My Dear Clients,
You all probably haven’t heard this but the IRS recently figured out they probably “over-corrected” last February and under-withheld everyone on their wages this past year. Yes, that’s right. Despite the fact that nearly everyone got a tax cut, when you’ve been under withheld that may just turn out to be a surprise balance due…and for those of you (about 10%) who would have owed anyway, that’ll just make preparing your taxes, well, extra special, won’t it? Anyway, that’s why the cartoon is the headline item here and very appropriate.
2018….so, where do I begin? This is going to be a very interesting tax season, and maybe not in a great way. Many changes to be had!
Before I get to that…welcome to my new clients! If you are new, this is your first annual client newsletter. Many of my regular clients look forward to this newsletter. This is my way of trying to give you what I think is most important in the world of taxes in one brief read. If you don’t like paper, you can find it online at the url above, and there are occasional hot links. 2018 is the first year of what I refer to as the “Tax Big Bang”: The Tax Cuts and Jobs Act—which has really changed a lot.
The federal tax forms will look different.
They re-designed the tax forms, and they look different. They did away with the Form 1040A and 1040EZ. Now there is a new one page 1040 has a number of subsidiary Schedules (Schedule 1, Schedule 2, etc.) that “flow” into it. There are still a number of Forms, too. To me, all of these forms look very different and will take getting used to. Of course, to my clients they might appear to be the same inscrutable forms they always were and be just as confusing as usual. I guess we’ll see.
For many of you, your taxes will be simpler this year– many things are no longer deductible.
Many of you will no longer be “itemizing.” This is due to the fact that state income and real estate taxes have a combined deduction limit of $10,000 AND the standard deduction has been raised to $12,000 for a single person and $24,000 for a married couple.
In particular, the following are no longer deductible starting in 2018:
1. Home equity interest deductions–not your first mortgage, but all second mortgages and lines of credit are essentially no longer deductible (may still be allowed within some limits).
2. Employee business expenses–unreimbursed mileage, etc.
3. Union dues.
4. Investment expenses–including advisor fees.
5. Entertainment expenses—however, meals (or meals per diem) while on a business trip or local meals where business is conducted are still deductible, but events like golf outings or sports games are no longer deductible.
6. All casualty losses–unless in a Presidentially declared disaster area.
7. All “2% miscellaneous itemized deductions.“
8. Moving expenses–gone.
The following are not gone, but are limited or changed:
As stated previously, State and Local Taxes are limited to $10,000 per year. (This includes all income, sales and real estate taxes).
In addition, Alternative Minimum Tax (AMT) while it still exists has been greatly reduced. Very few people will be subject to AMT. Overall, tax rates were lowered.
Mortgage interest–limited to $750,000 first mortgage (down from $1.0 million dollar first mortgage).
As you can see, the 2018 Act touches almost everything, and there’s more…
Individual Insurance Mandate
Starting in 2019, the national individual insurance mandate is gone; however, the Massachusetts insurance mandate remains.
For 2018, the exemptions to avoid the penalty have been liberalized so much so that anyone can avoid having to pay a penalty to the IRS for not having health insurance. Once again, the Massachusetts insurance mandate remains in place, and there are penalties to the state, but there are waivers there, too.
Alimony on divorces that take effect starting in 2019 is no longer deductible by the payer or taxable to the recipient. What’s interesting about this is that Massachusetts (and probably other states) have laws that establish how alimony is supposed to be set. These laws were written when alimony was tax deductible and took that tax deductibility into account. These alimony laws have not been changed so far. (Observation: If you might be paying alimony, 2019 is not a good time to be getting divorced, and if you’re receiving, it might be a very good time.)
We no longer have “exemptions” but we still have “dependents”.
“Exemptions” have been eliminated. You no longer get to claim your own exemption or that of a child, but you still get “tax credits” for dependents. In fact, tax credits for dependents have been increased.
New problem: If you own partnerships or S-corporations that have K-1’s reporting losses on them…
For a lot of my clients, the following is going to sound like Greek. Don’t worry. Just skip to the next topic—particularly if you don’t own any partnerships or S-corporations. The few that this applies to can hopefully follow along. The IRS has instituted a new CRACKDOWN and it’s on people who own partnerships and S-corporations with losses reported on the K-1s. See, here’s the deal: very frequently, a shareholder or partner will take losses that they are not legally entitled to. A “K-1” will report a loss, but that doesn’t mean a taxpayer can legally take it. In particular, you can’t take it if you don’t have “basis” in the partnership or corporation. Starting in 2018, before you can take a loss, the IRS is requiring extensive basis analysis worksheets to demonstrate that you actually have sufficient basis. This means that I will be asking YOU for this information. (I wouldn’t have it.) I’m sure you don’t either. Since nobody ever keeps track of this, you will need to go back to the accounting firm that prepares the taxes of the partnership or the S-corporation and ask them. Bottom line; this is going to be a royal pain in the “you-know-what” if this applies to you. You will find that this will be a real
“show stopper” in terms of getting your taxes done. Everything will be put on old while you need to go find this information. Once we have it we won’t need to go through the exercise again.
So, all of this sounds bad. There were a lot of “take aways,” but there are some good things, too.
Child Tax Credit
The child tax credit was GREATLY EXPANDED from $1,000 to $2,000 per child but more importantly, the income threshold has been raised. Many of my clients made too much money to take advantage of the child tax credit. This will now change. You can claim the child tax credit up to $400,000 of AGI for married filing jointly.
Higher Standard Deduction
The standard deduction for married couples is increasing from $12,000 to $24,000, ($6,000 to $12,000 if single) higher if over 65. What does this mean? As I discussed previously, many of my clients, especially, married couples will no longer be itemizing on their taxes. This means you won’t be filing a Schedule A to claim real estate taxes, mortgage interest, charitable deductions, etc. It’s not that they aren’t deductible, it’s just that the $24,000 standard deduction will be more beneficial to them.
Tax rates are lower, too.
I am not going to list a bunch of tax rate brackets here. Trust me. Tax rates were lowered, and this applies to everyone.
And then there’s the new “Qualified Business Income” (QBI) deduction under the new code section 199A
Starting in 2018, there is a new 20% deduction for most people who are self-employed. It does NOT MATTER whether you are Schedule C, an S-corporation, an LLC, or a partnership. Just not a “C” corporation. You do not have to do anything in particular to “structure yourself”. The reason this was done was that all “C corporations” had their corporate taxes lowered from 35% to 21% and Congress was trying to even the scales. Note that self-employed people are still subject to self-employment tax. This calculation is very complicated and has a lot of limitations. However, if you make less than $157,500, ($315,000 married filing joint) most of these limitations do not apply to you. Since most of my clients are below this limit, I am not going to go into any more detail. Anyone who wants more in depth discussion about this is welcome to reach out to me.
There have been numerous IRS regulations on this topic. In fact, some very surprising regulations came out a few days ago with some limitations that most tax professionals had not anticipated.
Moving on to the Commonwealth of Massachusetts…
Starting on July 1, 2019 a new payroll tax kicks in for all employees. Massachusetts will join three other states: New Jersey, Rhode Island and California with its own version of a government sponsored Family Medical Leave program.
This is a new self-funded program that involves a new payroll tax in this state. You will hear a lot about this coming summer. The taxes start this July but the benefits don’t kick in until two years from now.
Let me begin by telling you what you can receive under “Family and Medical Leave”. Beginning January 1, 2021, you can apply for up to $850 per week (depends on your salary history) for the following reasons:
- To deal with your own serious medical condition up to 20 weeks.
- To care for a family member who has a serious health condition for up to 20 weeks.
- To bond with your child during the first 12 months after the child’s birth or the first 12 months after the placement of the child with you for adoption or foster care for up to 12 weeks.
- To deal with any qualifying emergency arising out of the fact that a family member is on active duty or has been notified of an impending call or order to active duty in the Armed Forces for up to 26 weeks.
- To care for a family member who is a covered service member with a serious injury or illness incurred or aggravated in the line of duty for up to 26 weeks.
- You can have more than one of these events in a year, but the maximum total is 26 weeks.
Think of this as similar to filing for unemployment but now you will be able to file for “short term disability” and “maternity/paternity leave” that will be paid by a new state agency. Yes, this is happening. I am familiar with the program in Rhode Island, and essentially a medical doctor or (even a mental health professional like a psychologist) could fax in a form and put you on medical disability. Just like that.
Okay, so how are we to pay for this program? The program will be self-funded by a payroll tax which begins this year, giving the program 18 months to get money in. The tax is essentially split 50/50 between employees and employers. The initial tax is .63% of the first $128,400 of payroll. $128,400 is the amount that we pay social security taxes on. This amount goes up every year. As the social security “wage base” goes up so will the wages that we have to pay the tax on. For 2019 and 2020, the maximum amount that an employee would pay is .31 of their salary up to a maximum of $404 per year. Your employer matches that amount.
Here are more interesting wrinkles:
- Note: I said “initial” tax because every year the rate gets set so that the program self-funds. If the citizens of Massachusetts start to take a huge advantage of this, then the tax will go up and up.
- Employers with 25 or fewer employees don’t have to make the employer match they do have to withhold from their employees but there is no employer tax. With few exceptions, such as local government employees, everyone who is a MA employee will start to see this deduction on July 1—or you should.
- If you are SELF-EMPLOYED, you can voluntarily OPT IN. That is, you can decide to voluntarily pay the tax and in exchange get coverage. Honestly, if you are young self-employed person especially with a family, this might not be a bad idea. It’s essentially cheap short term disability and paid maternity/paternity leave.
- Here’s a really interesting aspect, firms that pay a majority of their workers on 1099’s MUST deduct the tax from their “1099 workers” too in addition to their employees. To be subject to this rule: you must have a payroll, and have a majority of your workforce paid via 1099’s.
Had enough of this? We can move along, but you can say, you heard it here first!
Massachusetts has passed a new law regulating Airbnb/HomeAway (short-term rental) operators.
Every person operating an Airbnb-type rental in Massachusetts now has to register with the state by June 30th, 2019. There are going to be state and local excise taxes. In addition, I understand there is going to be a central registry where people can see the addresses involved. Just to be clear, the law is only designed to capture the “short term rental” (one month or less). This does not affect a more traditional landlord-tenant arrangement where there’s a lease or a month to month tenancy at will.
One final Massachusetts reminder…the state now gives a $1-2,000 deduction from your income (worth $50 to $100) when you contribute to the state’s 529 plans, namely the “U Fund” or the “UPlan”.
The due date this year for everyone in Massachusetts is Wednesday, April 17, 2019. For the rest of the country, it’s Monday, April 15th.
Here’s how this works: This year’s normal filing due date for 2019 for everyone is Monday, April 15. But Monday, April 15 is Patriot’s Day in Massachusetts. That should shift it to Tuesday, April 16. However, April 16 is now “Emancipation Day” in Washington, DC, and there’s a federal law that says that that date can never be the due date, so the due date to Massachusetts residents is now the 17th.
My internal cutoff to receive your completed packages is: Sunday, March 24 at 5 pm. (Yes, Sunday) This is the cutoff date that I use that guarantees delivery of your taxes by the April 15 or 17
due date. Obviously, for tax returns that come in later, I will always do the best I can.
Security Issues and Identity Theft. (“It’s hip to be square.”)
Just a reminder, I have become very old fashioned, and there is just no better security than the U S Postal Service. I continue to discourage all of my clients from emailing me your tax documents with your social security number and all sorts of other information on them. This is a security risk to you, and a huge nuisance to me as I have to wade through these documents, and print them out so that I can input and work with the information. Yes, I want you to put things in a package and mail them to me. I know, it’s so old fashioned.
There are more secure ways of sending me information, but it typically involves my sending you an upload link for you to upload a specific document to a secure location where I then can access it from. (I can and will do this.) Snapping a photo from an iPhone and texting it to my cell phone at 781-206-4800 is acceptable but only for one or two pages. (The iPhone images are very hard to read and also not very easy to work with but acceptable for one or two pages.)
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Well, I could keep writing forever, but I have to stop somewhere, and I need to get out the organizers so we can get this tax season underway. Looking forward to seeing or hearing from you.
Best as always,
Charles Markham, MST, EA
U S Tax Court Bar No. MC0772