In this edition of our newsletter, we highlight some of the critical tax law changes and year-end planning opportunities, discuss business startups and cofounders, increased IRS cryptocurrencies enforcement, IRS deficiency notices, and much more.
Our goal is to provide you with an unparalleled level of client service. If you have questions related to any of the subjects discussed in this newsletter, be sure to give this office a call. We rely on satisfied clients as the primary source of new business, and your reviews and referrals are both welcomed and most sincerely appreciated!
Finalization of State- and Local-Tax Deduction Limitation
Penalty for Not Being Insured
Qualified Opportunity Funds
Seniors’ Special Tax Form
Family and Medical Leave Credit
Inflation Adjustments
Form W-4 Revision
As the end of the year approaches, now is a good time to review the various changes that impact 2019 tax returns. Some of the changes are likely to apply to your tax situation. In addition, be aware that various tax-related bills currently in Congress may or may not pass this year. If any of them do pass, we will quickly get the details to you.
Medical Threshold – Medical expenses are deductible as itemized deductions only if the total medical expenses for the tax year exceed a specified percentage of a taxpayer’s income. After dropping to 7.5% for 2017 and 2018, this threshold reverts to 10% for 2019. As a result, any medical expenses from 2019 are deductible only to the extent that they exceed 10% of a taxpayer’s adjusted gross income for the year.
Electric Vehicle Credit Phaseout – As an incentive to get taxpayers to move away from conventional-fuel (gasoline or diesel) vehicles, Congress has provided tax credits of up to $7,500 for the purchase of plug-in electric vehicles. However, Congress’s rules limit the full credit to the first 200,000 vehicles sold by a given manufacturer. Once a company sells 200,000 qualifying vehicles, the credit begins to phase out for that company. Tesla, Chevrolet, and Cadillac have all reached the phaseout point. The table below shows the credits available depending upon the quarter when the vehicle is purchased.
Vehicles Beginning Phaseout out 2019
Date Acquired
>>>
Vehicle
Before 2019
Jan – Mar 2019
Apr – June 2019
July – Sept 2019
Oct – Dec 2019
Jan – Mar 2020
After Mar 2020
Tesla*
$7,500
$3,750
$3,750
$1,875
$1,875
$0
$0
Chevrolet*
$7,500
$7,500
$3,750
$3,750
$1,875
$1,875
$0
Cadillac*
$7,500
$7,500
$3,750
$3,750
$1,875
$1,875
$0
*All qualifying models
If a qualifying vehicle is used partiality for business, the credit is proportionally allocated between personal and business tax credits. The personal portion can only offset the individual’s current-year tax liability; any excess is lost. The business portion can be carried back for one year and then forward up to 20 years until it is used up; any credit remaining after the 20th year is lost. As a tip, please note that the credit limit is per vehicle, not per taxpayer, so individuals who make multiple purchases can receive multiple credits.
Alimony – One delayed effect of the 2017 tax reform is that, the treatment of alimony changes for some individuals starting in 2019.
For divorces or separations entered into before 2019, alimony payments continue to be deductible for the payer and taxable for the recipient; such payments also still qualify as earned income for purposes of the recipient’s qualification for an IRA deduction. For divorces or separations executed after December 31, 2018, alimony payments are no longer deductible for the payer. In addition, for the recipient, they are no longer taxable income and do not count as earned income for the purposes of IRA deduction.
Divorces or separations entered into before 2019 continue to follow the pre-2019 rules unless they have been modified after December 31, 2018; in that case, the alimony payments are subject to the post-2018 rules if the modification expressly provides for this.
Finalization of State- and Local-Tax Deduction Limitation – The 2017 tax reform limited the itemized deduction for state and local taxes (SALT) to $10,000 (or $5,000 for married individuals filing separately). This has adversely impacted taxpayers in high-tax states such as California, Connecticut, New Jersey, and New York. Elected officials in several states have attempted to work around this restriction by establishing (or proposing to establish) state charities. The idea is that taxpayers would make deductible contributions that, in return, would give them tax credits against their SALT equal to most of the value of the charitable contributions. Unfortunately, these officials have overlooked the 1986 U.S. Supreme Court ruling that, if a taxpayer receives something in return for a contribution (i.e., a quid pro quo), the contribution is not deductible.
The final regulations generally reduce the charitable-contribution deduction by the amount of any SALT credit received. However, as an exception, if the credit does not exceed 15% of the contribution, the entire contribution is deductible.
Penalty for Not Being Insured – The Tax Cuts and Jobs Act (tax-reform) that was enacted at the end of 2017 eliminated the Obamacare shared-responsibility payment, effective starting in 2019. Congress didn’t actually repeal this penalty; instead, it effectively repealed it by tweaking by setting zero values for both the percentage of household income used in the calculation and the flat dollar amount of the penalty. As a result, the amount of the penalty is always zero. However, keep in mind that the penalty could be restored in the future if the direction that the political winds are blowing changes. In addition, beginning in 2020, some states may pick up where the federal government left off and charge a penalty to residents without qualified health insurance coverage.
Qualified Opportunity Funds – Taxpayers who receive capital gains on the sale or exchange of property (if the other party is unrelated) may elect to defer – and, potentially, partially exclude – those gains from their gross income if they are reinvested in a qualified opportunity fund (QOF) within 180 days of the sale or exchange. The amount of the gain (not the amount of the proceeds, as in Sec. 1031 deferrals) needs to be reinvested in order to defer the gain. The deferral period ends when the QOF investment ends or on December 31, 2026 – whichever is sooner. At that time, taxes must be paid on the deferred gain.
However, 10% of the deferred gains are forgiven QOF investments have been held for at least 5 years, and 15% of the gains are forgiven when those investments have been held for at least 7 years. Note that, with the deferral end date of December 31, 2026, qualifying for the 15% forgiveness requires a QOF investment on or before December 31, 2019.
Seniors Get a Special Tax Form – Lawmakers have long sought to provide taxpayers who are age 65 and older with a simplified tax form in place of the Form 1040. In the 2018 budget bill, Congress finally included a requirement that the IRS create such a form. As a result, the IRS will introduce Form 1040-SR, which will look a lot like the old form looked before the 2018 tax reform instituted its (politically motivated) division of the Form 1040 into multiple postcard-size schedules. It is unclear how much simpler the Form 1040-SR will be, but it will be available for 2019 returns. Form 1040-SR will be optional.
Family and Medical Leave Credit – The employer credit for family and medical leave, which was created in the 2017 tax reform, ends after 2019. This two-year program provides employers with a tax credit equal to 12.5% of the wages they paid to qualifying employees during any period when those employees were on family and medical leave, provided that the rate of the leave payments are at least 50% of the employees’ normal wages. The credit can be claimed for a maximum of 12 weeks of leave for any employee during the tax year. For each percentage point for which the leave payments exceed 50% of normal wages, this credit increases by 0.25 percentage points (up to a maximum of 25%). Participation in this credit program is optional.
Inflation Adjustments – Just about every tax-related value is adjusted for inflation. Some values are adjusted for any level of change, but others are adjusted only if the change reaches at least a specific dollar amount (so these values may not change every year). The table below includes the actual 2019 inflation adjustments and the projected 2020 adjustments for some of the most frequently encountered values.
Year
2018
2019
2020
Standard Deduction
Single or Married Filing Separately
12,000
12,200
12,400
Head of Household
18,000
18,350
18,650
Married Filing Jointly
24,000
24,400
24,800
Additional Standard Deduction (Age 65+ or Blind)
Unmarried
1,600
1,650
1,650
Married
1,300
1,300
1,300
Other Values
Annual Gift-Tax Exclusion
15,000
15,000
15,000
Foreign Earned-Income Exclusion
103,900
105,900
107,600
IRA Contribution Limit
5,500
6,000
6,000
IRA Contribution Limit (Age 50+)
6,500
7,000
7,000
401(k) Contribution Limit
18,500
19,000
*
401(k) Contribution Limit (Age 50+)
24,500
25,000
*
All values are in U.S. dollars.
* Value not available as of publication
Form W-4 Revision – During the previous tax season, many people received a smaller federal tax refund than normal or actually owed taxes despite usually getting a refund. In most cases, this was due to the last-minute passage of the tax-reform law at the end of 2017, which did not give the IRS not sufficient time to adjust the W-4 form and related computation tables for the 2018 tax year so as to account for all of the new law’s changes. The planned major revision to the W-4 for the 2019 tax year has since been delayed until 2020, so all taxpayers should make sure that their 2019 withholding is adequate.
If you are conversant with tax terminology, you can use the IRS’s newly updated withholding estimator. This tool helps taxpayers to determine whether their employers are withholding the right amount of tax from their paychecks. However, please note that the results are only as good as the information that is put into the estimator. Users need to properly estimate their other income for the year from various sources.
If you have questions related to any of the subjects discussed in this article, be sure to give this office a call.
Holiday Gifting with a Tax Twist
Article Highlights:
Employee Gifts
Gifts of College Tuition
College Student Supplies
Electric Car Credit
Work Equipment
Solar Electric Credit
Charitable Gifts
Some holiday gifts you provide to members of your family, employees, and others may also yield tax benefits. Here are some examples:
Employee Gifts — It is common practice this time of year for employers to give employees gifts. Although gifts are generally excluded from the recipient’s gross income, an employee cannot exclude gifts from his or her employer as a gift.
However, if the gift is infrequently offered and has a fair market value so low that it would be impractical and unreasonable to account for it, the gift’s value would be treated as a de minimis fringe benefit. As such, it would be tax-free to the employee and tax-deductible by the employer.
A gift of cash, regardless of the amount, is considered additional wages and is subject to employment taxes (FICA) and withholding taxes.
Caution: When a gift recipient is a W-2 employee, the employer must not issue them a 1099-MISC for a holiday gift of cash; the amount must be treated as W-2 income. This is a common error made by employers.
If an employer gives gift certificates, debit cards, or similar items that are convertible to cash, their value is considered additional wages, regardless of the amount.
If, as a means of promoting goodwill, an employer makes a general distribution of hams and turkeys to employees, they would not be taxable to the employee and would be deductible by the employer. That also goes for a coupon that is nontransferable and convertible only into a turkey, ham, gift basket, or the like at a particular establishment. However, if that coupon can be converted into cash, then the value would be treated as employee wages.
A Gift of College Tuition — An interesting quirk to the gift tax laws is that an individual can pay a student’s tuition directly to a qualified school, college, or university, and it will be exempt from gift tax and gift tax reporting. What student wouldn’t love to have part of his or her tuition paid? It would make a great gift.
As an aside, college tuition generally qualifies for a tax credit. Another quirk in the tax laws says that the education credit goes to the individual who claims the child as a dependent, resulting in another gift from the individual who pays the tuition.
Example: Whitney is attending college and is the dependent of her mother and father. Whitney’s grandfather makes a tuition payment directly to the college; since it was made directly to the school, Whitney’s grandfather does not have any gift tax issues. Since Whitney is a dependent of her parents, her parents would claim any available tuition credit. Thus, by paying the tuition, Grandpa made a gift of tuition to his granddaughter and a gift of the tuition credit to her parents.
College Student’s Supplies — If you have a spouse or child attending college, the costs of certain course materials qualify for the American Opportunity Tax Credit (AOTC) if the course materials are needed as a condition of enrollment and attendance. Thus, for example, if a computer is needed as a condition of enrollment and attendance at the college, the computer’s cost would qualify for the AOTC of the individual who claims the student as a dependent if the individual otherwise qualifies for the credit.
Electric Car Credit — If you purchase an electric car as a holiday gift for your spouse or even yourself, you will find that most electric cars come with a tax credit. To qualify to claim the credit on your 2019 tax return, the car will have to be "placed in service" by December 31, 2019. So merely ordering the vehicle, even if payment for it is made at the time when the order is placed, won’t be enough — you will need to receive the car and start using it before New Year’s Day. But before you leap, you should know that the credit is non-refundable, meaning it can only offset your actual tax liability, and that any excess credit over your tax liability will be lost. However, there is an exception when the electric vehicle is partially used for business, in which case the portion of the credit allocated to the business use will become a general business credit that is first applied to the tax in the credit year. Any remaining credit will be carried back one year, and then if not all of it is used still, the rest will be carried forward.
Work Equipment — If your spouse is self-employed and you purchase tools or electronics used in the spouse’s business, the costs of these items will qualify as a business tax deduction on the return for the year when the equipment is put into service.
Solar Electric Credit — If you and your spouse or another resident of the home decide to gift a home solar system to each other, you will qualify for a non-refundable tax credit equal to 30% of the cost of the home solar property (note that the credit will drop to 26% in 2020). If your tax liability is less than the credit, then the excess credit can be carried over to a future year. The solar credit is available to all residents of the home, even if they do not have an ownership interest in the home. Example: A mother and son live together in a home owned by the mother. The son purchases a solar system; as a result, the son will get the tax credit since he resides in the home. Caution: To claim a credit for the system’s costs on your 2019 return, the installation must be completed by December 31, 2019.
Charitable Gifts — Of course, contributions to qualified charitable organizations can be deducted, provided you itemize your deductions. If you are over age 70.5 and have not taken your required minimum distribution (RMD) from your IRA account for 2019, you might consider making direct transfers to the charities of your liking, thereby satisfying your RMD requirement while avoiding taxation of the distribution. Contact your IRA custodian or trustee to arrange the transfer, which would need to be completed by December 31, 2019, to count for 2019. So it’s best not to wait until the last minute to initiate the transfer.
Some words of caution about charitable contributions during the holiday season: When you are shopping at a mall and drop cash into the holiday kettle, you won’t get a receipt for your contribution, and a cash charitable contribution cannot be claimed as an itemized deduction without documentation. The same goes for buying and then giving new, unused toys to holiday toys-for-kids drives, which have become very popular. Tip: Save the purchase receipt for the toys and request verification of the contribution from the sponsoring organization. If the drop point is unmanned and it is not possible to obtain a contribution verification from the organization, the IRS will allow a deduction of up to $249, provided you document the purchase of what you’ve donated.
Also, during the holiday season, all of the scammers will climb out from under their rocks and do their best to trick you out of your well-intended contribution dollars. Be cautious, and make sure your contributions are going to legitimate charities.
If you have questions about how any of these suggestions might impact your tax situation, please give this office a call.
Year-End Tips for Charitable Contributions
Article Highlights:
Watch Out for Charity Scams
Tax Exempt Organization Search Tool
Tax Benefits of Charitable Contributions
Bunching Deductions
Qualified Charitable Distributions
Substantiation
As the end of the year and the holiday season approach, we will all see an uptick in the number of charitable solicitations arriving in our mailboxes and by email. Since some charities sell their contributor lists to other charities, frequent contributors may find themselves besieged by requests from all sorts of charities with which they are not familiar.
Watch Out for Charity Scams — You need to be careful, as scammers out there are pretending to be legitimate charities looking to take advantage of your generosity for their gain.
When making a donation to a charity with which you are unfamiliar, you should take a few extra minutes to ensure that your gifts are going to legitimate charities. The IRS has a search feature, Tax Exempt Organization Search, which allows people to find legitimate, qualified charities to which donations may be tax-deductible. You can always deduct gifts to churches, synagogues, temples, mosques, and government agencies—even if the Tax Exempt Organization Search tool does not list them in its database.
Here are some tips to make sure your contributions go to legitimate charities.
Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations.
Don’t give out personal financial information, such as Social Security numbers or passwords, to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money. Using a credit card to make legitimate donations is quite common, but please be very careful when you are speaking with someone who calls you; don’t give out your credit card number unless you are certain the caller represents a legitimate charity.
Don’t give or send cash. For security and tax-record purposes, contribute by check, credit card, or another way that provides documentation of the gift.
Another long-standing type of abuse or fraud involves scams that occur in the wake of significant natural disasters. In the aftermath of major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information, and they may set up phony websites claiming to solicit funds on behalf of disaster victims. Unscrupulous individuals may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims to get tax refunds.
Scammers may also attempt to get personal financial information or Social Security numbers, which can be used to steal the victims’ identities or financial resources. Disaster victims with specific questions about tax relief or disaster-related tax issues can visit the IRS website for Disaster Assistance and Emergency Relief for Individuals and Businesses.
Tax Benefits of Charitable Contributions — Contributions to charitable organizations are deductible if you itemize your deductions on Schedule A. Generally, the deduction is the lesser of your total contributions for the year or 50% of your adjusted gross income, but the 50% is increased to 60% for cash contributions in years 2018 through 2025, and lower percentages may apply for non-cash contributions and certain types of organizations. Itemized deductions reduce your gross income when determining your taxable income.
However, with the increase in the standard deduction as a result of the 2017 tax reform, many taxpayers are no longer itemizing their tax deductions (because the standard deduction provides a greater tax benefit). For those in this situation, there are two possible workarounds:
Bunching Deductions — The tax code allows most taxpayers to utilize the standard deduction or itemize their deductions if doing so provides a greater benefit. As a rule, most taxpayers just wait until tax time to add everything up and then use the higher of the standard deduction or their itemized deductions. If you want to be more proactive, you can time the payments of tax-deductible items to maximize your itemized deductions in one year and take the standard deduction in the next.
Qualified Charitable Distributions — Individuals age 70½ or older — who must withdraw annual required minimum distributions (RMDs) from their IRAs—are allowed to annually transfer up to $100,000 from their IRAs to qualified charities. Here is how this provision works, if utilized:
(1) The IRA distribution is excluded from income;
(2) The distribution counts toward the taxpayer’s RMD for the year; and
(3) The distribution does NOT count as a charitable contribution deduction.
At first glance, this may not appear to provide a tax benefit. However, by excluding the distribution, a taxpayer lowers his or her adjusted gross income (AGI), which helps with other tax breaks (or punishments) that are pegged at AGI levels, such as medical expenses when itemizing deductions, passive losses, and taxable Social Security income. In addition, non-itemizers essentially receive the benefit of a charitable contribution to offset the IRA distribution.
Substantiation — Charitable contributions are not deductible if you cannot substantiate them. Forms of substantiation include a bank record (such as a cancelled check) or a written communication from the charity (such as a receipt or a letter) showing the charity’s name, the date of the contribution, and the amount of the contribution. In addition, if the contribution is worth $250 or more, the donor must also get an acknowledgment from the charity for each deductible donation.
Non-cash contributions are also deductible. Generally, contributions of this type must be in good condition, and they can include food, art, jewelry, clothing, furniture, furnishings, electronics, appliances, and linens. Items of minimal value (such as underwear and socks) are generally not deductible. The deductible amount is the fair market value of the items at the time of the donation; as with cash donations, if the value is $250 or more, you must have an acknowledgment from the charity for each deductible donation. Be aware: the door hangers left by many charities after picking up a donation do not meet the acknowledgement criteria; in one court case, taxpayers were denied their charitable deduction because their acknowledgement consisted only of door hangers. When a non-cash contribution is worth $500 or more, the IRS requires Form 8283 to be included with the return, and when the donation is worth $5,000 or more, a certified appraisal is generally required.
Special rules also apply to donations of used vehicles when the claimed deduction exceeds $500. The deductible amount is based upon the charity’s use of the vehicle, and Form 8283 is required. A charity accepting used vehicles as donations must provide Form 1098-C (or an equivalent) to properly document the donation.
Don’t be scammed; make sure you are donating to recognized charities. Donations to charities that are not legitimate are not tax-deductible. Contributions to legitimate charities need to be properly substantiated if you plan to claim them as part of your itemized deductions. If you have any questions related to charitable giving, please give this office a call.
Cofounder Conflict Could Be One of the Biggest Threats to Your New Business
If you asked brand-new entrepreneurs to make a list of everything they think might one day pose a threat to their startup, you’d probably hear a variety of answers with similar themes.
Some might be (rightfully) worried about ultimately developing a product in search of a marketplace. Others may be worried about how they’re going to overcome the cash flow issues they’ll likely face. Others still might be worried about getting “taken for a ride” by the venture capital people they’re putting so much of their faith in.
While all of these are understandable concerns, none of them should be at the top of that list. The fact of the matter is, the number-one threat to your business isn’t an external factor at all.
It’s the people you’ve cofounded that business with.
While it’s absolutely true that founding a business with at least one other person increases your chances of becoming a success, it’s equally true that about 50% of cofounder relationships fail, and most of those failures are ugly.
This is because cofounder conflict is very real and far more common than many people prefer to assume. But by taking the time to learn as much about it as you can, you put yourself (and your colleagues) in the best position to mitigate risk from these issues as much as possible — before it’s too late.
Why Cofounder Conflict Happens
Cofounder conflict can ultimately happen for a myriad of reasons, and not all of them are going to be immediately obvious.
Sometimes when you start a business with someone else, you don’t realize just how incompatible your managerial styles are because you’ve never had the chance to put them on display. But once your startup is up on its feet and real decisions are being made on a daily basis, you might discover that you and your cofounder have two very different working styles.
Other times it comes down to the fact that roles and responsibilities among cofounders are not clearly defined. Who is actually supposed to be doing what? What is your specific job description and how does it overlap with that of your cofounders? What boundaries are in place that give each of you your necessary space, but that also allow you to truly collaborate with one another in the way you need to run a successful business?
Another issue could be the absence of stipulations on how “significant future changes will affect the management and control of the business.” Without a buy-sell agreement and succession plan in place, your business is at risk if any major event — like your partner’s death, divorce, or bankruptcy — may occur.
Finally, one of the biggest causes of cofounder conflict is that entrepreneurs make the mistake of taking any conflict as a warning sign that something sinister is afoot.
The truth is that running a business is hard and there are times where you will have arguments and disagreements with the people around you. This is true regardless of how similar your backgrounds are or how closely your visions align.
If you go through life assuming that conflict is something you can totally avoid, you’re in for a number of surprises and almost none of them are good. The key to a successful, long-term relationship with your cofounders involves not running from that conflict but embracing it. Have the argument. Talk about your differences. Hash things out and come to a solution together. Every moment may not be as fun as you’d hoped, but you will absolutely come out better for it.
Mitigating Cofounder Conflict: Breaking Things Down
Here’s the good news: once you’ve taken steps to learn about what cofounder conflict actually is and why it happens, you put yourself in the best position to avoid it in your own efforts — at least as much as possible.
By far, the key to at least relieving some of this conflict involves first identifying why it is happening with your particular startup. Are you having frequent arguments with your cofounders because of significant personality changes? Is it because your work ethics differ a great deal? Do you come from different backgrounds? Do you have totally contrasting management styles?
When left unchecked, these differences can form a major chasm that can be difficult to overcome. But if you identify them in your early days as an entrepreneur, you may be able to find a way to meet your cofounders “in the middle,” so to speak, to avoid bigger issues later on.
Remember that being an entrepreneur and founding a business with someone else ultimately requires a fair amount of give and take. Your startup does not belong exclusively to you and it would be unfair of you to act that way. Therefore, once you start to see conflict develop, don’t be afraid to address it head-on… but also understand that you must be willing to make compromises, too. Don’t just spend time identifying problems with someone else — offer up solutions of your own.
In terms of mitigating some of these potential risks, a buy-sell agreement can be very effective (and should be viewed as a necessity). This legally-binding document “anticipates the intent and needs of the owners, as well as the potential conflicts that may arise among them if one or more wishes to sell his/her interest in the business or is forced to dispose of such interest.”
Consulting with a tax and accounting professional during the process of negotiating a buy-sell agreement can be very beneficial for all parties involved. Contact our office for more information.
If you acknowledge your startup for what it really is — a collaboration between two or more people — you stand the best possible chance at ending the lion’s share of these cofounder conflicts before they’ve ever had a chance to start. At that point, the proverbial runway will be clear and there really is no limit to what you can accomplish together.
The IRS Is Hot on the Trail of Unreported Virtual Currency Transactions
Article Highlights:
Coinbase Disclosure
IRS Compliance Letters
New 1040 Question
Reporting under Penalty of Perjury
Treated as Property
Employee Payments
Independent Contractor Income
Information Reporting
New IRS Guidance
Back in 2018, Coinbase, a company handling virtual currency (also referred to as cryptocurrency) transactions, released the data of 14,000 of its users to the IRS after the information was subpoenaed, and virtual currency traders held their breath about what the IRS would do with the information related to those 14,000 users.
Although it took some time, after analyzing the Coinbase data, the IRS recently issued letters to more than 10,000 taxpayers whom they suspect have not been properly reporting their virtual currency transactions, and not all of the letters were the same. In fact, one letter was quite frightening. The following is a synopsis of each of the three letters:
Letter 6173 – This letter required a response from the taxpayer, by either providing a statement to the IRS that they have already complied with the required reporting or by filing a return that reports their virtual currency transactions. For situations in which the taxpayer had already filed a return but had left off the virtual currency transactions, they will need to file an amended return (Form 1040X). Taxpayers who have received this letter and ignored it may face a full-blown audit by the IRS and could be subject to substantial penalties.
Letter 6174 – This was a “soft notice” that did not require a response, and the IRS says it won’t be following up on it. However, the notice also warns that the taxpayer will be in hot water if they had virtual currency gains and fail to amend their return or continue to be noncompliant on future returns despite receiving the letter.
Letter 6174-A – The taxpayer isn’t required to respond to the letter but does need to correct their prior returns in which virtual currency transactions were omitted. The IRS warns of future enforcement action if the taxpayer doesn’t amend their return(s) or file their delinquent returns. After receiving the letter, the taxpayer can’t use an excuse of not knowing the law for failing to report their virtual currency gains.
Of course, Coinbase is not the only company handling virtual currency transactions, so others are not on the IRS’s radar – at least, not yet. The draft of the 2019 Form 1040 tax return was recently released, and it includes a new question…
“At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtually currency? Yes or No.”
And for those who have not read the fine print in the signature area of the 1040, it reads as follows:
“Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.”
Those taxpayers who have virtual currency transactions and fail to answer the question or answer it “no” have committed perjury and can be subject to some very serious penalties. As you can see, the IRS is definitely ramping up its compliance efforts.
Virtual currency is treated as property, so whenever it is sold, traded, or used to pay for services or to make a purchase, it constitutes a reportable tax transaction, just like selling a stock, where a gain or loss must be determined for each transaction.
Example: Taxpayer buys Bitcoin (BTC) so he can use it to make online purchases without the need for a credit card. He buys one BTC for $2,425 and later uses it to buy goods worth $500 (BTC was trading at $2,500 when he made his purchase). He has a $75 ($2,500 − $2,425) reportable capital gain. This is the same result that would have occurred if he had sold the BTC at the time of the purchase and used cash to purchase the goods. This example points to the complicated record-keeping requirement of tracking BTC’s basis. Since this transaction was personal in nature, no loss would be allowed if the value of BTC had been less than $2,425 when the goods were purchased.
Bitcoin is the most well-known of the over 4,000 variations of virtual currency, and although its value fluctuates, Bitcoin’s value has increased about 14 times in value from September 2016 to October 15, 2019. Many have purchased virtual currencies as a long-term investment, have never sold or traded their investment, and thus have no tax-reporting requirements. However, those who have acquired and then sold or exchanged virtual currency need to report their transactions to avoid some substantial penalties.
Using virtual currency to pay for goods and services in a business creates additional tax reporting issues, all of which include substantial penalties for non-compliance.
Paying Employees – The fair market value of virtual currency paid as wages is subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax (Social Security and Medicare A), and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement. Of course, these amounts are to be reported in U.S. dollars.
Independent Contractor Payments – The fair market value of virtual currency received for services performed as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self-employment income and is subject to self-employment tax.
Information Reporting – A payment made using virtual currency is subject to information reporting, to the same extent as any other payment made in property. For example, a person who, in the course of a trade or business, makes a payment of fixed and determinable income using virtual currency with a value of $600 or more to a U.S. non-exempt recipient in a taxable year is required to report the payment to the IRS and to the payee.
New Guidance from the IRS – The IRS recently released new guidance about virtual currency – the first in 5 years –which mainly dealt with whether taxpayers have gross income from two cryptocurrency events: hard forks of cryptocurrency the taxpayer owns and an airdrop of a new cryptocurrency following a hard fork, if the taxpayer receives units of new cryptocurrency. If you own virtual currency, no matter whether these terms sound like a foreign language to you or you are familiar with them, you may need to account for these events on your tax return for the year when they occur.
If you have unreported virtual currency transactions or need assistance understanding the new IRS guidance, you are encouraged to contact this office as soon as possible so that you might bring your virtual currency transactions into tax compliance before you hear from the IRS.
Take Tax Advantage of a Low-Income Year
Article Highlights:
Exercise Stock Options
Convert a Traditional IRA to a Roth IRA
Maximize IRA Distributions
Sell Appreciated Stock
Delay Business Expenditures
Release Dependency
Delay Personal Deductible Expenditures
People generally assume that tax planning only applies to individuals with the big bucks. But think again, as some tax moves benefit lower-income taxpayers and those who are having a lower-than-normal income year. So, if 2019 is not producing a lot of income for you, or your income will be substantially lower this year than it usually is, you may be surprised to know that you actually might be able to take advantage of some tax-planning opportunities. Implementing some of these ideas will require action on your part before the close of the year. Here are some possibilities.
Exercise Stock Options – If you are an employee of a corporation, the company may offer you the option to purchase shares of it at a fixed price at some future date, so that you can benefit from your commitment to the company’s success by sharing in the company’s growth through the increase in stock value. If those options are non-qualified, then you have to report the difference between your preferential option price and the stock’s value when you exercise the option as income. In a low-income year, this may give you the chance to exercise some or all of your options without any or with minimal income tax liability.
Convert a Traditional IRA to a Roth IRA – Roth IRA accounts provide the benefits of tax-free accumulation and, once you reach retirement age, tax-free distributions. This is why so many taxpayers are converting their traditional IRA account to a Roth IRA. However, to do so, you must generally pay tax on the converted amount. Many taxpayers overlook some great opportunities to make conversions, such as in years when their income is unusually low or a year when their income might even be negative due to abnormal deductions or business losses. Even the tax reform’s higher standard deduction may offer a taxpayer the opportunity to convert some or all of their traditional IRA to a Roth IRA without any conversion tax. If you are in any of these circumstances this year, you should consider converting some or all of your traditional IRA to a Roth IRA before the end of the year.
Maximize IRA Distributions – If you are retired and taking IRA distributions, make sure that you are maximizing your withdrawals with respect to your tax bracket. With the increased standard deduction and a lower-than-normal income, it may be tax-effective to actually withdraw more than the minimum required by law. In fact, you may even be able to take a distribution from your IRA with no tax liability. Presented with this situation, you would certainly want to take advantage of it before year’s end, even if you do not need the funds, which you could bank for the future.
Sell Appreciated Stock – Income tax rates increase as a taxpayer’s taxable income increases. The regular tax rates start at 10% and then increase in step amounts as one’s taxable income increases, reaching a maximum rate of 37%. However, long-term capital gains are given special treatment and only have three tax rates: 0%, 15%, and 20%. The 0% tax rate applies for taxpayers with taxable incomes up to the following amounts for 2019:
TAXABLE INCOME RANGE FOR THE 0% LONG-TERM CAPITAL GAIN RATE (2019)
Filing Status
Single
Head of Household
Married Filing Joint
Married Filing Separate
Taxable Income
$0–$39,375
$0–$52,750
$0–$78,750
$0–$39,375
This provides a unique opportunity to sell investments that will produce long-term capital gains (investments held for at least a year and a day) and benefit from the 0% long-term capital gain rates. Thus, if you have stocks that have appreciated in value, you may be able to sell them before the end of the year and pay no tax on the gain. The tops of the 0% ranges are adjusted each year for inflation and are expected to increase by about 1.6% for each filing status for 2020.
Delay Business Expenditures – If you are self-employed, you may find it beneficial to delay business-related purchases until next year to avoid reducing your current yearly income any further and save the deduction until next year, when the items are purchased.
Release Dependency – If you are the custodial parent of a child and receive no benefit from the nonrefundable child tax credit, you may want to consider releasing the dependency of the child to the non-custodial parent for the current year, allowing the non-custodial parent to claim the $2,000 child tax credit. Doing so will not affect your ability to claim the childcare credit or the refundable earned income tax credit. However, if the child is attending college, then any tuition credit will go to the one claiming the child. The dependency is released on IRS Form 8332, but care should be taken when completing the form to avoid unintentionally releasing the dependency for more than one year.
Delay Personal Deductible Expenditures – If you itemize your deductions and the deductions will provide no or minimal tax benefit this year, you might consider delaying paying that medical expense, real property tax bill, or state estimated tax payment, or making a charitable contribution, until after the first of the year. Many taxpayers find it beneficial to “bunch” deductions in one year and then claim the standard deduction in the alternate year. For example, by paying two years of church tithing or pledges to a charitable organization all in one year, deducting the total in that year, and then contributing nothing and taking the standard deduction the next year, the combined tax for the two years may be less than if a contribution was made in each year. However, before postponing payments until 2020, make sure that no penalties will be associated with delaying your tax-obligation payments.
If you have questions about employing any of these strategies or wish to make a tax-planning appointment, please give this office a call.
Tax Benefits for People with Disabilities
Article Highlights:
ABLE Accounts
Disabled Spouse or Dependent Care Credit
Medical Deductions
Home Modifications
Special Schooling
Nursing Services
Individuals with disabilities as well as parents of disabled children are eligible for a number of income tax benefits. This article explains some of these tax breaks.
ABLE Accounts – A federal law allows states to offer specially designed, tax-favored ABLE accounts to people with disabilities. Qualified ABLE programs provide the means for individuals and families to contribute and save to support individuals who became blind or severely disabled before turning age 26 in maintaining their health, independence, and quality of life. The 2017 tax reform, known as the Tax Cuts and Jobs Act (TCJA), added some additional features to the ABLE accounts.
The states run the ABLE programs authorized by the federal tax statute. A state that has established an ABLE account program can offer its residents the option of setting up one of these accounts or contract with another state that offers ABLE accounts. Contributions totaling up to the annual gift tax exclusion amount, currently $15,000, can be made to an ABLE account each year, and distributions are tax-free if used to pay qualified disability expenses.
Beginning in 2018 and through 2025, a TCJA provision allows the beneficiary of the ABLE account (i.e., the disabled person) to contribute a maximum additional amount each year, equal to the lesser of:
The beneficiary’s taxable compensation for the year, or
The prior year’s poverty level ($12,140 for 2019) for a one-person household.
However, the extra contribution isn’t allowed if the beneficiary’s employer contributes to a qualified retirement plan on the beneficiary’s behalf.
The beneficiary’s additional contribution qualifies for the non-refundable saver’s tax credit, which, depending on the beneficiary’s actual income, can be 10%, 20%, or even as much as 50% of up to the first $2,000 contributed, for a maximum credit of $1,000.
Disabled Spouse or Dependent Care Credit – A tax credit is available to individuals who incur childcare expenses for children under the age of 13 at the time the care is provided. This credit is also available for the care of the taxpayer’s spouse or of a dependent who is physically or mentally unable to care for himself or herself and lived with the taxpayer for more than half the year. This is also true for individuals who would have been dependents except for the fact that they earned $4,200 or more (2019) or filed a joint return with their spouse. The credit ranges from 20% to 35%, with lower-income taxpayers benefiting from the higher percentage and those with an adjusted gross income of $43,000 or more receiving only 20%. The care expenses qualifying for the credit are limited to $3,000 for one and $6,000 for two or more qualifying individuals.
Medical Expense Deductions – In addition to the “normal” medical expenses, individuals with disabilities can incur other unusual deductible expenses. However, to gain a tax benefit, an eligible taxpayer must itemize his or her deductions on Schedule A, and the taxpayer’s total medical expenses must exceed 10% of his or her adjusted gross income. Eligible expenses include:
Prostheses
Vision Aids – Contact lenses and eyeglasses
Hearing Aids – Including the costs and repair of special telephone equipment for people who are deaf or hard of hearing
Wheelchair – Costs and maintenance
Service Dog – Costs and care of a guide dog or service animal
Transportation – Modifications or special equipment added to vehicles to accommodate a disability
Impairment-Related Capital Expenses – Amounts paid for special equipment installed in the home or for improvements may be included as medical expenses, if their main purpose is medical care for the taxpayer, the spouse, or a dependent. The costs of permanent improvements that increase the property’s value may be partly included as a medical expense. The costs of the improvement are reduced by the increase in the property’s value. The difference is a medical expense. If the improvement does not increase the property’s value, the entire cost is included as a medical expense. Certain improvements made to accommodate a home to a taxpayer’s disabled condition, or to that of the spouse or dependents who live with the taxpayer, do not usually increase the home’s value, so the costs can be included in full as medical expenses. A few examples of full-cost medical expenses include constructing entrance or exit ramps for the home; widening entrance and exit doorways, hallways, and interior doorways; installing railings, support bars, or other modifications; and adding handrails or grab bars.
Learning Disability – Tuition fees paid to a special school for a child who has severe learning disabilities caused by mental or physical impairments, including nervous system disorders, can be included as medical expenses. A doctor must recommend that the child attend the school. Fees for tutoring recommended by a doctor from a teacher who is specially trained and qualified to work with children with severe learning disabilities may also be included.
Special Schooling – Medical care includes the costs of attending a special school designed to compensate for or overcome a physical handicap in order to qualify the individual for future normal education or for normal living. This includes a school that teaches braille or lip reading. The principal reason for attending the school must be its special resources for alleviating the student’s handicap. The tuition for ordinary education that is incidental to the special services provided at the school as well as the costs of meals and lodging supplied by the school are also included as medical expenses.
Nursing Services – Wages and other amounts paid for nursing services can be included as medical expenses. Services need not be performed by a nurse as long as the services are of a kind generally performed by a nurse. This includes services connected with caring for the patient’s condition, such as giving medication, changing dressings, and bathing and grooming the patient. These services can be provided in the home or another care facility. Generally, only the amount spent for nursing services is a medical expense. If the attendant also provides personal and household services, these amounts must be divided between the time spent performing household and personal services and the time spent on nursing services.
If you have questions about any of the disability-related tax benefits discussed in this article, or if you have questions concerning potential medical expenses not discussed above, please give this office a call.
Did You Just Get an IRS Notice of Deficiency? Here’s What to Do Next
Nobody likes getting mail from the IRS — especially when it’s something you weren’t expecting.
One minute, you’re minding your own business and aren’t even thinking about that return you filed months ago. The next minute you open your mailbox and see something called a “Notice of Deficiency” — and your anxiety immediately goes through the roof.
At this point, the most important thing you can do is to relax and take a deep breath. Getting a Notice of Deficiency from the IRS in the mail doesn’t automatically mean you’re about to be audited, and in fact, it may not mean anything bad at all. It does, however, require you to keep a few key things in mind to make sure that you respond in the right way.
What Is an IRS Notice of Deficiency?
Formally known as the CP3219A notice, a Notice of Deficiency is exactly what it sounds like — an indication that the IRS has recently received information that is different from what you originally reported when you filed your tax return for the year in question.
To put it another way, something that you put on your return doesn’t match with a piece of information that a third party provided to the IRS. The discrepancy could be as simple as a difference between your self-reported income and income reported on a Form 1099.
Now, despite the scary-sounding name, this isn’t necessarily a bad thing. Depending on the situation, it could just as easily result in a decrease in the amount of tax that you owe as it could result in an increase.
The note itself will explain exactly how the amount was calculated, so the first thing you’re going to want to do is read it to make sure that you understand — but also that you agree.
Moving Beyond the Notice of Deficiency
If you agree with the changes as outlined by the Notice of Deficiency, then that’s terrific — this process is almost over. All you have to do is sign the enclosed form (which should be Form 5564) and mail it to the address that is printed on the notice itself. This is called the Notice of Deficiency Waiver, and it just means that you agree to either pay the new amount that you owe or, in a perfect world, agree that you would like the IRS to send you some money that you didn’t know you had coming.
If you don’t agree with the changes, however, note that you do have the right to challenge them by filing a petition with the United States Tax Court — but you have to do so by absolutely no later than the date shown on the notice itself. The court will not consider your petition if you file beyond this deadline.
If you don’t agree with the changes and you have additional information that can help clear up any confusion, mail all of the supplementary documentation along with the aforementioned Form 5564 to the address on the notice. But keep in mind that doing this does not extend the amount of time you have to file your petition.
You should also be aware that if the mistake is something that happened because of identity theft that you suffered, there are additional options available to you. The most immediate involves filling out Form 14039, otherwise known as the Identity Theft Affidavit. You should then call the IRS, speak to a representative, explain your situation and get advice about what they want you to do next.
You could also contact the third party that gave the IRS the information that triggered the discrepancy in the first place. If the mistake is theirs, you can ask them to correct it — or at least provide you with more information to help you make your case.
If the mistake was a legitimate one on your end, you’ll also probably want to go over any other returns that you filed to make sure they don’t have the same issue — thus causing even more tax problems down the road. At the very least, you’ll want to file an amended tax return to include any additional information that you received (like more 1099s) after you filed your original one earlier in the year.
If you owe additional taxes and can’t afford to pay right now, don’t worry — it happens. You could always set up a payment plan or make other arrangements with the IRS. Depending on the situation, you could also make an Offer in Compromise and settle your bill for far less than you originally owed.
Resolving a Notice of Deficiency can be very overwhelming, and if not handled properly, you could end up with an even larger problem than you started with. For more assistance and to get help with your CP3219A notice, contact our office today.
How to Clean Up QuickBooks for 2020
Yes, it’s here again: the end of the year. You probably have a lengthy to-do list full of tasks that must be done before December 31. There’s one task—or rather, a series of tasks—that you should definitely add to that list: year-end QuickBooks cleanup. Following the guidelines provided here will do three things. It will:
Ensure that you’ve processed every 2019 transaction (or that you know why you can’t).
Give you a sense of closure, knowing that you’ve dealt with all your 2019 financial data.
Allow you to start your 2020 QuickBooks activities with as clean of a slate as possible.
First Things First
Before you start looking at transactions and running reports, check to make sure that your fiscal year is recorded correctly in QuickBooks. Open the Company menu and select My Company. Click the pencil icon in the upper right to open the Company Information window, then click Report Information in the tabs to the left. This window opens:
Is your company’s fiscal year recorded correctly in QuickBooks? If not, please contact us. Don’t try to fix this on your own.
Account For All Of Your Income
You certainly want to have received all the money owed to you by December 31 if at all possible. So, run a report to see which customers have outstanding, overdue balances. Open the Reports menu and select Customers & Receivables | A/R Aging Summary.
The first column here will read Current. You don’t have to worry about these customers. It’s the next four columns that will require follow-up. If your default payment terms are 30 days, you’ll see columns for 1-30, 31-60, 61-90, and >90. Customers with dollar amounts in those columns have not met their obligations and are past due by those date ranges.
Note: If your default terms are different (like 15 days), you’ll need to customize the report. In the toolbar at the top, you’ll see a field labeled Interval (days). Change it to reflect your own default terms and click Refresh in the upper right corner.
If your report contains only a sea of zeroes in those four columns, everyone is paid up. If not, you can send statements to anyone who is at least one day past due to remind them of what they owe. Open the Customers menu and select Create Statements to see this window:
Partial view of the Create Statements window
Make sure the Statement Date is correct since QuickBooks will use this to calculate aging. Then you can either enter a specific Statement Period or request All open transactions as of Statement Date. If you choose the latter, you’ll most likely want to limit the statements to customers whose payments are overdue. So, you’d click in the box in front of Include only transactions over [your number here] days past due date.
Below these options, you’ll be able to indicate which customers should receive statements. The most common choice is All Customers (who fall into the group you just defined), but you can also send to one or multiple customers, for example. QuickBooks will display a list if you select one of these. The right pane of this window contains several additional options that you can check or uncheck. When you’re satisfied, you can Preview, Print, or E-mail the statements.
Pay Outstanding Bills
You should also try to settle your Accounts Payable before the end of the year. Open the Reports menu and select Vendors & Payables | A/P Aging Summary. Look for dollar amounts in the columns that show aging beyond the first column. You can also run the Unpaid Bills Detail report and look at the Aging column, as pictured here:
Look in the aging column of this report to see which bills are past due and by how many days.
Note: QuickBooks has multiple Preferences that relate to reports and aging. We can go over these with you if you haven’t explored them.
There are other tasks you should complete before December 31, some of which may require our assistance. These include reconciling all accounts, running year-end reports, and clearing any deposits that remain in the Undeposited Funds account. We’re here if you need us now, otherwise we can connect in the New Year.
December 2019 Individual Due Dates
December 2 – Time for Year-End Tax Planning
December is the month to take final actions that can affect your tax result for 2019. Taxpayers with substantial increases or decreases in income, changes in marital status or dependent status, and those who sold property during 2019 should call for a tax planning consultation appointment.
December 10 – Report Tips to Employer
If you are an employee who works for tips and received more than $20 in tips during November, you are required to report them to your employer on IRS Form 4070 no later than December 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
December 31 – Last Day to Make Mandatory IRA Withdrawals
Last day to withdraw funds from a Traditional IRA Account and avoid a penalty if you turned age 70½ before 2019. If the institution holding your IRA will not be open on December 31, you will need to arrange for withdrawal before that date.
December 31 – Last Day to Pay Deductible Expenses for 2019
Last day to pay deductible expenses for the 2019 return (doesn’t apply to IRA, SEP or Keogh contributions, all of which can be made after December 31, 2019).
December 31 – Caution! Last Day of the Year
If the actions you wish to take cannot be completed on the 31st or a single day, you should consider taking action earlier than December 31st.
December 2019 Business Due Dates
December 2 – Employers
During December, ask employees whose withholding allowances will be different in 2020 to fill out a new Form W4 or Form W4(SP).
December 16 – Social Security, Medicare and Withheld Income Tax
If the monthly deposit rule applies, deposit the tax for payments in November.
December 16 – Nonpayroll Withholding
If the monthly deposit rule applies, deposit the tax for payments in November.
December 16 – Corporations
The fourth installment of estimated tax for 2019 calendar year corporations is due.
December 31 – Last Day to Set Up a Keogh Account for 2019
If you are self-employed, December 31 is the last day to set up a Keogh Retirement Account if you plan to make a 2019 Contribution. If the institution where you plan to set up the account will not be open for business on the 31st, you will need to establish the plan before the 31st. Note: there are other options such as SEP plans that can be set up after the close of the year. Please call the office to discuss your options.
December 31 – Caution! Last Day of the Year
If the actions you wish to take cannot be completed on the 31st or a single day, you should consider taking action earlier than December 31st.
Article Highlights: 
Article Highlights: 
Article Highlights: 
If you asked brand-new entrepreneurs to make a list of everything they think might one day pose a threat to their startup, you’d probably hear a variety of answers with similar themes. 
Article Highlights: 
Article Highlights: 
Article Highlights: 
Nobody likes getting mail from the IRS — especially when it’s something you weren’t expecting. 
Yes, it’s here again: the end of the year. You probably have a lengthy to-do list full of tasks that must be done before December 31. There’s one task—or rather, a series of tasks—that you should definitely add to that list: year-end QuickBooks cleanup. Following the guidelines provided here will do three things. It will: 
December 2 – Time for Year-End Tax Planning 