CPA Services Blog

New Updates for 2019 Taxes – Part 2

In part 1, we covered changes to taxable income brackets and tax rates for individuals and married filing jointly. In part 2, we will cover deductions and other updates.

Changes to Standard Deduction Amounts

A standard deduction is the dollar amount that reduces the amount of income on which you are taxed and varies according to your filing status. At the beginning of 2018, the new tax plan brought higher standard deductions with the intention of helping families keep more of what they earn. Higher standard deductions often benefit middle-income families who see their income subject to lower tax rates.

This coming tax year, new standard deduction amounts will increase to: $12,200 for individuals, $18,350 for heads of household, and $24,400 for married couples filing jointly and surviving spouses.

There are also a few specific standard deduction changes you need to know for 2019:

  • Additional standard deduction amount for the aged or the blind: $1,300 (increases to $1,650 for unmarried taxpayers).
  • The standard deduction for an individual claimed as a dependent by another taxpayer cannot exceed $1,100 OR the sum of $350+ the individual’s earned income, whichever is greater.
  • There will be no personal exemption amount for 2019 per the Tax Cuts and Jobs Act.
  • Alternative minimum tax (AMT) exemption amounts will be adjusted for inflation. The AMT exemption is a mandatory alternative to the standard income tax for taxpayers who make more than the exemption.

Updates to the Kiddie Tax

The Kiddie Tax is a tax law that was created in 1986 to regulate investment and unearned income tax for kids under the age of 17. Despite its cute name, this regulation is designed to close a loophole where parents would give their children large gifts of stock and avoid paying taxes on said “gift.” When Congress passed the Tax Cuts and Jobs Act in 2017, the Kiddie Tax changed dramatically. Now, if a child’s income exceeds a certain threshold set forth in the Kiddie Tax, a taxations structure applies. This structure dictates a tax rate on the amount of income earned separate from the tax rate of the child’s parents.

In 2019, the key change to the Kiddie Tax is that unearned income – income from sources other than a paycheck or salary – will be taxed according to the brackets which apply to estates and trusts. Dividends and interest get the same tax rates as can be found in the table below. For earned income, the rules have not changed. Please note that the Kiddie Tax applies to individuals under age 19 as well as college students under the age of 24.

Changes to Child Tax Credits

Parents will be relieved to know that the Child Tax Credit expanding in 2019. This credit gives parents a deduction of $2,000 per qualifying child (an individual who has not turned 17 during the taxable year). This credit is refundable up to $1,400. The TCJA also includes a temporary revision for a $500 nonrefundable credit for qualifying dependents other than qualifying children. To learn more about the specifics of the expanded CTC, read more here.

Schedule A Itemized Deductions

Itemized deductions are certain expenses that you may incur throughout the taxable year and you can claim against your tax return. If you qualify, you may be able to deduct some of these items from your adjusted gross income.

  1. Medical and dental expenses deduction: starting in 2019, you may only deduct medical and/or dental expenses which exceed 10% of your adjusted gross income. This is an increase from 7.5% in 2018.
  2. State tax deduction: there is a new limit of a combined total of $10,000 which you may deduct for state and local sales, income, and property taxes (or $5,000 for married taxpayers filing separately).
  3. Home mortgage interest deduction: you may only deduct interest on a mortgage used to buy, build, or improve your home up to $750,000 ($375,000 for married taxpayers filing separately).
  4. Charitable donation deduction: in 2018, the percent limit for charitable cash donations increased to 60%. The IRS is keeping the limit at 60% for 2019.
  5. Casualty and theft loss deduction: unfortunately, this deduction will be repealed for personal casualty and theft loss, except if your loss can be recorded in a federal disaster area.
  6. Job expenses, miscellaneous deductions: these had been subject to 2% floor but have been repealed for 2019. Prior to TCJA, employees could deduct business expenses that weren’t reimbursable by their employer as 2% miscellaneous itemized deductions if:
    • they were incurred or paid in the tax year,
    • if it allowed the taxpayer to carry on in their trade, and
    • if the expenses were ordinary and necessary.

The job expenses and miscellaneous deductions which will no longer be allowed starting in 2019 include:

  • Tax prep fees, unless you are able to allocate them under Schedule C, E, F
  • Unreimbursed employee expenses, including: sales, travel, and entertainment expenses for outside salespeople, and entertainment industry expenses, including agent, attorney and publicist fees
  • Home office for employees, union dues, out-of-pocket expenses, and uniforms- including police and fire, construction workers
  • Continuing education expenses
  • Investment advisor fees or asset management fees, and
  • Attorney fees, among others

Tax Credit and Deduction 2019 Adjustments

There have been some popular changes that passed under the tax reform law that impact your taxes in 2019. Here are a few of the deductions and credits you may be able to take advantage of (in addition to the Child Tax Credit).

  1. Earned Income Tax Credit (EITC): maximum EITC amount is $6,557 for married taxpayers filing jointly with three or more qualifying children.
  2. Adoption Credit: allowable credit for the adoption of a child with special needs is $14,080. The maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $13,810.
  3. Student Loan Interest Deduction: maximum deduction for interest paid on student loans is $2,500 (no change from 2018).
  4. Lifetime Learning Credit: joint filers seeking to receive a Lifetime Learning Credit must have an adjusted gross income amount of $116,000, up from $114,000 for 2018.
  5. Medical Savings Accounts: if you have self-only coverage in an MSA, and meet certain annual deductible limits, you may be able to take a tax deduction on your return. Click through to see if you qualify for a medical savings account deduction.
  6. Foreign Earned Income Exclusion: in 2019, the exclusion increases to $105,900, up from $103,900.

Last but not least, the shared individual responsibility payment has been eliminated for 2018. This provision was part of the Affordable Care Act and required taxpayers and dependents to have qualifying health care coverage (or an exemption) – or, make an individual shared responsibility payment on your federal income tax return.

Remember: these changes apply to your tax return due in 2020, not in April 2019. If you’re need a qualified tax preparer to prepare your 2018 tax returns, or would like more information on 2019 updates, get in touch with our experts to see how we can help.

 

New Updates for 2019 Taxes – Part 1

As 2018 winds down, it’s time to look ahead to the new year and the changes coming to your 2019 federal tax rates. The IRS recently announced changes to more than 60 tax provisions, including tax rate schedules, cost-of-living adjustments, and more. Many of the changes announced for 2019 align with the Tax Cuts and Jobs Act passed in 2017. These new policy regulations take effect starting January 1, 2019 – meaning they’ll impact the tax return you prepare for April 2020. Nevertheless, plan ahead and avoid surprises when tracking your finances.

Here are the key changes the IRS is making to your taxes in 2019.

New 2019 Taxable Income Brackets and Tax Rates

Just as in 2018, there are seven tax rates the IRS has bracketed out for 2019. These tax rates are set at 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The taxable income ranges have changed slightly from 2018. Here’s how these rates break out by filing status:

Source: https://taxfoundation.org/2019-tax-brackets/

In comparison to 2018, the income brackets have shifted upward slightly. For example, in 2018, incomes of 0 – $19,050 were taxed at 10%; now, the IRS includes incomes up to $19,400.

Don’t forget: this is a progressive income tax, meaning when calculating your potential tax savings, don’t use a flat rate. Many people fall into the trap of estimating their tax using their top rate and then comparing that amount to the tax calculated using the proposed rates.

Here’s an example. Pretend you’re an individual payer in the 22% taxable income bracket for 2019. That doesn’t mean you pay 22% tax on all income. If you’re single, you pay 10% on the first $9,700. Then you pay 12% on the next $29,775, etc. You only pay 22% on the income over $78,950. That’s what makes it progressive income tax.

Remember: these changes apply to your tax return due in 2020, not in April 2019. If you need a qualified tax preparer to prepare your 2018 tax returns or would like more information on 2019 updates, get in touch with our experts to see how we can help.

Continue to part 2 >>

Tax Law Update: What’s New in Tax Reform

What’s New in Tax Reform?

In our previous look at how the new tax plan will affect your income taxes in 2018, we examined the Senate and House plans. The tax reform bill has undergone reconciliation and has now passed. Here’s what you can look forward to in the new package, broken down for single and joint filers. Continue reading

How Will the New Tax Plan Affect You?

Not long ago, we wrote an overview of tax reforms, and legislation is now underway in Congress to implement some of these streamlined tax proposals. In just six months, plans have already shifted. The passage of a new tax reform law would usher in even more sweeping changes for corporate and personal finances.

Earlier this month, the House of Representatives voted to pass a version of the Tax Cuts and Jobs Act. Later the same day, the Senate Finance Committee unveiled and passed its own version. Although the final product has yet to be written by the reconciliation committee, now is the time to prepare for tax reform. During times of great economic change, the stability a skilled accountant offers can help you with smart tax planning, allowing you to control more of your own wealth and adjust to financial shifts.

Here’s what each bill looks like in its current state, the portions of it that are likely to be included in the final version, and how it could affect your financial goals. Continue reading

5 Accounting Mistakes You May Be Making

Some of the earliest writing archaeologists have discovered relates to accounting. Clearly, the concept of tracking goods and services exchanged has been with us for some time. That doesn’t stop businesses from repeating mistakes that could cost them – mistakes you could be making too. The good news is that seeing these pitfalls helps you avoid them, so here’s what you need to know about accounting for your organization whether you’re looking for a CPA firm to handle all your needs or just take care of routine bookkeeping.

 Relying on the Wrong Credentials

Accounting is a more varied field than some business owners realize, and not every accountant is qualified to take on every task. A bookkeeper or tax preparer may not be an accountant at all, yet for business owners seeking financial services, the distinction isn’t always clear. A CPA goes through years of education, rigorous testing, and ongoing coursework to maintain the title. They also have experience with handling an organization’s most sensitive data, including personnel files and financial information.

Accountants certified in multiple states are important assets for businesses that have additional branches. Your New York accountant who’s also a CPA in Florida, for example, can manage your financial records seamlessly. There may also be times you need specific accounting services such as forensic accounting or audits, and a CPA firm with a broader range of experience can provide them.

 Not Knowing What You Need

You may want someone who can handle daily and routine tasks such as preparing accounts payable, accounts receivable, and payroll. You might need a full-service accountant who also creates budgets and builds financial statements. You could be preparing for a sale or acquisition, a process that requires sharp accounting skills. For many businesses, not knowing what they want from their accountant becomes a stumbling block.

No matter what degree of service you need now, keep future growth in mind. Make a list of what you need now and what you may need soon. Consider the size and frequency of your financial transactions when deciding how much you need from your accountant too.

Working with a CPA Firm That Doesn’t Fit You

Accounting is about more than crunching numbers. You also need to feel comfortable with your CPA. The accountants you hire must understand your business thoroughly and be able to communicate their information to you in clear, concise terms. Look for a firm that stays in close contact with you and is readily accessible when you reach out to it. Your finances deserve individual attention, so pay attention if you feel you’re being overlooked or treated as part of a crowd.

Establishing a personal rapport also matters.

Your CPA will see every detail of your company’s finances, and financial records are often closely tied to other sensitive information. A trustworthy accountant is a must for any business.

 Lacking Financial Analysis

All the knowledge in your accountant’s head doesn’t do your firm much good if it isn’t available to you. Your CPA service should provide you with regular reviews of your organization’s financial health. A dashboard or daily report that lets you take the pulse of your company’s finances every day is essential to making informed business decisions. Look for a firm that gives you quality analytics, with figures broken down into comprehensive categories so you can watch growth as it happens and spot problems before they affect your bottom line.

Going It Alone

For start-ups and small businesses, handing the books to someone who took a few accounting courses in college is common practice, but it can backfire. Accountants have more than their education to support their skill; they also have experience. An in-house bookkeeper may handle corporate taxes once a quarter, but an accountant at a third-party firm deals with tax preparation every day. Accounting is important enough to entrust to professionals.

How Should LLCs Handle Corporate Tax on Retained Earnings?

Reinvesting in your business is essential to helping it grow, but shareholders also expect a return on their investment in the organization. How businesses distribute profits among shareholders and assume tax responsibilities on retained earnings will depend on a number of factors, including the amount of retained earnings and your organization’s expenses. Because these factors can change over time, it’s best to work with a New York accountant who has experience with state and federal tax law.

LLCs as Pass-Through Entities

LLC Corporate TaxesAn LLC, or limited liability company, is a hybrid entity that has characteristics of a corporation and a partnership. According to the IRS, it can be treated as either kind of business for tax purposes, depending on whether you opt to file a Form 8832 and affirm your organization’s status as a corporation. Otherwise, an LLC is a pass-through entity, which means that profits and tax liability “passes through” the business to be distributed among owners and shareholders.

Sometimes it’s preferable to allow tax liability to pass through to individual returns; at other times, you may want to file corporate taxes. Where this distinction matters most is with retained earnings.

Retained Earnings and Taxation

Retained earnings are what you have left for reinvestment in the company after subtracting dividends from the LLC’s total net income. This retained surplus that isn’t distributed to partners and shareholders is subject to taxation. If your organization’s retained earnings reach a $250,000 threshold, any amount beyond this becomes subject to a supplemental corporation tax at 39.6 percent. For example, if your LLC ends the fiscal year with $400,000 in retained earnings, $150,000 of that amount is taxed at the supplemental corporate rate for a tax liability of $59,400.

Under normal circumstances, then, it is often best to limit retained earnings and let revenue pass through unless you are able to justify a significant reinvestment of profits. The IRS makes exceptions on supplemental tax liability when businesses demonstrate how they plan to use these retained earnings.

Justification of Retained Earnings

A business that plans to expand, upgrade equipment, or invest in restocking inventory can offer a business justification for using retained earnings and may be able to waive additional taxes. You will need to document how you plan to allocate retained earnings. Your CPA can offer guidance on how to gather and prepare the necessary proof, which might include meeting minutes, quotes for services, and other evidence that your LLC is preparing for growth.

Form 8832 and Corporate Taxes

Another way to manage retained earnings is to file a Form 8832 and affirm your choice to have corporate taxes assessed on your LLC. For companies that intend to invest retained earnings into the organization over a few years, this may be a fiscally sound choice, but because you must wait five years before returning to a pass-through taxation structure, you will want to go over all your options with your accountant.

 

When Should You Outsource?

Whether they own a small business, a mid-sized regional organization, or a multi-national corporation, business owners have a host of options when it comes to accounting services. For some companies, handling routine accounting in-house and relying on an outside accounting firm for attestation and assurance makes sense. For others, turning over all accounting duties, including payroll and tax preparation, to a CPA is the best option. Continue reading

How Will Tax Reform Affect You?

2017 Tax Reform Proposal

President Trump’s recently released one-page tax reform proposal, linked here from the Journal of Accountancy, suggests sweeping changes to current tax codes intended to “grow the economy and create millions of jobs.” From dramatic simplifications of income tax brackets to a possible repeal of the estate tax, these shifts could have major implications for you and your business.

While an overview of proposed changes can help clarify how proposed reforms may affect your personal and corporate tax responsibilities, it’s best to speak with an experienced accountant who is familiar with your specific goals. Working with a Long Island CPA with a thorough understanding of federal, state, and local tax law is vital to preserving your wealth and building capital for new growth. Continue reading

Is Your Online Business Ready for Tax Season?

NY Tax Season

Thanks to technology, telecommuting, and the internet, office life has been transformed. Remote staffers work from anywhere in the world, your workspace has expanded into the cloud, and contractors contribute their unique expertise to your organization. While many of these changes make business easier to conduct than ever, they present unique challenges during tax season. A New York CPA with thorough knowledge of state and federal law can help you manage the new complexity of your organization’s online activity. Continue reading

Should You Choose a Roth IRA or a Traditional IRA?

Whether retirement is decades away or a few years off, the changes you make to your investment plans can have a significant impact on your post-retirement lifestyle. One big question many investors have is about Roth IRAs and traditional IRAs. Specific state and local regulations can also affect your saving strategy, so choose a New York accountant with a thorough understanding of how state laws intersect with your investment strategy. It’s best to seek the input of a qualified financial adviser before making investment decisions, but this quick guide will give you useful suggestions to discuss with your CPA. Continue reading