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Tax Letter
A summary of 2019 significant tax legislative changes and tax planning suggestions.
2650 Westview Drive • Wyomissing, PA 19610
(610) 678-9700 • (610) 678-9224 FAX
www.wgkcpa.com
Our mission is to serve our clients, large and small, with the highest
degree of quality and efficiency, assuring that each client receives
consistent, personal and professional services; to personally assist our
clients in reaching their business and financial goals, minimizing their tax
burdens and monetary obligations; to keep abreast of new developments
in the diverse realms we serve, so we may better assist each client with
the most appropriate accounting, auditing, financial and tax planning
services; and to serve our clients with respect and integrity.
TABLE OF CONTENTS
LEGISLATIVE CHANGES COME LATE ..................................................... 1
ITEMIZED DEDUCTIONS: ......................................................................... 2
OTHER ITEMS: .......................................................................................... 3
BUSINESS: ................................................................................................ 5
OTHER ITEMS OF INTEREST: .................................................................. 6
TAX PLANNING TIPS:................................................................................ 6
TAX FILING DEADLINES ........................................................................... 7
IDENTITY THEFT ...................................................................................... 7
CHARITABLE CONTRIBUTIONS .............................................................. 9
ALTERNATIVE MINIMUM TAX ................................................................ 10
CAPITAL GAINS & DIVIDEND INCOME TAX RATES .............................. 11
“KIDDIE” TAX ........................................................................................... 12
INDIVIDUAL FEDERAL TAX RATES........................................................ 12
HEALTH SAVINGS ACCOUNTS .............................................................. 13
HIGHER EDUCATION PLANNING .......................................................... 14
STANDARD MILEAGE RATES ................................................................ 18
REQUIRED IRA WITHDRAWALS ............................................................ 20
RETIREMENT PLANNING ...................................................................... 21
ESTATE AND GIFT PLANNING ............................................................... 22
PLANNING FOR SELF-EMPLOYED TAXPAYERS .................................. 23
SOCIAL SECURITY AND SELF-EMPLOYMENT TAXES ......................... 25
MEDICARE ............................................................................................... 26
AVOIDING PENALTIES FOR UNDERPAYING INCOME TAX ................. 28
DOCUMENT RETENTION AND AUDIT STRATEGIES ............................ 29
PENNSYLVANIA AND LOCAL TAXES AND DEVELOPMENTS .............. 30
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Headline
LEGISLATIVE CHANGES COME LATE
There was little tax legislative activity in Washington this year until December. Congress
was expected to fix some issues with the prior year Tax Cuts and Jobs Act (TCJA) as well
as address issues related to the Affordable Care Act (ACA) since the noncompliance
penalty was removed on individuals for the 2019 filing season. None of these issues
were addressed but the Form 1040 was updated again for 2019 and a new Form 1040-
SR was developed for seniors.
The 2019 Form 1040 will closely resemble the pre-2018 form but keep some of the
schedules included with the 2018 Form 1040 (Schedules 1-3). The Form 1040-SR closely
resembles the new Form 1040 but has a section added on page one that provides a chart
for simple calculation of the standard deduction.
Late in December “The Setting Every Community Up for Retirement Enhancement Act”
(SECURE Act) and “The Further Consolidated Appropriations Act, 2020” (FCAA) were
passed. These Acts created significant changes to retirement contributions and
distributions and also created many extender provisions; some with retroactive treatment.
The most relevant have been built into the body of this letter. The SECURE Act changes
are discussed in the table below.
Some changes made by The Tax Cuts and Jobs Act (TCJA) signed by President Donald J. Trump on December 22, 2017 that go into effect in 2019 are summarized on the next page. Some of these changes are further discussed in the body of this newsletter.
Employees are advised to complete the revised 2020 Form W-4 Employee’s Withholding Certificate. It better incorporates the changes made by TCJA and allows taxpayers to more accurately estimate their withholding requirements. https://www.irs.gov/pub/irs-pdf/fw4.pdf
SECURE Act
Created the Small Employer Automatic Contribution Tax Credit- employers who have 100 or fewer employees and implement an automatic employee contribution agreement to a newly formed or already existing 401(k) or SIMPLE plan are eligible for a $500 credit each year for 3 years. Effective for tax years beginning after Dec. 31, 2019.
Certain taxable stipends and non-tuition fellowship payments to graduate students are considered compensation for IRA contribution purposes. Effective for tax years beginning after Dec. 31, 2019.
The Traditional IRA contribution age limit has been eliminated. See us for additional information. Effective for tax years beginning after Dec. 31, 2019.
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SECURE Act
The 10 percent early withdrawal penalty for funds (up to $5,000 per individual per birth or adoption) withdrawn from a qualified plan and used for birth or adoption purposes is waived. Contact us for the details. It applies to distributions made after December 31, 2019.
RMDs start at age 72 rather than 701/2 if you turn 701/2 after December 31, 2019.
You can establish and fund stock bonus, pension, profit-sharing or annuity plans after the close of a tax year but before the due date of the tax return (including extensions) and elect to treat the plan as if it was adopted on the last day of the tax year. It applies to plans adopted after December 31, 2019.
Tax-free 529 Plan distributions have been expanded to include: books, fees, supplies, equipment (limited), and principal or interest payments on any qualified education loan of the designated beneficiary or sibling(s). Contact us for more details. It applies to distributions made after December 31, 2018.
RMDs from inherited defined contribution or IRA plans must be distributed by the 10th calendar year following the year of death (with exceptions).It applies to plan owners who die after December 31, 2019. Contact us for more information.
Effective 2019
Itemized medical deductions must exceed 7.5% (reinstated under FCAA) of Adjusted Gross Income (AGI) before they are deductible.
Payment of alimony is no longer deductible for divorce settlements that were finalized after December 31, 2018. Alimony income is no longer taxable for agreements finalized after December 31, 2018.
The individual “minimum essential coverage” penalty has been eliminated as mentioned above. Businesses are still subject to the penalty if they fail to offer coverage to their employees.
Starting in 2019 hardship distributions from a 401(k) plan can be taken before attempting to borrow from the 401(k) plan for the hardship event. Individuals are no longer required to wait 6 months to contribute to a 401(k) after taking a hardship distribution. (Check with your plan administrator before making any withdrawals for specific plan rules.) This is a Bipartisan Budget Act of 2018 change.
Forgiveness of principal residence mortgage acquisition debt up to 2 million is exempt from tax as reinstated by the FCAA.
ITEMIZED DEDUCTIONS:
Itemized deductions were previously limited for taxpayers who reached certain Adjusted Gross Income (AGI) ranges. This limitation, known as the Pease Limitation, has been suspended. All available itemized deductions will be deductible.
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Medical expenses that exceed 7.5% of AGI are deductible as an itemized expense for all taxpayers who can itemize. This was set to increase to 10% but was reinstated to 7.5% by the FCAA.
As of 2018, the deduction for State and Local Taxes (SALT) is limited to $10,000 ($5,000 MFS) in total. Any taxes that exceed this amount are not deductible. This includes income, realty and sales and use taxes.
The mortgage interest deduction is limited to mortgage interest secured by a primary or secondary residence and used to improve or purchase that residence. Interest on a Home Equity Line of Credit (HELOC) that was used to finance a college education, vacation, or any other expenditure is not deductible.
Interest on term and HELOC loans secured by your home prior to December 17, 2017 and used for purchase or improvement is deductible to the extent all secured debt does not exceed $1,000,000. Loans originating after this date are subject to a $750,000 limitation. The deductible interest phases out above these thresholds. Mortgage insurance premium (PMI) payments can be treated as deductible mortgage interest subject to the above limitations. This was reinstated under the FCAA.
Charitable contributions that do not exceed 60% of AGI can be deducted. Contributions in excess of 60% of AGI will carry over to future years. No charitable deduction will be allowed for the right to purchase tickets or seating at an athletic event of an institution of higher education.
A casualty loss can only be deducted if it occurs in a federally declared disaster area. The net loss must still exceed 10% of AGI and the first $100 is not deductible. A Federal Emergency Management Agency (FEMA) code must be included on Form 4684.
The 2% of AGI miscellaneous deduction has been suspended through 2025. Union dues, uniforms, licenses, tax preparation, broker fees and other expenses are not deductible.
OTHER ITEMS: The standard deduction is $24,400 for a married filing joint couple (MFJ). It is $12,200 for single individuals and married people who choose to file separately and 18,350 for Head of Household (HOH) filers. Taxpayers who are married and blind or 65 and older get an additional deduction of $1,300 per taxpayer and those who are single get an additional $1,650.
The child tax credit is $2,000. Up to $1,400 is now a refundable credit. The credit begins to phase-out at AGI of $400,000 MFJ and $200,000 all other filers. The phase-out ranges previously began at $110,000 MFJ, $55,000 MFS and $75,000 all other taxpayers. Clearly many more taxpayers will benefit from this credit. The enhancements were put in place to reduce the effect of the suspension of the individual exemptions.
• The $500 dependent credit is available to certain taxpayers. The dependent cannot be a qualifying child under age 17. They cannot have income in excess of $4,200 and must have lived with the taxpayer and the taxpayer must have provided more than 50% of their support. Notes: 1) the dependent’s funds aren’t support unless they are spent on support 2) Individuals who reside in nursing homes
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or other care facilities are considered residing with the taxpayer. The same is true for students living on campus. Temporary stays at camps, medical facilities, etc. are considered time at home.)
The income tax rates and brackets have been adjusted for inflation for all taxpayers. Please see the chart on page 13 for more information.
You can contribute $15,000 to Section 529 Plans into the account of a beneficiary each year to save for education expenses. Up to $10,000 a year of the plan assets can be used for K-12 education at a public, private, or religious school of the beneficiary’s choosing.
529 Plan contributions can be rolled into an Achieving Better Life Experience (ABLE) account (with some limitations). The rollover must be from the 529 plan of the ABLE account beneficiary. In addition, the Savers Credit can be taken on contributions to an ABLE account if made by the beneficiary and income requirements are met.
The AMT (Alternative Minimum Tax) was greatly enhanced under the TCJA and adjusted for inflation annually. Far fewer taxpayers will be subject to the tax.
Reminders: Conversions to a Roth plan from a traditional IRA, SIMPLE, or SEP cannot be recharacterized back to the original plan. Rollovers from other retirement plans to a Roth are subject to the same treatment; however, you may treat a contribution made to a traditional IRA or a Roth IRA as being made to the other type of IRA if done in the same year.
If you have a loan against your employer retirement plan and you quit or are terminated, the plan sponsor may offset the outstanding loan balance against the plan balance to be rolled over. This would generally place you in the position of paying tax on the shortfall of the balance rolled over to another plan. You may now fund the difference until the due date of the return including extensions.
Early withdrawals from retirement plans as a result of a disaster may be eligible for waiver of the 10% penalty on early distributions. Also, one may be able to spread out a disaster distribution over 3 years, repay the distribution, have expanded loan ability, and extend the repayment period.
The kiddie tax rules have changed. The unearned income of a child is taxed at ordinary and capital gain rates as applicable to estates and trusts. Unearned income above $2,200 will be taxed at these rates. You may be able to elect to report your child's interest, ordinary dividends, and capital gains distributions on your return. If you make this election, your child won't have to file a tax return. To make this election, attach Form 8814, Parents' Election To Report Child's Interest and Dividends (PDF) to your Form 1040 (PDF) or Form 1040NR (PDF) if your child meets all the conditions. The SECURE Act modified these rules to pre-2018 treatment effective for tax years beginning after December 31, 2019. However, a taxpayer may elect to use the old rules retroactively to tax years beginning in 2018 and 2019.
Hobby expenses (other than cost of goods sold) are no longer deductible as an itemized deduction.
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The deduction for moving expenses is suspended for all taxpayers except active military personnel who move as a result of military orders.
BUSINESS: The maximum corporate tax rate is 21%.
The AMT has been eliminated for corporate taxpayers.
For most affected taxpayers the Qualified Business Income (QBI) deduction under Section 199A is 20% of qualified business income. Taxpayers in higher income brackets ($321,400 MFJ and $160,700 all others) may face phase-out limitations or other wage and capital asset tests. This is a complex area of the TCJA. Notice 2019-07 provides a safe harbor definition of a real estate business as one owned by the taxpayer or disregarded entity in which the owner contributes 250 hours of rental services per enterprise. Beginning in 2019 real estate owners must keep records to document hours spent in real estate services. The services must be defined, hours for each service recorded, by whom service provided and the date of the service must be recorded. The safe harbor rule does not apply to any real estate that was used as a personal residence during the year or triple net lease agreements. Other aspects of QBI remain the same.
Business entertainment and country club and other private club dues are not deductible. Meals provided from an on-site cafeteria are subject to a 50% deduction limitation. Other meals are 50% deductible if the business owner or employee is present at the meal.
Section 179 expense election is $1,020,000 and begins to phase out when purchased assets exceed $2,550,000.
100% bonus depreciation is available for assets with a life of 20 years or less. It applies to used assets as well as new. The property cannot: be used by the taxpayer or predecessor prior to purchase; purchased from a related party; acquired from a component group member (please contact us for further restrictions). Qualified Improvement Property (QIP) no longer qualifies. This is one of the areas Congress was expected to “fix” in 2019.
A taxpayer can take up to $18,100 combined regular and bonus depreciation expense on passenger vehicles. SUVs and certain trucks are limited to Section 179 of $25,000. Non-passenger vehicles are not limited.
Any new net operating loss (NOL) must be carried forward and can offset only 80% of future income in any given year. Pre-2018 NOL carryforwards can be fully applied; they are not subject to the 80% limitation.
Deductible business losses are limited to the sum of aggregate gross income and $510,000 (MFJ) and $255,000 for all other taxpayers.
Like kind exchanges are limited to real property.
The write off for employee transportation fringe benefits is no longer allowed.
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Moving expenses paid or reimbursed by the employer must be included in W-2 wages of the employee. Moving expenses excluded from W-2 wages are not deductible by the employer.
A temporary Family Leave credit applicable in 2019 (and 2018) is available to employers who pay family or medical leave. The credit is equivalent to 12.5% of the wages paid.
The New Markets Tax, Paid Family and Medical Leave, Work Opportunity and Health Insurance Coverage credits have all been extended through 2020 and retroactively to 2018. Please contact us if you need additional information.
OTHER ITEMS OF INTEREST: Taxpayers are no longer required to have qualifying health coverage. The shared responsibility payment has been eliminated for individual taxpayers beginning tax year 2019. Taxpayers who receive a premium credit are still subject to repayment of the credit if their income exceeds the amount reported when applying for coverage through the exchange.
The estate tax exclusion is $11,400,000 in 2019. The gift tax exclusion is $15,000 in 2019.
TAX PLANNING TIPS: The higher standard deduction makes it less attractive to itemize. Section 179 expensing and 100% bonus depreciation are great incentives to purchase capital assets, but the QBI deduction needs to be considered before eliminating all business income through write offs. Higher Modified Adjusted Gross Income (MAGI) limits for child, dependent credits and AMT provide incentives to manage earnings to achieve the best tax strategy. Here are some ways to do that:
• If you and dependents need eyeglasses, braces, hearing aids or other expensive medical procedures try to purchase them in the same year so you can take advantage of the itemized medical expense deduction.
• Consider increasing your charitable contributions or making them every two to three years (bundle them together). Put the money in a savings account or other interest-bearing account until you are ready to contribute.
• Donate those no longer needed, dust collecting items to charity. Document items donated, (thrift store) value, to whom donated and date.
• Prepay mortgage interest.
• Pay final estimated tax payments in December if your total state and local income, realty and sales and use taxes will not exceed $10,000 and you are able to itemize.
• If 70½ or older make Qualified Charitable Distributions (QCD) to lower MAGI and benefit from an otherwise lost charitable deduction because you do not meet the itemized deduction threshold.
• Make the maximum contribution to Health Savings Account (HSA) and Flexible Spending Account (FSA). See https://www.fsafeds.com/explore/hcfsa/expenses for allowable expenditures.
• Harvest stocks that are at a loss and unlikely to recover.
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• Establish and contribute to 529 Plans and or ABLE accounts for your children/grandchildren and other individuals. This may have the effect of reducing state income taxes and will build a nice nest egg for education or other expenses.
• If you own a business and need new equipment, purchase it before year end so you can take advantage of depreciation alternatives.
• If your MAGI is near phase-out thresholds of various tax incentives utilize Section 179 or Bonus depreciation to reduce taxable income.
• If excess depreciation will put you in a loss position, consider electing out of bonus depreciation and reducing Section 179 expense. The new Section 199A deduction is largely based on Qualified Business Income (QBI). It may be advantageous to take the 20% deduction (for most taxpayers) and extend depreciation expense to future years. We can work with you to strategize the best solution.
• Utilize the $500 dependent credit when available (see p. 4). Determination of who is a dependent is made by applying the 2017 dependent exemption rules. Planning note: Families who have multiple support agreements can determine on an annual basis who will claim the credit. The eligible taxpayer must provide at least 10% of the total support to be eligible to claim the credit. The same individual would be eligible to claim itemized medical expenses they pay on behalf of the dependent.
TAX FILING DEADLINES
Partnership Form 1065 and S Corporation Form 1120S March 16, 2020
Individual Form 1040, C Corporation Form 1120, Foreign Bank and Financial Reporting (FBAR), FinCen Form 114, Trusts and Estates Form 1041
April 15, 2020
Tax Exempt Nonprofit Organization Form 990 May 15, 2020
Extended filings for Partnerships and S Corporations Sept. 15, 2020
Extended filings for Trusts & Estates Sept. 30, 2020
Extended filings for Individuals, C Corporations, FBAR Oct. 15, 2020
Extended filings for Tax-exempt Nonprofit Organizations Nov. 16, 2020
IDENTITY THEFT
Identity theft continues to be a serious problem. It is important all taxpayers safeguard
their personal information and not fall prey to the many scams that run afoul.
Remember these pointers:
• Store your social security card in a safe location (do not carry it with you).
• Do not provide your social security number to others unless absolutely necessary.
• Check your credit report routinely.
• Check your social security earnings report annually.
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• Do not provide personal information to others unless you know who is asking for
the information and why.
• Password protect computer files and use a firewall.
• The IRS does not initially call taxpayers. All correspondence will begin with a
letter. Rarely is a call made by an IRS agent. It will only happen after other
avenues of communication have already been established. Most IRS matters can
be resolved through mail or fax correspondence or the taxpayer calling the IRS.
When speaking with the IRS the individual will always provide an identification
number.
If you become a victim of identity theft, do the following:
• File a police report and an FTC report (https://www.ftc.gov/).
• Contact one of the 3 major credit bureaus (Experian, TransUnion, or Equifax) and check your credit report and place a fraud alert notice with them.
• Contact your financial institutions and close fraudulent or tampered accounts.
• If your social security number is compromised file Form 14039 with the IRS. A
fillable form is available at www.irs.gov.
• If you receive a notice from the IRS stating your social security number has been
compromised, call them immediately at the number they provided.
• Contact us so that we are aware of additional actions needed to file future returns.
Living in our technology savvy society provides pros and cons. The IRS advises that in
order to protect yourself, your tax returns, and your refunds, you should remain aware of
these seven items to maintain online security.
• Shop at familiar online retailers. The “s” at the end of https signifies a secure URL;
however, this does not prevent fraudsters from obtaining phony security
certificates.
• Avoid unprotected Wi-Fi. Avoid pop-up ads, unfamiliar sites, or online financial
transactions on unsecured Wi-Fi.
• Discern phishing emails from actual emails from the IRS or established financial
institutions. If you are asked to click a link to take you to a foreign website, DO
NOT click it. You are most likely being guided to a website laden with malware
trying to steal your username and passwords.
• Ensure your devices are protected and updated. Having antivirus, firewalls, and
other security measures protect you and your sensitive information from individuals
who seek to steal this data.
• Use strong, long, and unique passwords. A minimum of 8 characters is advised
but longer is more effective. Using a combination of letters, numbers, and special
characters is advised.
• Multi-factor identification is useful for ensuring you are the one accessing your
information.
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• Utilize encryption and password protection of sensitive data. Backing up important
information to a hard drive is also recommended. It is also important to note that
you should wipe the hard drive of your system before disposing of your computer.
TAX RELATED TOPICS
CHARITABLE CONTRIBUTIONS
Tax legislation that allowed taxpayers age 70½ or older to make tax-free distributions up
to $100,000 from traditional IRAs directly to charities has been permanently extended.
The increased charitable deduction for qualified conservation easements was also
permanently extended.
As a reminder, the IRS does not allow a deduction for any contribution of cash, check, or
other monetary gift unless you can show a bank record or a written communication from
the charity substantiating the donation. Also, donations of used household items and
used clothing must be in "good used or better condition" to be deductible. There is an
“antiques” exception for donated single items of used household items and used clothing
appraised at more than $500.
The appraisal must be written and contemporaneous with the donation. A general rule of
thumb is items donated should be valued at thrift shop or “yard sale” prices. Useful guides
can be found at https://satruck.org/Home/DonationValueGuide or
https://www.goodwill.org/wp-content/uploads/2010/12/donation_valuation_guide.pdf
to determine fair prices. Remember to keep a list of all items donated and the price you
have assigned to each. Large deductions for donations of used household items and
used clothing have been sustained upon IRS audit if properly documented. The IRS no
longer accepts round number estimates with no list of what was donated.
Donations of appreciated stock can often produce a higher tax benefit than selling the
stock and donating the cash or just donating cash. Besides the charitable contribution
deduction, you also save tax on capital gains by donating stock that has a significant
increase in value from when you, or someone who gave it to you, bought it. Be certain
that you have held the stock for at least one year prior to making the gift. Stock held less
than one year provides a deduction at your original cost basis. Conversely, you may have
stock that has fallen in value. If you donate stock that has lost value, you are precluded
from deducting the tax loss on your income tax return. It is better to first sell the
depreciated stock you are considering donating, take the loss, and then donate the
proceeds as a cash gift.
A deduction for a charitable donation of a vehicle, boat, or other high-end item, if sold by
the charity, is generally limited to the gross sales price. The fair market value may be
used if the charity does a “qualifying act” with the property. A qualifying act is a significant
use or material improvement of the asset or a sale of the asset below fair market value to
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the needy or disadvantaged. The qualifying act must also be part of the charity’s purpose
and be acknowledged in writing by the charity to the donor.
If the value of the sold vehicle, etc. is over $500, the charity must provide a Form 1098-
C to the donor stating the amount of the gross proceeds within 30 days of the sale.
If the sold vehicle, etc. is valued under $501, no form 1098-C is issued and the general
rules for donations of property to charities are followed such as getting an
acknowledgement from the charity for property valued between $250 and $500 or simply
documenting the donation and the fair market value with receipts and records for
donations below $250. To be deductible, the donor must make the donation to an
organization that is listed in IRS Publication 78 https://www.irs.gov/charities-non-
profits/tax-exempt-organization-search can help you check that information. You must
itemize your deductions (and attach a copy of form 1098-C, if applicable) in order to claim
the deduction. Be aware that, as with the donation of other kinds of property, deductions
exceeding $5,000 in value (other than cash, publicly traded securities, and certain other
limited property) require other substantiation, including a qualified appraisal.
ALTERNATIVE MINIMUM TAX
AMT is a second method of calculating tax by removing some deductions, exemptions and adding back some exempt income. It is only applicable if the tentative minimum tax exceeds your regular tax.
Some regular tax deductions and benefits that may trigger AMT are:
• Exercising incentive stock options (ISOs) - the exercise is not taxable for regular tax but the difference between the FMV of the stock and the exercise price is an AMT adjustment unless the stock is sold in the same year as the exercise.
• Taxes - state and local income taxes, real, and property taxes are disallowed when calculating AMT taxable income.
• Long-term capital gains - although long-term capital gains receive the same treatment for regular and AMT taxation, they can trigger AMT tax by pushing a taxpayer into AMT income range.
• “Tax-exempt” interest on private activity bonds - the interest is exempt for regular tax but taxable for AMT.
The AMT exemption is $111,700 if MFJ and Qualifying Widower. Single and HOH filers have an exemption of $71,700. The exemption for MFS is $55,850. The AMT phase-out begins at $510,300 for all taxpayers except MFJ - $1,020,600. Certain nonrefundable personal tax credits such as the credit for dependent care and the American Opportunity Tax Credit (AOTC) may offset an individual's regular tax and AMT. This offset provision was made permanent with the passage of American Taxpayer Relief Act (ATRA).
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CAPITAL GAINS & DIVIDEND INCOME TAX RATES
Capital Gains
Please be aware that brokerage statements reporting your dividends, interest, stock
sales, etc. must be mailed on or before February 15th. As has happened in previous
years, this deadline may be extended and the issuance of amended brokerage
statements after the initial ones are sent is also a possibility.
The capital gain rates remain the same in 2019 but the brackets have changed along with
the change in the income tax brackets. Additionally, depending on the amount of your
MAGI, capital gains are subject to the 3.8% Medicare Surtax.
The 0%, 15% and 20% capital gain rates apply in 2019 under the Tax Cuts and Jobs Act.
The 0% rate will apply to MFJ with income up to $78,750 and single with income up to
$39,375. The 15% rate applies up to $488,500 and $434,550 respectively and the 20%
rate applies above these income thresholds. HOH thresholds are $52,750, $461,700 and
20% in excess of $461,700. MFS thresholds are half of the MFJ thresholds.
Net short-term capital gains are, and will continue to be, taxed at higher ordinary income
tax rates. After first considering the investment value of such a decision, consider holding
stock for more than one year to take advantage of the lower long-term gains tax rates.
There are some assets which do not qualify for the lower tax rates. Collectibles, such as
antiques, fine art, gems and stamps, are taxed at a 28% rate even if held long term. The
portion of the gain on real estate that is attributable to “un-recaptured Code Section 1250
gain” is taxed at a 25% rate.
As the end of the year approaches, examine your investments. It may be beneficial to
sell some losers, provided that this strategy benefits your portfolio as well as saves taxes.
(The depressed stock can be repurchased 31 days later to avoid the wash sale
treatment.)
You can subtract capital losses from capital gains to zero out your gains, and still use up
to $3,000 more in capital losses to offset ordinary income. Unused capital losses can be
carried forward during your lifetime. In future years, you can use up to $3,000 per year
to offset ordinary income that exceeds future year capital gain income. Please note that
unused losses expire at death. You should also be aware that Pennsylvania does not
allow offsetting of other types of income with capital losses or carrying over net
capital losses to future years.
As stated above, if you are in the 10% and 15% marginal tax brackets at least some of
your long-term capital gains may be taxed at a 0% rate so that you would not have to
offset all of them with capital losses to eliminate or greatly reduce your tax. Please contact
us to maximize the use of the 0% capital gains rate under various scenarios.
The basis of property inherited from you is usually its fair market value on your date of
death no matter what you paid for it or how you otherwise acquired it. This is called a
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stepped-up basis. The significance of a stepped-up basis is that if your property is
inherited by your heirs and soon thereafter sold, there would be little or no capital gains
tax to pay. This strategy of holding highly appreciated assets until your death to give your
heirs a stepped-up basis should be considered in an overall financial and estate plan.
Please contact us to implement such a plan.
Dividend Income
Qualified dividend income is taxed at long-term capital gain rates, 0%, 15% or 20%, rather
than ordinary income rates. Dividends received on the common or preferred stock of a
domestic corporation and dividends received from qualified foreign corporations are
“qualified” dividends for purposes of the reduced rates. Furthermore, dividends received
from mutual funds are treated as qualified dividends if the earnings of the fund are at least
95% from qualified dividend income sources. Qualified dividends received by a
partnership or S corporation retain their qualified status when they are passed through to
the partners or shareholders.
If our office can be of assistance in reviewing your portfolio and helping you make some
important strategic decisions on how to maximize your tax savings, please let us know.
“KIDDIE” TAX
The “kiddie” tax law applies to children 19 years old and younger and to dependent
children who are full-time students up through age 24. To the extent the unearned income
of children who could be claimed as dependents under the pre-TCJA rules is over $2,200
for 2019, the unearned income will be taxed at trust and estate rates. There is no longer
a need to include parent and sibling(s) income in this calculation. If the unearned income
is below this amount, no federal income tax will be charged. Earned income is taxed at
the rates of single individuals.
This provision was repealed under the SECURE Act as discussed earlier. Taxpayers
may elect retroactive treatment for 2018 and 2019.
If your child is 19 or older and is providing more than 50% of his or her own support from
earned income, the unearned income is not subject to the “kiddie” tax and will be taxed
at the child’s own rate. We can assist you in reporting your child’s income correctly.
INDIVIDUAL FEDERAL TAX RATES
The individual tax rates and the bracket amounts adjusted for inflation for 2019 are
outlined on the next page.
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2019 Tax Rates/Brackets
Rates
Single
Taxable Income
Married Filing
Jointly
Taxable Income
Married Filing
Separately
Taxable Income
Head of Household
Taxable Income
From
To and
Including
From
To and
Including
From
To and
Including
From
To and
Including
10% $0 $9,700 $0 $19,400 $0 $9,700 $0 $13,850
12% $9,701 $39,475 $19,401 $78,950 $9,701 $39,475 $13,851 $52,850
22% $39,476 $84,200 $78,951 $168,400 $39,476 $84,200 $52,851 $84,200
24% $84,201 $160,725 $168,401 $321,400 $84,201 $160,725 $84,201 $160,700
32% $160,726 $204,100 $321,401 $408,200 $160,726 $204,100 $160,701 $204,100
35% $204,101 $510,300 $408,201 $612,350 $204,101 $306,750 $204,101 $510,300
37% $510,301 or more $612,351 or more $306,751 or more $510,301 or more
Standard deductions are as follows in 2019:
Under 65* Age 65 and over¹
Single individual $ 12,200 $ 13,850
Married filing jointly 24,400 29,200²
Married filing separately 12,200 13,850
Head of household 18,350 21,250
¹ Additional standard deductions can be taken by taxpayers who are 65 and/or blind at the
end of the year.
² $25,700 if only one is 65 or over
The personal exemption is suspended for tax years 2018 through 2025.
HEALTH SAVINGS ACCOUNTS
HSAs are individually controlled tax-deductible savings plans available to individuals who
have high-deductible health insurance plans that are ACA compliant.
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The high deductible health plan requires a minimum annual deductible for 2019 of $1,350
for individuals and $2,700 for families.
In 2019 the maximum out-of-pocket expenses increases to $6,750 for individuals and
$13,500 for families in 2019. Employers and employees may contribute to the Health
Savings Account. The employer contributions are tax-free, as are any distributions for
qualifying medical expenses. Contributions by employees to the HSA are deductible even
if they do not itemize. 2019 HSA holders under 55 years of age can contribute and deduct
up to $3,500 in 2019 for individual coverage or $7,000 in for family coverage. Those 55
and older can contribute an extra $1,000. You can make HSA contributions for 2019
through April 15, 2020, even though contributions are reported on Form W-2 in the year
made.
If an employee changes jobs, the HSA goes with him/her. The unused portion of the HSA
can be carried forward indefinitely and is considered a retirement distribution at retirement
if it is not used for medical expense. A distribution for medical expense, even after
retirement, is tax-free. Once a person is enrolled in Medicare (generally by reaching age
65), he/she may no longer make contributions to an HSA.
Qualified medical expenses include those items that would generally qualify as an itemized
deduction. Over-the-counter drugs (unless prescribed by healthcare professionals except
for insulin for diabetics) cannot be paid from HSA funds. Nonqualified expenses paid from
an HSA are subject to an additional tax. The additional tax on disqualified distributions is
20%. These rules also apply to FSAs.
HSAs are especially beneficial for those who are young and healthy. The contribution is
tax deductible and the earnings accumulate tax-free. The earnings could be substantial if
most of the contributions are not needed for medical expenses for several years. It’s like
a Super IRA!
HIGHER EDUCATION PLANNING
Tax incentives to help offset the high cost of education are available. These options
include Qualified Tuition Programs (Sec. 529 Plans), Coverdell Education Savings
Accounts, the AOTC (American Opportunity Credit), the Lifetime Learning Credit,
education savings bonds, student loan interest deduction, and the Qualified Tuition
Deduction which was set to expire has been reinstated under FCAA..
The AOTC was made permanent under Protecting Americans from Tax Hikes (PATH) Act.
The following is a brief outline of some of the more significant provisions of the AOTC:
• The maximum AOTC amount is $2,500 per eligible student per year (computed by taking 100% of the first $2,000 of qualified expenses & 25% of the next $2,000) of Qualified Tuition & Related expenses (QT&R);
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• Qualifying student dependent is a child under age 18 or a child under age 24 who is a student providing less than one-half of his support, who has at least one living parent, and doesn't file a joint return;
• QT&R expenses include tuition, fees, and course materials;
• The AOTC is allowed for each of the first four years of the student's post-secondary education in a degree or certificate program, and, for each eligible student, the AOTC can be claimed for four tax years;
• The AOTC is phased-out at MAGI between $80,000 and $90,000 for single filers (between $160,000 and $180,000 for joint filers);
• The AOTC can be claimed against AMT liability (unlike the Lifetime Learning Credit and the former Hope Credit); and 40% of the otherwise allowable AOTC is refundable
The Coverdell Education Savings Account (ESA) contribution limit was permanently set at
$2,000 by ATRA. Additional ATRA provisions relating to Coverdell ESAs are the
elimination of the marriage penalty phase-out range; entities are not subject to contribution
limits. Distributions may be used for qualified non-college expenses and contributions to
college tuition plans.
Student Loan Interest Deduction
Taxpayers may be able to deduct student loan interest as an adjustment to income, even
if they take the standard deduction. Qualified taxpayers may claim a maximum of $2,500
per year throughout the length of the loan. In 2019 the deduction is phased-out for single
taxpayers and those who file as head-of-household with modified adjusted gross income
between $70,000 and $85,000 and for married taxpayers who file joint returns with
modified adjusted gross income between $140,000 and $170,000. Individuals who are
claimed as a dependent on another taxpayer’s return and married taxpayers filing
separately may not claim this deduction. This deduction has been made permanent via
ATRA.
Qualified Tuition Deduction
A deduction will be available to certain taxpayers who pay qualified tuition and related
expense to a college or university as a condition of enrollment. These expenses include
student activity fees and course materials (books, equipment and supplies). The
deduction was reinstated under FCAA. Specific details concerning income thresholds and
amount of deduction are not yet available.
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Education Credits
Name American Opportunity Tax
Credit
Lifetime Learning Credit
Purpose A per student yearly credit
based on the amount of post-
secondary qualified tuition, fees
and course materials paid during
a calendar year by or on behalf
of oneself, one’s spouse or a
dependent; not available to
spouses filing separately.
A per return yearly credit based on the
amount of post-secondary qualified
tuition and fees paid during a calendar
year on behalf of oneself, one’s spouse
or dependents; not available to spouses
filing separately.
Qualified
Student
First four years student enrolled
in an accredited college or
university on at least a half-time
basis.
A student enrolled in an accredited
college or university to acquire or
improve job skills or graduate level
education.
Limits Up to $2,500 yearly calculated
by taking 100% of 1st $2,000 of
qualified expenses & 25% of the
next $2,000.
Up to $2,000 yearly calculated by taking
20% of up to
$10,000 of qualified expenses – these
amounts are not indexed for inflation.
Phase-outs AOTC:
Single filers: starts at $80,000 to $90,000 of modified adjusted gross
income
Joint filers: starts at $160,000 to $180,000 of modified adjusted gross
income
Lifetime credit:
Single filers: starts at $58,000 to $68,000 of modified adjusted gross
income
Joint filers: starts at $116,000 to $136,000 of modified adjusted gross
income
Interplay Cannot use AOTC and Lifetime credit for the same student in the same
year
Can use AOTC for one student and Lifetime Learning credit for another on
same return
Funds from tax free accounts cannot be included in expenses that qualify
the taxpayer for higher education credits.
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Education Savings Plans
Plan Name Section 529 Plan Coverdell ESA (CESA)
Purpose Savings for certain education
expenses: k-12, state, college,
vocational school, or university
sponsored; the person who opens
the account maintains ownership
of the account.
Savings for qualified expenses at
virtually all levels of education:
public, private and religious.
Investments
Allowed
Menu of broad-based investment
strategies to select from.
Very flexible – any investment
allowed in an IRA is permitted.
Contributions Unlimited cash but nondeductible
from federal income; donor may
contribute up to $15,000 in 2019
per student per year without using
gift tax lifetime credit or incurring
gift tax.
Note: There is a lifetime
contribution limit per beneficiary.
$2,000 nondeductible contribution
allowed per student per year in
2019 and may be made up to
April 15th (or the first business
day thereafter if the 15th is not a
business day) for the previous
calendar year; contributions are
phased out for single taxpayers
with modified adjusted gross
income of:
$95,000 to $110,000 ($190,000 to
$220,000 if married filing jointly).
Federal tax Earnings are not taxed;
distributions used for higher
education purposes are excluded
from income; beneficiary pays
taxes on all other distributions to
or for his/her benefit.
Earnings are not taxed;
distributions used for qualified
educational expenses are
excluded from income;
beneficiary pays taxes on all
other distributions plus 10%
surtax.
State tax May depend on the plan selected;
Pennsylvania allows a deduction
on the 2019 PA 40 for PA plan
contributions up to the lower of
taxable income or $15,000 per
beneficiary reported on Schedule
O. Joint filers may contribute up
to $15,000 each or $30,000
combined in 2019 per beneficiary.
None for PA residents; call us
concerning your state if you think
it may be relevant.
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ENERGY CREDITS
The credit for solar electric and solar water heating property is extended for property
placed in service through December 31, 2021.
The amount of the credit is based on 30% of the cost of the installed equipment through
2021. For example, suppose you spend $8,000 in 2019 buying and installing solar
heating panels on your residence. You may claim a credit of $2,400 (30% of $8,000).
The previously expired non-business energy property credit has been reinstated under
FCAA for 2019 and 2020 and retroactively to 2018. A 10% credit can be claimed for
windows, doors, insulation, heat pumps, etc. not to exceed $500 utilizing the Energy
Policy Act of 2005 rules.
Please let us know if you made any energy improvements to your residence so we can
determine if you are eligible to receive any of these credits.
STANDARD MILEAGE RATES
The standard rate for business purposes for 2019 is 58 (57.5 cents in 2019) cents per
mile. The depreciation portion is 26 cents in 2019 (27 cents in 2020).
The standard mileage rate for medical or moving purposes is 20 cents per mile for 2019.
The standard mileage rate for charitable purposes is statutorily fixed at 14 cents per mile
and is not periodically adjusted, unlike the other standard mileage rates.
The standard mileage rates are illustrated by the following chart:
Purpose Cents per mile 2019 Cost per mile 2020
Business 58 57.5
Medical/Moving 20 17
Charitable 14 14
FOREIGN ACCOUNTS
If you have a foreign account, had signature authority over or an “interest in” any foreign
financial account, Treasury Form TD-F 90-22.1 – Report of Foreign Bank and Financial
Accounts (FBAR) must be completed if the combined value of all non-domestic accounts
was more than $ 10,000 at any time during the year. The form should be submitted
separately to the U.S. Treasury and must be filed with the IRS on the same due date as
the federal 1040. A six-month filing extension is automatically granted. The criminal
penalty for willful failure to complete and submit this form is a fine of up to $500,000, a
jail term of up to ten years, or both.
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The severity of criminal penalties may depend upon other factors other than the failure to
file the form. Substantial civil penalties may also be assessed for willful or negligent
violations. The IRS is charged with enforcing this law and has taken an aggressive
approach to enforcement.
“Financial accounts” include:
• Bank accounts such as savings accounts, checking accounts, and time deposits.
• Securities accounts such as mutual funds, brokerage accounts, and securities
derivatives accounts.
• Accounts where the assets are held in a commingled fund and the account owner
holds equity interest in the fund.
• Any other account(s) maintained in a foreign (located outside the United States)
financial institution or with a person doing business as a financial institution.
• An insurance or annuity policy having cash surrender value.
• Commodity futures or options accounts.
• Hedge funds (possibly)
Individually held bonds, notes, or stock certificates are not “financial accounts”. In other
words, foreign bonds, notes, or stock in which you are invested and are held in your U.S.
brokerage account are not “financial accounts” for which you must file an FBAR.
Foreign commingled accounts in which an individual has a greater than fifty percent
interest must be reported.
In addition to the FBAR filing requirements, the IRS has enacted additional foreign
account filing requirements that must be submitted with individual or business income tax
forms. The information will be filed on Form 8938, Statement of Specified Foreign
Financial Assets.
Taxpayers who own specified foreign assets that exceed an applicable threshold must
file Form 8938 with their Form 1040 or other applicable income tax forms. The threshold
varies depending upon residency and filing status. Specified foreign assets include
financial accounts maintained by a foreign financial institution and, to the extent held for
investment, any stock, securities, or any other interest in a foreign entity and any financial
instrument or contract with an issuer or counterparty that is not a U.S. person. If you hold
any foreign assets, please let us know so we can determine if these filing requirements
apply to your specific situation.
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REQUIRED IRA WITHDRAWALS
If you have a Traditional IRA and you are age 70½ or older, generally you must take a
required minimum distribution (RMD) from your IRA by December 31. The year in which
you turn 70½, you have until April 1st of the following year to take your first RMD.
Subsequent RMDs must be taken by December 31. If you choose to delay your first RMD
to the following April, you will still need to take your second RMD by December 31 of the
same year. Often it more advantageous to take the first in the year you turn 70½ rather
than delaying.
The SECURE Act (as discussed earlier) modified the RMD age to 72 for individuals who
turn 70 ½ after December 31, 2019. These individuals can wait until the year they turn 72
to take their RMD.
If you have several traditional IRA accounts, you must calculate your RMD for 2019 and
beyond based on the prior year-end value of all your accounts, but you may withdraw
your total RMD from any one or combination of your IRA accounts. If you are at least
59½, you can withdraw from your IRA without the 10% early distribution penalty, but this
increases your AGI and may not be the best strategy.
Spouses of deceased taxpayers are eligible to treat the decedent’s IRA as their own.
Usually it is more beneficial for the spouse to take the IRA as his/her own because it is
then possible to distribute the IRA over a longer time period. Since the spouse will then
become the owner of the IRA, the spouse can make his/her own investment decisions
regarding the IRA and name a beneficiary or beneficiaries.
On the other hand, a surviving spouse who is under 59½ initially may not want to treat
the decedent’s IRA as his/her own in order to be able to receive penalty-free distributions
from the IRA for living expenses. The surviving spouse can elect at any time thereafter
to treat the IRA as his/her own. This nuance is an example of why it is important to notify
us whenever there is a critical event, such as a death, to explore all the complicated tax
issues that may be involved.
The age of the beneficiary at the taxpayer’s death determines the RMD for non-spousal
beneficiaries. For a single IRA with several beneficiaries the age of the oldest beneficiary
is used to calculate the RMD for all beneficiaries; however, thanks to the Pension
Protection Act of 2006, as of 2007 non-spousal beneficiaries of a single IRA can directly
roll over their portions of an inherited IRA into separate IRAs. Then the RMD on each of
the separated, “beneficiary” IRAs is determined based on the age of the beneficiary.
If the IRA owner dies after RMDs have begun and a beneficiary is not named, the IRA is
distributed to the estate over the period that had previously been determined for the
owner. If the IRA owner dies before RMDs begin, and no beneficiary is named, the IRA
must be distributed to the beneficiary of the estate within five years. If a trust is named
as beneficiary, the beneficiary of the trust takes the IRA over his/her lifetime as actuarially
determined.
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Keep in mind that high income individuals can still reap the benefits that lower income
taxpayers had by converting their traditional IRAs to Roth IRAs. Prior to 2010, there were
income restrictions on who could convert all or a part of a traditional IRA to a Roth IRA.
In any year a traditional IRA is converted to a Roth IRA, the previously untaxed income
in the traditional IRA will be taxed. All the previously untaxed income must be reported
in the year it is rolled. After the conversion, under current law, the Roth IRAs future
earnings are tax free and there is no required distribution.
The advantage of the conversion is that you can continue tax-free growth in your Roth
IRA for many years. We can help you determine if this tax planning strategy will work for
you.
RETIREMENT PLANNING
One of the best ways to prepare for your future is to contribute to a qualified retirement
plan. Since contributing to a retirement account is deductible (except for 401(k)s and
Roth IRAs), you will save on your current tax obligation. Not only do you receive a tax
deduction when you contribute to a qualified retirement account, but the earnings grow
much faster because the investment compounds over time, free of taxes. Below are two
tables – one highlighting the retirement plans for individuals and the other highlighting the
retirement plans for small business owners.
The 2019 phase-out ranges for making contributions to traditional or Roth IRAs are $193,000-$203,000 ($196,000-$206,000 in 2020) for married couples and $122,000-$137,000 ($124,000-$139,000 in 2020) for singles and HOH.
Retirement
Plan 401(k) or 403(b) SIMPLE Traditional & Roth IRAs
Ages Under 50 50 Plus Under 50 50 Plus Under 50 50 Plus
Years 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020
Contribution
Limits $19,000 $19,500 $25,000 $26,000 $13,000 $13,500 $16,000 $16,500 $6,000 $6,000 $7,000 $7,000
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“Emp’ee” = Employee and “Emp’er” = Employer
*Employers may contribute to a SEP up to 25% of an employee's eligible compensation
or $56,000 for 2019. Self-employed persons may contribute to a SEP up to 25% of their
net compensation (net profit from IRS Form 1040 Schedule C or K-1, reduced by 50% of
your self-employment tax), up to $56,000 for 2019.
Taxpayers can make just one IRA-to-IRA rollover per year.
All taxpayers, regardless of income levels or filing status, can roll over distributions
directly from an “eligible employer plan” (which includes an IRA) to a Roth IRA or convert
traditional IRA accounts to Roth IRAs. There are limitations to contributions to Roth IRAs
by certain taxpayers. These limitations can be circumvented by making non-deductible
contributions to a traditional IRA followed by a rollover or conversion to a Roth IRA.
ESTATE AND GIFT PLANNING
For 2019 and 2020, the maximum per-person, annual gift exclusion is $15,000. In
addition, you can continue to pay someone’s tuition and medical expenses directly to the
educational institution or medical provider and not subject the gift to tax nor have it applied
to the annual gift exclusion limit.
Retirement Planning for Business Owners
Retirement
Plan 401(k) SIMPLE SEP*
Ages Under 50 50 Plus Under 50 50 Plus Under 50 50 Plus
Years 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020
Emp’ee
Contrib
Lmts
$19,000 $19,500 $25,000 $26,000 $13,000 $13,500 $16,000 $16,500 $6,000 $6,000 $7,000 $7,000
Emp’er
Contrib
Lmts
25% of eligible compensation $13,000 $13,500 $16,000 $16,500 $56,000 $57,000 $56,000 $57,000
Emp’er +
Emp’ee
Lmts
$56,000 $57,000 $62,000 $63,000 $26,000 $27,000 $32,000 $33,000 N/A
Emp’ee
Borrow
Lmts 50% of acct. bal. up to $ 50,000
N/A N/A
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If you are financially able and inclined to do so, don’t neglect to give gifts up to $15,000
per person to your loved ones so that they are received by them on or before December
31. (If the gift is by check, the recipient must cash or deposit the check before year end
to qualify as a completed gift for that year.)
If your child or grandchild is over 18 years of age and not a dependent student under 24
years old and is in the bottom two tax brackets, consider gifting appreciated stock. Your
cost basis and holding period pass with the gift; however, the child pays 0% in tax in 2019
on any capital gain instead of the 15% or 20% tax you would pay on a sale assuming you
are not in the bottom two tax brackets. Note that in 2019 the child may pay 15% tax on
the part of the gain, if any, which causes the child’s taxable income to exceed $37,950.
Regarding both estate tax and generation-skipping transfer tax (transfers to
grandchildren, etc.), there is an $11.4 million exemption for U.S. citizens dying in 2019.
The exemption is indexed for inflation through 2025. In addition, for estate tax purposes,
but not for generation-skipping transfer tax purposes, any unused exemption of a
predeceasing spouse (dying after December 31, 2009) is available to the surviving
spouse’s estate. The ability to use a predeceasing spouse’s exemption is called
“portability” and is only available if the predeceasing spouse’s estate filed a federal estate
tax return.
The maximum lifetime taxable gifting exemption is tied to the estate tax exemption, i.e.
$11.4 million in 2019 and $11.58 million in 2020. Taxable gifts are “present interest” gifts
in excess of the $15,000 per person annual exclusion previously mentioned, and any
“future interest” gifts. Present interest gifts are gifts that are enjoyed immediately by the
recipient’ without strings attached’ such as cash gifts. Future interest gifts are gifts that
the recipient must wait for a future time to enjoy, such as certain gifts in trust. The top
estate and gift tax rate is 40% in 2019 and 2020. There is only one generation-skipping
transfer tax rate which is 40%.
PLANNING FOR SELF-EMPLOYED TAXPAYERS
In 2019 taxpayers may elect to expense fixed assets placed in service instead of
depreciating over their useful lives. For tax year 2019, expensing is allowed up to
$1,020,000 of capital expenditures subject to a dollar-for-dollar 2019 phase-out amount
of $2,550,000 in 2019.
To qualify for the election to expense set forth in the previous paragraph, the property
must be “tangible personal” property. "Real property" such as real estate (buildings and
their structural components) does not qualify, nor do intangibles such as patent rights.
Please note that the dollar limitation should not hinder your decision to purchase assets.
If an asset does not qualify for a full Section 179 deduction due to the purchase limitations,
the cost of the assets over the purchase limitations will be depreciable over their useful
lives.
The Section 179 election can be spread over multiple assets if the total cost covered by
the election doesn't exceed the dollar limit for that year.
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As mentioned above, if the total cost of qualifying property that you place in service during
a tax year beginning in 2019 is over $2,550,000, the immediate deduction limit is reduced
dollar-for-dollar to the extent your purchases are in excess of those limits. For example,
if you place in service $2,590,000 of qualifying property in a tax year beginning in 2019,
you may make the election for no more than $980,000 of property ($1,020,000 minus
$40,000 [excess of $2,590,000 over $2,550,000]).
The Section 179 deduction is limited to your taxable income from all your trades or
businesses calculated without regard to the Section 179 deduction. However, for most
types of property, any amount that cannot be immediately deducted because of taxable
income limitations is carried forward and can be deducted in subsequent years (to the
extent that the applicable dollar limit, the phase-out rule, and the taxable income limit
permit).
If Section 179 property is disposed of or retired before the end of the cost recovery period,
all or part of the amount of the deduction claimed under the election must be taken back
into income (“recaptured”). The amount recaptured is the amount deducted for Section
179 purposes less the amount allowable had the asset been depreciated instead. Exactly
how much will depend on the type of property and how long you used the property in a
trade or business. Using 100% bonus depreciation might be a better method if you are
uncertain if you will hold the asset for the cost recovery period.
We can help you with long-range planning for your equipment needs to take advantage
of this benefit.
Regarding the deduction of business automobile expense, there are two options:
The first option is to deduct actual expenses such as fuel, insurance, and repairs plus
depreciation of the vehicle. If you purchase the vehicle, the first-year depreciation limit
for 2019 is $10,100 for passenger automobiles and light trucks and vans. Additional
bonus depreciation of $8,000 can be taken. Electric vehicles are subject to the same caps
as non-electric vehicles. Larger vehicles and trucks with gross vehicle weight greater
than 6,000 pounds follow different rules and are discussed below. If you lease the vehicle,
you may not deduct depreciation, but instead you deduct the portion of the lease that is
for business purposes based on a ratio of business over total mileage.
The second option is to elect to use the standard mileage rate for automobile expenses.
The mileage rate for 2019 is $0.58 (see chart p.18). If the standard mileage rate approach
is used, it must be substantiated for each business use (that is, the mileage), or the time
and business purpose of each use. A record of the time, place, business purpose, and
number of miles traveled suffices. See https://www.irs.gov/taxtopics/tc510 for more
information.
We will work with you to determine which option provides more tax savings for your
particular situation. Remember that in both cases, a mileage log of business use needs
to be kept. For actual expenses, records such as invoices, receipts, and purchase
information of the vehicle must be maintained.
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Some larger vehicles have a more accelerated depreciation schedule which requires
some consideration when buying a new vehicle. First year expensing of SUVs, trucks
having a cargo bed less than 6 feet, and certain vans is limited to $25,500 if their gross
vehicle weight is over 6,000 lbs. and under 14,000 lbs. The deduction is prorated if the
vehicle is used at least 50% for business.
For example, if the vehicle costs $25,000 and is used 75% for business, $18,750 can be
deducted under Section 179. Remember, the Section 179 expense cannot be greater
than net profits. The overall Section 179 expense, including vehicles, is $1,020,000 in
2019. Section 179 is not an extra deduction, but it accelerates what would otherwise be
depreciated over five years or longer. These vehicles are eligible for Bonus depreciation
and can be fully written off if bonus is elected.
Also available is a 100% deduction of your, your spouse’s and your dependents’ health
insurance premiums up to the amount of your earned income from a business if you are
the business owner, partner, or a 2% or more shareholder in an S corporation as long as
your spouse and your dependents are not covered elsewhere. This applies to long-term
care insurance as well, although the deductible amount is further limited based on age.
Despite the changes regarding the taxing of unearned income of children less than 19
years old or dependent students under 24 years old, hiring your own child to work for you
can still be a benefit to you as well as to your child. As a business owner, in 2019, you
can deduct the child’s wages as a business expense. And earned income for the child is
taxed at the child’s tax rate, even though unearned income above $2,200 is taxed at trust
and estate rates until age 19 or for dependent students under 24 years old. If your child
is under age 18, there would be no Social Security or Medicare deductions, or employer
matching. Remember to open a regular or Roth IRA for your working child to reap
additional tax savings.
There is a new deduction for some profitable businesses reported on the Form 1040. It is
generally equivalent to 20% of Qualified Business Income (QBI). Some pass-through
income is eligible as well as sole proprietor, farm, and some rental and royalty. There are
some income limitations and phase-outs depending upon the nature of the business and
the AGI of the taxpayer. It is the most complicated section of the TCJA, but we will help
you navigate through it. It was put in place to lower the tax bracket on business income
and align the individual tax rate on business income with the new 21% corporate rate.
SOCIAL SECURITY AND SELF-EMPLOYMENT TAXES
The maximum amount of taxable annual earnings subject to the Social Security (OASDI)
tax is $132,900 for 2019 and $137,700 in 2020. This applies to employees and self-
employed persons. All earnings are taxable for Medicare. The 2019 employee FICA tax
rate is comprised of 6.2% OASDI and 1.45% Medicare.
For 2019, the maximum OASDI tax is $8,239.80 or $16,479.60 if you are self-employed.
All earnings are subject to Medicare tax. Self-employed taxpayers can deduct a portion
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(slightly more than 50%) of self-employment taxes from gross income when they file their
income tax return.
When you reach “full retirement age” and above, you may continue to work and still receive
full social security benefits. For those born in 1942, “full retirement age” is 65 years plus
ten months; for those born in 1943 through 1954, it is 66 years. For 2019, if a person
reaches full retirement age, the exempt earnings are $46,920. This limit is only for the
period beginning January 1, 2019 through the last day of the month before a person
reaches full retirement age. In that period, if you are collecting social security benefits, and
earn above $46,920 you will lose $1 of social security benefits for every $3 of earned
income above $46,920 ($48,600 in 2020). Those between 62 and 66 who have enrolled
and started to receive social security benefits may earn up to $17,640 in 2019 ($18,240
in 2020) per year ($1,470 and $1,520 per month respectively) without losing any benefits.
If you earned above $1,470 ($1,520 in 2020) per month during 2019 (you will have to pay
back $1 for every $2 of earned income above the limit).
The cost-of-living adjustment (COLA) for Social Security and Supplemental Security
income benefits is 2.8% in 2019 and 1.6% in 2020. For reporting social security as
taxable income, the maximum taxable base remains at 85% of social security benefits if
your “provisional income” (generally, adjusted gross income without regard to taxable
social security plus tax-exempt income plus one-half of the social security benefits) is
over $44,000 for joint filers and $34,000 for single individuals. If “provisional income” is
less than these income thresholds but more than $32,000 and $25,000, respectively, only
50% or less of social security benefits are taxable. Married people filing separately who
lived with their spouse during any part of 2019 are taxed on the lower of 85% of their
social security benefits or 85% of their “provisional income”.
MEDICARE
The standard Medicare Part B premium deducted for most people in 2019 from Social
Security benefits is $135.50 per month beginning January 1, 2019. As in the past, there
is a sliding scale used to determine whether additional Medicare Part B surcharges will
be added to the Part B standard premium deduction for 2019 and 2020. Higher income
individuals who have Medicare prescription drug coverage (Medicare Part D) are subject
to a Part D surcharge. In addition to the recipient's modified adjusted gross income for
2018, the amount of additional premium above the standard premium deducted from
Social Security depends upon the Social Security recipient's filing status, i.e. married filing
jointly, single and married filing separate (and living with the spouse during at least part
of the taxable year).
Medicare participants should examine all the available plans to determine the most
beneficial one for their scenario. The alternative to Medicare, Medicare Advantage, will
be changing for this tax year. There will be significantly fewer plans with out-of-pocket
expenses capped at $4,000 or less. This is due to health benefit providers deducing that
pushing the consumer to cover more of the expenses will act as a buffer to their
profitability. The following data tables highlight the rate of Part B and D charges that may
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affect you in 2020.
FOR MARRIED FILING JOINT
If your 2018 modified AGI is Your 2020
monthly Part B
surcharge will be
Your 2020
monthly Part B
premium will be
Your 2020 monthly
Part D, if applicable,
surcharge will be
More than But not over
$0 $174,000 - $144.60 -
$174,000 $218,000 $ 57.80 $202.40 $12.20
$218,000 $272,000 $144.60 $289.20 $31.50
$272,000 $326,000 $231.40 $376.00 $50.70
$326,000 $749,999 $318.10 $462.70 $70.00
$750,000 - $347.00 $491.60 $76.40
For Married Filing Separate
If your 2018 modified AGI is Your 2020
monthly Part
B surcharge
will be
Your 2020
monthly Part
B premium
will be
Your 2020 monthly part D, if
applicable, surcharge will be
More than But not over
$ 0 $87,000 - $144.60 -
$87,000 $412,999 $318.10 $462.70 $70.00
$413,000 - $347.00 $491.60 $76.40
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As evidenced by these new data tables, your Part B premiums may have increased if you
find your AGI in the higher brackets. Although taxpayers with lower AGIs may not be
affected, it is important to understand the tax implications if your AGI will affect your Part
B premiums. This is more reason for those over 70 ½ to make QCD contributions to
charity rather than writing a check.
2018 income will affect 2020 Medicare premiums. Therefore, it might be better for seniors
to postpone income from 2019 to 2020, so the effect of the higher income impacts the
Medicare Premium in 2021 rather than 2020.
Postponing taxable income in most cases is more prudent. Also, there are circumstances
(such as death, divorce, loss of work, etc.) that lower your higher-than-standard premium
payments and provide reasons to appeal incorrect calculations. Please contact us if you
think your Medicare Part B and/or Part D premiums were miscalculated and are too high.
AVOIDING PENALTIES FOR UNDERPAYING INCOME TAX
The safe harbor rules for federal estimated taxes are:
No matter what your taxable income is, there is no penalty if you pay 90% of the current
year tax in equal quarterly installments and/or through withholding.
If your adjusted gross income (AGI) for 2018 was less than $150,000 and you pay 100%
of that year’s tax in equal quarterly installments and/or through withholding during 2019,
there is no penalty for underpayment. The last quarterly installment is due January 15th,
2020.
REMINDER: If you are relying on your withholding to avoid a penalty on
Single Filers
If your 2018 modified AGI is Your 2020
monthly Part B
surcharge will be
Your 2020
monthly Part B
premium will be
Your 2020
monthly Part D, if
applicable,
surcharge will be
More than But not over
$ 0 $87,000 - $144.60 -
$87,000 $109,000 $ 57.80 $202.40 $12.20
$109,000 $136,000 $144.60 $289.20 $31.50
$136,000 $163,000 $231.40 $376.00 $50.70
$163,000 $499,999 $318.10 $462.70 $70.00
$500,000 - $347.00 $491.60 $76.40
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underpayment of income tax, make sure your current year-to-date
withholding is at least equal to last year’s withholding.
If your AGI for 2018 was $150,000 or more, and you pay 110% of the 2018 tax in equal
quarterly installments and/or through withholding during 2018, there is no penalty for
underpayment. The last quarterly installment is due January 15th, 2020.
If you notice that you have underpaid federal income taxes, the best strategy is to request
extra withholding, if possible, late in the year to make up for any past underpayments.
Withheld taxes, even those withheld at the very end of the year, are treated as if they
were paid evenly throughout the year.
Pennsylvania Department of Revenue has become very proactive about assessing
penalties for underpayment of income tax. In order to avoid these penalties, which would
be more accurately referred to as “interest,” make sure you pay each year at least 90%
of your current year PA tax or 100% of your prior year PA tax. Pay the tax in equal
quarterly installments and/or through withholding.
If you have any questions or need help with your estimated tax payments, such as
projecting your current year taxable income, do not hesitate to call us.
DOCUMENT RETENTION AND AUDIT STRATEGIES
Many individuals consider receiving an IRS notice to be a scary thing. Many notices can
be answered quickly and easily but sometimes a notice relates to a Notice of Audit. In all
cases it is important that all businesses and individuals retain all tax return documentation
for a minimum of three years after the filing date of a tax return. This includes all personal
and business bank statements that can be requested for review by the IRS if your return
is selected for review by the IRS.
The IRS has a random audit program where your return could be selected for a
compliance review through no fault of your own. In these audits, the IRS will trace bank
deposits back to your tax return and require explanation of any unreported deposits. It
may come as a surprise to many tax filers that the IRS can do this type of review. Most
taxpayers think a review is triggered by something specific on a filed return. This is not
always the case. We want to make you aware of this new random audit program.
Taxpayers with rental properties or the self-employed with Schedule C should consider
using separate bank accounts for each endeavor. Mixing different reporting entities in
one bank account will make any audit more painful than necessary.
Lastly, make sure you have proper documentation for all deductions taken, including
mileage logs for any mileage deduction and source documents for all itemized
deductions. In an audit situation, the burden of proof will be on you the taxpayer. The
more prepared you are, the quicker the agent will get through your audit.
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PENNSYLVANIA AND LOCAL TAXES AND DEVELOPMENTS The Pennsylvania personal income tax is levied at a rate of 3.07% against the taxable
income of resident and non-resident individuals, estates, trusts, partnerships, S
Corporations, business trusts and LLC not taxed as corporations.
The Commonwealth taxes eight classes of income: 1) compensation, 2) interest, 3)
dividends, 4) capital gains, 5) income from rents, royalties, patents and copyrights, 6)
income derived through trusts and estates, 7) profits from the operation of a business, 8)
gambling and lottery winnings. A loss in one income class cannot be used to offset income
in another income class. Gains or losses cannot be carried back or forward to other tax
years.
The following deductions, credits and exclusions are available to reduce tax
liabilities:
Deductions:
• Allowable unreimbursed expenses that are ordinary, actual, reasonable,
necessary and directly related to the taxpayer’s occupation or employment
• Medical savings account deduction
• Health savings account deduction
• IRC Section 529 tuition account program contributions
• ABLE account contributions
Credits:
• Foreign tax credit is allowed against Pennsylvania income tax for income taxes
paid by residents to other states (no longer allowed for tax paid to foreign countries)
• A Tax Forgiveness Credit is available to residents who meet certain income
thresholds
Exclusions:
• Payments to Section 125 plans for hospitalization, sickness, disability or death are excluded from Pennsylvania compensation
• Capital gain from the sale of a principal residence is excluded for all residents who own and use the residence at least two years during the five-year period preceding the sale date.
• Personal use of employer-owned property is excluded for income
All PA taxpayers who receive 1099-Rs must report the information on their Form PA 40.
Some 1099-R reported distributions are taxable, but those showing distribution codes of
3, 4, and 7 are not taxable for Pennsylvania.
As mentioned above ABLE accounts are exempt from all PA taxes. Undistributed earnings are not subject to tax. Distributions made to the beneficiary for qualified expenses are also exempt. A contributor can deduct up to $15,000 (2018 and 2019) per
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beneficiary from taxable income. The deduction cannot reduce taxable income below zero. Those who contribute to a Section 529 Qualified Tuition Account program will receive a
deduction on their Pennsylvania income tax return limited to the lower of taxable income
or $15,000 (2019 and 2020) per taxpayer. Joint filers may each contribute up to $15,000
each ($30,000 total in 2019 and 2020) per student. (Please see the prior section on
Higher Education Planning for more information on Section 529). These rules also apply
to PA ABLE accounts.
Health Savings Account (HSA) and Medical Savings (MSA) contributions are also
deductible against Pennsylvania income tax and are reported on Schedule O, Part II.
Distributions from these accounts that are included in income for federal tax purposes will
also be included in gross income for purposes of Pennsylvania income tax.
Additional Information
If you make internet purchases that did not charge PA sales tax you may receive a letter
from the vendor reporting the amount of the purchase and the sales tax to be paid. Report
this tax on line 25 “use tax” of the PA40.
Pennsylvania income tax withholding on lottery prize winnings is required if federal
income tax is withheld.
The inheritance tax rate on property transferred to a child 21 years or younger from a
deceased parent who died after December 31, 2019 is 0%.
The Property Tax/Rent Rebate Program benefits eligible Pennsylvanians age 65 and
older, widows and widowers age 50 and older, and people with disabilities age 18 and
older. Currently unchanged from 2018, 2019 household income levels up to $35,000 for
homeowners (which excludes half of social security income) and $15,000 for renters may
be eligible for this relief. Currently the maximum standard rebate is $650, which is not to
exceed the property tax or rent paid; the lower the income, the greater the rebate
potential. Supplemental rebates for qualifying homeowners can boost rebates to $975.
Business Taxes The corporate business rate is 9.99% on taxable income. A business that sustained a Net Operating Loss (NOL) can deduct 40% of the loss against current year income.
Online sellers who do not maintain a place of business in PA with sales of $100,000 or more in the prior 12 calendar months must register and remit sales tax to the Department of Revenue. Please contact us for additional information. The Educational Improvement Tax Credit (EITC) is available to businesses authorized to do business in PA. Initial applications must be completed by July 1. Applications must be completed electronically. Please contact us if you are interested in this program.
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For those involved in the film industries, the Film Production Tax Credit has been amended to allow the state to designate up to two tax credit districts. The tax credit may be authorized for fiscal tax years 2019/2020 and thereafter. There are many intricacies to this credit, please contact us for more information.
Before awarding any tax credits, the department has the right to verify all tax filings are current and all taxes are currently paid. Entities who make rent and royalty payments over $5,000 on Pennsylvania property to non-residents must withhold personal income tax on the payments. Pennsylvania partnerships and S corporations with non-resident owners must withhold PA personal income tax on pass-through income. Also, companies that bring out-of-state independent contractor workers into Pennsylvania for work and pay in excess of $5,000 must withhold personal income tax on the non-resident workers. Businesses are required to electronically file 1099-MISC forms for all classes of income.
We will update the website as changes or legislative updates come available. Please
check our website regularly: www.wgkcpa.com.
We hope this provides some insight about the changes to expect with your 2019 tax
filings. There is still opportunity to fund HSAs, 529 plans, increase charitable deductions
to reach the new itemized deduction thresholds, consider Section 179 and bonus
depreciation and a host of other planning techniques. Please contact us if we can be of
any assistance. We look forward to serving you.
Best regards,
Staff of William G. Koch & Associates
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Disclaimer
No Rendering of Advice The information contained within this document is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional accountant. Readers are advised not to act upon this information without seeking the service of a professional accountant. Accuracy of Information While we use reasonable efforts to furnish accurate and up-to-date information, we do not warrant that any information contained in or made available through this document is accurate, complete, reliable, current or error-free. We assume no liability or responsibility for any errors or omissions in the content of this document or such other materials or communications. IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (I) avoiding penalties under the Internal Revenue Service (II) promotion, marketing or recommending to another party any transaction or matter addressed herein.