent contractors rather than as employees. They do this because independent contractors are not covered by unemployment and workers’ compensation, or by federal and state wage, hour, anti-discrimination, and labor laws. In addition, businesses do not have to pay federal payroll taxes on amounts paid to independent contractors.
If you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus a penalty.
The Difference Between Employees and Independent Contractors
Independent Contractors are individuals who contract with a business to perform a specific project or set of projects. You, the payer, have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.
Sam Smith, an electrician, submitted a bid of $6,400 to a housing complex for electrical work. Per the terms of his contract, every two weeks for the next 10 weeks, he is to receive a payment of $1,280. This is not considered payment by the hour. Even if he works more or less than 400 hours to complete the work, Sam will still receive $6,400. He also performs additional electrical installations under contracts with other companies that he obtained through advertisements. Sam Smith is an independent contractor.
Labor laws vary by state. Please call if you have specific questions.
Employees provide work in an ongoing, structured basis. In general, anyone who performs services for you is your employee if you can control what will be done and how it will be done. A worker is still considered an employee even when you give them freedom of action. What matters is that you have the right to control the details of how the services are performed.
Sarah Smith is a salesperson employed on a full-time basis by Rob Robinson, an auto dealer. She works 6 days a week and is on duty in Rob’s showroom on certain assigned days and times. She appraises trade-ins, but her appraisals are subject to the sales manager’s approval. Lists of prospective customers belong to the dealer. She has to develop leads and report results to the sales manager. Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. She is paid a commission and is eligible for prizes and bonuses offered by Rob. Rob also pays the cost of health insurance and group term life insurance for Sally. Sally Smith is an employee of Rob Robinson.
Independent Contractor Qualification Checklist
The IRS, workers’ compensation boards, unemployment compensation boards, federal agencies, and even courts all have slightly different definitions of what an independent contractor is though their means of categorizing workers as independent contractors are similar.
One of the most prevalent approaches used to categorize a worker as either an employee or independent contractor is the analysis created by the IRS, which considers the following:
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What instructions the employer gives the worker about when, where, and how to work. The more specific the instructions and the more control exercised, the more likely the worker will be considered an employee.
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What training the employer gives the worker. Independent contractors generally do not receive training from an employer.
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The extent to which the worker has business expenses that are not reimbursed. Independent contractors are more likely to have unreimbursed expenses.
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The extent of the worker’s investment in the worker’s own business. Independent contractors typically invest their own money in equipment or facilities.
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The extent to which the worker makes services available to other employers. Independent contractors are more likely to make their services available to other employers.
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How the business pays the worker. An employee is generally paid by the hour, week, or month. An independent contractor is usually paid by the job.
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The extent to which the worker can make a profit or incur a loss. An independent contractor can make a profit or loss, but an employee does not.
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Whether there are written contracts describing the relationship the parties intended to create. Independent contractors generally sign written contracts stating that they are independent contractors and setting forth the terms of their employment.
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Whether the business provides the worker with employee benefits, such as insurance, a pension plan, vacation pay, or sick pay. Independent contractors generally do not get benefits.
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The terms of the working relationship. An employee generally is employed at will (meaning the relationship can be terminated by either party at any time). An independent contractor is usually hired for a set period.
- Whether the worker’s services are a key aspect of the company’s regular business. If the services are necessary for regular business activity, it is more likely that the employer has the right to direct and control the worker’s activities. The more control an employer exerts over a worker, the more likely it is that the worker will be considered an employee.
Minimize the Risk of Misclassification
If you misclassify an employee as an independent contractor, you may end up before a state taxing authority or the IRS.
Sometimes the issue comes up when a terminated worker files for unemployment benefits and it’s unclear whether the worker was an independent contractor or employee. The filing can trigger state or federal investigations that can cost many thousands of dollars to defend, even if you successfully fight the challenge.
There are ways to reduce the risk of an investigation or challenge by a state or federal authority. At a minimum, you should:
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Familiarize yourself with the rules. Ignorance of the rules is not a legitimate defense. Knowledge of the rules will allow you to structure and carefully manage your relationships with your workers to minimize risk.
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Document relationships with your workers and vendors. Although it won’t always save you, it helps to have a written contract stating the terms of employment.
Questions about how to classify workers? Don’t hesitate to call the office and speak to a tax professional who can assist you.
Social Security benefits include monthly retirement, survivor, and disability benefits; they do not include Supplemental Security Income (SSI) payments, which are not taxable.
Generally, you pay federal income taxes on your Social Security benefits only if you have other substantial income in addition to your benefits such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return.
Your income and filing status affect whether you must pay taxes on your Social Security. An easy method of determining whether any of your benefits might be taxable is to add one-half of your Social Security benefits to all of your other income, including any tax-exempt interest.
If you receive Social Security benefits you should receive Form SSA-1099, Social Security Benefit Statement, showing the amount.
Next, compare this total to the base amounts below. If your total is more than the base amount for your filing status, then some of your benefits may be taxable. In 2018, the three base amounts are:
- $25,000 – for single, head of household, qualifying widow or widower with a dependent child or married individuals filing separate returns who did not live with their spouse at any time during the year
- $32,000 – for married couples filing jointly
- $0 – for married persons filing separately who lived together at any time during the year
Taxpayers filing an individual federal tax return:
- If your combined income (adjusted gross income + nontaxable interest + 1/2 of your Social Security benefits) is between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
- If it is more than $34,000, up to 85 percent of your benefits may be taxable.
Taxpayers filing a joint federal tax return:
- If you and your spouse have a combined income ((adjusted gross income + nontaxable interest + 1/2 of your Social Security benefits) that is between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits.
- If it is more than $44,000, up to 85 percent of your benefits may be taxable.
Married taxpayers filing separate tax returns generally pay taxes on benefits.
State Taxes
Thirteen states tax social security income as well including Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.
Retiring Abroad?
Retirement income is generally not taxed by other countries. As a U.S. citizen retiring abroad who receives Social Security, for instance, you may owe U.S. taxes on that income, but may not be liable for tax in the country where you’re spending your retirement years.
If Social Security is your only income, then your benefits may not be taxable, and you may not need to file a federal income tax return. However, if you receive income from other sources (either U.S. or country of retirement) as well, from a part-time job or self-employment, for example, you may have to pay U.S. taxes on some of your benefits–the same as if you were still living in the U.S.
You may also be required to report and pay taxes on any income earned in the country where you retired. Each country is different, so consult a local tax professional or one who specializes in expatriate tax services.
Even if you retire abroad, you may still owe state taxes–unless you established residency in a no-tax state before you moved overseas. Also, some states honor the provisions of U.S. tax treaties; however, some states do not. Therefore, it is prudent to consult a tax professional.
If you receive Social Security, a tax professional can help you determine if some – or all – of your benefits are taxable.
If you are ready to file your taxes but are missing important tax forms here’s what you should do:
You should receive a Form W-2, Wage and Tax Statement, from each of your employers for use in preparing your federal tax return. Employers must furnish this record of 2019 earnings and withheld taxes no later than January 31, 2020 (allow several days for delivery if mailed).
If you do not receive your Form W-2, contact your employer to find out if and when the W-2 was mailed. If it was mailed, it may have been returned to your employer because of an incorrect address. After contacting your employer, allow a reasonable amount of time for your employer to resend or to issue the W-2.
If you received certain types of income, you may receive a Form 1099 in addition to or instead of a W-2. Payers have until January 31 to mail these to you.
In some cases, you may obtain the information that would be on the Form 1099 from other sources. For example, your bank may put a summary of the interest paid during the year on the December or January statement for your savings or checking account. Or it may make the interest figure available through its customer service line or Web site. Some payers include cumulative figures for the year with their quarterly dividend statements.
You do not have to wait for Form 1099 to arrive provided you have the information (actual not estimated) you need to complete your tax return. You generally do not attach a 1099 series form to your return, except when you receive a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., that shows income tax withheld. You should, however, keep all of the 1099 forms you receive for your records.
If, by mid-February, you still have not received your W-2 or Form 1099-R, contact the IRS for assistance at 1-800-829-1040. When you call, have the following information handy:
- the employer’s name and complete address, including zip code, and the employer’s telephone number;
- the employer’s identification number (if known);
- your name and address, including zip code, Social Security number, and telephone number.
Misplaced W-2
If you misplaced your W-2, contact your employer. Your employer can replace the lost form with a “reissued statement.” Be aware that your employer is allowed to charge you a fee for providing you with a new W-2.
You still must file your tax return on time even if you do not receive your Form W-2. If you cannot get a W-2 by the tax filing deadline, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement, but it will delay any refund due while the information is verified.
Filing an Amended Return
If you receive a corrected W-2 or 1099 after your return is filed and the information it contains does not match the income or withheld tax that you reported on your return, you must file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return.
Most taxpayers will receive one or more forms relating to health care coverage they had during the previous year. If you think you should have received a form but did not get one contact the issuer of the form (the Marketplace, your coverage provider or your employer). If you are expecting to receive a Form 1095-A, you should wait to file your 2019 income tax return until you receive that form. However, it is not necessary to wait for Forms 1095-B or 1095-C in order to file.
Form 1095-A. If you enrolled in 2019 coverage through the Health Insurance Marketplace, you should receive Form 1095-A, Health Insurance Marketplace Statement in early 2020.
Forms 1095-B or 1095-C. If you were enrolled in other health coverage for 2019, you should receive a Form 1095-B, Health Coverage, or Form 1095-C, Employer-Provided Health insurance Offer and Coverage by early March.
If you have questions about your Forms W-2 or 1099 or any other tax-related materials, don’t hesitate to contact the office.
