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31 Jul 2018
Estate Planning, Tax Credits, Tax Law Pearson & Co, PC 0 comment

VACATION RENTAL HOME BENEFITS & TAX BREAKS

VACATION RENTAL HOME BENEFITS & TAX BREAKS
Personal Use and As a Rental Unit

Well here we are half way through the summer and many of us have taken a vacation … maybe at a pricey resort or just day trips to the beach, lakes or the mountains. In this article, we’ll take a look at a vacation destination that could deliver more than just rest and relaxation, i.e.:

  • Less cost;
  • Added revenue stream;
  • Tax breaks; plus
  • Potential for capital appreciation.

That briefly outlines the advantages of a second home when employed as a vacation rental. So if you own a second home, or the boost in the economy prompts you to consider a purchase, then this article is for you.

OK, so let’s get a few basic definitions out of the way and examine tax treatment based on the mix of personal and rental use of a property.

Vacation Rental Home Benefits & Tax Breaks

A Vacation Rental Home … Not Necessarily a House

When it comes to vacation rental homes, the Internal Revenue Service makes the distinction that the property is used as a residence as opposed to a property used for businesses, such as an office building or retail center. Perhaps surprisingly, the IRS considers a “dwelling unit” to be a home, apartment, condo, mobile home, boat, or any other structure containing sleeping space, toilet, and cooking facilities. So that expands your potential investment choices in vacation rentals.

Note: If the property is used on a transient basis, as a hotel room would be, the IRS does not recognize it as a dwelling unit.

Personal Use vs. Rental – Effect on Tax Benefits

Pearson & Co. CPAs Blog Post - July 2018There are limits on the type and amount of expenses that you can deduct depending on how often you use the property for personal use and how often you rent it to others.

In general, there are two types of expenses associated with a vacation home – trade or business (or production of income) expenses and deductible personal expenses. Deductible personal expenses are items that are deductible in their entirety, regardless of whether the vacation home is personal use or rental property. Expenses in this category include casualty losses, state and local property taxes, and interest.

The first limitation on the deductibility of expenses is that the expenses related to a trade or business or the production of income (rental expenses) are only deductible to the extent you do not use the home for personal use. Basically, that is the number of days the unit is rented divided by its use for any other purpose during the taxable year – excluding days for repairs and maintenance. The resulting number is the amount of expenses tentatively deductible as rental expenses. There is more to the story, but these are the basics.

A second limitation also applies if your personal use is so extensive that the dwelling unit is treated as your “residence” for tax purposes. If the number of personal use days exceeds the greater of (1) 14 days or (2) 10% of the number of days the unit was rented at fair rental value, then the dwelling unit is a “residence” and you may not deduct any rental expenses that exceed the gross rental income from the property. Any deductible personal expenses not deducted because of the gross income limitation are allowed as itemized deductions.

In a few cases you must treat someone else’s use as your own. These include any day in which the home was used by a(n):

  • Member of your family,
  • Co-owner,
  • Member of a co-owner’s family,
  • Individual who is renting for less than fair rental value, or
  • Individual who is using your house under a “switching arrangement” that enables you to use another dwelling unit (such as switching a beach house and a mountain cabin).

It is important to note that family members’ use counts as your personal use even if they are paying fair rental value (unless they use the home for their primary residence). This is also true for the switching arrangement.

 

Rental Income and Tax Deductible Offsets

 

As previously mentioned, rental income generates an added revenue stream. Of course, that added income must be appropriately reported at tax time along with rent-related expense deductions.

Rent-related expenses may include such items as utilities, maintenance, upkeep, mortgage interest, real estate taxes and insurance. Additionally, the landlord may claim a depreciation deduction that relates to rental use. Interestingly, and often overlooked, is a deduction for the owner’s costs to travel to the vacation home on business connected to the rental.

Note: The Tax Cuts and Jobs Act include provisions that limit deductibility for acquisition debt and deductions for state and local taxes. There may be additional tax issues that could affect your unique tax status.

Takeaways

This article provides a basic overview of the definition of a dwelling unit and rules regarding vacation home rental expenses. There are other details to be considered. That said, if you own a second home and are thinking about using it as a rental property, or contemplating becoming a second home vacation rental landlord, I encourage you to call me to discuss your situation in more depth.

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

 

 

31 Jul 2018
Tax Law Pearson & Co, PC 0 comment

FOUR TAX TIPS FOR SMALL BUSINESSES

FOUR TAX TIPS FOR SMALL BUSINESSES
The New Tax Law – Much to Applaud by Small Business

Here we are better than halfway through the 2018 tax year and small businesses have much to be happy about as a result of the Tax Cuts and Jobs Act (TCJA). That said, while there is much to applaud, there is also much to be aware of as we approach the upcoming tax season. In this article we’ll touch on some of the highlights plus 4 key tax tips for small businesses.

Pearson & Co. CPAs

Tax Changes and Net Effect on Small Businesses

Of course the biggest news was the dramatic reduction in taxes for both pass-through and corporate entities. Some taxes were reduced permanently for corporations and through 2025 for pass-through businesses.

Pass-Through Businesses: The one provision that is the object of the most discussion is the 20 percent deduction for 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. Notably, this provision has far-reaching positive implications as about 95 percent of U.S. businesses are pass-through entities.

All taxpayers 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.

Note: The only limitation is on some service-based firms making more than the above income thresholds.

Corporations: The corporate tax rate is now 21 percent … a significant saving from the former 35 percent rate. Additionally, the Alternative Minimum Corporate Tax has been scrapped starting in 2018. In combination, this should have a positive effect on both capital formation and job creation.

First Year Bonus Depreciation: This is major for businesses that make eligible equipment and property purchases. The cost of these purchases may now be deducted 100 percent in the year made … up from 50 percent in past years. The incentive should result in the purchase of vehicles, computers and equipment that will further accelerate business growth and employment.

Transportation and Entertainment: Often offered as employee perks, tax-free employee commuter plans and reduced-rate entertainment plans will no longer be tax deductible expenses to employers. These fringe benefits may still be offered, but the expense deduction has been eliminated.

Pearson & Co. CPAsTips

Deadlines: Keep these dates in mind:

  • S-corporations – file business taxes by March 15.
  • 2018 tax returns due April 15, 2019.
  • Quarterly estimated tax deadlines are April 17, June 15, September 17 and January 15.

Taxes – Not a One-Time Event: Keep in mind that tax planning is a year-round process, not a one-time event at tax time. Maintain top-of-mind awareness regarding your tax situation.

Be Alert to Tax Law Changes: Even when working with a tax professional, make an effort to keep abreast of tax news. This will enrich your partnership with your tax preparer and potentially save you considerable tax dollars.

Ignore Taxes as Your Primary Decision Driver: Make your business decisions based on the best course of action for your enterprise. And never make your company judgments betting that reported tax breaks will be enacted.

Do It Yourself (DIY) is “Chancy”

OK.  The above is by no means a full rendition of all there is to know about the TCJA and small businesses. The net effects for small businesses are generally positive … but with enough twists and turns that really point to finding a tax pro that specializes in small business taxes.

If you choose a DIY path in monitoring your company’s tax status, here are a couple of resources that may help.

  • The U.S. Small Business Administration maintains a guide on navigating the tax code and staying up to date on your tax responsibilities as a business owner. Click here for more information.
  • The IRS also maintains its own information center on self-employed and small business taxes. You can find the guide here.

Alternatively, if DIY does not appeal to you or appears risky …

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

 

11 Jul 2018
Social Security Article by Pearson & Co. PC
Social Security Pearson & Co, PC 0 comment

THE UPSIDE AND THE LOWDOWN ON SOCIAL SECURITY IN 2018

THE UPSIDE AND THE LOWDOWN ON SOCIAL SECURITY IN 2018
How Current and Future Retirees Will Fare

Pearson & Co., PC - July 2018 Blog Post

 

For some, Social Security is, or will be, the centerpiece of their retirement table. At the very least, it will be a significant financial component for most seniors during their “golden years”. So in this article we’ll take a look at what may be expected in the Social Security playbook for retirees … both current and soon-to-be.

When Retirement is on the Horizon

Let’s start with folks who are anticipating retirement and what they should consider as it relates to Social Security benefits. An important consideration is when you should start claiming your benefits. Of course, your total financial circumstances will impact your decision, but ideally waiting until full retirement age will maximize your benefits over the course of your retirement.

Full retirement age is the age at which you may first become entitled to full or unreduced retirement benefits and will vary based on your year of birth. The earliest age that you may claim benefits is 62.  However you will receive a reduced amount for each year that you retire between age 62 and your full retirement age. Click here for the details, but here is a brief rundown on what to expect.

  • You’ll receive 6 to 7 percent more for each year by waiting until full retirement age.
  • Folks currently between ages 62 and 66 will break-even at roughly age 73 or 74.
  • Benefits continue to increase between full retirement age and age 70.
  • If you continue to work, you will forfeit one dollar of Social Security benefits for every two dollars you earn over $17,040 annually. Note: Earning $51,120 or more means you forfeit all of your Social Security benefits in that year!

Here’s an excellent planning tool on the Social Security website that will give you many different ways to calculate your benefits.

A word regarding spouses … spousal benefits will kick in for spouses with low or no earnings at 50 percent of your benefit. Again, if possible, waiting to retire at 70 is a real income booster.

For Those Folks Who Have Retired and Receive Social Security

Here’s a rundown on what you can expect in 2018 and perhaps beyond.

  • Modest cost of living adjustment will bump benefits by 2%. Net effect will be in the range of $25 in monthly benefits.
  • Maximum monthly benefit cap rises to $2,788.
  • Disabled folks will receive increases of $10 to $20 per month depending on their disability.

Safeguarding Your Identity and Benefits

It’s pretty well known that your Social Security number and personal information are prime targets for fraudsters. Here are some reminders of where and how to exercise caution to avoid the considerable emotional disruption and potential financial loss when your information has been compromised.

Social Security Number Theft and Safeguarding:

The Identity Theft Resource Center reports almost half of all identity theft now is happening in health care facilities and suppliers of medical equipment and services. Kiplinger offers up an additional eight categories of risky places to lose your Social Security number. Be cautious of providing your Social Security number without absolute assurance it is necessary to do so at that moment in time.

Replacement of Your Medicare Card:

If you haven’t already been contacted, you will receive a new Medicare card. The new card will not include your Social Security number.

Never Share Your Social Security Number on Social Media:

Your initial reaction to this may be “duh”. However, a Visa report reveals that about 7 percent of people have posted their Social Security number on social media.

Summary

OK. The above is by no means a full rendition of all there is to know about Social Security. If you continue in a DIY mode, here’s a slideshow with most of the above, plus an item or two that weren’t covered.

Alternatively, if DIY does not appeal to you or appears risky … Pearson & Co. stands ready to help. Call or email … we’ll respond promptly.

11 Jul 2018
Business, Employment Pearson & Co, PC 0 comment

HIRING QUALITY WORKERS IN TIGHT JOB MARKET

HOW TO HIRE QUALITY WORKERS IN TIGHT JOB MARKET
Strategy That Includes Significant Tax Savings

Pearson & Co., PC - Blog Post

It’s no secret … unemployment is at a record low. That’s great for Americans who are now enjoying good jobs … and challenging for employers seeking to attract and recruit quality workers. Full employment means a diminished pool of qualified job candidates.

That said, there is a largely untapped source of workers who, when hired, bring with them significant tax benefits to help new and existing small businesses. That group includes long-term unemployment recipients and other categories of workers with employment barriers.

Tax relief benefits are delivered through the Work Opportunity Tax Credit (WOTC) … income tax relief that encourages employers to hire designated categories of workers who face significant hurdles to becoming gainfully employed.

We’ll talk about the potential tax savings in a moment, but first a review of the ten categories of WOTC-eligible workers.

  • Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients
  • Unemployed veterans, including disabled veterans
  • Ex-felons
  • Designated community residents living in Empowerment Zones or Rural Renewal Counties
  • Vocational rehabilitation referrals
  • Summer youth employees living in Empowerment Zones
  • Food stamp (SNAP) recipients
  • Supplemental Security Income (SSI) recipients
  • Long-term family assistance recipients
  • Qualified long-term unemployment recipients.

The Work Opportunity credit is generally based on wages paid to eligible workers during the first two years of employment. Eligible businesses claim the WOTC on their income tax return. The intent is to encourage business investments that are considered crucial to boost economic development.

Here’s the real value of a tax credit. The best way to describe tax credits is 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.

Essentially, the WOTC is a business entitlement subsidy that may be enjoyed by any company that meets the legal criteria. To qualify for the credit, an employer must first request certification by filing IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, with the state workforce agency within 28 days after the eligible worker begins work. Other requirements and further details can be found in the instructions to Form 8850.

Takeaway

Business owners … looking to save money, reinvest in your business and grow the value of your most valuable business asset – your people? Qualifying for the WOTC will deliver on all those plusses.

 

27 Apr 2018
Health Coverage
News, Tax Law Pearson & Co, PC 0 comment

QSEHRA: NOT A WORD … AN ACRONYM

QSEHRA: NOT A WORD … AN ACRONYM
Health Benefit Option for Employers with 50 or Fewer Employees

Health Coverage

 

If you are an employer with 50 or fewer employees and have not heard of or participated in QSEHRA, this article is for you. First let’s flesh out the acronym QSEHRA … Qualified Small Employer Health Reimbursement Arrangements.

In straightforward terms, these plans allow small employers to reimburse employees to help pay for medical expenses … including individual insurance premiums. Reimbursed expenses are tax deductible to the employer and received tax-free by employees.

Note: QSEHRA is welcome news for employers that offered Health Reimbursement Arrangements (HRAs) prior to health care reform legislation which significantly restricted the use of such plans with heavy penalties imposed for violations. QSEHRAs are an exception to the Patient Protection and Affordable Care Act (PPACA) of 2010 HRA requirements.

Since the QSEHRA benefit was passed in December 2016 as part of the 21st Century Cures Act, literally thousands of businesses now offer these plans across the country. Notably, a majority of companies that chose this route did so to offer employee health benefits for the first time.

Reception by participating employees has been noteworthy with employees using nearly 80 percent of the tax-free money available to them through plans in 2017.

Small business decision-makers are particularly attracted to QSEHRA. The average employee count by companies adopting a plan in 2017 was six. That would indicate that many, if not most of these companies are least likely to afford traditional group health benefits. QSEHRA offers an appealing and affordable option.

As you likely suspect, there are requirements and limitations that apply to both employers and employees under the QSEHRA regulations. Here’s a brief rundown.

Employers

  • With 50 or fewer employees qualify if not considered an Applicable Larger Employer (ALE) under the PPACA.
  • The employer does not offer a group health plan.
  • Reimbursements in 2018 are limited to $5,050 for single coverage and $10,250 for family coverage.
  • The plan must be offered to all employees under the same terms with few exceptions.
  • Notifications to employees of their participation requirements.

Employees

  • Must demonstrate they have minimum essential coverage through another source as required by the PPACA.
  • Reduce their premium tax credit by the monthly reimbursement received from their company if the allowance doesn’t comply with the PPACA definition of “affordable coverage.”

Summary

QSEHRAs provide a valuable benefit to employers in attracting and retaining quality talent. Additionally, employees may enjoy tax-free dollars as reimbursement for medical expenses for themselves and their families. That said there are requirements that must be maintained by employers adopting these plans, with significant negative tax consequences for non-compliance. Business owners be sure to seek assistance from a tax professional.

This article is meant as a summary of the QSEHRA provisions. There is more to the story, especially as it may apply to your specific circumstances.

As ever, Pearson & Co stands ready to help you determine the applicability of QSEHRA for your company. A call or an email will be met with a rapid response!

27 Apr 2018
Security Pearson & Co, PC 0 comment

GOT AN UNEXPECTED TAX RETURN?

GOT AN UNEXPECTED TAX RETURN?
And a Request to Return It

Pearson-April2

 

The latest con launched by the fraudsters is the  “IRS Refunds” scam. The cybercriminals either steal client data from tax preparers or trick people into clicking on an email link or attachment to a fake page where thieves attempt to steal sensitive information.

Once the taxpayer’s data has been secured, the criminals file fraudulent tax returns that often direct tax refunds to be deposited to the taxpayer’s bank account.

Next, the crooks typically contact the victims by phone demanding that the money be returned. Their “cover” is to pose either as IRS agents or an IRS-authorized collection firm.

In another scenario, the taxpayer may receive a recorded call charging the taxpayer with fraud, threatening the victim with arrest and a “blacklisting” of their Social Security number. The recorded voice then tells the taxpayer to call a number for information on returning the refund. See IR-2018-27.

These are examples of current various tactics the thieves use to reclaim the refund from the taxpayers. Be alert! Their versions of the scam may continue to evolve.

The IRS has repeatedly confirmed that they will not:

  • Call to demand immediate payment over the phone, nor call about delinquent taxes without first mailing you several bills.
  • Call or email you to verify your identity by asking for personal and financial information.
  • Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
  • Require you to use a specific payment method, e.g. a prepaid debit card, etc.
  • Ask for credit or debit card numbers via phone or email.
  • Threaten to have you arrested or other penalty for not paying.

As directed by the IRS …

If you get a phone call from someone claiming to be from the IRS and asking for money here’s what you should do:

  • Do not give out any information. Hang up immediately.
  • Contact TIGTA to report the call. Use their IRS Impersonation Scam Reporting web page or call 800-366-4484.
  • Report it to the Federal Trade Commission by visiting FTC.gov and clicking on “File a Consumer Complaint.” Please add “IRS Telephone Scam” in the notes.
  • If you think you might owe taxes, call the IRS directly at 1-800-829-1040.

More information on how to report phishing or phone scams is available on IRS.gov.

27 Apr 2018
Security Pearson & Co, PC 0 comment

THE 2018 IRS DIRTY DOZEN TAX SCAMS

THE 2018 IRS DIRTY DOZEN TAX SCAMS
And the “Winners” are…

Tax SCAMS

 Caution! Fraudsters at Work

“We continue to work hard to protect taxpayers from identity theft and other scams,” said IRS Commissioner John Koskinen. “Taxpayers can and should stay alert to new schemes which seem to constantly evolve. We urge them to do all they can to avoid these pitfalls – whether old or new.”

For the fourth year, the service again offers its Dirty Dozen scams including some old, some new and a few either wily or routine. What follows is a recap of the top 12 nasty ploys that the bad guys use to steal taxpayers personal information, scam them out of money or talk them into engaging in questionable (even illegal!) behavior with their taxes.

Thanks to the IRS, you can view a video version of this story Dirty Dozen – English, or just read on!

  1. Phishing: Taxpayers need to be on guard against fake emails or websites looking to steal personal information. The IRS will never send taxpayers an email about a bill or refund out of the blue. Don’t click on one claiming to be from the IRS. Be wary of strange emails and websites that may be nothing more than scams to steal personal information
  2. Phone Scams: Phone calls from criminals impersonating IRS agents remain an ongoing threat to taxpayers. The IRS has seen a surge of these phone scams in recent years as scam artists threaten taxpayers with police arrest, deportation and license revocation, among other things.
  3. Identity Theft: Taxpayers need to watch out for identity theft especially around tax time. The IRS continues to aggressively pursue the criminals that file fraudulent returns using someone else’s Social Security number. Though the agency is making progress on this front, taxpayers still need to be extremely cautious and do everything they can to avoid being victimized.
  4. Return Preparer Fraud: Be on the lookout for unscrupulous return preparers. The vast majority of tax professionals provide honest high-quality service. But there are some dishonest preparers who set up shop each filing season to perpetrate refund fraud, identity theft and other scams that hurt taxpayers.
  5. Fake Charities: Be on guard against groups masquerading as charitable organizations to attract donations from unsuspecting contributors. Be wary of charities with names similar to familiar or nationally known organizations. Contributors should take a few extra minutes to ensure their hard-earned money goes to legitimate and currently eligible charities. IRS.gov has the tools taxpayers need to check out the status of charitable organizations.
  6. Inflated Refund Claims: Taxpayers need to be on the lookout for anyone promising inflated refunds. Be wary of anyone who asks taxpayers to sign a blank return, promises a big refund before looking at their records, or charges fees based on a percentage of the refund.
  7. Excessive Claims for Business Credits: Avoid improperly claiming the fuel tax credit, as well as avoid misuse of the research credit.
  8. Falsely Padding Deductions on Returns: Taxpayers should avoid the temptation of falsely inflating deductions or expenses on their returns to under pay what they owe or possibly receive larger refunds.
  9. Falsifying Income to Claim Credits: Don’t invent income to erroneously qualify for tax credits, such as the Earned Income Tax Credit.
  10. Frivolous Tax Arguments: Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims even though they are wrong and have been repeatedly thrown out of court. The penalty for filing a frivolous tax return is $5,000.
  11. Abusive Tax Shelters: The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them.
  12. Offshore Tax Avoidance: There have been a recent string of successful enforcement actions against offshore tax cheats. Taxpayers are best served by coming in voluntarily and getting caught up on their tax-filing responsibilities.

Taxpayers are encouraged to review the list in a special section on IRS.gov and be on the lookout for these con games.

30 Mar 2018
Tax Law Pearson & Co, PC 0 comment

SO YOU GOT MORE MONEY IN FEBRUARY!

SO YOU GOT MORE MONEY IN FEBRUARY!
Caution: The Bump In Your Paycheck May Not Be All Yours!

Pearson Co. CPAs - March Newsletter

The reason your check was bigger last month is because income tax brackets under the new tax law have changed. That means that the vast majority of American workers are enjoying more money in their pocket this year over last.

OK.  So definitely cause to celebrate, but do so with a reality check to be sure there are no hidden surprises awaiting you this time next year … when you file your 2018 tax return. The surprise may be that you owe taxes rather than be “even” or anticipate a refund.

Reality Check

Your objective is to be sure that your employer is withholding the correct amount of federal taxes from your paycheck. The idea is to have your withholdings at least match your anticipated tax bill, thereby avoiding owing taxes or a penalty.

On a more positive note, you may find that it is more advantageous to have less withheld and enjoy more take-home pay.

Reality Check Tool – IRS Withholding Calculator

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

Take just a few minutes to assemble the following information.

  • Your W-2
  • Most recent pay stubs.
  • Your 2017 income tax return, Form 1040.

Then click here Withholding Calculator and answer a few questions.

Your Withholding Calculator results will tell you whether you should ask your employer to revise your W-4 information to minimize or eliminate any negative impact on your tax liability. Alternatively, you may find that you will continue to enjoy more take-home pay.

If you need to have your employer change your deductions, you’ll need to provide a new Form W-4, Employee’s Withholding Allowance Certificate, you can use your results from the Calculator to help fill out the form and adjust your income tax withholding.

Note: If your circumstances change during the year, revisit the Calculator to make sure your withholding is still adequate.

Questions: Pearson & Co. will respond promptly. Give us a call or drop an email.

 

30 Mar 2018
HELOC Interest Deduction
HELOC Pearson & Co, PC 0 comment

HELOCs INTEREST DEDUCTION

HELOC INTEREST DEDUCTION
First They Say You Can’t … and Now They Say You Can … Maybe!

HELOC Interest Deduction Article from Pearson Co. CPAs

The Tax Cuts and Jobs Act (TCJA) passed in the closing days of last year, was apparently quite clear about the treatment of interest paid on home equity lines of credit (HELOC) … its tax deductible status was killed beginning with the 2018 tax year.

As a result of “many questions by taxpayers and tax professionals” the IRS has clarified that all interest deductions on HELOCs are not history. That clarification boils down to deductions may be permitted for home equity loans used for home improvement purposes. In the words of the IRS, taxpayers may “often still deduct interest on a home equity line of credit or second mortgage, regardless of how the loan is labeled when used to buy, build or substantially improve the taxpayer’s home that secures the loan.”

As you may expect there are limitations. The total debt on the house must be within statutory limits, i.e. the combined debt of the first mortgage and HELOC may not exceed $750,000 for joint filers and $375,000 for those filing separately.

Do This to Retain Deduction: Let’s assume your initial first mortgage when you bought your home was $350,000. In 2018, you take out a HELOC in the amount of $75,000. If you use the money to remodel your kitchen, add a deck or renovate your master bath, all of the interest is deductible.

Don’t Do These Things: In its policy statement on this issue, the IRS offers examples of what you may not do with your HELOC and still deduct the interest:

  • Pay off credit card bills and other personal debts;
  • Student loans;
  • Auto purchases;
  • Vacation travel expenses; and
  • Home furnishings.

So there are no restrictions on how you use proceeds from a HELOC … just specific guidelines that say to retain the interest deduction it must be used for purposes of home improvement. So let’s say you borrow $75,000 as a HELOC in 2018. You use $50,000 for home improvements and $25,000 to pay off student loans … interest on the $50,000 is still deductible; interest on the $25,000 applied to student debt is not.

Click here to read the full IRS text.

Alternatively … give us a call or drop an email and let’s talk about how the new law may affect your specific circumstances. Pearson & Co. … always ready to respond promptly and help!

30 Mar 2018
2018 Tax Law Insights from Pearson & Co. CPAs
Tax Law Pearson & Co, PC 0 comment

NEW TAX LAW AND THE GIG ECONOMY

NEW TAX LAW AND THE GIG ECONOMY
Attractions and Aversion for Workers and Employers

Pearson CPAs New Tax Law and the Gig Economy

The 21st Century worker landscape is rapidly gaining altitude in the gig economy sector … that’s the increased motivation and availability by both employers and workers, respectively, to hire and be hired as independent contractors.

The percentage of workers that make up the gig economy is reported in wide swings depending on the source. Even the Bureau of Labor Statistics has admitted difficulty in counting the exact number of independent contractors and contingent workers. That said, one reliable statistical resource, Intuit, estimates that gig workers represent 34 percent of the workforce, and will grow to be 43 percent by 2020.

Driving this growth is the internet and its capability to support workers functioning remotely from their employer. Additionally, successes such as Uber and Airbnb has 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 Tax Cuts and Jobs Act

Now the new tax law may accelerate that trend by rewarding workers who convert their status as employees to that of independent contractors. A distinct benefit under the new tax law is the “20% pass-through” tax deduction. In simplest terms, this allows sole proprietors, partnerships and S Corporations to deduct 20 percent of their “qualified business income” from their taxable income … meaning only 80 percent would remain taxable.

Admittedly, it’s difficult to predict how many workers will choose this route. For couples filing jointly, $315,000 is the cap above which the deduction is phased out. That said, joint filers who approximate that figure could find it to be a compelling option to make the change. Estimates are that the tax savings could approximate $15,000 per year in this scenario.

Many employers may benefit from this new provision in the tax law as well … particularly those who are seeking to reduce their payroll costs. Often independent contractors tend to be cheaper, plus payroll taxes that are the employer’s responsibility are passed on to the contingent worker.

Consider This

So caution to workers is the prudent route before taking steps to convert from employee to gig worker. Here are just a few considerations:

  • Loss of unemployment insurance;
  • No longer covered by workers compensation;
  • No predictable, steady income – subject to peaks and valleys of assignments;
  • Need to pay both the employer and employee portion of federal payroll taxes;
  • The Department of Labor and IRS have increased scrutiny in determining a workers status as truly being an independent contractor or must be treated as an employee.

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

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