Tag: 2018 Tax Law

30 Mar 2018
HELOC Interest Deduction
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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
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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.

25 Feb 2018
Virginia Consumer Use Tax
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VIRGINIA CONSUMER USE TAX

VIRGINIA CONSUMER USE TAX
Small Business Owners … Don’t Get Caught in Non-Compliance

Virginia Consumer Use Tax 1

OK, Virginia small business owners … you know all about paying sales taxes, because anything requiring that tax to be collected is done so by Virginia-based sellers/vendors you deal with. Likewise, you are familiar with the sales tax because you are required to collect it from buyers of your goods that are taxable.

Now let’s add another dimension to the world of taxable events … the consumer use tax. Generally, the consumer use tax becomes an issue when you rent, lease or buy tangible items that you didn’t pay sales tax on at the time of purchase. Practically speaking, this typically occurs when you buy something outside the state via the internet, by phone, through mail order or even an out-of-state purchase that you bring back to Virginia to use here.

Note: We’re not talking about “double taxation” on your purchases. They are subject to either sales tax or use tax, not both. Items exempt from sales tax in Virginia are also exempt from consumer’s use tax.

So for example, let’s say you order printer ink cartridges through a website of a company based in Texas and are not charged sales tax. You are required to pay use tax at the same rates as the Virginia sales tax. Sales tax rates in Virginia currently are:

Of course, there are exemptions. Rather than try to list those in this article, why not give us a call to discuss the specifics of your purchases and whether they are taxable or exempt.

The use tax is due for calendar-year filers by May 1. If you are a fiscal-year filer, your due date is the 15th day of the 4th month after the close of your taxable year.

Yes, there are penalties and interest charged for non-payment, underpayment or late payments. Click here for more info Penalty and interest … or better yet give us a call or drop an email. We’ll respond promptly.

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Summary

Small business owners especially need to be mindful of the need to comply with the requirements to declare purchases subject to use tax and to remit the applicable taxes.

Keep in mind that the Virginia Department of Taxation routinely conducts audits to enforce compliance. That activity is likely to become even more aggressive in this age of borderless commerce that is particularly fueled by the internet. The state has a vested interest in ensuring that businesses of all sizes pay either the sales tax or use tax on purchases that are not exempt.

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

25 Feb 2018
Tax Credits
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THREE TAX CREDITS FOR 2017

INDIVIDUAL TAXPAYERS
Be Sure to See If You Qualify for Three Tax Credits

Three Tax Credits Blog 1

Taxpayers!

You may qualify for one or more of three often overlooked tax credits that may put more money in your pocket.

  • Earned Income Tax Credit (EITC)
  • Child Tax Credit (CTC)
  • American Opportunity Credit (AOC)

If you qualify, tax credits will reduce the amount of tax you will pay. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. Here’s a brief rundown on each to determine your qualifications and potential tax-savings payoffs.

Note: Even if you are not required to file a tax return, consider doing so. If you qualify, you must file a 2017 tax return to claim your tax credit. You may end up paying less federal tax, pay no tax or even get a tax refund.

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Earned Income Tax Credit (EITC)

Note: Four of five eligible workers qualify – If not you, maybe someone you know.

Millions of taxpayers are likely missing out on this significant tax credit. That means larger refunds are being forfeited due to lack of awareness of this benefit.

If you know friends or loved ones who you think may have earned around $54,000 or less last year, you may do them a favor to learn about EITC eligibility and use the EITC Assistant to find out if they qualify.

Alternatively, we’ll be happy to help. Consider these potential benefits:

  • Eligible families with three or more qualifying children could get a maximum credit of up to $6,318.
  • People without children may receive an additional tax refund of $506.
  • Some may qualify even if they owe no tax in 2017.

Here’s more detail from the Internal Revenue Service to determine your qualifications and potential tax-savings payoffs.

2017 EITC Income Limits, Maximum Credit Amounts and Tax Law Updates

Earned Income and AGI Limits

Earned income and adjusted gross income (AGI) must each be less than:

Three Tax Credits Table 1

Investment Income Limit
Investment income must be $3,450 or less for the year.

Maximum Credit Amounts
The maximum amount of credit for Tax Year 2017 is:

  • $6,318 with three or more qualifying children
  • $5,616 with two qualifying children
  • $3,400 with one qualifying child
  • $510 with no qualifying children

A last word on qualifying taxpayers … you may qualify as a taxpayer with disabilities, parents of children with disabilities or a grandparent who works and are also raising grandchildren.

Certainly worth asking the question, “Do I qualify?” Give us a call. We will deliver your answer.

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Child Tax Credit (CTC)

You may be eligible to claim a tax credit that will reduce your tax by as much as $1,000 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:

  • Is 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 2017;
  • Did not provide over half of his or her own support for 2017;
  • Lived with you for more than half of 2017;
  • 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.

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.

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.

By law, the IRS is required to hold EITC and Additional Child Tax Credit refunds until mid-February — even the portion not associated with the EITC or ACTC.  The IRS expects the earliest of these refunds to be available in taxpayer bank accounts or debit cards starting February 27, 2018, if these taxpayers choose direct deposit and there are no other issues with their tax return.

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American Opportunity Credit (AOC)

You may be able to claim a credit of up to $2,500 for education expenses you paid for each student who qualifies for the AOC. The basic qualifying requirements are:

  • The student is yourself, your spouse or a person claimed as a dependent on your return.
  • You pay the education expenses for a student enrolled in qualified, higher education.

Forty percent of the American opportunity credit may be refundable. So if the refundable portion of your credit is more than your tax, the excess will be refunded to you.

There are limitations on the amount of your income and the amount of your tax owed. Here’s an overview of those requirements and others.

Table 2-1.Overview of the American Opportunity Credit for 2017

Three Tax Credits Table 2

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

Summary

You may qualify for one or more of three often overlooked tax credits that may end up with you paying less federal tax, pay no tax or even get a tax refund. Millions of taxpayers are missing out on this significant tax credit. That means larger refunds are being forfeited due to lack of awareness of this benefit.

Even if you are not required to file a tax return, consider doing so. If you qualify, you must file a 2017 tax return to claim your tax credit.

25 Feb 2018
Tax Law Pearson & Co, PC 0 comment

16 OF THE ZANIEST TRIES FOR A TAX-BREAK

The IRS Did Not Buy What These Taxpayers Were Selling

 

Without a doubt, you must give an ‘A’ (or at least an ‘E’) for effort when it comes to creativity by
American taxpayers seeking a tax break. Consider this sampling of 16 compiled and reported by
Kiplinger:

  • In search of peace and quiet
  • IRS induced emotional stress
  • Pizza as a payroll deduction
  • Standard deduction is doubled
  • Compensation for a wife’s affair

OK. You probably get the picture and the conclusion that none of these, plus a dozen more, did
not “fly” with the IRS. Click here for the whole array of whacky attempts to beat the tax code.

23 Jan 2018
Tax Cuts
Tax Law Pearson & Co, PC 0 comment

THE NEW TAX CUTS AND JOBS ACT

An Abbreviated Summary and How It Affects You

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Well it was a day-to-day roller coaster ride, but the Republicans finally cobbled together the Tax Cuts and Jobs Act that passed muster with both houses of Congress, plus earned President Trump’s signature on December 22, 2017.

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Quick Peek at the New Tax Act

Here’s the Reader’s Digest version, followed by a summary of provisions that may directly affect your taxes and your strategies to maximize your benefits under the new law during 2018 and beyond.

Note: This summary is an abbreviation of the plan details. You are urged to meet with your tax advisor for the specifics as it pertains to your unique circumstances.

  • Corporate tax rate cut from 35 percent to 21 percent (through 2025)
  • Top individual tax rate drops to 37 percent
  • Individual tax rates cut in all income tax brackets
  • Standard deduction is doubled
  • Personal exemptions are eliminated

Who Must File Form 1099?

Individual Income Taxes

The Act retains the seven income tax brackets but lowers tax rates which will be reflected in employees’ withholding in February 2018 paychecks.

Here’s what the new tax rates look like compared to the old.

2018 Income Tax Rates

Deductions & Exemptions

  • Standard deduction doubled from$6,350 for single filers to $12,000; married and joint filers increased from $12,700 to $24,000.
  • Personal exemptions of $4,150 eliminated
  • Most itemized deductions eliminated, e.g. alimony & home equity loan interest
  • Charitable contributions, retirement savings and student loan interest deductions retained
  • Mortgage interest deduction limited to the first $750,000 of the loan
  • State and local tax deductions limited to $10,000
  • Deduction for medical expenses that are 7.5 percent or more of income
  • Obamacare tax on those without health insurance repealed
  • 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

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Child and Elder Care

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

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Business Taxes

  • Corporate tax rate lowered from 35 percent to 21 percent
  • Standard deduction for pass-through businesses raised to 20 percent
  • Corporate interest expense deductions limited to 30 percent of income
  • Deductions for depreciable assets permitted in one year rather than amortizing over several
  • Others that mainly pertain to large corporations

Summary

Clearly there is much more to the revised and added provisions to the Tax Cuts and Jobs Act that cannot be included in this brief overview.  Click here if you’d like to read the Act in its entirety.

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Better yet, give us a call to schedule a time to review the specifics as they may affect your unique situation. Together, we can develop an optimum tax strategy that benefits you and your family.

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