Will You Owe Taxes This Year?

Remember that two-year comparison included in your tax package this year? The one that showed your 2017 tax situation in comparison to the impact that the Tax Cuts and Jobs Act would have if everything stayed 100% the same. Most of you saw a positive outcome - despite the loss of some itemized deductions and personal exemptions. This is due to the change in the tax brackets, the increase in the child tax credit, the pending qualified business deduction and other factors. But as I mentioned, these positive outcomes were contingent on your estimated payments and/or withholding remaining the same.

Most of the time, if you were required to pay estimated payments, I assessed these payments to remain the same, or even increased them, to make up for other areas of lost deductions or credits. But the withholding is an issue. At the beginning of the year, the withholding tables were adjusted for the new tax laws, which means that your employer may have not been withholding enough tax based on your overall tax situation.

The U.S. tax system is a pay-as-you-go process. Taxes must be paid as income is earned or received during the year. With the new tax laws, the way tax is calculated for most taxpayers has changed. In addition, any change in your tax situation for the year (e.g., selling stock, changing marital status, working multiple jobs, etc.) can affect how much tax needs to be paid during the year. 

If you receive salaries, wages, pensions, unemployment compensation and any taxable Social Security, you can adjust the amount of tax withheld. Some income is not subject to withholding, including income from self-employment or rental activities. Therefore, some of you may need to make estimated tax payments unless you expect to owe less than $1,000 when you file or if you had no tax liability in the prior year (subject to certain conditions). 

Making an adjustment to withholding or making an estimated tax payment may help you avoid an unexpected year-end tax bill and a potential penalty. I am happy to run some numbers from now to the middle of January to make sure you are on track, or to advise you to send a payment in for the fourth quarter. Bottom line: Let’s try to avoid a big (and costly) surprise!

Post-2018 Alimony Agreements

Irrelevant for tax purposes. There is no change in the federal income tax treatment of alimony and separate maintenance payments that are required by divorce agreements executed before 2019. As such, alimony payers take a deduction while alimony recipients include the payment in income post-2018. 

However, for any divorce or separation agreements executed in 2019 and later years, alimony will no longer be reported on the tax return. This is also the case for prior agreements later modified to state that the new rules apply.

The Party Is Over...

Deduction for entertainment expenses no longer allowed. Starting in 2018, deductions for activities that are generally considered to be entertainment, amusement or recreation expenses, or with respect to a facility used in connection with such activities, are disallowed. Forget front row concert tickets or box seats at the MLB game on another company’s dime.

Before the new law, if you took a potential client golfing to discuss a future relationship, this cost was 50% deductible as entertainment associated with the active conduct of a trade or business, but only if adequate records were kept. Now there is no such deduction. The government likes this provision because it eliminates the subjective determination of whether such expenses are sufficiently business-related.

However, if you reward an employee with an expense-paid vacation, you can still deduct this type of entertainment since it is treated as compensation to the employee. If you gave the same type of reward to a contractor, you would have to issue a 1099-Misc in order to gain a deduction.

Celebrations like holiday parties and annual picnics are still fully deductible because they are for the primary benefit of employees. Yet membership dues for any club organized for business, pleasure, recreation or other social purpose are not deductible and never have been allowed.

Providing Health Insurance Benefits - Part Three

HRAs offer tax-favored benefits. If you’re looking for a way to reduce employee benefit costs, you may wish to consider using a health reimbursement arrangement (HRA). An HRA is an employer-funded health benefit account for individual employees that may be used to pay their medical expenses and health insurance premiums. This type of plan is generally more economical and more flexible. Plus, it has more features than a traditional health benefit plan and, at the same time, provides favorable treatment for federal income tax purposes.

Under an HRA, the contributions you make and the amounts received by your employees are generally excluded from the employee’s income. In addition, any excess amounts at the end of the year can be carried over to future years without being lost.

In order to receive favorable tax treatment, an HRA must meet the following requirements:

•    The plan is paid for only by you and is not provided by an employee salary reduction election or under an employee benefit cafeteria plan;

•    The plan reimburses the covered person for medical care expenses of the person, the person’s spouse and the person’s dependents; and

•    The plan reimburses a covered person up to a maximum dollar amount for any period of coverage, and any unused portion of the maximum dollar amount at the end of that period is carried forward to increase the maximum reimbursement amount in subsequent coverage periods.

Self-Employed? To be considered for the plan, self-employed members must have one or less employee(s), be single entity owners of S or C-corps (with no unrelated, benefit eligible employees), or sole proprietors, single member LLCs, or partnerships.

In addition, the owner must have an employable interest (such as an employee), establish a compensation package, pay a W-2 wage monthly, reimburse medical expenses, and submit benefit expenses annually.

In order to make the self-employed HRA viable, the business owner would hire a family member (such as a spouse) and pay them a nominal monthly wage. The employed family member would pay all the family’s medical expenses from their personal account. Then, the business owner would reimburse 100% of the family’s medical expenses (including premiums and all medical expenses), along with a monthly W-2 wage, every month. At the end of each year, the employed family member would tally yearly expenses for taxes.

Providing Health Insurance Benefits - Part Two

A simple error may deny your deduction. As a business owner, you most likely provide health benefits for you and your employees. Even if you do not have employees, having a health insurance policy in your business may save you money.

As a self-employed taxpayer, you are allowed to deduct from your adjusted gross income, 100% of the cost of the health insurance policy. While this may not save in self-employment tax, the deduction will reduce your overall tax liability. You can title the policy in your name or in the name of your business.

If your business is a C corporation, the policy must be established by the business and in the business name. C corporations are allowed to deduct the cost of health insurance provided to the shareholders while remaining tax-free to the shareholder.

If your business is an S corporation, the policy must be established by the business, but not necessarily in the business name. A plan providing medical care coverage for the 2% shareholder in an S corporation is established by the S corporation if: (1) the S corporation makes the premium payments for the policy covering the shareholder (including a spouse or dependents, if applicable); or (2) the 2% shareholder makes the pre­mium payments and furnishes proof of payment to the S corporation, and then the S corporation reimburses the shareholder for the premium payments in the current taxable year. If the insurance premiums are not paid or reimbursed by the S corporation and included in the shareholder’s income, a plan providing medical care coverage for the shareholder is not established by the S corporation and the shareholder is not allowed the deduction. Provided these two conditions are met, and the payment for the premiums is included as wages to the shareholder, the shareholder is allowed a deduction on Form 1040, line 29, against income.