Archive for the "Tax News & Info" Category

Planning for Tax Reform

The details of the tax reform bills are emerging and some of the key features include a flat corporate tax rate of 21%, a top individual tax rate of 37%, and an election to choose either a property tax deduction or a state and local income tax deduction, up to $10,000.

For taxpayers in states with high income and property tax, the limit on the deductibility of these taxes next year will cause many people to lose these popular itemized deductions.

If you have the ability to prepay the property taxes that you owe in 2018, we recommend that you pay these taxes before the end of 2017. Prepaying state "income" taxes before the end of 2017 may also help reduce your 2017 tax if you are not subject to AMT (Alternative Minimum Tax).

The new tax bill, that is expected to be released this week, will double the standard deduction and limit the deductibility of some itemized deductions, so making any planned charitable deductions in 2017 or paying mortgage interest before year end may provide a benefit if you are not expected to itemize deductions next year.

Please contact us immediately if you are interested in having us run a tax projection to determine if you would benefit from any tax planning before year end.

Sharing Economy Basics

The rise of easy to use apps have allowed more and more people to take advantage of the sharing economy.  Countless people supplement their current income and a few even leave their steady paychecks behind and work for themselves, on their own schedule, by driving for Uber or renting their home through Airbnb.  This is referred to as the sharing economy, or gig economy.  While this can be liberating for some, there are important tax consequences that are often overlooked or misunderstood.

When you start participating in the sharing economy, you have started your own business and are an independent contractor of the app developer (Uber/Airbnb).  With that comes additional filing requirements and often additional taxes.  The most important, or largest new tax obligation, will likely be self-employment taxes.  Self-employment tax is currently 15.3% of your net self-employment income up to $127,500.  For a more in depth look at self-employment taxes please see our article “Self-Employment Taxes Explained.”  Keep in mind that this 15.3% tax is in addition to the regular income tax.

The income that you receive from the shared economy is taxable.  This is the case even if you do not receive a 1099-MISC, or 1099-K for electronic payments, or only accept cash.  You are also able to deduct from your taxable income, ordinary and necessary business expenses to arrive at net income.  This is the amount that you pay taxes on.

Ordinary and necessary business expenses will be different for the type of work you are doing.  Each segment of the sharing economy has its own attributes.  For example, depreciation, or the reduction in the value of an asset, will be very important to someone utilizing Airbnb.  Not so much for somebody driving for Uber.  The exact opposite will be true of the mileage deduction.  It is important to be aware of which tax deductions you can, and should, take advantage of.  It is equally important to understand the record keeping requirements to document those expenses.

If you are profitable in your gig economy venture, you may be required to make estimated tax payments throughout the year.  When you receive a paycheck, federal and state taxes are withheld from each check.  When participating in the gig economy you do not receive a paycheck, and therefore must send in your estimated tax payments separately.  These payments are due quarterly.

It may seem like you are responsible for all for all of the same things as an ordinary business.  That's because you are!  The IRS does not see your gig economy business any different than a property management company or taxi service provider.  It is important to be aware of each businesses characteristics and requirements to make sure there are no surprises when it is time to file your taxes.  For more information please contact your trusted tax advisor.

If you are thinking of joining Airbnb, please see our article on short term rentals.

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Short Term Rentals

The Twin Cities has been and continues to be a popular site for National events, mostly in the sports genre.  The next event that the Twin Cities is buzzing about hosting is the 2018 Super Bowl.  With this kind of national exposure, Minnesota residents are searching for opportunities to take advantage of the increase in tourism.

With the current media exposure for sites like Airbnb, short term rentals are gaining in popularity for their simplicity and tax benefits.

However, these short term rentals may not be quite as easy as they may seem.  Depending on the location and type of home you hope to rent out, you may have issues with zoning codes, specific license compliance, and association rules.  The fines for violating any one of these could outweigh any income you may hope to earn. Additionally, should any of your guests get injured, you could have a whole host of issues that you did not plan for.  And don't forget the cost of sales tax compliance.

Even with the risks, there are tax benefits to these short term rentals.  Income earned from renting out your main home for two weeks or less is not taxable and does not need to be reported on your income tax return.  The downside is that any expenses you incur to rent out your home are also nondeductible for tax purposes.  Therefore, if the expenses you incur such as license fees, additional insurance, cleaning and any repairs exceed the income received in the activity, there is no tax benefit.

In the end, short term rentals can be a great money making strategy as long as the risks don't outweigh the reward. Make sure that you do the research to stay in compliance and contact your insurance and tax advisors with any questions.

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Employee vs. Independent Contractor

Do you have employees or independent contractors?  This is an important question with potentially large tax implications. Employees are paid through payroll and wages are subject to FICA and unemployment taxes.  Independent Contractors are not subject to payroll taxes, however there are additional reporting requirements for payments of services. This is also an area in which governments are beginning to crack down.  The IRS offers Form SS-8, which can be submitted by either the business or the worker to help determine the correct treatment in uncertain cases.  To help determine into which category your workers fall the IRS has some common law control rules that fall into three categories; behavioral, financial, and type of relationship.

The first category is behavioral control.  This refers to the degree of the right the company has to control the workers job.  An example of this is the type and degree of instructions given.  Generally, an employee is instructed about when, where, and how to work.  An independent contractor (IC) is hired to complete a job and given minimal instruction.  How the worker is evaluated is also a factor.  A contractor is usually only evaluated on the end result, rather than the parts of the process.  Training also factors in.  Training the worker on how to do the job it is strong evidence that the worker is an employee.  It is important to note that actually controlling these aspects of the worker are not important.  What's important is having the right to this control.

The second category of control is financial.  ICs often have significant investment in their equipment, whereas employees typically use the company's equipment.  ICs are usually not reimbursed for their expenses and will have ongoing expenses even if no work is being performed.  Whether the worker is offering their services to the market and not just to the company is strong factor for independent contractors.

The last category is the type of relationship.  This includes contracts, benefits, and length of the relationship.  Independent contractor agreements are always a good idea.  However, the existence of a contract is not sufficient to classify a worker as an IC.  Benefits such as insurance, paid time off, and retirement plans are indicators of an employee relationship, as these are generally not offered to ICs.  A company typically hires an IC with the expectation that the work will be for a specific job, or period.  If there is an expectation that the relationship will continue forever, it is evident of an employer-employee relationship.

It is important to look at the entire relationship between a company and the worker.  It is possible that some factors point to IC status while others point to employee.  You must consider all the factors and document the ones used to make the determination.  For help in making the determination or guidance on how to document it, please contact your trusted tax advisor.

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How Assets Transfer at Death

Estate planning can be very tempting to ignore; the combination of tedium, taxes, and, of course, one's mortality is difficult to face.  Indeed, estate work is the epitome of the cliché "death and taxes".  However, neglecting such plans can leave your loved ones with a confusing and potentially expensive mess to sort out.  This post covers the three fundamental ways assets are transferred at death.

The first and probably most familiar is a Last Will and Testament.  Upon death, your assets make up your estate, and the transfer to your heirs is governed by the Will.  The document must go through the legal process of probate, which validates the Will and allows it to dictate the transfer of assets in the estate.  Probate can impose a burden of time and expense on the estate.  Probate can be limited or avoided by the use of trusts.

A trust is another way to transfer assets, and has the benefit of avoiding a probate.  A revocable trust, or "Living Trust", is type of trust that does not exist as a separate taxable entity from the individual while the individual is alive.  At death, the trust becomes a separate legal entity with its own EIN (employer identification number) and operates according to the trust agreement, which would specify how the assets are to be distributed.  A common error with this estate planning strategy is the failure to retitle all assets to the trust.  The title of assets to the trust is also called "funding" the trust, and any asset left outside the trust must go through the probate process.

While a trust can assist to avoid probate, the time and expense associated with creating a trust document and retitling assets can be every bit as costly as the creation of a Will—not to mention the time and expense associated with following the trust documents and distributing the assets when the time comes.  Therefore, the third way of transferring assets simplifies this process further by designating a beneficiary through each specific asset.  Bank accounts, brokerage accounts, 401(k) plans, and IRAs are all types of assets that will allow you to name a beneficiary or a transfer on death designation.

This is solely a broad overview of estate planning and should not be relied upon as either legal or tax advice.  You should consult with a legal and accounting professional for specific planning related to your situation.

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Health Savings Accounts Basics

High-deductible health plans are becoming more common.  A big benefit of these plans is the use of a health savings account (HSA).  An HSA allows you to save money for medical expenses and reduce your taxable income.

To open an HSA you must be enrolled in a high-deductible health plan.  The IRS defines this as an individual plan with a minimum annual deductible of $1,300 and annual out-of-pocket maximum of $6,550 for self-only coverage.  For family coverage these amounts are $2,600 and $13,100 respectively.  These limits are applicable for 2017 and are adjusted annually for inflation.  If you are eligible for Medicare or claimed as a dependent by anyone on their tax return you are not eligible to make HSA contributions.

Many insurance companies offer HSAs, for those that do not, most financial institutions offer separate HSA accounts.  Once you have established your HSA, you can decide how much to contribute.  The maximum amount you are allowed to contribute in 2017, again determined by the IRS and adjusted annually, is $3,400 for self-only coverage and $6,750 for family coverage.  If you are over age 55 you can "catch-up" by adding $1,000 to the maximums each year.

There are a few basic tax advantages to an HSA.  First, the money you contribute is tax deductible.  If your employer offers an HSA plan, the contribution is deducted from your pay-check before taxes are calculated.  If you make contributions outside of payroll, you can deduct the HSA contributions on your tax return.  Another tax advantage is the tax free growth of your HSA.  Any interest, dividends, or capital gains in your HSA account are not included in your taxable income.

An often overlooked component to HSAs, are their investment potential.  Depending on where you hold your HSA you may be able to invest in mutual funds, ETFs, stocks, and other investment vehicles to grow your investment.

If you use the money in your HSA to pay for qualified medical expenses there are no penalties or taxes due.  Once you turn 65, you can withdraw the money for any reason and not incur a penalty – however, the amount is included in your taxable income for that year.  If you withdraw the money before age 65 for a non-qualified expense there is a 20% penalty.

What is a qualified medical expense?  The IRS makes that determination, and there are numerous resources to ascertain what qualifies.  HSA Bank publishes a convenient list that can be found here.

There are numerous situations that can alter the basics described above.  If you have additional questions about HSAs or how they may relate to your specific circumstances, please contact your tax advisor for more information.

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Upcoming Tax Due Dates – Fall 2017

September 15th – 3rd quarter estimated tax payments are due for individuals required to pay estimated taxes.

September 15th – Partnership (1065) and S Corporation (1120S) income tax returns for 2016 that are on extension are due.

October 16th – Individual (1040) and Corporate (1120) income tax returns for 2016 that are on extension are due.

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Self-Employment Taxes Explained

If you have recently started your own small business you may have heard the term "Self-Employment Tax" crop up in conversations with your advisors.  Self-employment tax is not a new additional tax that you are required to pay because you started a business, but rather the government's way to collect Social Security and Medicare taxes for self-employed individuals.

Social Security and Medicare taxes are due on wages, tips, and net earnings from certain businesses. Self-employed individuals who report earnings on Schedule C of their individual tax return or Partners in partnerships with self-employment earnings are subject to self-employment tax.  Self-employment tax is made up of the following:

  1. Social Security tax 12.4% up to $127,200 of wages, tips, or net earnings in 2017.
  2. Medicare tax 2.9%
  3. Additional Medicare tax .9% this tax is only calculated for taxpayers whose wages, tips, and net earnings (including spouses) exceed certain thresholds depending on filing status. Currently the threshold is $200,000 for Single filers and $250,000 for Married Filing Joint filers.

Net earnings under $400 are not subject to self-employment tax.

As an employee who receives a Form W-2 wage reporting statement you may have noticed that Social Security and Medicare are withheld from your wages to get to your net check and are reported on your W-2.  The amount that is deducted from your pay is only half of the total tax due, your employer pays the other half.  When you are self-employed, the entire burden resides with you.  However, there is a deduction from the total income on your individual tax return that is equal to the employer equivalent or about half of the total self-employment tax. This deduction only affects your income tax and does not affect either your net earnings from self-employment or self-employment tax.

Most self-employed individuals are required to pay estimates throughout the year to pay the self-employment and income tax due on their earnings.  For a full discussion on estimates see our article. It is important to remember self-employment tax when saving for your overall tax liability as the numbers can change dramatically if not considered.  There are different ways of limiting your self-employment tax liability based on entity structure, retirement options, and expense planning.  For guidance on how to reduce your liability based on your individual situation please contact your tax advisor.

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2017 Update

Welcome to 2017. The rates and phase-out ranges for tax deductions are subject to change and cost-of-living adjustments on an annual basis.  Some of the new changes to 2017 include:

Mileage Rates

Business – 53.5 cents per mile

Medical or moving – 17 cents per mile

Charitable – 14 cents per mile

 

HSA Contribution

Self-Only – $3,400 (plus an additional $1,000 if 55 or older)

Family – $6,750 (plus an additional $1,000 if 55 or older)

 

Retirement Plan Contribution Limits

Traditional IRA –  The contribution limit remains the same, $5,500 or $6,500 if 50 or older, but the phase out limits have changed.

Single and Head of Household: phase-out begins at $62,000

Married Filing Joint (both spouses covered by employer plans): phase-out begins at $99,000

Married Filing Joint (only one spouse covered by employer plan): phase-out begins at $186,000

Roth IRA – The contribution limit remains the same, $5,500 or $6,500 if 50 or older, but the phase out limits have changed.

Single and Head of Household: phase-out begins at $118,000

Married Filing Joint: phase-out begins at $186,000

 401K and 403b Plans – the contribution limit for employees that participate in these plans remains the same at $18,000 or $24,000 if 50 or older.

Defined Benefit Plans – limited to $54,000 in 2017

 

If you have questions about your individual tax situation, contact your tax advisor.

2017

New Small Employer Health Reimbursement Arrangement

In December of 2016 President Obama signed the 21st Century Cures Act into law.  Included in this law was a provision to allow small employers to establish health reimbursement arrangements (HRAs) for their employees.  Previously, with the passage of the Affordable Care Act, these arrangements were subject to very high penalties as they did not satisfy the minimum essential coverage requirements.  There was relief from these penalties that expired in June of 2015.  The Cures Act now makes that relief effective for all plan years beginning before the end of 2016. Moving forward, a new type of reimbursement arrangement can be implemented.

A qualified small employer health reimbursement arrangement (QSEHRA) can be established.  A few guidelines regarding QSEHRAs:

  1. The definition of a "small employer" is the same as defined in the Affordable Care Act – less than 50 full time equivalent employees
  2. The company does not offer a group health plan
  3. The plan must cover all employees with very limited exceptions
  4. There is a cap to how much each employee can be paid – $4,950 per year for single employees and $10,000 per year for family coverage. Benefits generally must be offered at the same level to all employees
  5. The reimbursement arrangement can pay for medical expenses including health insurance premiums
  6. The amounts paid are deductible by the company but not income to the employee if the employee provides annual proof of minimum essential coverage for them and their family members
  7. Companies must provide an annual notice to eligible employees. The notice states the benefit amount and informs the employee to disclose the benefit to the health insurance exchange if they are receiving advance premium tax credits.

It has been a struggle recently for small employers to offer any assistance with employee health insurance.  The passage of the 21st Century Cures Act provides a valuable option that many small businesses can use to their advantage.  It is likely that in the coming months further guidance will emerge to help with the implementation and administration of QSEHRAs.  For additional information, or to discuss how this could benefit you, please contact your trusted tax advisor.

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