Article Summary: Filing Options Married Filing Jointly Unpleasant Consequences Pleasant Consequences Married Filing Separately Notifying SSA, IRS, employers Other Issues to Consider A taxpayer’s filing status for the year is based upon his or her marital status at the close of the tax year. Thus, if you get married on the last day of the tax year, you are treated as married for the entire year. The options for married couples are to file jointly or separately. Both statuses can result in surprises – some pleasant and some unpleasant – for individuals who previously filed as unmarried. Individuals filing jointly must combine their incomes, and if both spouses are working, combining income can trigger a number of unpleasant surprises, as many tax benefits are eliminated or reduced for higher-income taxpayers. The following are some of the more frequently encountered issues created by higher incomes: Being pushed into a higher tax bracket Causing capital gains to be taxed at higher rates Reducing the child care credit Limiting the deductible IRA amount Triggering a tax on net investment income that only applies to higher-income taxpayers Causing Social Security income to be taxed Reducing the Earned Income Tax Credit Reducing or eliminating medical deductions Filing separately generally will not alleviate the aforementioned issues because the tax code includes provisions to prevent married taxpayers from circumventing the loss of tax benefits that apply to jointly filing higher-income taxpayers by filing separately. On the other hand, if only one spouse has income, filing jointly will generally result in a lower tax because of the lower joint tax brackets and a higher standard deduction, double the amount for single individuals ($24,400 for 2019), if the couple does not itemize deductions. In addition, some of the higher-income limitations that might have applied to an unmarried individual with the same amount of income may be reduced or eliminated on a joint return. Filing as married but separate will generally result in a higher combined income tax for married taxpayers. For instance, if a couple files separately, the tax code requires both to itemize their deductions if either does so, meaning that if one itemizes, the other cannot take the standard deduction. Another example relates to how a married couple’s Social Security (SS) benefits are taxed: on a joint return, none of the SS income is taxed until half of the SS benefits plus other income exceeds $32,000. On a married-but-separate return, and where the spouses have lived together at any time during the year, the taxable threshold is reduced to zero.

Article Highlights: Solar Credit Plug-In Electric Vehicle Credit Penalty for Not Having Health Insurance Medical Deduction Restrictions New Alimony Rules Standard Deduction Increase Increased Retirement Contributions Federal Tax Brackets Increase You have your 2018 tax return filed, or perhaps on extension, and now it is time to look forward to the changes that will impact your 2019 return when you file it in 2020. Keeping up with the constantly changing tax laws can help you get the most benefit out of the laws and minimize your taxes. Many tax parameters, such as the standard deduction, contributions to retirement plans, and tax rates, are annually inflation adjusted, while some tax changes are delayed and take effect in future years. On top of all that, we have Congress considering the retroactive extension of some tax provisions that expired after 2017 as well as proposing new tax legislation. The inflation adjustments shown are not the only items adjusted for inflation. For a full list, see IRS Revenue Procedure 2018-57. At any rate, here are some changes that might affect your 2019 return: Solar Credit – Although the solar credit remains at 30% for 2019, as a reminder, the credit rate will drop to 26% in 2020. This means that for each $1,000 spent on qualified solar property, the credit will be $40 less in 2020 than if the expense were paid and the credit was claimed in 2019. However, this is a non-refundable credit, meaning it can only offset your tax liability, but the unused credit can carry over to a future tax year as long as the credit is allowed; it is currently scheduled to end after 2021. So, be cautious of overzealous salespeople trying to talk you into an expenditure for which you may not get the full credit. Plug-In Electric Vehicle Credit – Although the credit amounts have not changed, the credit begins to phase-out for each manufacturer after it produces its 200,000th qualifying vehicle. For example, the very popular Tesla vehicle did qualify for the full credit in 2018. However, Tesla has entered the phase-out stage, and for 2019, the credit is only $3,750 for purchases in the first 6 months of the year, then drops to $1,875 for vehicles bought through the rest of 2019, and is zero for post-2019 purchases. If you are contemplating buying a plug-in electric vehicle, check the IRS website for the current credit by manufacturer. Penalty for Not Being Insured – The Affordable Care Act required individuals to have health insurance and imposed a “shared responsibility payment” – really a penalty – for those who didn’t comply. The penalty could have been as much as $2,085 for most families. That penalty will no longer apply in 2019 or the foreseeable future. Medical Deductions Further Restricted – Unreimbursed medical expenses are allowed as an itemized deduction to the extent they exceed a percentage of a taxpayer’s adjusted gross income (AGI). As part the Affordable Care Act, Congress increased that percentage from 7.5% to 10%. That increase was temporarily rescinded in the most recent tax form. However, starting with the 2019 returns and for the foreseeable years, the AGI medical floor will be 10% of AGI. This is where the “bunching” strategy may benefit your ability to deduct medical expenses. This means paying as much of your medical expenses as possible in a single year so that the total will exceed the AGI floor and your overall itemized deductions will exceed the standard deduction. Example: Your child is having orthodontic work done, which will cost a total of $12,000, and the dentist offers a payment plan. If you pay in installments, you will spread the payments out over several years and may not exceed the medical AGI floor in any given year. However, by paying all at once, you will exceed the floor and get a medical deduction. New Alimony Rules – For divorces and separation agreements entered into after 2018, the alimony paid is not deductible, and the alimony received is not taxable. In addition, the alimony recipient can no longer make an IRA contribution based on the alimony received. It is important to understand that this treatment of alimony only applies to alimony payments paid under agreements entered into after 2018 or under prior agreements modified after 2018 that include this new provision. For agreements entered into before 2019 that haven’t been modified, the old rules continue to apply: the alimony paid is deductible, and the alimony received is included in income. Also, an IRA deduction can be made based upon the taxable alimony received. Standard Deduction – The standard deduction, which is inflation adjusted annually, is used by taxpayers who do not have enough deductions to itemize. For 2019, the standard deductions have increased as follows: • Single: $12,200 (up from $12,000 in 2018) • Married filing jointly: $24,400 (up from $24,000 in 2018) • Married filing separately: $12,200 (up from $12,000 in 2018) • Head of household: $18,350 (up from $18,000 in 2018) Individuals who are blind and/or age 65 or over are allowed standard deduction add-ons. These add-ons are for the taxpayer and spouse but not for dependents. The add-on amounts are $1,300 for those filing jointly (unchanged from 2018) and $1,650 for all others (up from $1,600 in 2018). Increased Retirement Contributions – All IRA and retirement contributions are subject to inflation adjustment, meaning the allowable amounts may be increased each year. This gives you the opportunity to increase your retirement savings in 2019. • Simplified Employee Pension (SEP) Plans – The maximum amount for 2019 is $56,000 (up from $55,000 in 2018). • Individual Retirement Accounts (IRAs) – For both traditional and Roth IRAs, the maximum contribution has been increased to $6,000 (up from $5,500 in 2018). This is the first change to IRAs since 2013. The additional amount taxpayers age 50 and over can contribute remains unchanged at $1,000. • 401(k) Plans – The maximum employee contribution has been increased to $19,000 (up from $18,500 last year). The additional amount for taxpayers who’ve reached age 50 remains unchanged at $6,000. • Simple Plans – The maximum elective contribution is $13,000 (up from $12,500 in 2018). The additional amount for taxpayers age 50 and older remains unchanged at $3,000. • Health Savings Accounts (HSAs) – Although meant to be a way for individuals covered by a high-deductible health plan to save money for future medical expenses, these plans can also be used as a supplemental retirement plan. Contributions are deductible, earnings accumulate tax-free, and if distributions are used for qualified medical expenses, they are tax-free. However, when used as a supplemental retirement plan, the distributions would be taxable. The following are the contribution limits for 2019: o Self-only coverage: $3,500 (up from $3,450 last year) o Family coverage: $7,000 (up from $6,900) Federal Tax Brackets – The tax brackets were inflation adjusted (by approximately 2% over the 2018 brackets), meaning more of your income is taxed at a lower bracket in 2019 than it was in 2018. As an example, here are the brackets for 2019 for taxpayers using the single filing status: • 10%: $9,700 or less • 12%: More than $9,700 but not more than $39,475 • 22%: More than $39,475 but not more than $84,200 • 24%: More than $84,200 but not more than $160,725 • 32%: More than $160,725 but not more than $204,100 • 35%: More than $204,100 but not more than $510,300 • 37%: Applies to taxable incomes of more than $510,300 These are the brackets for married taxpayers filing jointly: • 10%: $19,400 or less • 12%: More than $19,400 but not more than $78,950 • 22%: More than $78,950 but not more than $168,400 • 24%: More than $168,400 but not more than $321,450 • 32%: More than $321,450 but not more than $408,200 • 35%: More than $408,200 but not more than $612,350 • 37%: Applies to taxable incomes of more than $612,350 For other filing statuses, see Revenue Procedure 2018-57. Note: These are step functions, so for example, the first $9,700 of taxable income is taxed at 10%, the next $29,775 ($39,475 − $9,700) is taxed at 12%, and so forth.

Did you receive a lump-sum disability severance payment when you separated from military service? You may be entitled to a refund of the taxes you paid on that income. Learn more. .embed-container { position: relative; padding-bottom: 56.25%; height: 0; overflow: hidden; max-width: 100%; } .embed-container iframe, .embed-container object, .embed-container embed { position: absolute; top: 0; left: 0; width: 100%; height: 100%; }

Article Highlights: IRS Enforcement Campaign Virtual Currency Valuation Transactions Character of the Gain or Loss Foreign Currency Transactions Foreign Bank and Financial Account (FBAR) Reporting Payment for Goods and Services Acquiring Virtual Currency Virtual Currency Mining Employee Payments Independent Contractor Payments 1031 Exchanges The IRS announced in late July 2019 that it is ramping up its campaign to ensure that taxpayers with cryptocurrency transactions report these transactions on their income tax returns – and report them correctly – by sending “educational” letters to approximately 10,000 taxpayers who either didn’t report their crypto-transactions or may have reported them incorrectly. The IRS said it used its compliance efforts to identify the taxpayers who may be noncompliant. Because fewer than 900 taxpayers reported virtual currency gains and losses each year on their tax returns from 2013 to 2015, the IRS stepped up enforcement of the rules. As part of that effort, the IRS got court approval in March 2018 for a summons to obtain account and transaction information on more than 14,000 customers from Coinbase, a company that services buyers and sellers of Bitcoin. Although the IRS didn’t say so in its recent announcement, presumably the leads for the 10,000 taxpayers who will receive a letter came from this source. Taxpayers receiving these letters should not ignore them, as taxpayers who don’t properly report the income-tax consequences of virtual-currency transactions will be liable for not just the tax but also penalties and interest. In some cases, taxpayers could be subject to criminal prosecution. It may be necessary for taxpayers with cryptocurrency transactions to file amended returns to correct their earlier filings or to file a late original return for any year when they filed no return. This holds true not just for the recipients of the IRS’s letters but for others who have a filing requirement related to their cryptocurrency transactions. So let’s go over the basics of cryptocurrencies and taxes: As our world has become more “digital,” it was only a matter of time before cryptocurrencies were developed. One of the first of these virtual currencies was Bitcoin, and the Bitcoin network came online in 2009. Since then, additional cryptocurrencies have been developed. Cryptocurrencies have a comparable value in real currency or take the place of real currency. These virtual currencies can be purchased with or exchanged into U.S. dollars, euros, and other real or virtual currencies. Valuation – A virtual currency’s value is based upon market value, i.e., what a willing buyer will pay a willing seller – much like trading in stocks. On July 27, 2019, when this article was written and according to Oanda (an online currency converter), a Bitcoin (BTC), one of the more popular virtual currencies, was worth $9,780, while one Bitcoin was worth $12,650 on July 10 and $3,436 six months earlier. So you can see that this is a very volatile market. It took several years for the IRS to come up with guidance on how to deal to transactions involving virtual currencies. It finally issued Notice 2014-21, determining that virtual currency is to be treated as property and that the general tax principles applicable to property transactions also apply to transactions using virtual currency. Therefore, it is extremely important for taxpayers who engage in cryptocurrency transactions to maintain a record of their cost basis; this can be a daunting but necessary task for those actively buying and selling cryptocurrencies. How the property principles work for cryptocurrency can best be illustrated by example. Example A: A taxpayer buys Bitcoins (BTC) to use when making online purchases without the need for a credit card. He buys one BTC for $2,425 and later uses it to buy goods (BTC was trading at $2,500 at the time he made his purchase). He has a $75 ($2,500 − $2,425) reportable capital gain. This is the same result as if he had sold the BTC at the time of the purchase and used U.S. dollars to purchase the goods. This example points to the complicated record-keeping requirement for tracking BTC’s basis. Since this transaction was personal in nature, no loss would be allowed if the value of one BTC had been less than $2,425 at the time when the goods were purchased. Example B: Taxpayer buys Bitcoin (BTC) as an investment. The same rules apply as for stock transactions. Gains are taxable in the year realized, and any resulting loss, when combined with the other capital transactions for the year, are limited to $3,000 ($1,500 if a married taxpayer filing separate). At the same time that the IRS announced it was mailing 10,000 educational letters, it stated that it anticipates issuing additional legal guidance in this area in the near future.

Article Highlights: Tax Loss for a Security Sold or That Is Worthless Proving Worthlessness Selling a Worthless Stock by Year-end Brokers May Accommodate Clients Capital Loss Deduction If you are like most investors, you occasionally will pick a loser that declines in value. Sometimes, a security can even become worthless when the issuing company goes out of business. Gains and losses for securities, including stock, stock rights, bonds, debentures, and similar debt instruments, are not recognized for tax purposes until the securities are sold or become worthless. If the security is sold for a loss, the date of loss is easily determined since it is the sale date. However, for worthless stocks, it is not that easy to determine the date of loss, and taxpayers cannot just pick the year they want to for claiming the loss. The IRS says a stock is worthless when a taxpayer can show that the security had value at the end of the year preceding the deduction year and that an identifiable event caused a loss in the deduction year. Just because an issuing company has filed bankruptcy does not necessarily mean its stock is worthless in that year. The company could be in reorganization, or the stock might not be worthless until a later year. Whatever you do, don’t wait until it’s too late to take your loss. If the IRS challenges the loss and the security is found to have become worthless in an earlier year, the current year’s loss will be denied. Your only recourse at that point is to amend your prior year’s return to claim your loss, provided the three-year statute of limitation has not expired. If the loss is claimed too early, the IRS will also deny it (making you wait until a subsequent year when the stock actually becomes worthless).

The IRS announced in late July 2019 that it is ramping up its campaign to ensure that taxpayers with cryptocurrency transactions report these transactions on their income tax returns. Watch the video to learn more. .embed-container { position: relative; padding-bottom: 56.25%; height: 0; overflow: hidden; max-width: 100%; } .embed-container iframe, .embed-container object, .embed-container embed { position: absolute; top: 0; left: 0; width: 100%; height: 100%; }