June 2018 Business Due Dates

June 15 – Employer’s Monthly Deposit Due

If you are an employer and the monthly deposit rules apply, June 15 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for May 2018. This is also the due date for the non-payroll withholding deposit for May 2018 if the monthly deposit rule applies.

June 15 – Corporations

Deposit the second installment of estimated income tax for 2018 for calendar year corporations.

June 2018 Individual Due Dates

June 11 – Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during May, you are required to report them to your employer on IRS Form 4070 no later than June 11. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

June 15 – Estimated Tax Payment Due

It’s time to make your second quarter estimated tax installment payment for the 2018 tax year. Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include:

  • Payroll withholding for employees;
  • Pension withholding for retirees; and
  • Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis.

Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (the “de minimis amount”), no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors:

• The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty.

• The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can’t avoid the penalty under this exception.

However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.

This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible.

CAUTION: Some state de minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules.

June 15 – Taxpayers Living Abroad

If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, June 15 is the filing due date for your 2017 income tax return and to pay any tax due. If your return has not been completed and you need additional time to file your return, file Form 4868 to obtain 4 additional months to file. Then, file Form 1040 by October 15. However, if you are a participant in a combat zone, you may be able to further extend the filing deadline (see below).

Caution: This is not an extension of time to pay your tax liability, only an extension to file the return. If you expect to owe, estimate how much and include your payment with the extension. If you owe taxes when you do file your extended tax return, you will be liable for both the late payment penalty and interest from the due date.

Combat Zone – For military taxpayers in a combat zone/qualified hazardous duty area, the deadlines for taking actions with the IRS are extended. This also applies to service members involved in contingency operations, such as Operation Iraqi Freedom or Enduring Freedom. The extension is for 180 consecutive days after the later of:

  • The last day a military taxpayer was in a combat zone/qualified hazardous duty area or served in a qualifying contingency operation, or have qualifying service outside of the combat zone/qualified hazardous duty area (or the last day the area qualifies as a combat zone or qualified hazardous duty area), or
  • The last day of any continuous qualified hospitalization for injury from service in the combat zone/qualified hazardous duty area or contingency operation, or while performing qualifying service outside of the combat zone/qualified hazardous duty area.

In addition to the 180 days, the deadline is also extended by the number of days that were left for the individual to take an action with the IRS when they entered a combat zone/qualified hazardous duty area or began serving in a contingency operation.

It is not a good idea to delay filing your return because you owe taxes. The late filing penalty is 5% per month (maximum 25%) and can be a substantial penalty. It is generally better practice to file the return without payment and avoid the late filing penalty. We can also establish an installment agreement which allows you to pay your taxes over a period of up to 72 months.

Please contact this office for assistance with an extension request or an installment agreement.

Don’t Have a Budget? QuickBooks Online Can Help

The hardest part of creating a budget is getting started. QuickBooks Online provides tools that can jump-start the process.

You know you should have a budget. You’re aware that it can help you stay on track with your company’s income and expenses throughout the year. Maybe you’ve even tried to make one before, but you got discouraged by the mechanics or by the difficulty of estimating money in and out for the next 12 months.

June may not be the beginning of your fiscal year, but that doesn’t mean you can’t make a serious effort to start building a budget that can help you rein in expenses and set revenue goals.

Here’s a look at QuickBooks Online’s budgeting features.

Creating the Framework

Before you begin, you’ll want to make sure that your fiscal year is set correctly in QuickBooks Online. Click the gear icon in the upper right, then click Your Company | Account and Settings | Advanced. If the First month of fiscal year isn’t correct, click the pencil icon over to the right and change it. Then click Save and exit out of this window.

Click the gear icon again and select Budgeting, then click Add budget in the upper right.

QuickBooks Online asks you the questions that need to be answered before you start filling in your budget grid.

The first thing you’ll do is give your budget a descriptive name by entering it in the Name field. Next, open the drop-down list under Fiscal year and select the correct 12-month period. You can create your budget in one of three intervals: Monthly, Quarterly, or Yearly. If you want to populate your budget with numbers from this year or last, make that selection in the Pre-fill data? field.

There’s one more option at the top of the Budgets Grid screen that’s not shown in the image above. You can Subdivide by Customer, Class, or Location. This can be useful if you want to view budget data specific to a subset of entries in each of those categories. You could, for example, choose three customers and view only their numbers in the grid individually, one at a time.

Providing Your Numbers

Once you’re satisfied with the selections you’ve made, click Create Budget in the lower right. The screen will refresh and display a grid that you can edit.

Let’s say you’re working on a budget for the second half of 2018. QuickBooks Online brought in your numbers for January-May. You see that the numbers don’t vary much from month to month on one specific line item, so you’re going to assume that they will continue to be true (unless you know something that will affect it after May). You could enter a rough average of the first five months in the JUN field.

Hover your cursor over the arrow to the side of that field, and this sentence appears in a small bubble: Click to copy the value across on the row. QuickBooks Online will then enter that number in the JUL through DEC fields.

 

QuickBooks Online can save you some time as you enter data in your budget grid fields.

When you’re done entering data in all of the fields relevant to your business, click Save in the lower right and close the window. Your budget will now show up in the list.

Tip: If you have multiple blank rows and don’t want them to be displayed, click the gear icon in the upper right corner of your budget page. Click in the box in front of Hide blank rows to create a checkmark.

The Hard Part

QuickBooks Online simplifies the mechanics of creating a budget, but it’s up to you to supply the numbers. There’s lots of common-sense advice that experts offer for this process, like:

  • Remember seasonal upswings and downswings.
  • Make your goals as realistic as possible. You might want to create separate budgets for “needs” and “wants.”
  • Track your expenses carefully for a period of time so you can estimate more confidently.
  • Create reports regularly that compare your budget vs actuals.

QuickBooks Online can help you with that last piece of advice; it offers a report called Budget vs. Actuals. You’ll find it in the Business Overview group.

We can help, too. Once we understand a little more about your business structure and goals, we can take a look at your income and expense history and make some personalized recommendations. Connect with us soon, and we can start you on the path to a more focused financial future.

Solar Tax Credit – The Dark Side

Article Highlights:

  • Solar Promotions
  • Solar Tax Credit
  • Nonrefundable Credit
  • Financing Costs
  • Solar Credit Phase-out
  • Leasing a Solar System

There are TV ads, telemarketing phone calls and sales people at your front door all promoting the benefits of solar power, and one of the key considerations and a frequently mentioned benefit is the 30% federal tax credit.

What isn’t included in the ads – and something most potential buyers are unaware of – is that the solar credit is a nonrefundable tax credit, meaning the credit can only be used to offset your tax liability. This can come as a very unpleasant surprise and is often a financial hardship when the purchaser of a home solar system finds out that the credit is nonrefundable and that they won’t get the full credit.

For example, a married couple with three children, all under age 17, and an annual income of $78,000 installed a solar system costing $20,000 in 2018, expecting a $6,000 credit on their tax return. Their standard deduction in 2018 is $24,000, leaving them with a taxable income of $54,000. The tax on the $54,000 is $6,099. They are also entitled to a $2,000 child tax credit for each child, which reduces their tax liability by $6,000 and results in a tax liability of $99. Since the solar credit is nonrefundable, the only portion of the credit they can use is $99, not the $6,000 they had expected.

On top of that, the family is probably financing the solar system, which significantly adds to the system’s cost. If the entire $20,000 cost were financed by a 5% home equity loan for 20 years, then the interest on that loan over its term would be $11,678, bringing the total cost of the solar system to $31,678 or a monthly cost of $132.

Some municipalities even allow home energy improvements to be financed through the property tax system by adding the payments to the quarterly or semi-annual property tax bills. Interest rates on these arrangements are generally higher than home equity loans, reaching levels of 9 to 10%. If the loan in our prior example would have been at 9%, then the interest on the loan over 20 years would be $23,187, bringing the total cost to $43,187 or a monthly cost of $180. It is also a common misconception that solar system payments added to the property tax bill can be deducted as property taxes. That is incorrect; however, the interest portion of the loan payment is generally deductible as home acquisition debt interest. The lender should supply a loan amortization schedule indicating the annual interest amount.

The unused credit does carry over from year to year as long as the solar energy credit is available. Currently, the credit is being phased out, and 2021 is the last year it can be claimed. Furthermore, the credit percentage rate is being phased down, with the 30% continuing through 2019 and then dropping to 26% in 2020 and 22% in its final year.

In lieu of purchasing a solar system, some homeowners opt to lease a system. This arrangement is not eligible for the solar credit.

As you can see, there is a lot to consider before making the final decision to install a solar system. Is it worth it, and is it the right thing financially for you? Please call for a consultation before signing any contract to make sure a solar system is appropriate for you.

Should I Use a Credit Card to Pay My Taxes?

With tax filing season out of the way, paying off those tax bills that weren’t paid by April 18th is the next major concern for people. While there are a few options for payment agreements if you can’t afford to write a check for the full amount immediately, there’s also the option of paying your tax bill with a credit card. It can be less confusing than navigating IRS payment plans, and if your credit card has a nice rewards program, then it’s something to think about.

Depending on how much you owe in taxes and what terms your credit card offers, it may or may not be worth putting your tax bill on your credit card. Here are some of the pros and cons of using a credit card to pay your taxes and why you would or wouldn’t want to pursue this option.

Processing Fees

Legally, the IRS cannot directly accept credit card payments so they use three different approved payment processors for taking credit and debit card payments. At the time of writing, the processor with the most favorable rate is pay1040.com. Their minimum processing fee is $2.59, otherwise charging 1.87% of your balance. So, if you owe $2,000 in taxes, then you’d be charged a total of $2,037.40.

Keep in mind that this processing fee is steeper the bigger that your outstanding balance is, and you need to pay it on top of whatever you’ll owe in interest. If you go on a payment plan and pay by direct debit or check, you’ll only pay the IRS interest rate and any applicable penalties with no processing fees.

Interest Rates and Balance Transfers

Interest rate varies by the credit card that you have, but the average rate is 15.07%. For the first quarter of 2018, the IRS interest rate on underpayments is 4% (expected to go up to 5% for the second quarter.) This interest rate is in addition to any applicable penalties like the .0.50% late fee that applies every month until the balance has been paid off. But the interest rate the IRS charges is a lot less than the average credit card interest rate.

If you anticipate paying your balance off over time, you will definitely pay a lot more interest with a credit card even if it’s less confusing to calculate than the IRS interest rates, which change more often. However, if you open a new credit card intended for balance transfer if your credit’s good, then you can get a few months to a whole year to pay off your balance at a 0% interest rate which both buys time and saves money. But if you’re late on the payments eventually and/or your credit isn’t that great, this isn’t a likely option.

Credit Card Rewards

Credit card rewards, like cash rebates and frequent flier miles, are what often makes the extra fees and interest tempting to put your tax balance on your credit card: Why not get a free vacation for paying your taxes?

But financial experts estimate that most credit card rewards only net you about 1% back of what you purchase. It’s worth sitting down and doing the math on how much the IRS interest rates and forgoing processing fees would save you so you can take that vacation out of pocket instead. Unless you plan on paying off your entire balance immediately and the reward offered is worth what you’ll pay in fees, reward programs aren’t likely to completely defray the costs of using a credit card for your taxes.

Tax Bills and Your Credit Report

Ultimately, if you need extra time to pay your taxes, you are better off with an IRS installment or short-term payment agreement since owing money on these plans does not appear on your credit report. However, carrying a balance will appear once you shift the responsibility from the IRS to your credit card company. In addition to impacting your available credit, it also affects your credit utilization score based on how much of your available credit is being used.

If you’re looking for housing, more credit, or other situations that warrant your credit report being pulled, then you’ll want to avoid paying your taxes with a credit card.

Ultimately, it’s up to you to weigh the risks and benefits of using a credit card to pay your taxes. If you’re taking a longer-term approach, an installment agreement is likely to cost you less both upfront and in the long run.

Is a Roth Conversion Right for You? But Be Careful, They Can No Longer Be Undone!

Article Highlights:

  • Conversion Timing
  • Why Convert?
  • When to Convert?
  • Issues to Consider Before Making the Decision

Roth IRA accounts provide the benefits of tax-free accumulation and, once you reach retirement age, tax-free distributions. This is the reason why so many taxpayers are converting their traditional IRA account to a Roth IRA. However, to do so, you must generally pay tax on the on the converted amount. After making a conversion, your circumstances may change, and you may find yourself wishing you had not made the conversion. In the past, you could change your mind later and undo the conversion. But that option is no longer available under tax reform. So, be careful: once a conversion is made, there is no going back.

Timing is everything, and a favorable time to make a traditional IRA to Roth IRA conversion is a year when your income is abnormally low or the value of your traditional IRA has declined. You can also convert portions of your traditional IRA over a number of years, thereby gradually converting the traditional IRA to a Roth IRA, spreading the tax liability over a number of years, and keeping it in a lower tax bracket. If you previously made non-deductible contributions to a traditional IRA, those amounts can be converted tax-free but must be converted ratably with the other funds in the traditional IRA.

Many taxpayers overlook some great opportunities to make conversions, such as years when your income is abnormally low or a year when your income might even be negative due to abnormal deductions or business losses. Even the new higher standard deductions may offer a taxpayer the opportunity to convert some or all of their traditional IRA to a Roth IRA without any conversion tax.

Everyone’s financial circumstances are unique, and issues to consider include:

  • Will there be enough years before retirement to recoup the conversion tax dollars through tax-free accumulation?
  • Is your income low enough or are your deductions high enough to enable a tax-free or minimal tax conversion?
  • Will you be in a lower or higher tax bracket in the future?
  • Where would the money to pay the conversion tax come from? Generally, it must be from separate funds. If it is taken from the IRA being converted, for individuals under age 59½, the funds withdrawn to pay the tax will also be subject to the 10% early distribution penalty, in addition to being taxed.
  • It might be appropriate for you to design your own custom conversion plan over a number of years, rather than converting everything at once.

Conversions can be tricky, and once made, they can no longer be undone. If you are considering a conversion, it might be appropriate to call for an appointment so that this office can help you properly analyze your conversion options or develop a conversion plan that fits your particular circumstances.

Summer Employment For Your Child

Article Highlights

  • Higher Standard Deduction
  • IRA Options
  • Self-Employed Parent
  • Employing Your Child
  • Tax Benefits

Summer is just around the corner, and your children may be looking for summer employment. With the passage of the most recent tax reform, the standard deduction for single individuals jumped from $6,350 in 2017 to $12,000 in 2018, meaning your child can now make up to $12,000 from working without paying any income tax on their earnings.

In addition, they can contribute the lesser of $5,500 or their earned income to an IRA. If they contribute to a traditional IRA, they could earn up to $17,500 tax free, since the combination of the standard deduction and the maximum allowed contribution to an IRA for 2018 is $5,500. However, looking forward to the future, a Roth IRA with its tax-free accumulation would be a better choice.

Even if your child is reluctant to give up any of their hard-earned money from their summer or regular employment, if you have the financial resources, you could gift them the funds to make the IRA contribution, giving them a great start and hopefully a continuing incentive to save for retirement.

With vacation time just around the corner and employees heading out for their summer vacations, if you are self-employed, you might consider hiring your children to help out in your business. Financially, it makes more sense to keep the family employed rather than hiring strangers, provided, of course, that the family member is suitable for the job.

Rather than helping to support your children with your after-tax dollars, you can instead hire them in your business and pay them with tax-deductible dollars. Of course, the employment must be legitimate and the pay commensurate with the hours and the job worked. A reasonable salary paid to a child reduces the self-employment income and tax of the parents (business owners) by shifting income to the child.

Example: You are in the 25% tax bracket and own a self-employed business. You hire your child (who has no investment income) and pay the child $15,000 for the year. You reduce your income by $15,000, which saves you $3,750 of income tax (25% of $15,000), and your child has a taxable income of $3,000 ($15,000 less the $12,000 standard deduction) on which the tax is only $300 (10% of $3,000).

If the business is unincorporated and the wages are paid to a child under age 18, the pay will not be subject to FICA (Social Security and Medicare taxes) since employment for FICA tax purposes doesn’t include services performed by a child under the age of 18 while employed by a parent. Thus, the child will not be required to pay the employee’s share of the FICA taxes, and the business won’t have to pay its half either.

Example: Using the same information as the previous example, and assuming your business profits are $130,000, by paying your child $15,000, you not only reduce your self-employment income for income tax purposes, but you also reduce your self-employment tax (HI portion) by $402 (2.9% of $15,000 times the SE factor of 92.35%). But if your net profits for the year were less than the maximum SE income ($128,400 for 2018) that is subject to Social Security tax, then the savings would include the 12.4% Social Security portion in addition to the 2.9% HI portion.

A similar but more liberal exemption applies for FUTA, which exempts from federal unemployment tax the earnings paid to a child under age 21 while employed by his or her parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his or her parents. However, the exemptions do not apply to businesses that are incorporated or a partnership that includes non-parent partners. Even so, there’s no extra cost to your business if you’re paying a child for work that you would pay someone else to do anyway.

If you have questions related to your child’s employment or hiring your child in your business, please give this office a call.

Choosing Your Accounting Method Under New Tax Laws

Businesses today must take a closer look at their accounting methods. Since the passage of new tax laws, with changes to thresholds for choosing accounting methods, all companies need to take an inward look at their current accounting methods to determine if they are the most beneficial permissible method applicable. It is important to work closely with accounting professionals here — making changes as well as decisions on how accounting methods need to be updated.

What Is Changing?

The Tax Cuts and Jobs Act put into place new laws for a variety of sectors. One key area impacted that many business owners do not immediately consider is accounting. The overall method of accounting and the type of business can be key factors to consider. This tax reform set out to support small business owners and offer key ways to reduce some taxes. It also put into place provisions and accounting method reform with a focus on keeping things simple. Outdated methods of accounting minimized the amount of information shared, but they tend to overcomplicate methods. This is especially true with outdated gross receipt thresholds. Old methods required business owners to use accrual basis accounting which tends to increase overall administrative costs and compliance requirements.

Here is a look at some of the key changes businesses should recognize moving forward.

Limits on Cash Method of Accounting Improved

One key change is the limitation on which businesses can use the cash method of accounting. Previously, companies could not use the cash method of accounting — commonly considered the most natural and more affordable method — as an option if they reached a threshold in revenue. Previously, this method could not be used if the average annual gross receipts for the company were limited to companies with revenue under $10 million, except for the following companies that are that are limited to $1 Million:

  • Retailing (NAICS codes 44 and 45);
  • Wholesaling (NAICS code 42);
  • Manufacturing (NAICS codes 31 – 33);
  • Mining (NAICS codes 211, 212);
  • Publishing (NAICS code 5111); or
  • Sound recording (NAICS code 5112).

The new law changes this. First, it increases the threshold to $25 million. It also indexes this to inflation (meaning it can rise over time due to inflationary measures). Companies who are now able to use this method will note an accounting method change. It will allow the company to recognize ratable taxable income from this change over a period of four years — you do not have to adjust this all at one time. Additionally, any losses are recognized immediately.

Changes in Inventory Accounting

The law also changes Internal Revenue Code Section 263A. These UNICAP rules made for very specific restrictions for business owners. Prior to the changes, the revenue threshold was subject to the UNICAP rules. It requires businesses that maintain an inventory to apply specific costs to their inventory. When this cost is applied, it raises the company’s balance sheet. Overall, it increases the amount of taxable income the company has, therefore making it harder to overcome the threshold.

Now, companies with $25 million in revenue that qualify for the cash method of accounting will be able to note their inventories as non-incidental supplies or materials. Another option is to use their financial accounting treatment for inventories.

Long-Term Contract Changes

Another key area of the law has to do with long-term contracts. Previously, any business with $10 million or less in average annual gross receipts and maintained contracts expected to end within two years were considered small contractors. As a result of this classification, the businesses did not have to use a percentage of completion method of accounting. This helped streamline efforts for the company. The new law still applies for the most part. However, the new law increases that threshold from $10 million up to $25 million. And, it is indexed for inflation. This means more companies — those with revenue under $25 million — now achieve this same benefit.

What Does This Change Mean for You?

As a business owner, it can mean significant changes. When you meet with your accounting professionals, it will be important to look at several things:

  • Do the changes apply to your situation? Any business around the gap of $10 million ($1 Million for certain companies) to $25 million may need to consider the new methods of accounting available to them.
  • Do the changes benefit the company? Choosing the cash method of accounting over the accrual method is often beneficial, but not to all organizations.
  • Does the change require substantial changes to business operations? Though operations may stay the same, tax planning will change.

For these reasons, companies should work closely with accounting professionals to apply the changes under these laws. The law went into effect in December of 2017 – which means it applies to 2018 and beyond. For this reason, it is important to get up to date now.

Big Changes to the Kiddie Tax

Article Highlight:

  • Prior Law
  • New Law
  • Earned Income
  • Unearned Income
  • Fiduciary Rates
  • Strategies

Years ago, to prevent parents from transferring their investment accounts into their children’s name to avoid taxes, Congress created what is referred to as the kiddie tax. This counteracted the strategy of taking income from the parents’ higher tax bracket and shifting it to their children’s lower tax bracket.

The kiddie tax plugged that tax loophole by taxing the child’s unearned income (income not from working) at the parent’s top marginal rate.

That has all changed under the new tax reform. Beginning in 2018, children’s tax rates are no longer based upon their parents’ top marginal rates. Congress streamlined the kiddie tax by taxing a child’s unearned income by the capital gain and ordinary income rates that apply to trusts and estates. Thus, the child’s tax is unaffected by the parent’s tax situation or the unearned income of any siblings, while the earned income is taxed using the single tax rates.

Although this will greatly simplify the preparation of a child’s return, there will be losers and winners. One of the big winners will be a child who is employed. Since earned income is taxed at single rates, a working child will benefit from the new higher standard deduction allowing them to make up to $12,000, instead of the previous $6,350 of earned income without any tax.

On the other hand, for those with substantial unearned (investment) income, that income will no longer be subject to the parent’s top tax bracket but instead will be taxed at the rates for estates and trusts, which for 2018 hit 37% at a taxable income of $12,500.

The losers will be children with substantial investment income, which will be taxed at the trust rates, especially children whose parents are in a low tax bracket. Under the old law, a child’s unearned income was taxed at the parents’ top tax bracket, which now may be lower than the fiduciary tax rates.

The kiddie tax applies to children under the age of 18, a child age 18 at the end of the year with earned income less than one half the cost of their support, and full-time students between the ages of 18 and 24, also with earned income less than one half the cost of their support.

Parents with children might consider some of the following investment strategies for their children to avoid the kiddie tax issues:

  • U.S savings bonds – Invest in U.S. savings bonds. Not the best return on investment, but interest can be deferred until the bonds are cashed.
  • Tax-deferred annuities – Invest in tax-deferred annuities. The income can be deferred until the annuity is surrendered.
  • Municipal bonds – Invest in municipal bonds. They generally produce tax-free interest income (which may be taxable to the state).
  • Growth stocks – Invest in stocks that focus more on capital appreciation than current income.
  • Unimproved real estate – Invest in unimproved real estate, which provides appreciation without current income.
  • Family employment – If the family has a business, that family business could employ the child. The child’s earned income is not subject to kiddie tax and will generate a deduction for the family business (assuming the wages are reasonable for the work actually performed). The child’s earned income can offset the standard deduction for a dependent, and the excess income will be taxed at the child’s rate (not the parent’s). In addition, the child would also qualify for an IRA, which provides an additional income shelter.
  • Individual IRA Account – If a child has investment income and earned income, the earned income can be used as a basis for depositing investment funds into an IRA account. Funding an IRA at an early age is perhaps one of the most underused family wealth-building strategies. Generally, a Roth IRA would be preferable for a child with little or no tax liability.
  • Sec. 529 Qualified Tuition Plans – If parents, grandparents, or others want to transfer money to a child, depositing the funds into a Sec. 529 plan will allow the earnings to accumulate tax-deferred, and if used for qualified college expenses, the earnings are withdrawn tax-free.

If you have questions or would like to schedule an appointment to discuss a child’s tax situation and options, please give this office a call.

Good and Bad News About The Home Office Tax Deduction

Article Highlights:

  • Home Office
  • Qualifications
  • Actual-Expense Method
  • Simplified Method
  • Income Limitation
  • Employee Deduction

“Home office” is a type of tax deduction that applies to the business use of a home; the space itself may not actually be an office. This category also includes using part of a home for storing inventory (e.g., for a wholesale or retail business for which the home is the only fixed location); as a day care center; as a physical meeting place for interacting with customers, patients, or clients; or the principal place of business for any trade or business.

Generally, except when used to store inventory, an office area must be used on a regular and continuing basis and exclusively restricted to the trade or business (i.e., no personal use). Two methods can be used to determine a home-office deduction: the actual-expense method and the simplified method.

Actual-Expense Method – The actual-expense method prorates home expenses based on the portion of the home that qualifies as a home office; this is generally based on square footage. These prorated expenses include mortgage interest, real property taxes, insurance, heating, electricity, maintenance, and depreciation. In the case of a rented home, rent replaces the interest, tax, and depreciation expenses. Aside from prorated expenses, 100% of directly related costs, such as painting and repair expenses specific to the office, can be deducted.

Simplified Method – The simplified method allows for a deduction equal to $5 per square footage of the home that is used for business, up to a maximum of 300 square feet, resulting in a maximum simplified deduction of $1,500.

Even if you qualify for a home-office deduction, your deduction is limited to the business activity’s gross income—not, as many people mistakenly believe, its net income. The gross-income limitation is equal to the gross sales minus the cost of goods sold. This amount is deducted on a self-employed individual’s business schedule.

The good news is that, under the tax reform, the home-office deduction is still allowed for self-employed taxpayers. The bad news is that this deduction is no longer available for employees, at least for 2018 through 2025. The reason for this change is that, for an employee, a home office is considered an employee business expense (a type of itemized deduction); Congress suspended this deduction as part of the tax reform.

If you have concerns or questions about how the home-office deduction applies to your specific circumstances, please give this office a call.