2019 Tax Changes That May Impact You

23 04 2019

There were a number of important tax developments in the first quarter of 2019, that may affect you, your family, your investments, and your livelihood, including:

  • Estimated Tax Penalty Relief
  • Employer Identification Number (EIN)
  • Electric Car Credit Declines
  • Deduction for Back Alimony
  • Qualified Business Income Deduction
  • Qualified Business Income Deduction: Calculating W-2 Wages
  • Qualified Business Income Deduction: Rental Real Estate Safe Harbor
  • Options for Those Unable to Pay the Taxman

Estimated Tax Penalty Relief

The IRS announced that it is waiving the estimated tax penalty for many taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year. This waiver covers taxpayers whose total withholding and estimated tax payments are equal to or greater than 80 percent of their taxes owed, rather than the usual statutory percentage threshold of 90 percent. This relief expanded that initially offered by IRS; the earlier relief pertained to taxpayers who had paid 85 percent of their taxes owed. The relief was prompted by changes in the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017), some of the which might impact withholding (e.g., the repeal of the personal exemptions and many itemized deductions and the capping the state and local income tax deduction at $10,000). A Government Accountability Office (GAO) report estimated that nearly 30 million taxpayers could be underwithheld in 2018. IRS also provided procedures for requesting the waiver and procedures under which taxpayers who have already paid underpayment penalties but who now qualify for relief may request a refund.

For more information, view this Forbes article “IRS Expands Tax Underpayment Penalty Relief.” Then give us a call to discuss its potential impact.

Employer Identification Number (EIN)

As part of its ongoing security review, the IRS announced that, starting May 13, only individuals with tax identification numbers may request an Employer Identification Number (EIN) as the “responsible party” on the application. Individuals named as responsible party must have either a Social Security number (SSN) or an individual taxpayer identification number (ITIN). Under Code Sec. 6109(a)(1), persons are required to include taxpayer identifying numbers on returns, statements, or other documents filed with the IRS. One of the principal types of taxpayer identifying numbers is an EIN. IRS generally assigns an EIN for use by employers, sole proprietors, corporations, partnerships, nonprofit associations, trusts, estates, government agencies, certain individuals, and other business entities for tax filing and reporting purposes. A person required to furnish an EIN must apply for one with the IRS on a Form SS-4 (Application for Employer Identification Number). The new change will prohibit entities from using their own EINs to obtain additional EINs. The requirement will apply to both the paper Form SS-4 and online EIN application.

For more information, view the IRS site here; then contact us about its impact on you and your business.

Electric Car Credit Declines

IRS announced that, during the fourth quarter of 2018, General Motors (GM) reached a total of more than 200,000 sales of vehicles eligible for the plug-in electric drive motor vehicle credit under Code Sec. 30D(a). Accordingly, the credit for all new qualified plug-in electric drive motor vehicles sold by GM will begin to phase out Apr. 1, 2019. Qualifying vehicles from GM purchased for use or lease are eligible for a $7,500 credit if acquired before Apr. 1, 2019. Beginning Apr. 1, 2019, the credit will be $3,750 for GM’s eligible vehicles. Beginning Oct. 1, 2019, the credit will be reduced to $1,875. After Mar. 31, 2019, no credit will be available.

For more information, see IRS announces phase-out of credit for GM plug-in electric drive motor vehicles.

Deduction for Back Alimony

The Tax Court held that an ex-husband’s payment of alimony arrearages resulted from a contempt order by a Family Court was not a “money judgment”, and so qualified as deductible alimony. With respect to divorce instruments executed before Jan. 1, 2019, amounts received as alimony or separate maintenance payments are taxable to the recipient and deductible by the payor in the year paid. An alimony payment is one that meets the certain specific requirements, such as it must be made under a divorce or separation instrument and the payor’s obligation to make the payment must end at the death of the payee spouse. On the other hand, a money judgment is a document issued by a court stating that the creditor (or other plaintiff) has won a lawsuit and is entitled to a certain amount of money. A NY court found a taxpayer to be in contempt due to his failure to make his alimony payments and sentenced him to 150 days in jail unless he paid $225,000 to his former spouse. The taxpayer paid the $225,000 at issue and claimed an alimony deduction. The Tax Court found that the court’s order was not a money judgment, but rather a contempt order to achieve the payment of alimony arrearages which retained their character as alimony.

For more information, see the IRS’s tax treatment of alimony webpage. Then, contact us with questions about how this change may impact your taxes.

Qualified Business Income Deduction: Final Regulations

The IRS issued final Code Sec. 199A regulations for determining the amount of the deduction of up to 20% of income from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate (the qualified business income deduction). The regulations cover a wide range of topics and discuss the operational rules, including definitions, computational rules, special rules, and reporting requirements; the determination of W-2 wages and unadjusted basis immediately after acquisition of qualified property; the computation of qualified business income, qualified real estate investment trust (REIT) dividends, and qualified publicly traded partnership income; the optional aggregation of trades or businesses; the treatment of specified services trades or businesses and the trade or business of being an employee; and the rules for relevant passthrough entities, publicly traded partnerships, beneficiaries, trusts, and estates.

For more information, see IRS issues final Sec. 199A qualified business income deduction regs; Final Sec. 199A qualified business income deduction regs: Qualified business income; and Final Sec. 199A regs explain specified service trade/business and trade/business of being an employee.

Qualified Business Income Deduction: Calculating W-2 Wages

IRS provided three methods for calculating W-2 wages under Code Sec. 199A, the qualified business income deduction, for purposes of the deduction limitation based on W-2 wages and for purposes of the deduction reduction for certain specified agricultural and horticultural cooperative patrons. Under Code Sec. 199A, W-2 wages include:

  • The total amount of wages as defined in Code Sec. 3401(a) (dealing with income tax withholding);
  • The total amount of elective deferrals (within the meaning of Code Sec. 402(g)(3));
  • Compensation deferred under Code Sec. 457; and
  • The amount of designated Roth contributions.

For any taxable year, a taxpayer must calculate W-2 wages for purposes of Code Sec. 199A using one of the three methods provided by IRS. The first method (the unmodified Box method) allows for a simplified calculation, while the second and third methods (the modified Box 1 method and the tracking wages method) provide greater accuracy. The Box numbers referenced under each method refers to those on the Forms W-2 (Wage and Tax Statement).

For more information, see Rev Proc provides methods for calculating W-2 wages for Sec. 199A purposes.

Qualified Business Income Deduction: Rental Real Estate Safe Harbor

The IRS provided a safe harbor under which a rental real estate enterprise will be treated as a trade or business for purposes of the qualified business income deduction under Code Sec. 199A. That Code provision provides a deduction to non-corporate taxpayers of up to 20% of the taxpayer’s qualified business income from each of the taxpayer’s qualified trades or businesses, including those operated through a partnership, S corporation, or sole proprietorship, as well as a deduction of up to 20% of aggregate qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income. Solely for this purpose, a rental real estate enterprise will be treated as a trade or business if:

  • Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;
  • For tax years beginning prior to Jan. 1, 2023, 250 or more hours of rental services were performed per year with respect to the rental enterprise; and
  • The taxpayer maintains contemporaneous records on the hours of all services performed; a description of all services performed; the dates on which such services were performed; and who performed the services. (This contemporaneous records requirement doesn’t apply to tax years beginning before Jan. 1, 2019).

For more information, see this Forbes article Understanding the 199A Deduction After the New IRS Final Regulations.

Options for Those Unable to Pay the Taxman

The April 15th deadline for filing 2018 income tax returns (for most taxpayers, at least; April 17 for Maine, Massachusetts and the District of Columbia) has recently passed. The IRS advised taxpayers who don’t have cash to pay the balance due on their returns, that taxpayers can avoid penalties but not interest if they can get an extension of time to pay from the IRS. However, such extensions merely postpone the day of reckoning for the period of the extension (generally, six months). The IRS outlined other ways in which financially distressed clients may be able to defer paying their income taxes, including installment agreements (a short-term 120-day payment plan and a long-term payment plan) and an offer in compromise with the IRS.

For more information, see the IRS’ information for tax payment options.

Do I need a tax extension?

4 04 2019

I’ve heard people talk about getting a tax extension, but I’m unsure why. What are the benefits? And, will I be audited if I do extend?

Here are the frequently asked questions about filing a tax extension and its answers.

Tax extension FAQ cover

Click to enlarge.

What does filing an extension do?

  • An extension is a form filed with the IRS to request additional time to file your federal tax return. The extension period is six months, which extends the due date for submitting your final returns from April 15 to Oct. 15.** In some states, filing an extension with the IRS will automatically extend the time to complete a state income tax return.
  • Filing an extension grants you additional time to submit your complete and accurate return, but you still need to estimate whether you will owe any taxes and pay that estimated balance by April 15.**
  • Extending your return allows you and your CPA more time to prepare your tax return to ensure filing of an accurate tax return. In many cases, you may still be waiting for additional information (e.g., Schedule K-1, corrected 1099s, etc.) to complete your return.

Why does my CPA suggest we extend my tax return?

  • If your CPA has recommended that you file an extension, it may be due to many reasons, such as:
  • The volume of data or complexity of certain transactions (e.g., sale of a rental property) on your return requires additional time.
  • The amount of time remaining in filing season is limited for the CPA to complete client returns by April 15** due to late arriving information.
  • Many CPAs have a “cutoff” or deadline for clients submitting their tax information so they can plan their workload to ensure all client returns and extensions are completed by April 15.**
  • Your CPA may suggest filing an extension if there are aspects of your return affected by pending guidance due to tax reform.

Am I more likely to be audited if I extend?

Extending will NOT increase your likelihood of being audited by the IRS. It is better to file an extension rather than to file a return that is incomplete or that you have not had time to review carefully before signing.

What are the primary benefits of extending my tax return?

  • It provides for additional time to file returns without penalty when you are waiting for missing information or tax documents (such as corrected 1099s). Just remember that an extension provides additional time to file, but not additional time to pay. Penalties may be assessed if sufficient payment is not remitted with the extension.
  • You may qualify for additional retirement planning opportunities or additional time to fund certain types of retirement plans (e.g., SEP IRA).
  • It is often less expensive (and easier) to file an extension rather than rushing now, then possibly needing to amend your return later.

Should I do anything differently if I am filing an extension or “going on an extension”?

No, you still should give your CPA whatever information you have as early as possible or as soon as it becomes available.

  • Expect to pay any anticipated taxes owed by April 15.** You still need to submit all available tax information to your CPA promptly so they can determine if you will have a balance due or if you can expect a refund.
  • If you are required to make quarterly estimated tax payments, your first quarter estimated tax payment is due April 15.* Your CPA may recommend that you pay the balance due for last year and your first quarter estimated tax payment for this year with your extension.
  • If you are anticipating a large refund, your CPA will likely try to get your extended return completed as soon as possible once all tax information is available. Your CPA may also want to discuss tax planning opportunities with you so that in future years, you don’t give the IRS an interest-free loan!

Is there anything I can do to avoid filing an extension if I know I am missing some information now?

If you know you will be waiting until the last minute for one or two documents, you may be able to minimize the chance of having to file an extension by providing all other available documents to your CPA as soon as you receive them. By doing so, your CPA can prepare a draft return for you to review and discuss in advance. And they may be able to add the missing piece of data or last-minute information and complete your returns by April 15.**

I heard there were changes to due dates for some tax returns. Will that effect me this year?

The due dates for certain business tax returns were changed for 2017. There have been no changes to the due dates for the 2018 tax year. The earlier due date of March 15 for partnerships/LLCs may increase the likelihood of filing your individual return by the original deadline.

Due dates and extension periods for other returns have been revised and may be discussed with us to determine if you will be affected by the changes. Give us a call at one of our five locations for an appointment.

** The federal filing deadline for 2018 returns will be April 15, 2019.