ARM CPA hopes that you and your family have wonderful Thanksgiving and holiday season. This time of the year is perfect to discuss year-end tax planning. We look forward to speaking with you soon!
In general, your decision will depend upon which filing status results in the lowest tax. But bear in mind that, if you and your spouse file a joint return, each of you is jointly and severally liable for the tax on your combined income, including any additional tax that IRS assesses, plus interest and most penalties. This means that IRS can come after either of you to collect the full amount. Although there are provisions in the law that offer relief from joint and several liability, each of those provisions has its limitations. Thus, even if a joint return results in less tax, you may choose to file a separate return if you want to be certain of being responsible only for your own tax.
In most cases, filing jointly offers the most tax savings, particularly where the spouses have different income levels. The “averaging” effect of combining the two incomes can bring some of it out of a higher tax bracket. For example, if one spouse has $75,000 of taxable income and the other has just $15,000, filing jointly instead of separately for 2019 can save $2,447.50 in taxes.
Note that filing separately doesn’t mean you go back to using the “single” rates that applied before you were married. Instead, each spouse must use the “married filing separately” rates. These rates are based on brackets that are exactly half of the married filing joint brackets but are still less favorable than the “single” rates. This means the “marriage penalty” (which requires some marrieds to pay at a higher tax rate on the same total income than they would pay if each filed as a single) isn’t eliminated by filing separate returns. Although Congress has provided relief from the marriage penalty in the tax rates, those changes don’t provide a complete solution.
There is a potential for tax savings from filing separately, however, where one spouse has significant amounts of medical expenses. Beginning in 2019, medical expenses are deductible only to the extent they exceed 10% (7.5% for 2018) of adjusted gross income (AGI).
If a medical expense deduction is isolated on the separate return of a spouse, that spouse’s lower (separate) AGI, as compared to the higher joint AGI, can result in larger total deductions. For example, if one spouse has $26,000 in medical expenses and the spouses’ joint income is $260,000, then the jointly filing spouses can’t deduct any of the medical expenses, because 10% of $260,000 is $26,000 (and $26,000 − $26,000 = $0). But if the separate income of the spouse with the medical expenses is $150,000, the deduction increases to $11,000 on a separate return, because 10% of $150,000 is only $15,000, and $26,000 minus $15,000 equals $11,000.
Other tax factors may point to the advisability of filing a joint return. For example, the child and dependent care credit, adoption expense credit, American Opportunity tax credit, and Lifetime learning credit are available to a married couple only on a joint return. And you can’t take the credit for the elderly or the disabled if you file separate returns unless you and your spouse lived apart for the entire year. Nor can you deduct qualified education loan interest unless a joint return is filed. You may also not be able to deduct contributions to your IRA if either you or your spouse was covered by an employer retirement plan and you file separate returns. Nor can you exclude adoption assistance payments or any interest income from series EE or Series I savings bonds that you used for higher education expenses if you file separate returns.
In addition, social security benefits may be more heavily taxed to a couple that files separately. The benefits are tax-free if your “provisional income” (your AGI with certain modifications plus half of your social security benefits) doesn’t exceed a “base amount.” The base amount is $32,000 on a joint return, but zero on separate return (or $25,000 if the spouses didn’t live together for the entire year).
The decision you make for federal income tax purposes may have an impact on your state or local income tax bill, so the total tax impact has to be compared. For example, an overall federal tax saving by filing separately might be offset by an overall state tax increase, or a state tax saving might offset a federal tax increase.
Unfortunately, we can’t give you any hard and fast rules of thumb for when it pays to file separately. The tax laws have grown so complex over the years that there are often a number of different factors at play for any given situation. However, there is one approach guaranteed to come up with the correct decision. We can simply calculate your tax bill both ways: jointly and separately. Then the approach that leads to overall tax savings could be used.
Deductibility of long-term medical care services. The costs of qualified long-term care, including nursing home care, are deductible as medical expenses to the extent they, along with other medical expenses, exceed 10% of adjusted gross income (AGI).
Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal-care services required by a chronically ill individual provided under a plan of care presented by a licensed health-care practitioner.
To qualify as chronically ill, an individual must be certified by a physician or other licensed health-care practitioner (e.g., nurse, social worker, etc.) as unable to perform, without substantial assistance, at least two activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) for at least 90 days due to a loss of functional capacity, or as requiring substantial supervision for protection due to severe cognitive impairment (memory loss, disorientation, etc.). A person with Alzheimer’s disease qualifies.
Deductibility of premiums paid for qualified long-term care insurance. Premiums paid for a qualified long-term care insurance contract are deductible as medical expenses (subject to an annual premium deduction limitation based on age, as explained below) to the extent they, along with other medical expenses, exceed the 10% of AGI threshold mentioned above. A qualified long-term care insurance contract is insurance that covers only qualified long-term care services, doesn’t pay costs that are covered by Medicare, is guaranteed renewable, and doesn’t have a cash surrender value. A policy isn’t disqualified merely because it pays benefits on a per diem or other periodic basis without regard to the expenses incurred.
Qualified long-term care premiums are includible as medical expenses up to the following dollar amounts: For individuals over 60 but not over 70 years old, the 2019 limit on deductible long-term care insurance premiums is $4,220 ($4,160 for 2018), and for those over 70, the 2019 limit is $5,270 ($5,200 for 2018).
Deductibility of amounts paid to the nursing home. Amounts paid to a nursing home are fully deductible as a medical expense if the person is staying at the nursing home principally for medical, rather than custodial, etc., care. If a person isn’t in the nursing home principally to receive medical care, then only the portion of the fee that is allocable to actual medical care qualifies as a deductible medical expense. But if the individual is chronically ill (as defined above), all of the individual’s qualified long-term care services, including maintenance or personal care services, are deductible.
Including medical expenses you pay for your parent as part of your deductible medical expenses. If your parent qualifies as your dependent under the tests discussed below at (a) through (d), you can include any medical expenses you incur for your parent along with your own when determining your medical deduction. Importantly, if your parent doesn’t qualify as your dependent only because the tests at (b) and (c), below are flunked—and the tests at (a) and (d) are passed—you can still include these medical costs with your own.
Dependency tests. Even though the dependency exemption doesn’t apply for 2018–2025 (see below), the tests for dependency still apply in determining whether a taxpayer is entitled to various other tax benefits, such as head-of-household filing status (see below). To qualify: (a) you must provide more than 50% of your parent’s support costs; (b) your parent must not have gross income in excess of the exemption amount ($4,200 for 2019; $4,150 for 2018); (c) your parent must not file a joint return for the year; and (d) your parent must be a U.S. citizen or a resident of the U.S., Canada, or Mexico. Your parent can qualify as your dependent even though he or she doesn’t live with you, provided the support and other tests mentioned above are met.
Amounts you pay for qualified long-term care services required by your parent and eligible long-term care insurance premiums, discussed above, as well as amounts you pay to the nursing home for your parent’s medical care, are included in the total support you provide.
If the support test ((a) above) can only be met by a group (you and your brothers and sisters, for example, combining to support your parent), a multiple support form can be filed to grant one of you the exemption, subject to certain conditions.
Qualification for head-of-household filing status. If you aren’t married and the dependency tests are met for your parent (see “Dependency tests,” above), you may qualify for head-of-household filing status, which has a higher standard deduction and lower tax rates than the single filing status. You may be eligible to file as head of household even if the parent for whom you claim an exemption doesn’t live with you. In order to qualify for head-of-household status, generally you must have paid more than half the cost of maintaining a home for yourself and a qualifying relative for more than half the year. In the case of a parent, however, you may be eligible to file as head of household if you pay more than half the cost of maintaining a home that was the principal home for your parent for the entire year. Thus, if your parent is confined to a nursing home, you’re considered to be maintaining a principal home for your parent if you pay more than half the cost of keeping your parent in the nursing home.
Dependency exemption (suspended for tax years 2018–2025). The dependency exemption is suspended for tax years 2018–2025. For tax years after 2025, the taxpayer may be able to claim an exemption for a parent that qualifies as the taxpayer’s dependent under the tests discussed above. The deduction claimed on the return is equal to the inflation-adjusted exemption amount.
Exclusion for payments under life insurance contracts. If your parent is terminally or chronically ill and is insured under a life insurance contract, he or she may be able to receive tax-free payments (accelerated death benefits or so-called “viatical” payments) while living. Any lifetime payments received under a life insurance contract on the life of a person who is either terminally or chronically ill are excluded from gross income. A similar exclusion applies to the sale or assignment of a life insurance contract to a person who regularly buys or takes assignments of such contracts and meets other qualifying standards. These lifetime payments could be used to help pay the costs of your parent’s nursing home.
The Tax Cuts and Jobs Act (TCJA) has made changes to the tax treatment of alimony that you will be interested in. These changes take effect for divorces and legal separations after 2018.
Old rules. Under the old rules, an individual who pays alimony may deduct an amount equal to the alimony or separate maintenance payments paid during the year as an “above-the-line” deduction. (An “above-the-line” deduction, i.e., a deduction that a taxpayer need not itemize deductions to claim, is more valuable for the taxpayer than an itemized deduction.)
And, under old rules, alimony and separate maintenance payments are taxable to the recipient spouse (includible in that spouse’s gross income).
New rules. Under the TCJA rules, there is no deduction for alimony for the payer. Furthermore, alimony is not gross income to the recipient. So for divorces and legal separations that are executed (i.e., that come into legal existence due to a court order) after 2018, the alimony-paying spouse won’t be able to deduct the payments, and the alimony-receiving spouse doesn’t include them in gross income or pay federal income tax on them.
TCJA rules don’t apply to existing divorces and separations. It’s important to emphasize that the current rules continue to apply to already-existing divorces and separations, as well as divorces and separations that are executed before 2019.
Some taxpayers may want the TCJA rules to apply to their existing divorce or separation. Under a special rule, if taxpayers have an existing (pre-2019) divorce or separation decree, and they have that agreement legally modified, then the new rules don’t apply to that modified decree, unless the modification expressly provides that the TCJA rules are to apply. There may be situations where applying the TCJA rules voluntarily is beneficial for the taxpayers, such as a change in the income levels of the alimony payer or the alimony recipient.
If you wish to discuss the impact of these rules on your particular situation, please give us a call.
The “Nanny Tax” isn’t limited to a nannies. It also applies to housekeepers, maids, babysitters, gardeners or other household employees who aren’t independent contractors.
If you employ someone who’s subject to the “Nanny Tax,” you aren’t required to withhold federal income taxes from the employee’s pay. You have to withhold only if your nanny asks you to and you agree to withhold. (In that case, have the nanny fill out a Form W-4 and give it to you, so you can withhold the correct amount.) However, you may be required to withhold social security and Medicare tax (FICA). And you may also be required to pay (but not withhold) federal unemployment (FUTA) tax.
FICA: You have to withhold and pay FICA taxes if your nanny earns cash wages of $2,100 (annual threshold) or more (excluding the value of food and lodging) during calendar year 2019. If you reach the threshold, the entire wages (not just the excess) will be subject to FICA.
However, if your nanny is under age 18 and child care isn’t the nanny’s principal occupation, you don’t have to withhold FICA taxes. So, if your nanny is really a student who is a part-time baby-sitter, there’s no FICA tax liability for services the nanny provides. On the other hand, if your nanny is under age 18 and the job is the nanny’s principal occupation, you must withhold and pay FICA taxes.
You should withhold from the start if you expect to meet the annual threshold; your nanny won’t appreciate a large, unexpected withholding from pay later on. If you aren’t sure whether the annual threshold will be met, you can still withhold from the start. If it turns out the annual threshold isn’t reached, just repay the withheld amount. If you make an error by not withholding enough, withhold additional taxes from later payments.
Both an employer and a nanny have an obligation to pay FICA taxes. As an employer, you’re responsible for withholding your nanny’s share of FICA. In addition, you must pay a matching amount for your share of the taxes. The FICA tax is divided between social security and Medicare. The social security tax rate is 6.2% for the employer and 6.2% for the nanny, for a total rate of 12.4%. The Medicare tax is 1.45% each for both the employer and the nanny, for a total rate of 2.9%.
Example: In 2019, you pay your nanny $300 a week, and no income tax withholding is required. You must withhold a total of $22.95, consisting of $18.60 for your nanny’s share of social security tax ($300 × 6.2%) and $4.35 ($300 × 1.45%) for your nanny’s share of Medicare tax. You would pay the nanny a net of $277.05 ($300 − $22.95). For your (employer’s) portion, you must also pay $22.95 ($300 × 7.65%), for total taxes of $45.90.
If you prefer, you may pay your nanny’s share of social security and Medicare taxes from your own funds, instead of withholding it from pay. Using the figures from the above example, for each $300 of wages, you would pay your nanny the full $300 and also pay all of the total $45.90 in taxes.
If you do pay your nanny’s share of these taxes, your payments aren’t counted as additional cash wages for social security and Medicare tax purposes. In other words, you don’t have to compute social security and Medicare tax on the payments. However, your payments of the nanny’s taxes are treated as additional income to the nanny for federal income tax purposes, so you would have to include them as wages on the Form W-2 that you must provide, as explained below.
FUTA: You also have an obligation to pay FUTA tax if you pay a total of $1,000 or more in cash wages (excluding the value of food and lodging) to your nanny in any calendar quarter of the current year or last year. The FUTA tax applies to the first $7,000 of wages paid. The maximum FUTA tax rate is 6.0%, but credits reduce this rate to 0.6% in most cases. FUTA tax is paid only by the employer, not by the employee, so don’t withhold FUTA from the nanny’s wages.
Reporting and paying: You must satisfy your “Nanny Tax” obligations by increasing your quarterly estimated tax payments or increasing your withholding from your wages, rather than making an annual lump-sum payment.
As an employer of a nanny, you don’t have to file any of the normal employment tax returns, even if you’re required to withhold or pay tax (unless you own your own business, see below). Instead, you just report the employment taxes on your tax return, Form 1040, Schedule H.
On your income tax return, you must include your employer identification number (EIN) when you report the employment taxes for your nanny. The EIN isn’t the same number as your social security number. If you already have an EIN from a previous nanny, you may use that number. If you need an EIN, you must file Form SS-4 to get one. I’ve enclosed a blank form you can use.
However, if you own a business as a sole proprietor, you must include the taxes for your nanny on the FICA and FUTA forms (940 and 941) that you file for your business. And you use the EIN from your sole proprietorship to report the taxes for your nanny.
You’re also required to provide your nanny with a Form W-2. If the nanny’s 2018 wages are subject to FICA or income tax withholding, the W-2 is due by Jan. 31, 2019. Additionally, you must file a Form W-2 for 2018 with the Social Security Administration by Jan. 31, 2019. Your EIN must be included on the Form W-2.
Recordkeeping: Be sure to keep careful employment records for each nanny and other domestic employee. Keep the tax records for at least four years from the later of the due date of the return or the date when the tax was paid. Records should include: employee name, address, social security number; dates of employment; dates and amount of wages paid; dates and amounts of withheld FICA or income taxes; amount of FICA taxes paid by you on behalf of your nanny; dates and amounts of any deposits of FICA, FUTA or income taxes; and copies of all forms filed.
Health Savings Accounts (HSAs) allow eligible individuals to make deductible contributions that can be withdrawn tax-free for reimbursement of eligible medical expenses. For 2020, the limitation on HSA deductions is $3,550 (up from $3,500 for 2019) for an individual with self-only coverage under a High Deductible Health Plan (HDHP) or $7,100 (up from $7,000 for 2019) for family coverage. An HDHP is defined under IRC Sec. 223(c) as a health plan with an annual deductible not less than $1,400 (up from $1,350 for 2019) for self-only coverage or $2,800 (up from $2,700 for 2019) for family coverage, with annual out-of-pocket expenses (deductibles, copayments, and other amounts, but not premiums) not exceeding $6,900 (up from $6,750 for 2019) for self-only coverage or $13,800 (up from $13,500 for 2019) for family coverage.
ARM is among more than 50 global accounting firms that visited the “Gateway to the Pacific” for the BKR International Americas Regional Meeting, May 18-21, in Vancouver, British Columbia, Canada. ARM is a member of BKR International, a leading international association of independent accounting and business advisory firms. For almost 30 years, BKR has connected members and their clients with global experts and resources, including host member firm Lohn Caulder LLP in Vancouver.
With this year’s theme of “The Firm of the Future,” the Americas conference featured experts on change management, streamlined cloud and blockchain technologies, high-growth strategies, hiring for the firm of the future, and business transitions. Leadership and change accountability expert Michelle Ray, of “Lead Yourself First Enterprises,” discussed how self-directed leadership is essential in the face of technology’s rapid revolution, especially given the impact of AI and other disruptors on the accounting profession. Lee Frederiksen, Ph.D., founder of Hinge, introduced a “high-growth manifesto” based on years of groundbreaking research on high-growth accounting firms and professional services. Technology expert Roy Keely of Right Networks addressed change through the lens of high-growth firm technologies that are adding client value and streamlining operations.
“In my short time as chair of BKR’s Worldwide Region, I am amazed at the participation and sharing that occurs through BKR events,” said Manuel Rangel, Jr., president of BKR member firm CPC Rangel, S.C. (Mexico City). “Our exclusive approach to selecting independent accounting firms for membership allows leaders to openly discuss their challenges and to learn new ideas from each other.”
For example, a panel of firm leaders shared their best practices for social media and marketing strategies, while another session of experts discussed cross-referral services available through BKR member firms for R&D credits and cybersecurity assessments.
BKR Americas Chair Karen Brenneman, CPA, MT, and managing partner of Hall, Kistler & Company LLP (Canton), noted that the Americas Region offers a rich and diverse alliance of independent accounting firms and consultancies to help firms grow, from Vancouver in western Canada, all the way to Chile in South America. “Managing the firm of the future will require a trusted association of professionals, and we already enjoy these close relationships through BKR.”
BKR International is the sixth largest global association of independent accounting and business advisory firms, representing the expertise of more than 160 independent accounting and business advisory firms in over 500 offices and 80 countries. For more information visit www.bkr.com.
House lawmakers on Tuesday, April 9 approved by unanimous consent the IRS reform bill, the “Taxpayer First Act of 2019” (H.R. 1957). The legislation represents the first transformative revisions to the IRS since 1998. Senate Finance Committee Chairman Charles E. Grassley, R-Iowa and ranking member Ron Wyden, D-Ore., have introduced companion legislation in the Senate. Senate leadership, however, has not determined when it will take up the bill.
The House had approved similar legislation in December 2018, but the Senate never voted on it.
The Taxpayer First Act would restrict the IRS’s use of private debt collectors, establish an independent office of appeals, strengthen the agency’s cybersecurity and better protect taxpayers identities. The measure would also make improvements to the IRS whistleblower program.
Under IRC Sec. 30D(e)(2), the credit for new qualified plug-in electric drive motor vehicles is phased out over a period of four calendar quarters once the total number of qualifying vehicles sold by a manufacturer after 2009 reaches 200,000. In a recent Notice, the IRS announced that General Motors, LLC reached this limit during the calendar quarter ending 12/31/18. Therefore, qualifying General Motors vehicles are eligible for the full $7,500 credit if they are purchased before 4/1/19. A reduced credit of $3,750 applies to vehicles purchased from 4/1/19 through 9/30/19. From 10/1/19 through 3/31/20, the credit will be reduced to $1,875. After 3/31/20, no credit will be available. Notice 2019-22 and News Release IR 2019-57.
On Saturday (March 30), a bipartisan retirement reform bill was introduced in the House. The bill, “Setting Every Community up for Retirement Enhancement (SECURE) Act of 2019,” contains a number of measures aimed at expanding and preserving retirement savings, providing administrative improvement, and raising revenue. The bill was sponsored by House Ways and Means Committee Kevin Brady (R-TX), Representative Mike Kelly (R-PA), Ways and Means Committee Chairman Richard Neal (D-MA), and Representative. Ron Kind (D-WI).
Provisions in the bill would:
…simplify the nonelective contribution 401(k) safe harbor;
…increase the credit amount for small employer plan start-up costs;
…create a small employer automatic enrollment tax credit of up to $500 per year;
…repeal the maximum age limit on contributions to a traditional IRA;
…increases the required minimum distribution age to 72;
…allow transfers of to a plan or IRA of lifetime income investments or distributions of a lifetime income investment in the form of a qualified plan distribution annuity in certain circumstances;
…allow penalty-free withdrawals from retirement plans for births or adoption distributions; and
…expand the Code Sec. 529 education savings accounts to cover costs associated with registered apprenticeships, homeschooling, up to $10,000 of qualified student loan repayments, and private elementary, secondary, or religious schools.