IRS To Waive Some Estimated Tax Penalties

With the confusion over whether or not your employer was withholding enough tax on your behalf, or if your 2018 estimated payments should be based on your 2017 tax liability, or reflective of the new tax legislation, the IRS has decided to give some of us a break.

So long as you paid in 85% of your total tax liability for 2018, your penalty will be waived. For more information, please see IRS Notice 2019-11.

The New Rules Surrounding Casualty Losses

Beginning in 2018 and continuing through 2025, casualty losses are no longer allowed as an itemized deduction for many taxpayers. If you suffer a personal loss to property as the result of a storm, fire, flood, theft or some other unforeseen incident, your loss is not deductible unless the loss occurred in a federally declared disaster area announced officially by the President.

Losses incurred in federally declared disaster areas are still allowed as an itemized deduction and are subject to the $100 per casualty and 10% of adjusted gross income limitations. However, if you have personal casualty gains, your casualty losses can still be offset against those gains, even if the losses aren’t incurred in a federally declared disaster. Also, any gain resulting from a casualty can be deferred into replacement property.

More information can be found through the IRS website here.

What Is The Best Business Entity?

The idea of starting a business is scary enough; then comes the difficult decision of what type of business entity to establish. You’ll need to consider your financial needs, risk and ability to grow. Choosing correctly at the start is critical because it can be difficult to change your legal structure after you have registered your business.

A sole proprietorship is quick and inexpensive to form. You have complete control over your business. You are entitled to all profits from the business. Nonetheless, you are also liable for all business debts and have an unlimited personal liability, which may be undesirable. This type of entity may also make it difficult to raise capital if needed.

A partnership has several options: (1) a general partnership with overall equal division of profits, liability and management or (2) a limited partnership with one partner controlling the operations and other partners with limited roles. Partners must file taxes twice, once for the partnership and once for the individual. Also, if disputes arise between partners, there could be some drama. Similarly, with this type of business, you could be held liable for actions made by your business partner.

A multi-member limited liability company (LLC) is a hybrid between a partnership and a corporation, and it can be taxed as either. This entity provides options for the actual business structure with the limited liability of a corporation and the operational flexibility and tax structure of a partnership.

If liability and outside funding are your main con­cerns, then a C corporation might be your best fit. A C corp­oration provides limited liability. Other pros of a C corporation are the ability to generate capital. Plus, the current tax rate is capped at 21%. Conversely, C corporations are subject to double taxation—once when the corporation makes a profit and again when it pays dividends to shareholders. There’s also the accumulated earnings tax, a tax imposed by the federal government on companies with retained earnings deemed to be unreasonable and in excess of what is considered ordinary. Essentially, this tax encourages companies to issue dividends, rather than retain the earnings.

An S corporation is also a good option for limited liability; yet, an S corporation has stricter operational processes including shareholder compensation requirements. On a positive note, this type of corporation eliminates any double taxation since the income is passed through to the shareholders to report on their personal returns.

The best option for you will depend on your personal and business goals and how they align with what each type of entity has to offer. I can help you with this decision - I would rather have you consult with me first before jumping into an entity that isn’t right for you, whether tax-wise or administrative-wise.

Home Equity Loan Interest

New Law Eliminates Deduction For many of you, finding the money to pay for a new car, boat or dream vacation was as easy as tapping the equity in your home. Prior to 2018, you could use the equity in your home to make large purchases, pay expenses or consolidate debt and deduct the interest on up to $100,000 of debt.

After 2017 and before 2026, this tax savings strategy is gone. While you can still use the equity in your home to borrow needed funds, the interest is no longer deductible unless you use the money to buy, construct or improve your home. The elimination of this deduction applies regardless of when the home equity debt was incurred.

2018 Year-End Considerations

Looking for last minute tax savings? Here’s some ideas to consider by December 31st, 2018:

· Boost pretax contributions to your 401(k) or similar retirement plan to reduce your income

· Ask if a year-end bonus can be paid out next year instead of this year

· If you are an independent contractor, reduce your income by making year-end purchases of tax-deductible expenses such as equipment and supplies

· Also, hold off on collecting on unpaid invoices until next year

· Sell off investment positions with unrealized losses to reduce capital gains

· Hold off selling profitable positions until next year

· Bunch your charitable deductions, meaning, if you are still itemizing, consider making your contributions this year rather than next year. It might make more sense to itemize this year rather than next year because these standard deductions are indexed for inflation and can be expected to increase slightly.

· Pay your January mortgage payment in December

· Make an estimated payment to avoid penalty. The rule is that you pay 100-110% of your tax liability for the current year, based on the previous year liability. If you find you are coming up short, you can make a fourth quarter tax payment on January 15th to help offset any penalties.

· Going into 2019, you will need to change your withholding by filling out a new W4 and submitting it to your payroll department. We can discuss this more at tax time.

As a refresher, here are some of the changes to itemized deductions for 2018 and going forward under the Tax Cuts and Jobs Act of 2017:

2018 itemized deductions There are numerous changes to itemized deductions to be aware of under the new law. Note that states vary widely in how they treat itemized deductions for individual taxpayers under state income tax laws.

Pease Limitation With the passing of the Tax Cuts and Jobs Act, the limitation on itemized deductions is temporarily repealed for tax years beginning on January 1, 2018. The repeal does not apply to taxable years beginning after December 31, 2025.

Mortgage interest For any acquisition indebtedness incurred after December 14, 2017, interest would only be deductible for loan amounts not exceeding $750,000 (for married filing jointly). As under current law, the acquisition debt limit applies in aggregate on up to two personal residences. Existing mortgages as of December 14, 2017 continue to be subject to the current $1,000,000 limitation.

Home equity loans Interest will no longer be deductible on a home equity loan after 2017 unless the proceeds are used to substantially improve a home, and therefore meet the definition of acquisition debt.

State and local income, sales, and property taxes The law permits individual taxpayers to deduct up to $10,000 for any combination of state and local income taxes, property taxes and sales taxes. Taxes in excess of $10,000 are not allowed as a deduction on schedule A.

Miscellaneous itemized deductions Deductions for miscellaneous itemized deductions subject to the two percent floor (including tax preparation fees, investment expenses and unreimbursed business expenses) are repealed.