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28 Oct 2020
News, Tax Law Pearson & Co, PC 0 comment

WHAT’S IN A NAME?

WHAT’S IN A NAME?
Lots … When It Comes to Working from Home Tax Breaks

WHAT’S IN A NAME?

Working from home (WFH) now has become a dominant reality for many American workers. You may be one of the approximately 45 million persons working from home full-time … or know a relative, friend or professional colleague who are among the 42 percent of the U.S. labor force doing so.

The WFH paradigm was triggered in response to the months-long health and economic challenges of COVID-19. Many experts, perhaps even most, agree that the WFH economy will prevail long after the coronavirus pandemic that spawned it is conquered.

Of course, this new phenomenon will produce both challenges and positive payoffs for WFH Americans. Work-life balance, finances and family issues will all be affected either positively or less-so in varying degrees.

In this article, we’ll focus on a frequent tax-related question asked by those working from home.

“What tax-breaks do I get for use of home floor space and added work-related expenses?”

The answer differs for those who the IRS deems to be an employee vs. an independent contractor. The former will not enjoy tax relief … while self-employed individuals may deduct certain business-related expenses. What follows is a rundown on how each worker classification may fare.

Who Does the IRS Consider to Be an Employee?

The simple answer is … if you receive a W-2 form for your work, you are an employee. Tax law revisions in 2018 prevents employees from deducting job-related expenses that are not reimbursed by their employer. And that is the case even when mandated by your employer to do so under current efforts to fight the spread of coronavirus.

When You Are Self-Employed/Independent Contractor

Self-employed workers, often referred to as independent contractors, may deduct allowable business-related costs. To do so requires that detailed records are maintained and itemized on your tax return.

You may qualify for one or more of the 10 deductions summarized below.

Note: Be sure to give us a call regarding how any of these or others may affect your unique circumstances.

Home Office

Your guiding principle to determine deductions for your home office is based on the percentage of space in your home exclusively devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home exclusively devoted to your business activities.

Note: Be precise. For example, if you only use one corner of your dining room table for business use … the total dining room floor space will not qualify.

You may then deduct the qualifying percentage for each of the following:

  • Rent or interest on your home mortgage
  • Utilities
  • Homeowners insurance
  • Property taxes

Additionally, the following will be considered as eligible deductions:

  • Office Supplies

Essential items to your business such as printer paper and ink cartridges, desk and filing cabinet likely will qualify as deductible.

  •  Equipment

Computer, printers and equipment uniquely essential for your business plus repairs are deductible. Likewise, the cost of a smartphone you use solely for business and related expenses qualify as write-offs.

  • Software

When used strictly for your business, any software you purchase or pay for monthly qualifies.

  • Travel Costs

Travel expenses you incur to visit a client or attend a conference are deductible. That may include mileage, airfare, lodging, parking and other travel-related costs paid by you.

  • Meals and Entertainment

Make sure that your costs are all directly related to business. Fifty percent of qualified expenses may then be deductible.

  • Training and Education

Professional education expenses necessary to run or grow your business will qualify.

  •  Marketing and Advertising

Expenses to attend trade-shows, printed promotional items, website expenses, business cards and other marketing and advertising costs are deductible.

  •  Professional Services

You will likely incur expenses for outside help or advice. Your CPA, attorney, IT contractor and others will all qualify as fee-for-service deductions

  • Health Insurance

If you meet the following criteria, you may deduct 100% of your health insurance premiums for yourself, your spouse and dependents:

  1. Your business is claiming a profit for the tax year, and
  2. you (and your spouse and dependents) were not eligible for coverage from an employer or under your spouse’s plan during the months you’re claiming.

.

Again, the above 10 items are meant only as a summary of deductions you may claim as a self-employed individual or independent contractor. There may be others that qualify, so it’s wise to keep track of expenses such as bank charges, shipping costs, post office box fees and reasonable costs for holiday gifts for your best clients.

Have Immediate Questions or Concerns?

Pearson & Co stand ready to help as needed. A phone call or email is all it takes.
We’ll respond promptly.

28 Oct 2020
Text, word Payroll is written on a folder lying on documents on an office desk with a laptop and a calculator. Business concept.
Business, IRS, News, Payroll Tax, Tax Law Pearson & Co, PC 0 comment

PAYROLL TAX DEFERRAL

PAYROLL TAX DEFERRAL
Boon for Employees? Burden for Employers?

payroll taxEarly last August, President Trump directed Treasury Secretary Steven Mnuchin to permit employers to temporarily suspend the collection of employees’ shares of Social Security payroll taxes … equal to 6.2 percent of the compensation of eligible employees. In response to the economic stress of COVID-19, the intent was to offer financial relief in the form of more take-home pay for employees for the period September 1, 2020 through December 31, 2020.

Eligible employees are those whose pretax wages or compensation during any biweekly pay period is less than $4,000. That means that an employee’s qualifying status could vary from one period to the next depending on earnings. Workers earning more than $104,000 annually are excluded from the payroll tax suspension.

During the four-month period, participating employers are to suspend withholding and not required to remit to the IRS the amount of Social Security payroll taxes that would have ordinarily been paid. Treasury Secretary Mnuchin has said he “can’t force” companies to participate, suggesting that the deferral would be voluntary, but that he hopes many companies will join in the effort.

It’s important to emphasize that this suspension of collecting and remitting Social Security payroll taxes is a payroll tax deferral … not tax forgiveness. President Trump’s order to delay the due date for payroll taxes for millions of workers includes the provision that the deferred taxes must be paid by April 30, 2021. That means eligible employees will enjoy fatter paychecks for the balance of this year … yet face the prospect of having to tighten their belts to comply with repayment in the first four months of next year.

In a nutshell, the tax is postponed for a specific period and then must be repaid.

The IRS follow-up guidance puts responsibility to pay the deferred taxes squarely on the backs of participating employers. Employers must collect and remit all the deferred payroll taxes between January 1 and April 30, 2021. This means withholding double the normal tax from employees’ pay checks during those four months … unless arrangements are made to collect the taxes due from the employee. Failure to do so results in interest and penalties that will accrue to the employer effective May 1, 2021.

Questions that immediately surface are: what if an employee refuses to agree to repayment … or leaves the company … or doesn’t earn enough to pay the back taxes? Without further clarification, it appears that the obligation to pay continues to be an employer obligation.

Employees of employers that choose to participate, may anticipate smaller paychecks next year when Social Security payroll taxes are withheld at twice the rate experienced before September 1, 2020. Alternatively, employees may be wise to set aside the extra funds received currently in a savings account to avoid high credit card debt or personal loans during the first four months of 2021.

Note 1: The President’s directive does not address Social Security tax deferral for self-employed individuals. Only employment-related taxes are included, not self-employment taxes.

Note 2: Unlike the voluntary provision for private employers, the Trump administration has refused to allow federal employees or members of the military to opt out. Additionally, employees remain liable for the deferred tax should they leave federal for civilian employment.

There are questions being raised by legislators, the American Institute of CPAs, U.S. Chamber of Commerce and others to clarify the benefits of this program to employers and employees. That said, as of this writing and in the absence of revisions by lawmakers, the above summary appears to be the facts.

If any of the foregoing seems unclear as to how it applies to your specific circumstances, please keep in mind that Pearson & Co. will help.
Give us a call or drop an email. We’ll respond immediately.
13 Aug 2020
Stimulus Package 2
Covid-19, News Pearson & Co, PC 0 comment

PANDEMIC STIMULUS PACKAGE 2

PANDEMIC STIMULUS PACKAGE 2
We Don’t Know What We Don’t Know!

stimulus

Nearly every American has been directly affected by the original $2.2- trillion stimulus package provided for earlier this year as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The financial relief terms and benefits expired and are awaiting further Congressional action.

CARES Act Financial Relief

Here’s a summary of the key provisions of the CARES Act that delivered significant economic assistance to many:

Individuals

  • One-time payment: of $1,200 per taxpayer plus $500 for each qualifying child
  • Unemployment Benefits: Unemployment insurance expanded if job loss is due to COVID-19. Once regular state benefits expire, eligible recipients may collect up to an additional 13 weeks of benefits plus an additional $600 per week which expired on July 31.
  • Evictions: Tenants in federally-backed housing granted 120 days of eviction relief to July 25, 2020.

    Note: This eviction moratorium does not relieve tenants the obligation to pay rent.

Businesses

  • The Paycheck Protection Program (“PPP”): Authorizes forgivable loans to small businesses to pay their employees during the COVID-19 crisis.

  Note: Provisions of the PPP were revised on June 5, 2020, by the Paycheck Protection Program Flexibility Act (PPPFA) in        response to complaints about the original bill. Click here for a review of the major provisions of the PPPFA.

  • Employee Retention Credit: Designed to encourage businesses to keep employees on their payroll.
  • Paid Sick Leave Credit & Family Leave Credit: Small and midsize employers can claim two new refundable payroll tax credits … paid sick leave credit and the paid family leave credit. Each fully reimburses eligible employers for the cost of providing COVID-19 related leave to their employees … and to make that repayment immediate.
  • Evictions: Financially strapped apartment landlords with government-backed mortgages can avoid foreclosure if they don’t evict tenants. The order applies to the Fannie Mae and Freddie Mac mortgage companies, which will extend mortgage forbearance to any landlord “negatively affected by the coronavirus national emergency,” according to the Federal Housing Finance Agency.

Congress Stalled … President Acts

Both Democrat and Republican lawmakers have proposed extensions to major provisions of the CARE Act. The Democrat proposal is embodied in a bill called HEROES. The Republican version is the HEALS Act.

However, after considerable negotiations, Congress adjourned having been unable to reach agreement on a bi-partisan compromise to reestablish much needed monetary aid to both individuals and businesses.

One day after coronavirus relief negotiations fell apart in Congress, President Donald Trump signed multiple executive actions intended to help people struggling financially due to the coronavirus pandemic. There are four major provisions of the executive order:

  •  Suspension of payroll taxes;
  •  Federal unemployment payments of $400 a week (a $200 cut from the previous $600)
  •  Deferrals on student loan payments through the end of the year
  •  Efforts to minimize evictions at federal housing.

Notably: The order does not include another round of stimulus payments.

Both Republicans and Democrats have indicated they are in favor of another round of stimulus payments. Since the decision on a second stimulus was excluded from Trump’s order, it would have to be stand-alone legislation passed by Congress or part of a broader-based compromise bill.

There will likely be delaying actions initiated to prevent President Trump’s executive orders to be implemented. That said, there is much discussion that the president’s executive action may motivate Democrat and Republican leaders to reconvene and agree on extensions to most, if not all, of the CARES Act provisions.

Summary

So, while we don’t know what we don’t know … this is an election year and taxpayers of every stripe are under significant financial stress. Our inclination is to anticipate Congressional resolution sooner rather than later.

If any of the foregoing seems unclear as to how it applies to your specific circumstances, please keep in mind that Pearson & Co. will help.
Give us a call or drop an email. We’ll respond immediately.
29 Jul 2020
News, Retirement Pearson & Co, PC 0 comment

SENIORS & RETIREES … ANOTHER FINANCIAL BREAK

SENIORS & RETIREES … ANOTHER FINANCIAL BREAK
No Need to Deplete Your Retirement Fund in 2020
And If You Have … At Your Option, Return Distributions to Your Account

Financial BreakEarlier this year, we reported that President Trump signed the SECURE Act into law raising the Required Minimum Distribution (RMD) age to 72 from 70½ . That proved to be a boon for taxpayers who can afford to delay IRA withdrawals. Delaying receipt of the RMD until age 72 significantly reduced taxable income for many taxpayers. Be sure to click here for the details

More Financial Relief for Seniors & Retirees

Now there is further financial relief triggered by The Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The Act provides for RMDs to be waived during 2020 for IRAs and retirement plans. That expansion of benefits includes beneficiaries with inherited accounts.

Participants in virtually all defined contribution retirement plans qualify, i.e.:

  • traditional IRAs
  • SEP IRAs
  • SIMPLE IRAs
  • 401(k) plans
  • 403(b) plans
  • 457(b) plans
  • profit sharing plans.

Note: The RMD suspension does not apply to qualified defined benefit plans.

Already Took Your RMD for 2020 … Good News!

At your option, you may return the distribution to your qualifying plan. Additionally, the suspension of the RMD rule for this year means your distribution is likely eligible for rollover to another IRA/qualified retirement plan as well as return to the original plan. The key is to repay the distribution to the distributing plan no later than Aug. 31, 2020, to avoid paying taxes on that distribution.

How Else May Seniors Benefit?

Why does skipping your RMD in 2020 matter? Like most people, you funded your IRAs and 401(k)s with tax-deferred dollars. Particularly if you are among the many Americans struggling in 2020 because of the pandemic, having more flexibility on distributions can be a financial bonus.

Additionally, both the equity and fixed income markets have been extremely volatile. You may win by giving your retirement portfolios another year to recover.

If any of the foregoing seems unclear as to how it applies to your specific circumstances, please keep in mind that Pearson & Co. will help.
Give us a call or drop an email. We’ll respond immediately.
15 Jun 2020
Paycheck Protection Flexibility Act
IRS, News, PPP, Tax Law Pearson & Co, PC 0 comment

THE MORE THINGS CHANGE … THE MORE THEY CONTINUE TO CHANGE

THE MORE THINGS CHANGE … THE MORE THEY CONTINUE TO CHANGE
Paycheck Protection Program … Favorable Changes for Borrowers

Paycheck Protection Flexibility ActThe Paycheck Protection Flexibility Act

Business owners and managers, you are well aware of the Paycheck Protection Program (PPP) and perhaps are participating as borrowers. Well there have been significant changes effective last week that liberalizes several key provisions of the program as originally approved by Congress.

By unanimous vote, the U.S. Senate passed the House version of the revised PPP legislation and submitted to President Trump who signed it into law. Combined, the changes result in significant flexibility to make it easier for more borrowers to reach full, or virtually full, loan forgiveness as contemplated in the PPP introduced last March and made effective April 3, 2020.

More on that in a bit as well as additional much needed relief for borrowers as they seek forgiveness of their loan amounts … but first a quick recap of the history of the PPP.

Employer Subsidies to Relieve Employee Finances

The Paycheck Protection Program (“PPP”):  Authorizes forgivable loans to small businesses to pay their employees during the COVID-19 crisis. The U.S. Small Business Administration (SBA) will guarantee loans of up to $10 million to eligible businesses. The loans will be forgiven if businesses maintain payroll for eight weeks at employees’ normal salary levels and use the loan proceeds for qualifying expenses.

Effective April 3, 2020 businesses can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Questions should be directed to your local lender to determine its participation in the program.

The Two Laws That Shadow New Legislation

That’s it in a nutshell as designed. Following that came the two laws that invariably are the follow-up scenarios to new laws … 1) Unintended Consequences and 2) Interpretation Confusion. A sampling:

  • Many big banks weren’t prepared to accept applications resulting in frustration on the part of business owners seeking financial relief. Notably, it was all too common for banks to only work with borrowers that were existing customers. That hamstrung numerous small businesses in their efforts to apply under the program … the specific group the PPP was designed to help.
  • The compliance measurement for loans to be forgiven was eight weeks from receipt of the payment from the feds. Employers unable to open due to C-19 quarantine, were frustrated by not having a “rolling” 8-week qualifying period beginning when they resumed opening their doors.
  • Lack of definition of taxation for loan amounts not qualifying as forgiven.
  • Inability to locate and reinstate former employees, plus many refusing to return to work due to enhanced unemployment benefits under the CARES Act.

The Answer … the Paycheck Protection Flexibility Act

Following is a summary of six of the new legislation’s main provisions designed to simplify initiating and qualifying for PPP loans:

  1. Current PPP borrowers enjoy a tripling of the 8-week period to 24 weeks. New PPP borrowers will have a 24-week covered period terminating no later than Dec. 31, 2020. That means added flexibility for borrowers to attain maximum loan forgiveness as they now have 24 weeks to spend the borrowed funds. Alternatively, they can choose to retain the original 8-week period.
  2. Borrowers can use the 24-week period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. The deadline has been extended to December 31 from the previous deadline of June 30.
  3. Borrowers must spend a minimum 60 percent of the loan on payroll, significantly reduced from 75 percent. The original PPP rules provided for a sliding scale to determine forgiveness eligibility. On Monday, June 8, SBA Administrator Jovita Carranza and Treasury Secretary Steven Mnuchin clarified that partial loan forgiveness will also be available under the 60% threshold. Specifically, if a borrower uses less than 60% of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60% of the loan forgiveness amount having been used for payroll costs.
  4. Many employers anticipate, or are experiencing, difficulty in fully restoring their workforce to pre-pandemic levels. Under the new regulations, loan forgiveness eligibility will not be forfeited if employers can demonstrate that some employees declined to return to their jobs or the pre-pandemic headcount is no longer a requirement for the business to return to normal operations.
  5. Current PPP loan borrowers may extend repayment for up to five years if the lender agrees to revised terms. The payback period for new borrowers who are not seeking, or who are ineligible for forgiveness, is extended from two years to a minimum of five. The interest rate remains at 1%.
  6. PPP loan borrowers were prohibited under the CARES Act to delay payment of their payroll taxes. The new bill reverses that rule and allows for deferred payment of payroll taxes through December 31, 2020.

Summary

The loans, part of the Coronavirus Aid, Relief, and Economic Security Act (CARES), are meant to help owners cover payroll costs, rent and utilities. The Paycheck Protection Flexibility Act further extends the intent of federal regulators to provide business owners with financial relief. While it’s “early-days” under the new rule, business owners have generally responded positively to the boost in flexibility to respond to loan requirements and maintain eligibility for loan forgiveness.

A federal spokesperson, Kevin Hasset, a senior economic advisor to the White House and former Chair of the Council of Economic Advisors, said “The No. 1 ask was extending the PPP for 24 weeks, and this legislation delivers on that.”

And the much-improved national unemployment statistics seem to indicate that the PPP is having a significant impact on the retention and rehiring of workers. Unexpectedly, but pleasantly welcomed, 2.5 million jobs were added to the economy last month. The unemployment rate dropped to 13.4 percent in May from 14.7 percent in April. As more of the economy reopens, more jobs will return. 

So, we’ll see how everything pans out under the new rules. Keep in mind the Two Laws That Shadow New Legislation … 1) Unintended Consequences and 2) Interpretation Confusion. That means there will be more in the way of guidance, clarity and regulatory revisions. Stay tuned and remember … you are not alone!

Give us a call and we’ll quickly help you determine how the new and changing rules affect your unique circumstances.

 

13 May 2020
IRS, News, Tax Credits, Tax Law Pearson & Co, PC 0 comment

SMALL & MIDSIZE BUSINESSES HIT BY COVID-19

SMALL & MIDSIZE BUSINESSES HIT BY COVID-19
3 New Tax Credits to Help Relieve Your Financial Burden

Pearson & Co. CPAs COVID-19 Tax Credits and SavingsBusiness owners … you may qualify for one or more of three new tax credits announced and launched by the Treasury Department and the Internal Revenue Service.

  • Employee Retention Credit
  • Paid Sick Leave Credit
  • Paid Family Leave Credit

Each of these credits are designed to encourage businesses to keep employees on the payroll plus fully reimburse eligible employers for the cost of providing COVID-19 related leave to their employees. Qualifying for one or more of these business tax credits will deliver a financial win/win for employers and workers alike.

We’ll get into the details of each of the credits in a moment.  As a preface, let’s start with a brief lesson on “What are tax credits?”  The best way to describe tax credits are in contrast to what most taxpayers understand … tax deductions. Tax deductions reduce the amount of your income subject to tax. Tax credits directly reduce the tax itself.

For example, assume your business spends $5,000 on equipment or some other item that results in a tax deduction. That will reduce your taxable income by $5,000. In a 25% tax bracket, you would save $1,250 in taxes.

Now compare that with a $5,000 tax credit. That amount is subtracted from the amount of tax owed as opposed to an offset to income … as is the case with a tax deduction. Result: Your tax bill is reduced by the full $5,000 tax credit.

Why These 3 Tax Credit Breaks for Businesses?

The intent is to help businesses and employees weather the C-19 pandemic. As with the many other federal tax credits, the above three are business entitlement subsidies for any company that meets the legal criteria. With that background, let’s look at an overview of the provisions of each.

Employee Retention Credit

Again, this credit is designed to encourage businesses to keep employees on their payroll. The tax credit equals 50 percent of up to $10,000 in wages paid by an eligible employer including a portion of employer provided health care costs.

Eligibility is contingent on the business, regardless of size, being financially impacted by COVID-19. The exceptions are state and local governments and small businesses that take small business loans.

To be eligible, employers must be in one of two categories which must qualify each calendar quarter

  1. The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.
  2. The employer’s gross receipts are below 50% of the comparable quarter in 2019. Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.

There are differences in wages that qualify for employers with 100 employees or less and those with more than 100 employees.

Eligible employers will be immediately reimbursed for the credit by reducing their required deposits of payroll taxes withheld from employees’ wages by the amount of the credit.

Note: Click here for a complete rundown at the IRS website.

Better yet, give us a call and we’ll quickly help you determine if you qualify and for how much.

Paid Sick Leave Credit & Family Leave Credit

Small and midsize employers can claim two new refundable payroll tax credits … paid sick leave credit and the paid family leave credit.  The design and intent are to immediately and fully reimburse eligible employers for the cost of providing COVID-19 related leave to their employees … and to make that repayment immediate.

The Paid Sick Leave Credit applies for employees unable to work (including telework) because of Coronavirus quarantine or self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis. Those employees are entitled to paid sick leave for up to 10 days (up to 80 hours) at the employee’s regular rate of pay up to $511 per day and $5,110 in total.

The Family Leave Credit reimburses employers for employees who are unable to work due to caring for someone with Coronavirus or caring for a child because the child’s school or place of care is closed, or the paid childcare provider is unavailable due to the Coronavirus. Those employees are entitled to paid sick leave for up to two weeks (up to 80 hours) at 2/3 the employee’s regular rate of pay or, up to $200 per day and $2,000 in total.

Employees are also entitled to paid family and medical leave equal to 2/3 of the employee’s regular pay, up to $200 per day and $10,000 in total. Up to 10 weeks of qualifying leave can be counted towards the family leave credit.

Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit.

Here’s a quick summary of these credits.

Employer Reimbursements:

  • 100% reimbursement for required paid leave.
  • Cost of health insurance is included in the credit.
  • Employers do not owe their share of social security and Medicare taxes on the paid leave.
  • Self-employed individuals receive an equivalent credit.

Quick & Easy Reimbursement:

  • Dollar-for-dollar tax offset against the employer’s payroll taxes
  • The IRS will send any refunds owed as quickly as possible.

Note: Click here for a complete rundown at the IRS website.

Better yet, give us a call and we’ll quickly help you determine if you qualify and for how much.

 

26 Mar 2020
2020 Required Minimum Distributions-Featured
IRS, News, Retirement, Tax Law Pearson & Co, PC 0 comment

SECURE ACT BUMPS RMD AGE TO 72!

SECURE ACT BUMPS RMD AGE TO 72!
A Boon for Taxpayers Who Can Afford to Delay IRA Withdrawals

2020 Required Minimum Distributions-FeaturedRequired Minimum Distributions (RMDs) are mandatory for Americans who are participants in Individual Retirement Accounts (IRAs) or participate in a 401K plan. In this article we’ll lump all under the heading of retirement accounts.

Since inception of the above plans, RMDs were the rule beginning at age 70½. With a stroke of his pen, President Trump signed the SECURE Act into law raising the RMD age to 72. This revision reflects that Americans are living and working longer. Notably, since the original law was enacted, life expectancy has increased more than 2 percent (1.6 years) for all Americans and more than 8 percent for those over age 65.

So, that means beginning January 1, 2020, money from the above retirement accounts must start flowing to you in specific, minimum amounts no later than April 1 following the year you reach age 72.  Other than Roth IRAs, RMD withdrawals apply to all other individual retirement accounts … IRA, Simple IRA or SEP IRA as well as 401K plans.

Note:  Roth IRAs are not subject to mandatory withdrawals until after the death of the owner.

Estimates are that only about 20 percent of retirees take no more than the minimum RMD. So, the change to the rules will have little effect on the remaining 80 percent who withdraw more than the IRS requires.

The RMD changes are a boon to most taxpayers who can afford to delay taking money out.

Here’s an example of the tax-saving difference the new RMD limit may deliver to a taxpayer who will be 70½ this year and having a retirement account valued at $100,000. Under the old rules, that person would be required to take a minimum IRA withdrawal of $3,650 in tax year 2020. In contrast, under the SECURE Act, the RMD will be $3,906 at age 72.

Delaying receipt of the RMD until age 72 reduces the taxpayer’s taxable income by $7,300.

The distribution amount will change from year to year based on accepted IRS tables that model anticipated life expectancy. Since life expectancy estimates diminish with age, annual RMD will vary as well. The exact distribution amount changes from year to year. It is calculated by dividing an account’s year-end value by the distribution period determined by the IRS.

The table shown below is the Uniform Lifetime Table, the most commonly used of three life-expectancy charts that help retirement account holders figure mandatory distributions. The other tables are for beneficiaries of retirement funds and account holders who have much younger spouses.

So, in keeping with the above calculations, assume our retiree is age 72 with a retirement account valued at $100,000. To calculate the year’s RMD amount, look at the age of the retiree on Dec. 31 (72) and note the corresponding distribution period (25.6). Divide the value of the retirement account by the distribution period to determine the RMD for that tax year … $100,000 divided by 25.6 = $3,906.

Note: Make sure you do this for all traditional IRAs or 401 K accounts you have in your name. Once you add up all of the RMDs for each of your accounts, you can withdraw that total amount from one or more of your retirement accounts. You don’t have to take your RMD from each account as long as the total you withdraw satisfies your RMD responsibility. Consider withdrawing from smaller balance accounts and close them out to simplify and consolidate your retirement accounts.

Why is a Minimum Distribution Required?

The good news is that you enjoyed years of tax deductions and (hopefully) tax deferred growth in your retirement account. So, it’s your money … why can’t you decide how much and when to take it out … or just leave it sit? The answer is the tax-man will get his due.

You paid no taxes on your deductible retirement plan contributions. And you paid no taxes on any incremental growth on your investments during the years accumulating your nest egg. Therefore, the IRS wants its just due when you withdraw funds in your retirement. That said, chances are your post-retirement tax bracket is lower than during your prime earning years, so you’ll likely keep more money than if you had not initiated your retirement account.

Similarly, if you were permitted to leave all your money in your retirement account, it would eventually become eligible to be passed on as inheritance and not trigger a taxable event. Your RMD compels you to take out at least a minimum amount which is added to your gross income and potentially subject to tax.

3 Frequently Asked Questions

There are three questions that are commonly asked and may be on your mind as well. It’s likely you will have others that we’d like to help you with … just give us a call or drop an email … we’ll respond promptly.

  1. Do you need to take your entire RMD all at one time?
    No. Frequency of withdrawals is not an issue. The important thing is that, in the aggregate, all your withdrawals add up to your RMD in the year required. 
  2. Should you appoint a named beneficiary for each of your retirement accounts?
    Yes. By so doing you will avoid your account balance(s) being included in your estate in the event of your death. 
  3. Are there consequences if I don’t withdraw my RMD as required?
    Yes. You may be subject to a 50 percent excise tax on the amount not distributed. 

Other Considerations

The foregoing is not meant as a comprehensive recount of the RMD requirements. There are other considerations that may apply in your specific circumstances. Some issues may include:

  • Inherited retirement accounts and RMD after account owner dies
  • RMD based on Joint Life & Last Survivor Expectancy Table if your spouse is more than 10 years younger than you and is sole beneficiary

If any of the foregoing seems unclear as to how it applies to your specific circumstances, please keep in mind that Pearson & Co. will help. Give us a call or drop an email. We’ll respond immediately.

27 Feb 2020
Employment, IRS, News, Tax Form Guidance, Tax Law Pearson & Co, PC 0 comment

NEW W-4 FORM IN THE NEW YEAR

YOUR NEW W-4 FORM IN THE NEW YEAR
Important to Pay Attention Early in 2020 to Avoid Surprises

You may have been among taxpayers who had an unexpected and unwelcomed experience last tax season … owing the feds rather than enjoying a refund. What happened? Well the tax code overhaul in 2017 resulted in positive tax savings for many if not most Americans. To complement these revisions to tax law, the IRS reduced the amount of tax withheld from wages to dovetail withholding with the provisions of the new law.

What followed was a demonstration of unintended consequences and many people didn’t have enough taxes withheld from their paychecks in 2018 to cover the taxes they owed … unintended consequences and unpleasant surprises.

As the remedy to avoid a repeat performance, the IRS overhauled the calculation of how much federal income tax an employer must withhold from an employee’s paycheck in 2020. The document for you to be concerned about is a revised Form W-4.

Yes, it’s different from the old form, so it’s important for you to review your entries on the new form to ensure accuracy in the amount of your withholdings. Your payoffs: 1) Avoid owing money at tax time along with a potential penalty. 2) Be sure you are not withholding too much and missing out on the use of that money all year … said another way, giving the IRS an interest-free loan!

While there is no requirement for you to file a new W-4 other than the practical reasons offered above, unless you start a new job after 2019. That will trigger your need to complete a new W-4 form. You’ll need to put together a fair amount of information which may require guidance from your tax preparer. So, it’s likely that you’ll choose to take the new form home and fill it out there rather than doing so on your first day at work.

If Your Taxes are Simple … So Is the New Form

Simple means you only have one job … and you’re not filing a joint return with a working spouse, no dependents, taking the standard deduction, not claiming tax credits and don’t receive income that is not employment related. If that’s your status, just provide your name, address, Social Security number and filing status followed by your signature and date.

Taxes Not So Simple

The new form provides entries for all income in your household. That means for each job you may have and your spouse’s income if you file jointly. You’ll have to assemble information about your spouse’s income, your dependents, tax credits, and the deductions you expect to claim. That information may trigger a call to your tax preparer to know your total deductions from last year, qualification for the child tax credit, non-wage income in 2019 and other tax-related items.

Note: If you choose not to disclose income from a second job that will be visible to your boss or to share your spouse’s income, you can use the IRS Tax Withholding Estimator to determine how much your household should have withheld and enter that on your W-4.

The Estimator doesn’t require you to provide sensitive information such as your name, Social Security number, address or bank account numbers. Additionally, the IRS doesn’t save or record the information you enter.

Be prepared with your most recent income tax return at hand, your and your spouse’s most recent pay stub plus other sources of income, e.g. invoices, statements and 1099 forms.

Sound Complex?

You are not alone … as with most tax-related things it can be confusing and time-consuming. There are resources that may help you. You could visit the IRS website and if you choose to dig deeper your might seek answers to frequently asked questions that others have posed. You may also receive guidance from your human resources department.

Better yet, why not give us a call and we’ll get it done for you.

27 Feb 2020
Employment, IRS, News, Tax Form Guidance, Tax Law Pearson & Co, PC 0 comment

EMPLOYERS! HEADS-UP ON NEW I-9

EMPLOYERS! HEADS-UP ON NEW FORM I-9
MAY 1, 2020 DEADLINE

You’re familiar with Form I-9 to verify the identity and employment authorization of individuals hired for employment in the United States. Through April 30, employers can choose to use the previous edition dated 07/17/2017 or the new edition. The new edition is now available and becomes mandatory beginning May 1, 2020.

All U.S. employers must properly complete Form I-9 for every individual they hire for employment in the United States …  that means citizens and noncitizens alike. Both employees and employers (or authorized representatives of the employer) must complete the form.

Employers must retain the completed forms for a designated period and make them available for inspection when called to do so.

For more detailed information visit the U.S. Citizenship & Immigration Services website, visit I-9 Central or join a free Form I-9 webinar.

As ever, Pearson & Co. stands ready to help!
Give us a call or an email. We’ll respond promptly.

31 Oct 2019
IRS, News, Tax Form Guidance, Tax Law Pearson & Co, PC 0 comment

THE EVER-EVOLVING FORM 1040

THE EVER-EVOLVING FORM 1040
Hopes for a Postcard to File Your Taxes … Dashed Once Again!

Post Card Tax Filing

Earlier this year, the IRS heralded the introduction of a new and improved tax Form 1040. You’ve heard that the new tax law provides for a “postcard-sized” tax return. The intent was to simplify filing Form 1040 for the 2018 tax year and presumably beyond. Like most of us, you immediately came up with a postcard-like image.

Well as it turns out, the IRS vision of a postcard-sized 1040 came out like this.

New 1040 Form

Now Pay Attention!  There’s a side 2 as well!

New 1040 Form - Back Side

But wait, there’s more to the story. Six new schedules were introduced relating to such things as additional sources of income and qualifying for tax credits.

Assuming your tax situation was super-simple, your responsibility was to file the base postcard return. However, the reality is that you most likely faced the necessity to also file one or more of the new schedules.

Here’s the IRS matrix summary to help you know which new schedules may apply.

IRS Matrix

OK. So much for simplicity.

Now comes the latest 1040 news from the IRS … the “postcard-size” Form 1040 has been officially scrapped. The IRS has announced abandoning its earlier effort to revamp the latest form and working on a new version that more closely resembles the traditional 1040 … remember 2017.

In large part, this turn of events is a direct result of objections from the tax preparation community that viewed the revised “work-in-process” prototype as being inefficient and burdensome.

In the words of the IRS, “We generally do not release drafts of forms until we believe we have incorporated all changes. However, in this case we anticipate it is likely that this draft will change at least slightly before being released as final. Whether we make changes to this draft or not, we will post a new draft later this summer with our standard coversheet (this page) indicating we do not expect that draft of the form to change.”

IRS Draft 1 - Form 1040

IRS Draft 2 - Form 1040

There are numerous changes in the draft version as it continues to evolve. This is not the place to enumerate the differences as the final version has not been released … although expected in November of this year. In its current form, the new 1040 has one more line than its predecessor … 24 vs. 23 and sports being 1.5 inches longer than the 2018 version.

Additionally, the Schedules 1-6 referenced above have been reduced to just three … Schedules 4, 5, and 6, which dealt with taxes on retirement plans, refundable credits and foreign addresses will no longer be in use Depending on content in the remaining three, a sigh of relief is in order.

Taxpayers Age 65 and Older … A 1040 Built for You

In July of this year, the IRS released a draft form of the 1040-SR, U.S. Tax Return for Seniors. Some of the design elements include:

  • Highlights retirement income streams and other tax benefits for older taxpayers.
  • Based on the regular 1040 and uses same schedules, instructions and attachments.
  • Larger fonts to make the text easier to read.
  • A standard deduction chart is featured for seniors to take advantage of the higher standard deduction.

To learn more about the debut of this form tailored for taxpayers 65 and older … Click Here.

How Will The New Form Affect You? Perhaps Not at All.

You are probably among the majority of American taxpayers who won’t file a paper tax Form 1040. Nearly 90% of taxpayers are expected to use a tax preparer or file electronically … more than 131 million people e-filed their returns in 2019.

If you intend your tax filing for 2019 to be a DIY project, be sure to reconsider and seek the services of a tax preparation professional. You’ll benefit from enhanced peace of mind and know that your tax bite, or refund, is accurate and to your maximum benefit based on your unique circumstances.

As ever, Pearson & Co. stands ready to help!
Give us a call or an email. We’ll respond promptly.

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