Safe Harbor for First Year Passenger Auto Depreciation

Under the Tax Cuts and Jobs Act (TCJA), there is an additional first-year depreciation deduction that applies to qualified property, including passenger automobiles, acquired and placed in service after September 27, 2017, and before January 1, 2027.

Generally, both the section 179 and the depreciation deductions for passenger automobiles are subject to dollar limitations for the year in which the taxpayer places the passenger automobile in service and, for each succeeding year. For a passenger automobile qualifying for the 100-percent additional first-year depreciation deduction, TCJA increased the first-year limitation amount by $8,000.

If the depreciable basis of a passenger automobile for which the 100-percent additional first-year depreciation deduction is allowed exceeds the first-year limitation, the excess amount is deductible in the first taxable year after the end of the recovery period.

While this may be somewhat confusing for taxpayers, guidance is now available for a safe harbor method of accounting for passenger automobiles. Here is how the safe harbor works:

The safe harbor allows a depreciation deduction for the excess amount during the recovery period. It is, however, subject to the depreciation limitations applicable to passenger automobiles.

To apply the safe-harbor method, the taxpayer must use the applicable depreciation table found in Appendix A of IRS Publication 946, How To Depreciate Property. Taxpayers should note that the safe harbor method does not apply to a passenger automobile placed in service by the taxpayer after tax year 2022, or to a passenger automobile for which the taxpayer elected out of the 100-percent additional first year depreciation deduction or elected under section 179 to expense all or a portion of the cost of the passenger automobile.

Taxpayers can use the safe harbor method of accounting by applying it to the depreciation deduction of a passenger automobile on their return for the first taxable year following the placed-in-service year.

Five Facts About the Additional Medicare Tax

Some taxpayers may be required to pay an Additional Medicare Tax if their income exceeds certain limits. Here are some things that you should know about this tax:

1. Tax Rate. The Additional Medicare Tax rate is 0.9 percent.

2. Income Subject to Tax. The tax applies to the amount of certain income that is more than a threshold amount. The types of income include your Medicare wages, self-employment income and railroad retirement (RRTA) compensation. See the instructions for Form 8959, Additional Medicare Tax, for more on these rules.

3. Threshold Amount. You base your threshold amount on your filing status. If you are married and file a joint return, you must combine your spouse’s wages, compensation or self-employment income with yours. Use the combined total to determine if your income exceeds your threshold. The threshold amounts are:

Married filing jointly: $250,000
Married filing separately: $125,000
Single: $200,000
Head of household: $200,000

3. Withholding/Estimated Tax. Employers must withhold this tax from your wages or compensation when they pay you more than $200,000 in a calendar year. If you are self-employed you should include this tax when you figure your estimated tax liability.

4. Underpayment of Estimated Tax. If you had too little tax withheld, or did not pay enough estimated tax, you may owe an estimated tax penalty. For more on this, please call.

5. Form 8959. If you owe this tax, file Form 8959, Additional Medicare Tax, with your tax return. You also report any Additional Medicare Tax withheld by your employer on Form 8959.

Is Home Equity Loan Interest Still Deductible?

The Tax Cuts and Jobs Act has resulted in questions from taxpayers about many tax provisions including whether interest paid on home equity loans is still deductible. The good news is that despite newly-enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC) or second mortgage, regardless of how the loan is labeled.

Background

The Tax Cuts and Jobs Act of 2017, enacted December 22, 2017, suspends the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan. This suspension is in effect from 2018 through 2025.

Under the new law, for example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not. As under prior law, the loan must be secured by the taxpayer’s main home or second home (known as a qualified residence), not exceed the cost of the home and meet other requirements.

New dollar limit on total qualified residence loan balance

For anyone considering taking out a mortgage, the new law imposes a lower dollar limit on mortgages qualifying for the home mortgage interest deduction. Beginning in 2018, taxpayers may only deduct interest on $750,000 of qualified residence loans. The limit is $375,000 for a married taxpayer filing a separate return. These are down from the prior limits of $1 million, or $500,000 for a married taxpayer filing a separate return. The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home.

Deadline for Retirement Plan Distributions is April 1

In most cases, taxpayers who turned 70 1/2 during 2018 must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) and workplace retirement plans by Monday, April 1, 2019.

The April 1 deadline applies to owners of traditional (including SEP and SIMPLE) IRAs but not Roth IRAs. Normally, it also applies to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.

The April 1 deadline only applies to the required distribution for the first year. For all subsequent years, the RMD must be made by December 31. In other words, a taxpayer who turned 70 1/2 in 2018 (born after June 30, 1947, and before July 1, 1948) and receives the first required distribution (for 2018) on April 1, 2019, for example, must still receive the second RMD by December 31, 2019.

Affected taxpayers who turned 70 1/2 during 2018 must figure the RMD for the first year using the life expectancy as of their birthday in 2018 and their account balance on December 31, 2017. The trustee reports the year-end account value to the IRA owner on Form 5498, IRA Contribution Information in Box 5. Worksheets and life expectancy tables for making this computation can be found in the appendices to Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).

Most taxpayers use Table III (Uniform Lifetime) to figure their RMD. For a taxpayer who reached age 70 1/2 in 2018 and turned 71 before the end of the year, for example, the first required distribution would be based on a distribution period of 26.5 years. A separate table, Table II, applies to a taxpayer married to a spouse who is more than 10 years younger and is the taxpayer’s only beneficiary. Both tables can be found in the appendices to Publication 590-B.

Though the April 1 deadline is mandatory for all owners of traditional IRAs and most participants in workplace retirement plans, some people with workplace plans can wait longer to receive their RMD. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.

Now is the time to begin planning for distributions required during 2019. An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount in Box 12b on Form 5498. For a 2018 RMD, this amount would be on the 2018 Form 5498 that is normally issued in January 2019.

Report Name Changes Before Filing Taxes

All of the names on a taxpayer’s tax return must match Social Security Administration records because a name mismatch can delay a tax refund. Here’s what you should do if anyone listed on their tax return changed their name:

1. Reporting Taxpayer’s Name Change. Taxpayers who should notify the SSA of a name change include the following:

Taxpayers who got married and use their spouse’s last name.
Recently married taxpayers who now use a hyphenated name.
Divorced taxpayers who now use their former last name.

2. Reporting Dependent’s Name Change. Taxpayers should notify the SSA if a dependent’s name changed. This includes an adopted child who now has a new last name. If the child doesn’t have a Social Security number, the taxpayer may use a temporary Adoption Taxpayer Identification Number (ATIN) on the tax return. Taxpayers can apply for an ATIN by filing a Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions.

3. Getting a New Social Security Card. Taxpayers who have a name change should get a new card that reflects a name change. File Form SS-5, Application for a Social Security Card. Taxpayers can get the form on SSA.gov or by calling 800-772-1213.

Taxable vs. Nontaxable Income

All income is taxable unless the law specifically excludes it, but as you might have guessed, there’s more to it than that. With that in mind, let’s take a closer look at taxable vs. nontaxable income.

Taxable Income

Taxable income includes any money you receive, such as wages and tips, but it can also include non-cash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return.

Tip Income. If you get tips on the job from customers, that income is subject to taxes. Here’s what you should keep in mind when it comes to receiving tips on the job:

Tips are taxable. You must pay federal income tax on any tips you receive. The value of non-cash tips, such as tickets, passes or other items of value are also subject to income tax.
Include all tips on your income tax return. You must include the total of all tips you received during the year on your income tax return. This includes tips directly from customers, tips added to credit cards and your share of tips received under a tip-splitting agreement with other employees.
Report tips to your employer. If you receive $20 or more in tips in any one month, from any one job, you must report your tips for that month to your employer. The report should only include cash, check, debit and credit card tips you receive. Your employer is required to withhold federal income, Social Security and Medicare taxes on the reported tips. Do not report the value of any noncash tips to your employer.
Keep a daily log of tips. Use the Employee’s Daily Record of Tips and Report to Employer (IRS Publication 1244), to record your tips.

Bartering Income. Bartering is the trading of one product or service for another. Small businesses sometimes barter to get products or services they need. For example, a plumber might trade plumbing work with a dentist for dental services. Typically, there is no exchange of cash. If you barter, the value of products or services from bartering is taxable income. Here are four facts about bartering that you should be aware of:

Barter exchanges. A barter exchange is an organized marketplace where members barter products or services. Some exchanges operate out of an office and others over the Internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. The exchange must give a copy of the form to its members who barter and file a copy with the IRS.
Bartering income. Barter and trade dollars are the same as real dollars for tax purposes and must be reported on a tax return. Both parties must report as income the fair market value of the product or service they get.
Tax implications. Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes or excise taxes on their bartering income.
Reporting rules. How you report bartering on a tax return varies. If you are in a trade or business, you normally report it on Form 1040, Schedule C, Profit or Loss from Business.

Nontaxable Income

Here are some types of income that are usually not taxable:

Gifts and inheritances
Child support payments
Welfare benefits
Damage awards for physical injury or sickness
Cash rebates from a dealer or manufacturer for an item you buy
Reimbursements for qualified adoption expenses

In addition, some types of income are not taxable except under certain conditions, including:

Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
Income from a qualified scholarship is normally not taxable. This means that amounts you use for certain costs, such as tuition and required books, are not taxable. However, amounts you use for room and board are taxable.
If you received a state or local income tax refund, the amount may be taxable. You should have received a 2018 Form 1099-G from the agency that made the payment to you. If you didn’t get it by mail, the agency may have provided the form electronically. Contact them to find out how to get the form. Be sure to report any taxable refund you received even if you did not receive Form 1099-G.

Pros and Cons of Filing a Tax Extension

Obtaining a 6-month extension to file is relatively easy and there are legitimate reasons for doing so; however, there are also a few downsides. If you need more time to file your tax return this year, here’s what you need to know about filing an extension.

What is an Extension of Time to File?

An extension of time to file is a formal way to request additional time from the IRS to file your tax return, which in 2019, is due on April 15 (if you live in Maine or Massachusetts you may file by April 17). Anyone can request an extension and you don’t have to explain why you’re asking for more time.

Note: Special rules may apply if you are serving in a combat zone or a qualified hazardous duty area or living outside the United States. Please call the office if you need more information.

Individuals are automatically granted an additional six months to file their tax returns. In 2019, the extended due date is October 15. Businesses can also request an extension. In 2019, the deadline for S-corporations and Partnerships is September 16 and October 15 for C-corporations.

Caution: Taxpayers should be aware that an extension of time to file your return does not grant you any extension of time to pay your taxes. In 2019, April 15 is the deadline for most to pay taxes owed and avoid penalty and interest charges.

What are the Pros and Cons of Filing an Extension?

As with most things, there are pros and cons to filing an extension. Let’s take a look at the pros of getting an extension to file first.

Pros

1. You can avoid a late-filing penalty if you file an extension. The late filing penalty is equal to 5 percent per month on any tax due plus a late payment penalty of half a percent per month.

Note: If you are owed a refund and file late, there are no penalties for late filing.

2. You can also avoid the failure to file penalty if you file an extension. if you file your return more than 60 days after the due date (or extended due date), the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a late-filing or late-payment penalty if you can show reasonable cause for not filing or paying on time.

3. You are able to file a more accurate–and complete–tax return. Rather than rushing to prepare your return (and possibly making mistakes), you will have an extra 6 months to gather up required tax records, especially if you are still waiting for tax documents that haven’t arrived or need more time to organize your tax documents in support of deductions.

4. If your tax return is complicated then your tax preparer or accountant will have more time available to work on your return to make sure you can take advantage of every tax credit and deduction you are entitled to under the tax code.

5. If you are self-employed, you’ll have extra time to fund a retirement plan. Individual 401(k) and SIMPLE plans must have been set up during the tax year for which you are filing, but it’s possible to fund the plan as late as the extended due date for your prior year tax return. SEP IRA plans may be opened and funded for the previous year by the extended deadline as long as an extension has been filed.

6. Filing an extension preserves your ability to receive a tax refund when you file past the extension due date. Filers have three years from the date of the original due date (e.g., April 15, 2019) to claim a tax refund. However, if you file an extension you’ll have an additional six months to claim your refund. In other words, the statute of limitations for refunds is also extended.

Cons

1. If you are expecting a refund, you’ll have to wait longer than you would if you filed on time.

2. Extra time to file is not extra time to pay. If you don’t pay a least 98 percent of the tax due now, you will be liable for late-payment penalties and interest. The failure to pay penalty is one-half of one percent for each month, or part of a month, up to a maximum of 25% of the amount of tax that remains unpaid from the due date of the return until the tax is paid in full. If you are not able to pay, the IRS has a number of options for payment arrangements. Please call the office for details.

3. When you request an extension you will need to estimate your tax due for the year based on information available at the time you file the extension. If you disregard this, your extension could be denied and if you filed the extension at the last minute assuming it would be approved (but wasn’t) you may owe late filing penalties as well.

4. Dealing with your tax return won’t be any easier 6 months from now. You will still need to gather your receipts, bank records, retirement statements and other tax documents–and file a return.

If you feel that you need more time to prepare your federal tax return, then filing an extension of time to file might be the best decision.

Are Social Security Benefits Taxable?

Social Security benefits include monthly retirement, survivor, and disability benefits; they do not include Supplemental Security Income (SSI) payments, which are not taxable.

Generally, you pay federal income taxes on your Social Security benefits only if you have other substantial income in addition to your benefits such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return.

Your income and filing status affect whether you must pay taxes on your Social Security. An easy method of determining whether any of your benefits might be taxable is to add one-half of your Social Security benefits to all of your other income, including any tax-exempt interest.

Tip: If you receive Social Security benefits you should receive Form SSA-1099, Social Security Benefit Statement, showing the amount.

Next, compare this total to the base amounts below. If your total is more than the base amount for your filing status, then some of your benefits may be taxable. In 2018, the three base amounts are:

$25,000 – for single, head of household, qualifying widow or widower with a dependent child or married individuals filing separate returns who did not live with their spouse at any time during the year
$32,000 – for married couples filing jointly
$0 – for married persons filing separately who lived together at any time during the year

Taxpayers filing an individual federal tax return:

If your combined income (adjusted gross income + nontaxable interest + 1/2 of your Social Security benefits) is between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
If it is more than $34,000, up to 85 percent of your benefits may be taxable.

Taxpayers filing a joint federal tax return:

If you and your spouse have a combined income ((adjusted gross income + nontaxable interest + 1/2 of your Social Security benefits) that is between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits.
If it is more than $44,000, up to 85 percent of your benefits may be taxable.

Married taxpayers filing separate tax returns generally pay taxes on benefits.

State Taxes

Thirteen states tax social security income as well including Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.

Retiring Abroad?

Retirement income is generally not taxed by other countries. As a U.S. citizen retiring abroad who receives Social Security, for instance, you may owe U.S. taxes on that income, but may not be liable for tax in the country where you’re spending your retirement years.

If Social Security is your only income, then your benefits may not be taxable, and you may not need to file a federal income tax return. However, if you receive income from other sources (either U.S. or country of retirement) as well, from a part-time job or self-employment, for example, you may have to pay U.S. taxes on some of your benefits–the same as if you were still living in the U.S.

You may also be required to report and pay taxes on any income earned in the country where you retired. Each country is different, so consult a local tax professional or one who specializes in expat tax services.

Note: Even if you retire abroad, you may still owe state taxes–unless you established residency in a no-tax state before you moved overseas. Also, some states honor the provisions of U.S. tax treaties; however, some states do not. Therefore it is prudent to consult a tax professional.

If you receive Social Security, a tax professional can help you determine if some – or all – of your benefits are taxable.

The Small Business Health Care Tax Credit

If you’re a small business owner with fewer than 25 full-time equivalent employees you may be eligible for the small business health care credit.

What is the Small Business Health Care Credit?

The small business health care tax credit, part of the Patient Protection and Affordable Care Act enacted in 2010, is specifically targeted to help small businesses and tax-exempt organizations provide health insurance for their employees. Small employers that pay at least half of the premiums for employee health insurance coverage under a qualifying arrangement may be eligible for this credit. Household employers not engaged in a trade or business also qualify.

How Does the Credit Save Me Money?

The tax credit is worth up to 50 percent of your contribution toward employees’ premium costs (up to 35 percent for tax-exempt employers). The tax credit is highest for companies with fewer than 10 employees who are paid an average of $27,100 or less in 2019 ($26,600 in 2018). The smaller the business, the bigger the credit is. For example, if you have more than 10 FTEs or if the average wage is more than $27,100, the amount of the credit you receive will be less.

Note: The credit is available only if you get coverage through the SHOP Marketplace.

Here’s an example: If you pay $50,000 a year toward workers’ health care premiums–and you qualify for a 15 percent credit–you’ll save $7,500. If you save $7,500 a year from tax year 2017 through 2018, that’s a total saving of $15,000. And, if in 2019 you qualify for a slightly larger credit, say 20 percent, your savings go from $7,500 a year to $10,000 a year.

Is My Business Eligible for the Credit?

To be eligible for the credit, you must cover at least 50 percent of the cost of single (not family) health care coverage for each of your employees. You must also have fewer than 25 full-time equivalent employees (FTEs), and those employees must have average wages of less than $50,000 a year. This amount is adjusted for inflation annually and in 2018 was $53,200.

Let’s take a closer look at what this means. A full-time equivalent employee is defined as either one full-time employee or two half-time employees. In other words, two half-time workers count as one full-timer or one full-time equivalent. Here is another example: 20 half-time employees are equivalent to 10 full-time workers. That makes the number of FTEs 10, not 20.

Now let’s talk about average wages. Say you pay total wages of $200,000 and have 10 FTEs. To figure average wages, you divide $200,000 by 10–the number of FTEs–and the result is your average wage. In this example, the average wage would be $20,000.

Can Tax-Exempt Employers Claim the Credit?

Yes. The credit is refundable for small tax-exempt employers too, so even if you have no taxable income, you may be eligible to receive the credit as a refund as long as it does not exceed your income tax withholding and Medicare tax liability.

Can I Still Claim the Credit Even If I Don’t Owe Any Tax This Year?

If you are a small business employer who did not owe tax during the year, you can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments are more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit. That’s both a credit and a deduction for employee premium payments.

Can I File an Amended Return and Claim the Credit for Previous Tax Years?

If you can benefit from the credit this year but forgot to claim it on your tax return there’s still time to file an amended return.

Businesses that have already filed and later find that they qualified in 2016 or 2017 can still claim the credit by filing an amended return for one or both years.

Four Tax Deductions That Disappeared in 2018

Tax reform eliminated a number of deductions that many taxpayers counted on to reduce their taxable income. Here are four that could affect you.

1. Personal Exemptions

Personal exemptions enabled individual taxpayers to reduce their taxable income in addition to the standard deduction, but were repealed for tax years 2018 through 2025. While the standard deduction did increase significantly under tax reform to compensate – $12,000 for individuals, $24,000 for married taxpayers filing jointly, $18,000 for heads of household – some taxpayers could still lose out.

2. Tax Preparation Fees

Tax preparation fees, which fell under miscellaneous fees on Schedule A of Form 1040 (and were also subject to the 2% floor), were also eliminated for tax years 2018 through 2025 as well. Examples of tax preparation fees include payments to accountants, tax prep firms, and the cost of tax preparation software.

3. Unreimbursed Job Expenses

For tax years starting in 2018 and expiring at the end of 2025, miscellaneous unreimbursed job-related expenses that exceed 2% of adjusted gross income (AGI) are no longer deductible on Schedule A (Form 1040). Unreimbursed job-related expenses include union dues, continuing education, employer-required medical tests, regulatory and license fees (provided the employee was not reimbursed), and out-of-pocket expenses paid by an employee for uniforms, tools, and supplies.

4. Moving Expenses

Prior to tax reform (i.e., for tax years starting before January 1, 2018), taxpayers were able to deduct expenses related to moving for a job as long as the move met certain IRS criteria. However, for tax years 2018 through 2025, moving expenses are no longer deductible–unless you are a member of the Armed Forces on active duty who moves because of a military order.