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29 Aug 2019
Estate Planning, News, Tax Law Pearson & Co, PC 0 comment

YOUR LIFE CYCLE … AND THE TAX CUTS & JOBS ACT (TCJA)

YOUR LIFE CYCLE … AND THE TAX CUTS & JOBS ACT (TCJA)
The TCJA Affects Your Tax Planning Regardless of Your Stage of Life

Taxes and Life Cycle

While there is every likelihood that there will be continued guidance from the IRS or legislators, here’s how we see the TCJA as it affects various stages in life for individual taxpayers. Keep in mind that almost all these provisions expire after 2025.

Life Events and the TCJA

Married adults now enjoy relief from the so-called “marriage penalty”. That means that their tax return filed jointly will more closely parallel that of two people filing as single

Personal and dependent exemptions are eliminated. In place of personal exemptions, TCJA essentially doubled the standard deduction. Likewise, in place of dependent exemptions, TCJA doubled the per child tax credit. Additionally, higher income families enjoy substantially increased income thresholds that trigger a phase-out of the credit yielding more tax savings.

Tax-advantaged education plans, 529 plans, now permit up to $10,000 may be used to pay for primary and secondary school … and enjoy tax-free withdrawal of that amount by parents and grandparents. Given the escalating costs of higher education, the tax-deferred feature of funds in 529 plans continues to be attractive and motivating to retain funds in the plan for as long as possible.

Taxpayers taking new mortgages are limited to interest deductions on the first $750,000 of loan principal and may no longer deduct interest for home equity debt … unless the loan is used to purchase, build or substantially renovate your home.

Itemized deductions for property taxes and state and local income or sales taxes now capped at $10,000.

Alternative Minimum Tax (AMT) exemption levels are increased and the income threshold at which the AMT exemption phases out is elevated. These moves will significantly reduce the number of tax payers subject to the AMT.

Job change expenses such as preparation of resumés, travel and other work-related costs are no longer permitted as an itemized deduction.

Moving expenses are eliminated as a deduction, other than for active-duty military under orders to relocate. The impact for employers is that reimbursing employees for moving expenses is no longer tax deductible.

Investment gains i.e., qualified dividends and long-term capital gains taxes, remain unchanged. However, of note is that the dollar amount breakpoint at which the rates apply has increased offering important tax savings to investors.

Taxpayers who support their elderly parents and choose to itemize may deduct out-of-pocket medical expenses at an increase from 7.5 percent to 10 percent in 2019.

The annual contribution to Achieving a Better Life Experience (ABLE) accounts is increased and may be used to claim the retirement saver’s credit as well. Additionally, funds in 529 plans may be rolled over to ABLE accounts to further benefit disabled individuals.

Couples divorcing after 2018 will find that alimony is no longer deductible, and payments to the recipient are no longer taxable as income.

Summary

Of course, the above, and more, is subject to interpretation and additional guidance by the IRS and federal legislators. So, here’s a suggestion if you have questions as to how the TCJA affects you and your tax planning.

A time-saving and less stressful approach is to give us a call or drop an email to schedule a time to review the specifics of your unique situation and develop an optimum tax strategy to benefit both you and your family.

29 Aug 2019
IRS, News, Tax Law Pearson & Co, PC 0 comment

MAIL ADDRESSED TO YOU … RETURN ADDRESS: IRS

MAIL ADDRESSED TO YOU … RETURN ADDRESS: IRS
Know What to Do to Avoid Panic Attack

Pearson CPA IRS Mail

You may get a letter from the IRS, if not this year, perhaps some time in the future. When/if that happens, work hard not to get your exercise by jumping to conclusions. It does not mean that you are the object of an IRS audit.

It is likely that your letter is what’s called an IRS Notice CP 2000. While that may sound a bit intimidating … not to panic. The IRS sends this notice when information from a third party doesn’t match the information you reported on your tax return such as from an employer or financial institution. This discrepancy may cause an increase or decrease in your tax … or leave your tax bill unchanged.

That said, do not ignore the notice. There are specific steps for you to take to resolve whatever issue or issues are in question. Here’s a rundown on the basics. For more detail in writing click here or view this short video.

Notice CP 2000

  • The notice is to see if you, the taxpayer, agrees or disagrees with the changes proposed by the IRS.
  • You will have 30 days from the date printed on the notice to respond.
  • If you need personal assistance, your CP 2000 Notice will provide a phone number for you to call. You will then be connected to a live person (not an automated response system) to understand the meaning of the notice and what you need to do to resolve any issues.

The IRS is persistent … here’s what happens if you don’t respond, or your response is unacceptable.

Notice CP3219A

  • You will receive another notice if you don’t respond or if the IRS does not accept the additional information you provided.
  • The notice will detail why the IRS proposes the tax change and the reasoning that went into determining the change.
  • If you disagree, you have the right to challenge the decision in Tax Court. Whether you choose that remedy or not, the IRS will continue to cooperate in helping you resolve the issue.

Takeaways

OK.  Hopefully, you agree there is no need to panic if you receive your CP 2000 Notice. So now you may choose to face the response on your own.

Alternatively, a time-saving and less stressful approach is to give us a call or drop an email to schedule a time to review the specifics of your unique situation and together develop an appropriate response.

10 Jul 2019
Pearson & Co. CPAs
Estate Planning, Tax Law Pearson & Co, PC 0 comment

PLAN TO SELL YOUR HOME?

PLAN TO SELL YOUR HOME?
Good News!  You May Qualify to Exclude Gain from Income

Home Selling Tax Advice from Pearson CPAs

Your home is likely your single most valuable asset.  Good to know that when you eventually sell it, most of the profit you make won’t go to the IRS.

Will you pay tax on the sale of your home? Now, anyone can exclude up to $250,000 of gain or $500,000 for a married couple filing jointly on the sale of a home. That means most people will pay no tax unless they have lived there for less than 2 out of the last 5 years.

Notably, this is not a one-time tax break … you can use this capital gain exclusion to avoid tax on a home sale repeatedly.

This good news may even prove to be better as there are additional steps you can take to further enhance the tax benefits of selling your home. Read on to figure out how you may qualify.

Three Qualification Tests

There are three tests you must meet in order to treat the gain from the sale of your main home as tax-free:

  • Ownership: You must have owned the home for at least two years during the five years prior to the date of your sale.
  • Use: You must have lived in the home as your principal residence for at least two of the five years prior to the date of sale.
  • Timing: During the 2-year period ending on the date of sale, you did not exclude gain from the sale of another home.

You can use this exclusion every time you sell a primary residence, as long as you satisfy these tests.

Note 1: Homeowners excluding all the gain do not need to report the sale on their tax return. If profit from the sale exceeds the $250,000 or $500,000 limit, the excess is reported as a capital gain at tax-filing time.

Note 2: Taxpayers who experience a loss when their main home sells for less than what they paid for it may not deduct the amount of the loss on their tax return.

How to Figure Whether You Have a Gain

You have a gain when you sell your house for more than the original cost that you paid.

If you purchased your home from an existing owner, the price you paid is the agreed to purchase price plus certain settlement and closing costs.

If you built your home, your original cost is the cost of the land, construction costs, architect fees and utility provider hookups.

If you inherited your home, best bet is to check with the executor of the estate to provide you with information about the basis of your home. There are different rules depending on the date of the previous owner’s death.

Your next step is to determine the adjusted basis … the cost of your home adjusted for tax purposes by improvements you’ve made or deductions you’ve taken. Improvements are those that added value to your home, prolonged its useful life, or gave it a new or different use … not included are expenses for routine maintenance and minor repairs. Deductions may include casualty losses, depreciation expenses, and a variety of other costs that may further reduce your adjusted cost basis.

For example, if the original cost of the home was $100,000 and you added a $5,000 patio, your adjusted basis becomes $105,000. If you then took an $8,000 casualty loss deduction, your adjusted basis becomes $97,000.

Important: As with most tax issues, there is more to the story. Best move on your part is to seek guidance from your tax professional.

Summary

Most home sellers don’t even have to report the home sale transaction to the IRS. But if you’re one of the exceptions, knowing the rules will help you hold down your tax bill. Might be best to seek professional help to ensure you’re in compliance.

Give us a call or drop an email to schedule a time to review the specifics of your unique situation.

06 May 2019
Pearson Perspective
Business, Employment Pearson & Co, PC 0 comment

THE U.S. GIG ECONOMY

THE U.S. GIG ECONOMY
The Prophecies … Now Grounded in Facts

At just about this time last year, the Pearson Perspective published an article spotlighting the apparent rise of the gig economy … increasing emphasis by both employers and workers to hire and be hired as independent contractors. Another term often used to describe this burgeoning segment of the workforce is contingent workers.

Pearson Perspective - May 2019

Contingent workers are best described as all those who are not a direct hire or more specifically are not employees. Another oft-used definition is “A contingent workforce is a provisional group of workers who work for an organization on a non-permanent basis, also known as freelancers, independent professionals, temporary contract workers, independent contractors or consultants.”

While the number of independent contractors and contingent workers was, and is, difficult to quantify, one reliable statistic offered by Intuit reported gig workers to then represent 34 percent of the workforce. Astoundingly, the report further anticipated a significant increase to 43 percent by 2020. Three reasons were proposed to explain what was driving this expected juggernaut of workforce transformation:

  • Internet and technology that supports workers functioning remotely from their employer;
  • Successes such as Uber and Airbnb called attention to many who had not considered the potential to perform as contingent workers either as their primary occupation or, in current vernacular, as a side-hustle.
  • The new tax was expected to accelerate that trend by rewarding workers who convert their status as employees to that of independent contractors. That could mean that sole proprietors, partnerships and S Corporations may deduct 20 percent of their “qualified business income” from their taxable income … meaning only 80 percent would remain taxable.

So the Gig Economy was widely heralded and accepted by many as the wave of the future with significant impact for workers, employers and regulatory bodies. In this article, we’ll look at examples of the predictions and anxiety generated by this foretold upset in the balance of the American workforce.  Then read on for the latest findings on this employment phenomenon.

The Predictions

Why I Believe In The Freelance Workstream is the title of an article published in the August 18, 2014 issue of Forbes

The writers, Jeff Wald and Jeffrey Leventhal, make a strong case for the continued upward trend in freelancers as a percentage of the total U.S. workforce. Freelancers, also known as independent contractors, are estimated to be about 16-20% of the workforce by 2020. In contrast, that number was 6.7% just 15 years ago. Coincidentally, the percentage of full and part-time employees is expected to drop to 82% in 2020, a reduction from 91.9% in 1995.

A study by Staffing Industry Analysts bears witness to this reported trend. Here is a graphic representation of their analysis for the 5 years ending in 2014.

Pearson Perspective - May 2016

The Anxieties

In its acceptance of the generally accepted projections of future growth of the Gig Economy, no less of a government agency than the Department of Labor weighed in and addressed the issue this way:

“As employers seek new ways to make the employment relationship more flexible, they have increasingly relied on a variety of arrangements popularly known as “contingent work.” The use of independent contractors and part-time, temporary, seasonal, and leased workers has expanded tremendously in recent years. The Commission views this change both as a healthy development and a cause for concern.”

Employers were and continue to be urged to recognize there is risk in four key areas when using freelance talent:

  1. Risk with the Department of Labor and the IRS over whether these workers can truly be classified as independent contractors – both of these agencies would prefer to see all workers as “employees” even if part-time or temporary. The payment of payroll taxes by the employer is an obvious concern.
  2. Risk of injury – who holds the workers’ compensation coverage obligation? Who holds the risk? The Virginia Workers Compensation Commission will attribute the claim against the business owner in the absence of other coverage and employers may find that their supposed “contractors” are assigned to them by the Commission as employees. Employers should review the Commission’s explanation.
  3. Risk of Accidents – if damage occurs due to an accident, in the employer’s premises or a customer’s premises, does the freelance worker carry general liability insurance coverage for the claim?
  4. Risk of illegal use of someone else’s intellectual property – freelance workers comes  with a “toolkit” of processes and techniques they apply for the business owner’s benefit. Much of this is “intellectual property”. If that intellectual property actually belongs to a company for whom this freelancer once worked, the business owner may have liability for its use and benefit. This is particularly a challenge for software development, but can surface in many other areas or work.

 

Note:  It’s valuable to draw a distinction between temps and contingent workers. The primary difference is that temp workers are employed by a staffing firm. Contingent workers work directly with an enterprise to perform in the completion of specific assignments. Therein is the potential for risk on the part of businesses or non-profits seeking to use freelance talent.

And Now the Truth

The perception is apparently not supported by reality. Said another way, the supposed radical transformation of the U.S. workforce is not borne out in a recent survey by the Bureau of Labor Statistics (BLS). Take a look at The Gig Jobs Picture in the chart below. As you’ll see, in 2017, the share of workers in so-called gig jobs was 10.1 percent of total employment, almost exactly what it was in 2005 (10.7 percent) and 1995 (9.9 percent).

Pearson Perspective - May 2019

So what can be anticipated for the future? Hard to say, but for the moment there is an opportunity to step back, take a deep breath and accept that the gig economy has remained remarkably stable. While the past is no guarantee of the future, certainly the trend has remained notably constant.

As ever, we stand ready to help. A phone call or email to Pearson & Co. is all it takes.

19 Dec 2018
Tax Credits, Tax Law Pearson & Co, PC 0 comment

CHILD TAX CREDIT DOUBLED

Potential to Reduce Your Tax Bill
by as Much as $2,000 per Qualifying Child

Child Tax Credit Doubled

Raising children is an expensive responsibility. So it’s worth your while to take just a few minutes to see if you may qualify for relief under the Child Tax Credit (CTC). The CTC has been expanded under the new tax law enacted last year. Chief among the enhanced benefits is an increase of 100% which raises the credit from $1,000 to $2,000 per qualifying child.

We’ll take a look at the criteria to determine a child’s qualifications in a moment.  But first a word about tax credits. The best way to describe tax credits is in contrast to what most taxpayers understand … tax deductions. When compared to tax deductions, tax credits yield the better tax savings. Tax deductions reduce the amount of your income subject to tax. Tax credits directly reduce your tax bill.

For example, assume you spend $2,000 that results in a tax deduction. That will reduce your taxable income by $2,000. In a 25% tax bracket, you would save $500 in taxes.

Now compare that with a $2,000 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 $2,000 tax credit! In the above example, the tax credit increases tax savings by 400%

Taxpayers, businesses and individuals, find tax credits trump tax deductions every time in saving tax dollars.

Qualifying for the Child Tax Credit

As mentioned above, you may be eligible to claim a tax credit that will reduce your tax by as much as $2,000 per qualifying child. Additionally, if you do not qualify for the full amount, you may be able to take the refundable additional child tax credit. The basic criteria to determine a child’s qualifications are:

Your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them (for example, your grandchild, niece, or nephew);

  • Was under age 17 at the end of 2018;
  • Did not provide over half of his or her own support for 2018;
  • Lived with you for more than half of 2018;
  • Is claimed as a dependent on your return;
  • Does not file a joint return for the year; and
  • Was a U.S. citizen, a U.S. national, or a resident of the United States. If the child was adopted, see Adopted child .

Check out this link f you still have questions whether your child is a Qualifying Child for the CTC?

 Note: If you have at least one child that qualifies for the CTC, you may also be eligible for the Additional Child Tax Credit if you get less than the full amount of the CTC.

Notably, if you don’t owe any tax before claiming the credit, you may receive up to $1,400 in credit refunds.

Your family income must be a minimum of $2,500 to claim the credit.

As your income increases, the child tax credit begins to phase out. The phase-out trigger is increased to $200,000, or $400,000 if married filing jointly. This means that more families with children younger than 17 qualify for the larger credit.

Dependents who can’t be claimed for the child tax credit may still qualify the taxpayer for the credit for other dependents. The new tax law creates a non-refundable Family Tax Credit of up to $500 per qualifying person. These dependents may also be dependent children who are age 17 or older at the end of 2018. It also includes parents or other qualifying relatives supported by the taxpayer.

Clearly, this may be a complicated series of qualifications to decipher. If you even think you may qualify, give us a call to discuss and determine what you may expect in tax credits.

19 Dec 2018
Charitable Giving Advice from Pearson & Co. CPAs
Charitable Giving, Tax Credits, Tax Law Pearson & Co, PC 0 comment

DECEMBER … THE MONTH FOR GIVING

Do So Charitably, and With Caution

This is the season for giving. Generally we all feel more willing to open our purses for good causes. And there are plenty of opportunities to do so … both solicited and unsolicited by you. So in this article we’ll cover two major considerations before you write that check or offer your credit card:

  • Avoid fraudsters seeking to take advantage of your generosity, and
  • Determine if your donation will be to a tax-exempt charity which will trigger a tax deduction for you.

December - The Month for Giving

Research Before Giving

Research Before GivingParticularly at this time of year, you are likely to be solicited for contributions from charities and professional fundraisers working on behalf of charities. Your contact may be by phone, face-to-face, email or the internet … including social networking sites you may frequent.

Scammers use the same solicitation channels, so a few words of caution if the charity on the surface sounds appealing. Run, do not walk, when a solicitor:

  • Uses a name that closely resembles that of a better-known, reputable organization.
  • Thanks you for a pledge you don’t remember making.
  • Refuses to provide detailed information about its identity, mission, costs, and how the donation will be used.
  • Won’t provide proof that a contribution is tax deductible.
  • Uses high-pressure tactics like trying to get you to donate immediately, without giving you time to think about it and do your research.
  • Asks for donations in cash or asks you to wire money.
  • Offers to send a courier or overnight delivery service to collect the donation immediately.
  • Guarantees sweepstakes winnings in exchange for a contribution. By law, you never have to give a donation to be eligible to win a sweepstakes.

For more information, visit ftc.gov/charityfraud.

Ensuring Your Contribution is to a Tax-Exempt Charity

Not all charities are equal … when it comes to tax-deductible contributions. You may be able to deduct donations to a tax-exempt organization on your tax return so it’s critical that you determine whether your targeted charity qualifies as tax-exempt.

Before we help you determine how to identify a charities tax-exempt status, it’s worth a minute to revisit an important change in both the standard deduction and itemized deductions as enacted in the new tax law.

The standard deduction doubled from $6,350 for single filers to $12,000; married and joint filers increased from $12,700 to $24,000. This, coupled with the changes to itemized deductions, is likely to lead to more taxpayers taking a simplified approach to filing, i.e. electing the standard deduction.

Note: Traditionally, Virginia tax law has conformed to federal. However, that is not the case today as the state standard deduction has not been increased to track with the revised federal rules. There are proposals to revise the Commonwealth’s law, so be sure to check with your tax advisor to determine your best tax strategy.

OK,  let’s assume you and your tax advisor agree to consider itemizing your deductions and contribute to one or more favorite charities. To further the likelihood you will enjoy tax savings from your effort to do good, you’ll want to be sure your chosen charity is designated as tax-exempt by the Internal Revenue Service.

Happily, the IRS has a resource that will help … the Tax Exempt Organization Search tool which allows you to search for charities and identify their tax status and filings. If you choose to use the tool, here are the things to look out for:

  • Confirm an organization is tax exempt and eligible to receive tax-deductible charitable contributions.
  • Has an organization had its tax-exempt status revoked.
  • The list does not include certain organizations that may be eligible to receive tax-deductible donations, including churches, organizations in a group ruling, and governmental entities.
  • Organizations are listed under the legal name or a “doing business as” name on file with the IRS.

Questions about should you take the standard or itemized deduction route and whether a charity qualifies as tax-exempt … give us a call to discuss. We’ll respond promptly.

 

20 Nov 2018
Tax Credits, Tax Law Pearson & Co, PC 0 comment

2018 TAX PLANNING FOR THE FIRST YEAR UNDER THE NEW TAX CODE

Business & Individual Tax Rates, Deductions, Exemptions & Credits

Top of Mind Communications - Tax Planning Article

Once again, the season for tax planning is upon us … and this year with a number of challenges for both businesses and individuals. The primary driver is the changes brought about by the passage of the Tax Cuts and Jobs Act (TCJA).

On balance, most taxpayers, both businesses and individuals, will enjoy tax savings under the new regulations. Nevertheless, end of year planning is critical to maximize your benefits and minimize your tax bite.

End of year tax planning for businesses will include the need to factor in … reduced tax rates for C corporations; elimination of the corporate alternative minimum tax; allowance for a 20% deduction for individual owners of certain proprietorships, partnerships and S corporations; and accelerated up-front write-off for an ever-expanding group of business assets.

Among the changes affecting individual taxpayers include doubling the standard deduction, elimination of personal exemptions, and numerous itemized deductions reduced or eliminated.

Let’s take a closer look.

Our objective is to summarize the revised tax law provisions and prompt you to seek guidance from your tax advisor to determine the specifics as it pertains to your unique circumstances. Certainly, that may be a prudent step on your part as the tax code adjustments likely will affect your strategies to maximize benefits under the new law for you and your family.
This article is intended only as a review of the new law’s highlights. The details are beyond the scope of this piece so seeking advice from a professional tax expert is advised.
Now, as promised, let’s examine the tax rates, tax deductions, exemptions and tax credits provided for in the Tax Cuts and Jobs Act for both individual taxpayers and businesses.

Business Tax Planning Richmond VA

BUSINESSES

Income Taxes

  • Corporate tax rate lowered from 35 percent to 21 percent
  • Alternative Minimum Tax eliminated

Business Deductions

  • Pass-through business deductions – up to 20 percent of business related income; applies to partnerships, S corporations and sole proprietorships with some limits and exceptions. Deduction phases out for certain professional service individuals – starts at $315,000 for joint return filers and $157,000 for all other taxpayers.
  • Section 179 deductions for depreciable personal property permitted in one year rather than amortizing over several; maximum amount increased to $1 million per year.
  • Bonus depreciation now available on both new and used property.
  • Vehicle depreciation cap is increased and indexed for inflation; new limits are $10,000 (year 1); $16,000 (year 2); $9,600 (year 3); $5760 per year thereafter until cost is recovered.
  • Entertainment expenses – 50 percent deduction of business-related food and beverage expenses retained; no deduction for entertainment and membership dues.
  • Corporate interest expense deductions limited to 30 percent of income.

INDIVIDUAL TAXPAYERS

Tips for Individual Tax Payers from Top of Mind CommunicationsNote: Most individual changes are effective January 1, 2018 and will expire at the end of 2025.  Unless Congress passes another law prior to then, the old tax code provisions will be reinstated.

Individual Income Taxes

The Act retains the seven income tax brackets of the previous tax code, but with reduced tax rates for individuals in all brackets but one. The net effect of these reductions were realized by most employees as employer payroll withholding was reduced … resulting in increased take-home pay beginning with their February 2018 paychecks.

Comparison of New Tax Rates vs. Old
Icome Tax RatesNote: Capital gains rates remain unchanged under the new law.

Individual Deductions

  • Standard deduction doubled from $6,350 for single filers to $12,000; married and joint filers increased from $12,700 to $24,000. This, coupled with the changes to itemized deductions, is likely to lead to more taxpayers taking a simplified approach to filing, i.e. electing the standard deduction.
  • Mortgage interest deduction limited to the first $750,000 of the loan; permitted on first or second home; interest on loans up to $1 million initiated prior to December 15, 2017 grandfathered
  • Home equity loan interest eliminated unless used to buy, build or substantially improve the taxpayer’s home that secures the loan.
  • State and local income tax, sales tax and real property tax deductions limited to $10,000 in the aggregate
  • Miscellaneous itemized deductions eliminated; includes employee business expenses and investment advisor fees
  • Charitable contributions deductions are retained for those taxpayers able to itemize deductions
  • Deduction for medical expenses increased to 7.5 percent or more of income in 2017; 10% in 2019.
  • Alimony payments no longer deductible for new divorces beginning in 2019
  • Casualty losses to personal property no longer deductible unless covered by specific federal disaster declarations

Individual Exemptions

  • Personal exemptions of $4,150 eliminated
  • Estate tax exemption doubled to $11.2 million for singles and $22.4 million for couples
  • Alternative minimum tax exemption increased from $54,300 to $70,300 for singles; from $84,500 to $109,400 for joint filers

Individual Tax Credits

When compared to tax deductions, tax credits yield the better tax savings. Tax deductions reduce the amount of your income subject to tax. Tax credits directly reduce the tax itself.

For example, assume you or your business spends $5,000 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!

  • Child tax credit increased to $2,000 from $1,000
  • American Opportunity Credit and Lifetime Learning Credit remain unchanged
  • Credit of $500 for each non-child dependent.
  • 529 savings plans permitted for tuition at private and religious K-12 schools

Obamacare tax on those without health insurance repealed beginning in 2019

Summary

Again, the tax code revisions likely will affect your strategies to maximize benefits under the new law for you and your family. Our objective is to summarize the new provisions and prompt you to seek guidance from your tax advisor to determine the specifics as it pertains to your unique circumstances.

Alternatively, a time-saving and less stressful approach is to give us a call or drop an email to schedule a time to review the specifics of your unique situation and develop an optimum tax strategy that benefits you and your family.

With the new tax code as the frame of reference, we stand ready to help you with traditional end-of-year tax strategies that include deferring income to a later year and accelerating deductions into the current year. The TCJA may deliver on a number of additional benefits to you, your family and/or your business.

 

30 Oct 2018
Estate Planning Pearson & Co, PC 0 comment

HOW TO CHOOSE THE EXECUTOR OF YOUR ESTATE

HOW TO CHOOSE THE EXECUTOR OF YOUR ESTATE
Never a Popularity Contest

How to select an Executor of your Will

Who Will Implement My Estate Plan Upon My Disability or Death?

Choosing the executor of your estate is the single most important decision you will make to minimize future unknowns, provide peace-of-mind for your family and create an orderly transition of assets in the event of your death or disability.

Your choice of capable people to administer your estate plan is critical. The individual or entity chosen will shoulder significant responsibilities in managing your estate plan directives.

Competency, harmony and willingness to serve are the operative bywords in selecting the people or entities that will carry out your wishes at a time you are no longer able to do so. Any of these managing “slots” may be filled by one or more individuals or a corporate entity such as a bank – or some combination of all three.

Competency

Your choice of an executor is not in the category of a popularity contest, nor the ranking of a family member. Choices should never be made simply because an individual is a close friend or your oldest child.  Your selection should reflect the individual’s capabilities and certainly never on the basis of hurting someone’s feelings.

Harmony

In some instances, it may be prudent to appoint two or more adults as joint executors. That said, there are at least a few circumstances to carefully consider. For example:

  • Appointing two siblings with an adversarial relationship creates the potential for an explosive and protracted delay in settling your estate according to your wishes.
  • Likewise, choosing two or more executors who have no history of successfully working together may be a recipe for a confrontational atmosphere that may lead to less than efficient management of your affairs.

If there is a need for co-executors and no clear choices of compatible individuals to fulfill those roles, you may appoint an entity such as a bank, trust company or a law firm that offers executor services.

Willingness

This element is closely tied to the above discussion of Competency. Assuming the executor candidate is competent, it is important to determine that person’s readiness to assume the required duties of the role he or she is expected to play. Depending on the complexity of the estate, it may be a far more overwhelming task than expected. Additionally, there are potential legal liabilities for negligent handling of the estate.

Of course, expertise does not have to be personally demonstrated in all aspects of “a life in the day of an executor”, as there is plenty of help available from a capable team of accounting, legal and investment professionals.

Of course, when you seek  to name an executor, you are urged to seek counsel and direction from competent accounting and legal professionals for guidance. This article is meant as a general discussion document and not to be construed as providing legal, accounting or tax advice.

Of course, at Pearson & Co. our work as accountants is to maximize your estate value and minimize your tax bite. In serving you, we can also introduce you to skilled estate planning professionals. If we can help with a referral … just ask.

29 Oct 2018
Business, News, Tax Law Pearson & Co, PC 0 comment

END OF YEAR TAX STRATEGIES

END OF YEAR TAX STRATEGIES

For Business Owners and Individual Taxpayers

Pearson & Co. CPAs - November 2018 Blog Post

Yes … it’s hard to believe … the 2018 income tax season is nearly upon us. Certainly, seems like we just finished with 2017.

As the old adage goes, “No time like the present”, to start thinking about what steps to take to be sure you enjoy maximum tax-savings advantage in the first taxable year under the Tax Cuts and Jobs Act (TCJA).  So here are considerations for you to discuss with your professional tax advisor.

As ever, Pearson & Co. stands ready to serve you in your tax and accounting needs.

Pearson & Co. CPAs - Year End Tax Strategies

Business Owners

The TCJA reforms can affect the bottom line of many small businesses. Notably, the tax-saving benefits come down to three major categories:

  • Qualified Business Income Deduction
  • 100% Expense Deduction for Depreciable Business Assets
  • Employee Fringe Benefits

Qualified Business Income Deduction

This provision in the tax reform legislation applies to so-called pass-through businesses, i.e. enterprises’ income that is taxed on the firm-owners’ personal tax return. These entities include partners in partnerships, shareholders in S corporations, members of limited liability companies (LLCs) and sole proprietors.

All taxpayers who qualify as described above and who earn less than $157,500 and file singly ($315,000 for a married couple) can now deduct from their overall taxable income 20% of the income they receive via pass-through businesses.

There is more to the story, so be sure to seek guidance from a qualified tax professional. For example, S corporation owner’s salary must meet the “reasonable compensation” standard.

100% Expense Deduction for Depreciable Business Assets

For tax years 2018 through 2025, businesses are now able to write off most depreciable business assets in the year the business places them in service. The 100-percent depreciation deduction generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property.

Machinery, equipment, computers, appliances and furniture generally qualify. Additionally, the TCJA expands definition of eligible property improvements made to non-residential property.

Note: The maximum deduction increased from $500,000 to $1 million per year.

So if you’ve been holding off on these types of purchases, reconsider your position in light of the considerable tax savings that may result.

Employee Fringe Benefits

Entertainment and meals: The new law eliminates the deduction for expenses related to entertainment, amusement or recreation. However, taxpayers can continue to deduct 50 percent of the cost of business meals if the taxpayer or an employee of the taxpayer is present and other conditions are met. The meals may be provided to a current or potential business customer, client, consultant or similar business contact.

Qualified transportation: TCJA disallows deductions for expenses associated with transportation fringe benefits or expenses incurred providing transportation for commuting unless necessary for employee safety.

Bicycle commuting reimbursements: Employers can deduct qualified bicycle commuting reimbursements as a business expense for 2018 through 2025. However,  these reimbursements in must be included in the employee’s wages.

Qualified moving expenses reimbursements: Reimbursements an employer pays to an employee in 2018 for qualified moving expenses are subject to federal income tax.

Employee achievement award: Special rules allow an employee to exclude certain achievement awards from their wages if the awards are tangible personal property. The new law clarifies that tangible personal property doesn’t include cash, cash equivalents, gift cards, gift coupons, certain gift certificates, tickets to theater or sporting events, vacations, meals, lodging, stocks, bonds, securities and other similar items.

An employer also may deduct awards that are tangible personal property, subject to certain deduction limits.

Pearson & Co. CPAs - Year End Tax Strategies

Individual Taxpayers

Double-check Your W-4 Form

If you haven’t already done so check to be sure that your employer is withholding the correct amount of federal taxes from your paycheck. The idea is to have your withholdings match your anticipated tax bill, thereby avoiding owing taxes or penalty. On a more positive note, you may find that it is more advantageous to have less withheld and enjoy more take-home pay.

The IRS has made your reality check simple. Just use the IRS Withholding Calculator. Here’s what to do.

Just click here and answer a few questions … Withholding Calculator

Harvest Stock Losses That Qualify as Tax Deductions

If you file jointly you may deduct up to $3,000 ($1,500 if filing singly) in losses on stocks you sell before year-end. Doing so will reduce your taxable income, plus offset any gain on stocks you sell as well.

Compare Benefits of Standard Deduction vs. Itemizing

The new tax law essentially doubled the standard deduction and significantly reduced the qualifications for itemized deductions. Even if you have a history of itemizing, this year you may be better off taking the standard deduction.

Note: Traditionally, Virginia tax law has conformed to federal. However, that is not the case today as the state standard deduction has not been increased to track with the revised federal rules. There are proposals to revise the Commonwealth’s law, so be sure to check with your tax advisor to determine your best tax strategy.

Maximize Your Tax Advantaged Retirement Plan Contributions

Make the most of your 401K, IRA and other tax favored savings plans.

Flexible Spending Accounts

Check on your plan’s deadline for withdrawals and your current account balance. To avoid losing funds, schedule your medical appointments and purchase other health care items covered by your plan.

Divorce Considerations – Possible Sense of Urgency

Thanks to the Tax Cuts and Jobs Act (TCJA), alimony payable for divorces entered into after this year will no longer be tax deductible to the payor and will not be taxed as income to the recipient. That may result in conflicting desires on the part of divorcing couples based on comparative benefits.

Couples considering a divorce should study five areas of concern before the end of the year … ideally with guidance from a tax professional and other expert advisors with a success history of dealing with married partners calling it quits.

  • Alimony
  • Business Valuation
  • Pensions
  • Other Assets
  • Prenuptial Agreements

Takeaways

Is the tax code complex? Yes … for both business owners and individual taxpayers. And this, the first taxable year under the revised tax code, stands to be even more complex as there are unanswered questions and interpretations that will continue to surface.

Pearson & Co. stands ready to help. Call or email … we’ll respond promptly!

24 Sep 2018
Supreme Court Ruling
Business, News, Tax Law Pearson & Co, PC 0 comment

SUPREME COURT RULING STUNS SMALL ONLINE BUSINESSES

SUPREME COURT RULING STUNS SMALL ONLINE BUSINESSES
At Stake … Comply With Tax Laws of 50 States and 3,000+ Counties
To Collect and Remit Sales Taxes

Pearson & Co. CPAs

In a decision earlier this year, the Supreme Court of the U.S. (SCOTUS) ruled that states may collect sales taxes on sales by businesses within the state … whether or not the business had a physical presence in the state. This overturned a 1992 SCOTUS ruling which limited states ability to collect sales taxes only from entities with a brick-and-mortar presence within its borders. The prior decision has now been declared “unsound and incorrect” by the high court.

Impacts of the latest ruling have been received as either an unprecedented economic burden or a long overdue and positive leveling of the playing field. Small businesses selling online subscribe to the former while larger companies and tax collecting jurisdictions applaud the decision. Let’s take a look at who loses, who wins and what role Congress may play as the repercussions of this ruling pan out.

Small Online Businesses

The real challenge for small online businesses is the complexity of compliance issue. Each state determines what products, goods or services are subject to sales tax. Additionally, there are county and local tax jurisdictions that may weigh in for their share as well. So small online businesses are faced with a myriad of designations of what’s taxable, by whom, and in what amount … without any uniform definition.

So from a practical standpoint, let’s consider a Virginia based business that sells online. Clearly, the responsibility for sales within the Commonwealth is to collect and remit taxes to appropriate tax collection entities. Depending on volume of sales, that may require a few hours or at most several days for an employee to perform this function as part of a larger job responsibility.

United States Counties

Now duplicate that function with clashing requirements by 50 states, 3,000+ counties and by some estimates potentially as many as 12,000 jurisdictions nationally … no longer a part-time activity. Perhaps a typical example is a small business paying $20 to $60 quarterly to each of dozens/hundreds of jurisdictions.

So businesses, especially small businesses, operate on the same basis as individuals … finite financial resources to be deployed in the most advantageous way to maintain and promote the value of the business to all stakeholders – customers, owners and employees. Cost to employ compliance personnel restricts or eliminates valuable assets that may otherwise be directed to job creation, capital formation and return on investment. That means added cost to the detriment of increased investment in economic growth with a “trickle-up” loss to the national welfare.

When you consider the sheer numbers of tax jurisdictions that now must be served by small online businesses, with no uniformity of compliance requirements, recognize another likely event … audits by out-of-state jurisdictions. What’s a small business to do when faced with a claim? Respond with legal representation to a demand letter … at what cost … or take the easy way out and pay the requested amount rather than trying to defend a far-off tax court action?

So small online businesses are stunned by the reversal of a long-held ruling that sales tax only need to be paid on sales where the business has a physical presence. What to do? Small online businesses are becoming aligned in an effort urging Congress to step in and create national standards for interstate commerce and supplant the current patchwork quilt of state and local tax laws. Stay tuned!

Effects on Larger Businesses

Larger Businesses … Including Those Seling Online

Companies that have a bricks-and-mortar presence have been unanimous in applauding the SCOTUS decision. Their claim, not entirely without merit, is that they have been operating at a competitive disadvantage. While online sales by small business are dwarfed by the revenues generated by the big guys, they continue to grow steadily and drive a concerted call for a more even playing field and fairer tax legislation.

A statement from Target read in part, “We are pleased the Court’s ruling will close the loophole that has allowed online-only retailers to avoid collecting and remitting sales taxes while still requiring local businesses to do so.”

Interestingly, supporters of the SCOTUS ruling include big online sellers like Amazon, Walmart and Target. While they now frequently collect and remit state taxes, local taxes are rarely if ever included in that effort. So this does add to their tax responsibilities, but they have a massive technology advantage over small sellers so are generally comfortable in dealing with the change.

Note:  Technological strength could become a boon for Amazon.  It already has the compliance machinery in place and can make it easy for a seller using Amazon’s platform to collect and remit sales tax. Small online retailers may be strongly motivated to engage with Amazon for this immediate resolution to challenges they may not be able to handle financially.

States, Counties and Local Tax Jurisdictions

“Follow the money” is often touted as a sure path to determine motivation. Sales taxes typically range broadly from 1 percent to 10 percent or so. If we think about 5 to 7 percent as a likely jump in added revenue, it’s not a tremendous windfall for the tax collectors.

That said, according to the SCOTUS decision, estimates of sales taxes lost to sellers outside of a jurisdiction run between $8 billion and $33 billion annually. As Senator Dirksen once said, “A billion here and a billion there … soon you’re talking about real money.” Clearly there has been definite support from tax collection jurisdictions for the current ruling.

As evidence of anticipation and desire for the change, many states had already passed laws to trigger tax collection when and if the Supreme Court decided as it did. That means that companies selling into these states are immediately subject to compliance. Again, small businesses will bear the brunt of the need to comply now or run the risk of audits, fines or a decision to withdraw from selling in certain states.

Tax Jurisdictions

The U. S. Congress

Many major online retailers have joined with small business groups to clarify the SCOTUS ruling and provide a framework that will both defend small businesses while providing uniformity and consistency for all online players regardless of size.

Congress has the authority to resolve the issue of online sales tax fairness, and create a solution that’s uniform across the country. That said it has failed to do so despite repeated introductions of legislation by members of Congress to resolve the issue. Congress’s most robust effort was the Marketplace Fairness Act, which was introduced in the Senate in 2013 and would have authorized states that had met standards for simplified sales tax rules to require large online and catalog retailers to collect sales taxes … notably with significant exemptions to protect small businesses. The Senate passed the MFA with a bipartisan vote of 69 to 27, but it was never brought to a vote in the House.

With this recent SCOTUS ruling and pressure building from the online selling community, perhaps this will be the year when the MFA is reconsidered and passed in some final form that clarifies the current confusion.

Takeaways

Our crystal ball is as cloudy as anyone else’s, but we’re convinced of two things:

  • It is likely with the current change as desired by larger online sellers and the potential financial burdens it imposes on the smaller players, Congress will act to resolve the inequities while maintaining a fair and just commercial climate for all.
  • Consumers will not be fazed by an added sales tax. They are used to it when going to a bricks-and-mortar store and the convenience plus savings in time and money will continue to accelerate online sales initiated by consumers.

 

 

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