Learning Center for Tax and Financial Insights

Article Highlights: Average Refund Down Tax Filings Down Effects of Lower Refunds Actual Tax Generally Lower How This Happened If your tax refund is less than you anticipated, you are not alone. In a report issued by the Treasury Department on February 14, the average refund it is paying in 2019 has dropped to $1,949 from $2,135 in the prior year. In addition, the number of returns filed so far has dropped from 13.5 million last year to 11.4 million this year for the same period. With all the hype about how tax reform would reduce taxes, taxpayers were anticipating larger refunds this year but instead are receiving less, on average. This has left the Republican lawmakers who passed the tax reform scrambling to explain why the refunds are lower. Lower refunds can be especially harmful to taxpayers who count on their refunds to pay their annual property taxes, holiday spending and other debts. Many count on the refunds to pay for summer vacations and other discretionary spending. Some who normally receive refunds may even find themselves owing money this year. Although most taxpayers will actually pay less in taxes this year, this does not necessarily translate into increased refunds. For most, the tax cut provided more take-home pay during 2018, instead of adding to their refunds at the end of the year. This decrease in withholding spread over 52, 26 or 24 paychecks is far less noticeable than a lump sum added to the refund.

Article Highlights: Tax Reform Penalty for Not Being Insured Premium Tax Credit Employer Penalty Coverage Exemptions Hardship Exemptions Thanks to the tax reform, beginning in 2019, the penalty for not having adequate health insurance, which the government refers to as the “individual shared responsibility payment,” will no longer apply. The elimination of this penalty as of 2019 does not impact the health care subsidy for low-income families, which is known as the premium tax credit and which is available for policies acquired through a government insurance marketplace. This elimination also does not affect the penalties assessed on employers that do not offer affordable insurance to employees and that have 50 or more full-time-equivalent employees. However, the penalty still applies for individual taxpayers who did not have minimum essential health coverage for 2018 and is the greater of the sum of the family’s flat dollar amounts or 2.5% of the amount by which the household’s income exceeds the income-tax-filing threshold. For 2018, the flat dollar amounts are $695 per year ($57.92 per month) for each adult and half that amount ($347.50; $28.96 per month) for each child under the age of 18; the maximum family penalty using this method is $2,085 per year ($173.75 per month). As an example, say that a family of four (2 adults and 2 children) has a household income that exceeds the income-tax-filing threshold by $100,000. This family would have a maximum penalty equal to the greater of the flat dollar amount ($695 + $695 + $347.50 + $347.50 = $2,085) or 2.5% of the income amount (2.5% × $100,000 = $2,500). Thus, the maximum penalty would be $2,500. However, the penalties are applied separately per month, and they do not apply in a given month if certain exceptions are met. There are a number of exceptions to the penalty, as listed below. For details related to qualifying for any of these exceptions, please give this office a call. Some of the penalty exceptions apply to the entire year, and some only apply to a specific month in the year. If penalty relief applies to a specific month, it also applies to the months just preceding and following that month. The table below lists the various exceptions and the code number the government assigned to that exception. COVERAGE EXCEPTIONS CODE NUMBER Income below the tax-filing threshold. No code Coverage considered unaffordable. A Short coverage gap (less than 3 months). B Certain U.S. citizens or resident aliens living abroad. C Member of a health care ministry. D Member of an Indian tribe. E Incarcerated. F Aggregate self-only coverage unaffordable. G Resident of a state that did not expand Medicaid. G Member of tax household born or adopted during the year. H Member of tax household died during the year. H Member of certain religious sects. ECN* Ineligible for Medicaid based on a state decision not to expand Medicaid. ECN* Coverage considered unaffordable based on projected income. ECN* Certain Medicaid programs that are not minimum essential coverage. ECN* * Certain hardship exemptions. G – See list below

Article Highlights: Pre-Tax Reform Home Mortgage Interest Deduction o Home Acquisition Debt o Home Equity Debt Tax Reform Mortgage Interest Deduction Changes o Home Acquisition Debt o Home Equity Debt Tracing Equity Debt Refinancing Property Taxes As part of the recent tax reform, the Tax Cuts and Jobs Act of 2017, the deduction for home mortgage interest and property taxes has undergone substantial alterations. These changes will impact most homeowners who itemize their deductions each year. Mortgage Interest – Prior to the tax reform, a taxpayer could deduct the interest he or she paid on up to $1 million of acquisition debt and $100,000 of equity debt secured by the taxpayer’s primary home and/or designated second home. This interest was claimed as an itemized deduction on Schedule A of the homeowner’s tax return. This tax deduction was often cited as one of the reasons to purchase a home, rather than renting a place to live. Qualified home acquisition debt is debt incurred to purchase, construct, or substantially improve a taxpayer’s primary home or second home and is secured by the home. Home equity debt is debt that is not acquisition debt and that is secured by the taxpayer’s primary home or second home, but only the interest paid on up to $100,000 of equity debt had been deductible as home mortgage interest. In the past, homeowners have used home equity as a piggy bank to purchase a new car, finance a vacation, or pay off credit card debt or other personal loans – all situations in which the interest on a consumer loan obtained for these purposes wouldn’t have been deductible. The old law continues to apply to home acquisition debt by grandfathering the home acquisition debt incurred before December 16, 2017, to the limits that applied prior to the changes made by the tax reform. As explained later in this article, equity debt interest didn’t survive the tax reform’s legal changes. New Acquisition Debt Limits: Under the new law, for home acquisition loans obtained after December 15, 2017, the acquisition debt limit has been reduced to $750,000. Thus, if a taxpayer is buying a home for the first time, the deductible amount of the acquisition debt interest will now be limited to the interest paid on up to $750,000 of the debt. If the home acquisition debt exceeds the $750,000 limit, then a prorated amount of the interest will still be deductible. If a taxpayer already has a home with grandfathered acquisition debt and wishes to finance a substantial improvement on the home or acquire a second home, the total of the prior acquisition debt and the new debt, for which the interest would be deductible, would be limited to $750,000 less the grandfathered acquisition debt existing at the time of the new loan. This may be a tough pill to swallow for many future homebuyers, since the cost of housing is on the rise, while Congress has seen fit to reduce the cap on acquisition debt, on which interest is deductible. Equity Debt: Under the new law, equity debt interest is no longer deductible after 2017, and this even applies to interest on existing equity debt, essentially pulling the rug out from underneath taxpayers who had previously taken equity out of their homes for other purposes and who were benefiting from the itemized deduction. Note: Equity debt used to purchase, construct or substantially improve one’s home or second home is not treated as equity debt for tax purposes, it is instead treated as acquisition debt (See acquisition debt limits above).Tracing Equity Debt Interest: Because home mortgage interest rates are generally lower than business or investment loan rates and easier to qualify for, many taxpayers have used the equity in their home to start businesses, acquire rental property, or make investments, or for other uses for which the interest would be deductible. With the demise of the Schedule A home equity debt interest deduction, taxpayers can now trace interest on equity debt to other deductible uses. However, if the debt cannot be traced to a deductible purpose, unfortunately, the equity interest will no longer be deductible. Refinancing: Under prior law, a taxpayer could refinance existing acquisition debt, and the allowable interest would be deductible for the full term of the new loan. Under tax reform, the allowable interest will only be deductible for the remaining term of the debt that was refinanced. For example, under the old rules, if you refinanced a 30-year term loan after 15 years into a new 25-year loan, the interest would have been deductible for the entire 25-year term of the new loan. However, under tax reform, the interest on the refinanced loan would only be deductible for 15 years – the remaining term of the refinanced debt.

Article Highlights: $600 Threshold Exceptions Form W-9 Impact of Tax Reform 1099-MISC Filing If you use independent contractors to perform services for your business or your rental that is a trade or business, for each individual whom you pay $600 or more for the year, you are required to issue the service provider and the IRS a Form 1099-MISC after the end of the year, to avoid losing the deduction for their labor and expenses. (This requirement generally does not apply to payments made to a corporation. However, the exception does not extend to payments made for attorney fees and for certain payments for medical or health care services.) It is not uncommon to have a repairman out early in the year, pay him less than $600, then use his services again later and have the total for the year exceed the $600 limit. As a result, you might overlook getting the information needed to file the 1099s for the year. Therefore, it is good practice to always have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services. Having a properly completed and signed Form W-9 for all independent contractors and service providers will eliminate any oversights and protect you against IRS penalties and conflicts. The government provides IRS Form W-9, “Request for Taxpayer Identification Number and Certification,” as a means for you to obtain the data required from your vendors in order to file the 1099s. It also provides you with verification that you complied with the law, should the individual provide you with incorrect information. We highly recommend that you have a potential vendor or independent contractor complete a Form W-9 prior to engaging in business with him or her. Many small business owners and landlords overlook this requirement during the year, and when the end of the year arrives and it is time to issue 1099-MISCs to service providers, they realize they have not collected the required documentation. Often, it is difficult to acquire the contractor’s, handyperson’s, gardener’s, etc., information after the fact, especially from individuals with no intention of reporting and paying taxes on the income.

Article Highlights: Annual Mileage Optional (Standard) Mileage Method Actual-Expense Method Vehicle Depreciation Luxury-Vehicle Limits SUVs Interest Expenses Business-Vehicle Sales or Trade-ins Employees Plug-in Electric Vehicle Credits The Tax Cuts and Jobs Act of 2018 and other tax reforms have brought about significant changes in the way that vehicle use is deducted for business purposes. Before getting into these changes, it is appropriate to first provide a review of the two methods for deducting the use of a business vehicle. It is important to understand that both methods require keeping track of (1) the vehicle’s total annual mileage and (2) the vehicle’s annual mileage for business purposes. When using the optional mileage rate (also referred to as the standard mileage rate), only business miles are counted. When using the actual-expense method, the operating expenses and depreciation must be prorated based on the proportion of the total mileage that was for business purposes. To document the total mileage, deduct the odometer reading on the first day of the year from that on the last day of the year. For the business mileage, keep a daily record in an appropriate ledger. Keep in mind that the IRS states that all vehicles are used personally to some extent; it will look for a proration between business and (nondeductible) personal use. Optional Mileage Rates – The standard mileage rates for the business use of a car, van, or pickup or panel truck are shown below: OPTIONAL MILEAGE RATES FOR BUSINESS USE Year Deduction per Business Mile Imputed Depreciation*per Business Mile 2018 54.5 cents 25.0 cents 2019 58.0 cents 26.0 cents *This is the amount of depreciation included in the optional mileage rate. However, a business cannot use the standard mileage rates if it has previously used the actual-expense method (via Sec. 179, bonus depreciation, or depreciation). This rule is applied on a vehicle-by-vehicle basis. In addition, the standard mileage rate for business use cannot be applied to any vehicle that is used for hire, such as taxi, or to more than four vehicles simultaneously. Actual-Expense Method – Taxpayers always have the option of calculating the actual costs of a vehicle’s business use rather than using the standard mileage rates. Using the actual-expense method in the year when a vehicle is placed into business service may be worthwhile due to the potential for higher fuel prices, the extension and expansion of the bonus depreciation, or increased depreciation limitations for passenger vehicles as a result of the Tax Cuts and Jobs Act. Actual expenses include the costs of the following: Gasoline Oil and Other Fluids Lubrication Repairs Registration Insurance Depreciation (or lease payments) Interest Vehicle Depreciation - The so-called luxury-vehicle rules limit the annual depreciation deduction for vehicles that weigh 6,000 pounds or less. The recent tax reform substantially increased these limits by providing much larger first- and second-year deductions for more expensive vehicles. The table below displays the limits for vehicles that were placed into service in 2018. These rates will be adjusted based on inflation in future years. The recent tax reform also included the option for the taxpayer to add a 100% bonus depreciation to the first-year luxury-vehicle rates (see the amount for “First Year with Bonus” in the table below). However, if a vehicle was purchased before September 28, 2017 (but was not put into service until 2018), the first-year depreciation cap with the bonus is reduced from $18,000 to $16,400. Prior to 2018, the depreciation values for vans and light trucks were different from those for cars. In 2018, the depreciation limits are the same for both categories, but in future years, the limits may diverge because separate inflation adjustments will apply to the two categories.

Article Highlights: Missing W-2 Contact the Office Contact the Employer Contact the IRS Prepare a Substitute W-2 File on Time or Get an Extension W-2 Withholding Have you received all of your W-2s? These documents are essential for completing individual income tax returns, as they include the taxable amount of your wages and the amount withheld for federal and (if applicable) state income tax, along with pension plan and other information that is needed to prepare your return. Employers have until January 31st to provide or send you your W-2 earnings statement covering what you earned in the prior year, either electronically or in paper form. If you have not received your W-2 in a reasonable time frame (allowing for time for mail delivery) after the January 31 due date, follow these steps: 1. Contact This Office - Let this office know that you are missing a W-2. If your appointment is in the near future, we will advise you whether to keep the appointment or change it to another time. Generally, when a W-2 or 1099 is missing, it is best to keep the appointment so that everything else for the return can be completed. You can then mail the missing document to the office or drop it off at a later date. That way, your return can be finished as soon as the missing form becomes available, which will speed up your refund, if you are receiving one. 2. Contact Your Employer - Contact your employer to inquire about if and when the W-2 was mailed. It could be that the employer, especially a former employer, may not have your current address. After contacting the employer, allow a reasonable amount of time for the employer to resend or reissue the W-2. However, if the employer does not respond to your request or has gone out of business, you have two options: A. Contact the IRS - If you still have not received your W-2 by the end of February, you can call the IRS for assistance at 800-829-1040. However, we recommend that you hold off contacting the IRS until you are certain that you will not be receiving a W-2 from the employer. If and when you do call the IRS, have the following information at hand: Your name, address (including ZIP code), phone number, taxpayer identification number (a Social Security number for most people), and dates of employment Your employer/payer's name, address (including ZIP code), and phone number If known, your employer/payer's identification number (EIN). If you worked for the same employer in a prior year, the EIN will be on your copy of the W-2 for that year. The IRS will contact the employer/payer for you and request the missing or corrected form. B. Prepare a Substitute W-2 Using Form 4852 - Contact this office about having a Form 4852 prepared. You use this option as a last resort after having exhausted your efforts to obtain a W-2 from the employer. With luck, you will have your last pay stub, which will include the information needed to accurately prepare the 4852. If not, other means will have to be used to estimate the amounts, which may result in having to amend your return at a later date if the estimate is subsequently determined to be inaccurate. The following information will be needed to complete the substitute W-2: Your identification number and dates of employment, Your employer/payer's name, address (including ZIP code), and phone number If known, your employer/payer's identification number (EIN). If you worked for the same employer in the prior year, the EIN will be on that W-2. Wages, tips, and other compensation you received during the year Social security wages Medicare wages and tips Social security tips Federal income tax withheld State income tax withheld Local income tax withheld Social security tax withheld Medicare tax withheld