Our other articles in this series:

1. 2019 IRS-California Tax Return, Contributions, Filing Deadline Extensions
2. How the 2019 Coronavirus Relief Bill Helps Individuals (CARES Act)
3. How the 2019 Coronavirus Relief Bill Helps Businesses (CARES Act)

As part of the historic The Coronavirus Aid, Relief, and Economic Security (CARES) Act signed into law on March 27, 2020, a key component that will benefit many Americans is the provision for economic stimulus payments, also known as the Recovery Rebate Credit.  Here are some key points:

• The payment is an advance payment of a 2020 tax credit; Taxpayers that did not receive the full rebate or any rebate this year as an advanced credit may still qualify based on their 2020 income when they file taxes early next year. However, if your 2020 income would otherwise disqualify you from the rebate, you do not have to pay it back.
• The maximum credit is $1,200 per individual ($2,400 MFJ) plus $500 per qualifying child under 17 years old.
• The credit is phased out by 5% ($5 for every $100 over the limit) for AGIs exceeding:
  • $150,000 for MFJ — phased out at $198,000 if there are no children;
  • $112,500 for HOH filers — phased out at $146,500 if the HOH has one child;
  • $75,000 for all other taxpayers — phased out at $99,000; and
  • For every child claimed, add an additional $10,000.

• For people who have already filed their 2019 tax returns, the IRS will use this information to calculate the payment amount. For those who have not yet filed their return for 2019, the IRS will use information from their 2018 tax filing to calculate the payment. The stimulus payment will be deposited directly into the same banking account reflected on the return filed.  This is expected to occur within three weeks.
• For taxpayers who did not provide direct deposit information, in the coming weeks the Treasury plans to develop a web-based portal for individuals to provide their banking information to the IRS online so that individuals can receive payments immediately as opposed to checks in the mail.
• For individuals who did not file a 2018 or 2019 return, the IRS is developing a simplified process for them to file.
• Seniors are eligible even if they did not file a 2018 or 2019 return.  The IRS will base a rebate on Form SSA-1099, Social Security Benefit Statement or Form RRB-1099.
• College students generally are not eligible if they are claimed as a dependent on their parents’ return.
• The rebate will not be used to offset tax debts, or who are behind on other payments to federal or state governments, including student loan payments. The only administrative offset that will be enforced applies to those who have past due child support payments that the states have reported to the Treasury Department.

Here is a link to the IRS’s FAQs on these payments:

www.irs.gov/newsroom/economic-impact-payments-what-you-need-to-know

As always, if you have any questions please contact us.

Our other articles in this series:

1. 2019 IRS-California Tax Return, Contributions, Filing Deadline Extensions
2. All About Economic Stimulus Payments Under the CARES Act
3. How the 2019 Coronavirus Relief Bill Helps Businesses (CARES Act)

On March 27, 2020, The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law.  Here are a few of the key tax-related provisions of the law which may affect you:

• Recovery Rebate credit of up to $1,200 per individual and $500 per child that are phased out for taxpayers with AGI over $75,000 ($150,000 MJF and $112,500 HOH) and plan to be distributed within the next three weeks.  These will be direct deposited to individuals using direct deposit banking information on a return any time after January 1, 2018.
• Penalty-free withdrawals of tax retirement funds of up to $100,000.  One can avoid taxes on the withdrawal if the money is put back within three years; otherwise income is recognized over a three-year period.  It must be a corona-virus-related distribution such as having the virus or experiencing adverse financial consequences, such as inability to find work or childcare.
• They have increased the limit on borrowing from 401(k) accounts from $50,000 to $100,000, with 2020 payments extended for a year.
• A temporary waiver of Required Minimum Distribution (RMD) requirements in 2020.
• For filers taking the standard deduction there is an above-the-line charitable contribution up to $300.
• The suspension of charitable contribution limits for 2020.

These are very uncertain and confusing times. Please let us know how we can assist you or answer your questions. We hope you and your families are staying well.

Our other articles in this series:

1. 2019 IRS-California Tax Return, Contributions, Filing Deadline Extensions
2. All About Economic Stimulus Payments Under the CARES Act
3. How the 2019 Coronavirus Relief Bill Helps Individuals (CARES Act)

On March 27, 2020, The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law in response to the current COVID-19 crisis.  Here are a few of the key tax-related provisions of the law which may affect you:

• SBA Paycheck Protection Loan for the lesser of $10 million or 2.5 months of payroll, excluding annual salaries over $100,000. The term is 10 years at 4% interest, with no collateral or personal guarantee.  Repayment is deferred from 6 to 12 months, depending upon the lender. If the money is used to keep people employed or cover group healthcare benefits, lease and utility payments, some or all of the loan is forgiven, and that forgiveness does not generate taxable income. 
• The delay of employer payroll tax deposits for 2020 (50% due by December 31, 2021, and 50% due by December 31, 2022).  The eligible payroll taxes are the employer’s portion of Social Security taxes 6.2% of employee’s wages. Self-employed taxpayers can also defer this same portion.  Eligible employers must have experienced either:
  • Partial or full suspension of business operations during the calendar quarter due to governmental order that limited commerce, travel, or group meeting due to COVID-19, or
  • 50% decrease or more in gross receipts from the same quarter in 2019.
• A refundable employer retention credit equal to 50% of qualified wages against quarterly Social Security taxes, to offset up to $10,000 of wages paid per employee in 2020. Employers who take advantage of the Payroll Protection Loan discussed above, are not eligible.
• The reinstatement of NOL carrybacks for the 2018–2020 taxable years, and repeal of the 80% taxable income limitation for the 2018–2020 taxable years.
• A TCJA technical correction that classifies qualified improvement property as 15-year recovery period, allowing the bonus depreciation deduction to be claimed for such property retroactive as if it was included in the TCJA at the time of enactment.
• The deferral of excess business loss limitations until 2021.
• An increase in the business interest deduction limitations from 30% to 50% of adjusted taxable income for the 2019 and 2020 taxable year.
• A Cancellation of Debt (COD) exclusion of small business loans forgiven under the Act.

As always, if you have any questions please contact us.

Our other articles in this series:

1. All About Economic Stimulus Payments Under the CARES Act
2. How the 2019 Coronavirus Relief Bill Helps Individuals (CARES Act)
3. How the 2019 Coronavirus Relief Bill Helps Businesses (CARES Act)

In response to the current COVID-19 (coronavirus) pandemic crisis, the IRS (Department of Treasury) and the State of California extended several deadlines.  

• Tax filings: the April 15, 2020 tax filing deadline is extended 3 months to July 15, 2020 to file and pay balances due for both business and individual returns.
• First quarter estimated taxes: the first estimated tax payment for 2020, also originally due on April 15, was extended to July 15, 2020.
• Second quarter estimated taxes: deadline extended from June 15 to July 15. 
• HSA and IRA contribution deadlines: these have also been extended from April 15 to July 15, 2020.
• Making payments: payments can be made by check with vouchers (Federal Form 1040V and FTB 3582) by the new due dates, or we would recommend paying online as it is safer and you will have immediate confirmation.  To make online payments go to the following websites:
  • Federal:  https://www.irs.gov/payments/direct-pay
  • California:  https://www.ftb.ca.gov/pay/bank-account/index.asp

Resources and more information

IRS: read more details in the IRS filing and payment deadlines questions and answers.

California: California Franchise Tax Board’s filing and payment deadlines.

As always, if you have any questions please contact us.

With the passage of the 2017 Tax Cuts and Jobs Act, there has been much discussion regarding the decreased tax rates and eliminations or limits on certain deductions.  But how does the new tax law affect the deductions for charitable contributions?  On the one hand, the limit on cash contributions has been increased from 50% to 60% of Adjusted Gross Income (AGI).  On the other hand, the increased standard deduction to $12,000 for singles and $24,000 for married filing joint, may mean that the standard deduction is more than itemized deductions.  Therefore, one may not get the added tax benefit of the charitable contribution.  Congress giveth and Congress taketh away….  What are some strategies to attain a charitable contribution deduction if you don’t normally itemize?

Consider the strategy of bunching.  If your regular charitable giving doesn’t quite exceed the standard deduction threshold in a partic ular year, you may want to consider making your regular yearend giving on January 1 of the subsequent year, and then again by December 31 of that same year, so that two years’ worth of contributions are in the same tax year, so as to exceed the standard deduction.

Consider making a Qualified Charitable Distribution (QCD).  If you’re over 70½ and taking required minimum distributions (RMDs) from a traditional IRA, consider transferring that money directly to a qualifying charity.  You won’t get a tax deduction per se, but this qualified charitable distribution is not included in taxable income.  You will report the total distribution on your tax return, but enter -0- for the taxable amount, with the notation QCD.  This can allow you to meet your RMD, as well as get a tax benefit for a charitable contribution.

To make sure that the charitable contribution is deductible always make sure of the following:

• Keep a copy of the yearend donor letter that the charity sends you. If you make the payment online, keep a copy of the official receipt after you charge your credit card or PayPal account.
• The charity is a 501©(3) organization, and make sure that there is a statement to the effect of no goods or services were received for the donation. Most 501©(3) organizations will have this on their website, most likely on the “Donate” page.
• Remember to save the receipts for any donations made at the grocery or pet store that you add on to your regular purchase.
• Some of your friends may be soliciting donations through social media, such as Facebook, for their favorite charity in lieu of birthday gifts or in memory of a loved one. Again, make sure it’s a legitimate charitable organization and keep your receipt.  Check out websites like Charity Navigator to ensure that this is an organization that you support, and that most of your dollars are going to the purpose you believe in.  A good rule of thumb is no more than 10% of the funds should be used for each of fundraising and administration purposes; i.e., at least 80% should go directly to the cause.
• Also remember, donations to political organizations are NOT deductible.

As always, if you have any questions regarding how the new tax law and charitable contributions affect you, please contact us, and we can assist you.

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With the passage of the 2017 Tax Cuts and Jobs Act, the Affordable Care Act’s (ACA) individual mandate was repealed.  The individual mandate requires taxpayers to carry a minimum level of health coverage, unless they qualify for a hardship exemption.  Without this coverage taxpayers will incur a tax penalty.

Employer mandate

Although this portion of the ACA was repealed, the employer mandate portion was not.  The employer mandate still requires that employers with 50 or more full-time employees offer health insurance coverage that provides

1. Minimum essential coverage to employees and dependents
2. Minimum value (at least 60% of total allowed costs)
3. Affordable premiums (less than 9.56% of the employee’s household income)

So, if your employer provides the above coverage, the repeal of the individual mandate should not affect you.

Individual Mandate

Although the individual mandate was repealed at the end of 2017, it will not go into effect until 2019, meaning it is still very much in effect for 2018.  This means that if a taxpayer is not covered by minimum essential health insurance in 2018, he or she will be subject to a penalty, known as the individual shared responsibility payment when they file their tax return.  The penalty is the higher of

• 5% of ann
  ual house hold income, up to a maximum of the total annual premium for the national average price of a Bronze plan on the exchange, or
• $695 per adult and $347.50 per child under 18, up to a maximum of $2,085 per household.

The above penalties are pro-rated by 1/12 for every month you do not have coverage, unless it is only 1-2 months (the “short gap” exemption.)  The penalty is calculated in the worksheets in the Form 8965, Health Coverage Exemptions instructions.

You may qualify for an exemption to this penalty if you meet certain criteria, such as the lowest-priced coverage (Bronze plan) available to you is more than 8.05% of your household income or you don’t have to file a tax return if your income is below the filing requirement.  For a complete list of qualifying exemptions please refer to the Form 8965 instructions.  To apply for the exemption, you must file Form 8965, Health Coverage Exemptions, with your tax return.

Premium Tax Credit

Although the individual mandate has been repealed, and taxpayers are no longer required to have health insurance, insurance coverage will still be available on affordable insurance exchanges.  When applying, if your expected annual income is below a threshold, you may be eligible for a subsidy for your monthly premiums.  This subsidy is known as the Advanced Premium Tax Credit (APTC).

At the end of the year, when youfile your tax return, and your actual annual income is determined, you will need to file Form 8962, Premium Tax Credit.  The insurance exchange will provide you with Form 1095-A, Health Insurance Marketplace Statement, in January subsequent to yearend, listing policy information, including the monthly premium and the monthly advance payment of premium tax credit.  Based upon this information and your actual modified adjusted gross income, you will calculate what your actual PTC is, which may be more or less than the APTC.  If it is more, you will have to repay some or all of the credit; if it is less, you may get additional credit.  This is why it is important not only to provide a reasonable estimate upon application with the exchange, but to notify the exchange of any significant changes in income during the year, due to employment of a household member or other life events.  Having to repay the advanced premium tax credit when filing your income tax return can be a very unwelcome surprise!

The individual mandate portion of the ACA is complex and can be confusing to navigate.  If you have any questions about how the individual mandate affects you and your tax situation, please contact us for more information.

Photo by Helloquence on Unsplash

You have worked hard in contributing to the success of your company, and in return your company may reward you beyond your basic annual salary.  Below are some of the more common forms of supplemental and incentive compensation, and how they will affect your tax liability and reporting obligations.

Bonuses and commissions.  Bonuses and commissions are generally tied to some type of metric, and so may vary from year to year, and they are awarded much less frequently than regular salary perhaps only annually.  In addition, because these are considered supplemental wages, they are generally withheld at a statutory 22% and 10.23% for Federal and California, respectively.  For many executives, they will be in a higher tax bracket than 22%, thus, this withholding will not be sufficient, and they may have a large tax bill at yearend.  For these reasons, tax planning is very important in order to estimate what your annual income and tax liability will be, as well as ensure that your withholding is sufficient to cover such liability.

Stock options.  There are two types of stock options:  Incentive Stock Options (ISOs) and Nonqualified Stock Options (NSOs).  The tax treatment of these two are different:

Event	Incentive Stock Option (ISO)	Nonqualified Stock Option (NQSO)
Grant of option	Not taxable	Taxable as ordinary income to the extent that the fair market value at grant exceeds the exercise price
Exercise of option	Not taxable for regular tax; however, difference between the fair market value at exercise and exercise price is subject to alternative minimum tax (AMT), reported on Form 3921, Exercise of an Incentive Stock Option Under Section 422(b).	Taxable as ordinary income to the extent that the fair market value at exercise exceeds the exercise price. Included in Box 1 of W-2, as well as reported in Box 12, Code V. FICA and Federal income tax withholding is required. For independent contractors, reported on Form 1099-MISC if $600 or more.
Sale of stock	Difference between sale price and basis (exercise price) is long-term capital gain if sold one year or more from exercise; ordinary income reported on W-2 if sold less than one year from exercise. FICA and Federal income tax withholding is not required.	Difference between sale price and basis (exercise price + any income recognized upon grant /exercise) is long-term capital gain if sold one year or more from exercise; short-term capital gain if sold less than one year.

Upon sale of the stock the financial institution will issue a Form 1099-B reporting the proceeds.  They may or may not include cost basis.  Often the cost basis reported only represents the exercise price; it usually does not represent what was already included in the employee’s W-2.  As such, you will most likely need to add the W-2 portion to your cost basis, so as not to double count the gain.  Because often a cashless exercise and sale generally occur concurrently (a disqualifying disposition), the proceeds and cost basis should be similar, and there would only be a slight loss representing the commissions on the transactions.  You may need to get additional statements or reports from your payroll department and/or your financial institution to determine the cost that went through your W-2 if it is not specifically delineated. Because the concurrent sale is reported on the W-2, it is treated as ordinary income.  Another strategy is to exercise the stock option and hold it for at least a year before selling, in order to get long-term capital gain treatment, albeit, this may be cash-flow prohibitive.

Employee Stock Purchase Plan (ESPP).  In an ESPP, the employee may purchase company stock at a discounted price of generally 85% of the fair market value.  The discount is considered additional income and is included on the W-2 in box 1, and may be detailed further in either Box 12 or on the final paystub.  In addition, you will receive a Form 3922, Transfer of Stock Acquired Through an Employee Purchase Plan Under Section 423© in January following the year of purchase.  This is an informational return, which doesn’t need to be reported on your tax return per se, but you should keep track of the details, so that you will have correct cost basis when you subsequently sell the stock.  Your financial institution may track this for you, so that you can obtain the correct cost basis on sales of this stock.

Restricted Stock Unit (RSU).  An RSU is a grant valued in terms of company stock, but company stock is not issued at the time of the grant.  Generally, the vesting period is over 3-4 years, with a pro rate shares vesting on the anniversary of the grant date, at which time stock is actually issued.  The corresponding fair market value of this stock is included in W-2 income.  Often a portion of the stock is concurrently sold in order to cover the mandatory taxes on this income.  What is important to remember here is that the employee must keep track of

• the vesting schedules of his/her various grants, and plan on this additional income;
• the cost basis of shares that were concurrently sold for tax purposes in order to calculate gain or loss; and
• the cost basis of RSU shares sold at a later date, which will result in a gain or loss.

Again, most financial institutions will track this for you, so you can obtain the correct cost basis on sales.

Although stock compensation can be a very lucrative form of compensation, the tax reporting of the different types, as well as the timing of taxable events can be confusing and create a puzzle of documents from your payroll department and financial institution, as well as tax forms.  However, to the extent that you are in control of some elements of the timing of these events, you can plan accordingly.

Please contact us to determine how the timing, tax and cash-flow effects of these various forms of stock compensation may affect you in the current and future tax years.

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With the passage of the Tax Cuts and Jobs Act of 2017, there was a promise that for many Americans the new tax law would be so simple that they could file on a postcard. In fact, the IRS has already drafted this so-called postcard tax return, which is larger than most postcards, and will be double-sided. As such, one would want to mail it in an envelope for privacy. In addition, over 90% of taxpayers file their tax returns electronically any way (do millennials even know what a postcard is?), so what is the real benefit of the postcard?

The real gist of the postcard return is that for many, preparing a tax return will be a simpler process. The new postcard is the size of a half a sheet of paper, which is larger than most regular postcards. Plus, there is a front AND back. But, not only have they shrunk the form, they’ve also shrunk the font size. So, essentially the old forms 1040, 1040A and 1040EZ front and back have been reduced. That sounds simpler, right? But, wait. There’s more…

For those of you who file Schedules A through E and beyond, these schedules have not changed considerably, and you will still need to use them. In addition, there are NEW worksheets, Schedules 1-6:

1. Additional Income and Adjustments to Income. This is where you report all your non-W2 income, such as investment, business, rental income, and alimony, as well as adjustments such as self-employment insurance and IRA deductions.
2. Tax. This worksheet calculates your various components of income tax.
3. Nonrefundable Credits. This worksheet lists your various credits, such as dependent care, child, and residential energy credits.
4. Other Taxes. This is for non-income taxes, such as self-employment, household employer and healthcare individual mandate taxes.
5. Other Payments and Refundable Credits. This is where one would list their estimated tax payments, Premium Tax Credit, and excess Social Security withholding.
6. Foreign Address and Third-Party Designee. This form just has these two items, which may be inapplicable to many taxpayers.

This new tax return reminds us of the ancient Greek monster Hydra, where if you chopped off a head, two more grew back. Here, they’ve reduced the main form to a “postcard” but have added six more schedules. While for some taxpayers, the completion of the tax form may be simpler, due to the increased standard deduction and the elimination of personal exemptions, for others the new form and related schedules, may be just as confusing, as ever, if not more so. We encourage you to contact us to assist you in navigating through the necessary forms and requirements of the new tax law.

So will you be able to file on a postcard? Maybe. But you’ll want to e-file anyway….

Photo by Samuel Zeller on Unsplash

In late December 2017, the Tax Cuts and Jobs Act was enacted.  The most significant change for everyone is that the tax brackets have all been lowered; the highest tax rate has decreased from 39.6% to 37%.  Some other significant changes for everyone, are that the standard deduction has been raised to $12,000 and $24,000 for singles and married couples, respectively.  This is somewhat offset by the personal exemption being eliminated, which is in turn offset by increasing the child tax credit from $1,000 per child to $2,000.

So, what does this mean for you?

With the decrease in tax brackets, those people who used to be in 15 to 25% tax bracket, will be in the 12 to 22% tax bracket.  So, for many who only claimed a standard deduction in the past, they will most likely see their taxes decreasing.  This increase in the standard deduction will mean that more taxpayers will be able to claim the standard deduction, rather than itemizing their deductions.

Here’s why.  The aggregate of all state, local and property taxes is limited to $10,000.  In high-tax states, such as California, many people will be subject to this limitation.  So, if your status is married filing joint, unless your other deductions such as mortgage interest and charitable deductions exceed $14,000, you won’t be able to itemize.  But what about miscellaneous deductions such as unreimbursed employee business expenses, investment expenses and even tax preparation?  These have all been eliminated with the new tax law.

Elimination of the personal exemption

Another important elimination is the personal exemption.  In 2017, every person in the household was entitled to a $4,050 exemption ( subject to certain phaseouts based on income).  These have been eliminated under the new tax law.  So, in effect, the old standard deduction and personal exemption have been replaced by 2018’s new higher standard deduction.  Although this is a significant deduction loss for families, the increase in the child tax credit has increased from $1,000 to $2,000

On the income side, not much has changed.  There have been few changes to investment income, business income, rental income, retirement income, as well as the adjustments to income, such as retirement plan deductions and self-employed health insurance.

Will you owe more or less taxes? Now is the time to review.

So, with rates going down (which have caused withholding rates to decrease accordingly), standard deduction going up, but itemized deductions being eliminated or limited, will you owe more or less in taxes?  This is not an easy answer, as there are so many moving parts.

If you have concerns about this, we encourage you to contact us, and we can prepare a tax planner so that you can have a better understanding of how much your tax liability will be, as well as make sure you have appropriate withholding.  If your situation results in a higher tax liability, but your withholding has decreased, this could potentially put you in a position of owing underpayment penalties when you file your tax return in early 2019, so you’ll want to consider increasing your withholding or perhaps making estimated tax payments.

You can also check out the IRS withholding calculator to ensure that your withholding is appropriate.

As always, if you have any questions regarding how the new tax law affects you, please contact us, and we can assist you.

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Consider Roth conversion:   If you have a traditional IRAs, consider a Roth conversion.  Remember, Roth conversions result in taxable income, so there are many things to consider in determining whether a Roth conversion makes sense for you, such as what tax bracket you’re in now vs. retirement, ability to pay the additional tax on conversion, years until you retire, etc.  But if your 2016 income has decreased more than usual, it might make sense for you to convert.  Roth conversions MUST be done by 12/31/16.

Maximize your 401(k) contributions:  By maximizing this retirement contribution you reduce your taxes, as well as reducing AGI which may qualify for more deductions and credits that are subject to AGI phase-out.  The maximum contribution for 2016 is $18,000 plus an additional $6,000 if you are 50 or better.  The only time you can contribute to your 2016 401(k) is in 2016!

Make charitable contributions:  Support causes that you believe in.  Clean out your closet and donate to charity.  Make sure you have the documentation, such as a receipt from the charity to support all contributions, even those under $250.

Estimate taxes due for 2016:  If you think you will owe, adjust withholding accordingly, in order to avoid underpayment penalties.  If you think you will get a commission, bonus or exercise stock options, please ensure that it is withheld at your regular rate, rather than the standard supplemental 25% and 6% rates for Federal and California, respectively, as this may not be sufficient if you are actually in a higher tax bracket!  Also, if you pay any state taxes due you may get a Federal deduction.  Also consider prepaying your April property tax installment.  But beware that you are not subject to Alternative Minimum Tax (AMT).

Prepay college tuition:  Think about prepaying college tuition for first term of 2017 in order to qualify for the full $4,000 subject to the American Opportunity Credit.  If your AGI is under $180,000 ($90,000 if single), you may qualify for the credit of up to $2,500.  The IRS is requiring a Form 1098-T in order to claim this credit in 2016!

Spend your FSA:  If you still expect to have funds in your Flexible Spending Account (FSA), make arrangements to have doctor checkups, elective procedures, etc. by December 31, so that you can use your FSA funds.  FSA funds for each year are “use it or lose it,” unless your company has elected the $500 carryover option.

If you want to know how the above suggestions might affect you, please contact us.