Library Workshop on Tax Changes for Individuals

Last week, I had a fabulous opportunity to speak to a very attentive audience at the Arlington County Public Library about individual tax changes due to the 2017 Tax Cuts and Jobs Act. Libraries are a tremendous community resource. I felt privileged to be part of their program to help our neighbors gain awareness of the new taxes law and its impact.

We covered a lot of ground in 90 minutes (plus questions). The material was pretty general, geared toward increasing awareness the many tax changes impacting individual taxpayers. The impact of those changes varies based on individual income, family size, geography and other factors.

Six of the factoids from my presentation could be valuable information for you:

  • Good news! Tax brackets are reduced for the top six of seven individual tax brackets. Most taxpayers benefit from the new, lower rates. However, some taxpayers in the 33% marginal tax bracket move up to 35% in 2018 (e.g., singles $200-400K).
  • The decision whether to itemize or take the standard deduction has completely changed. The standard deduction is doubled, and some taxpayers will get a higher deduction be taking it. Another benefit is preparing a simpler tax return, without Schedule A. For those who still itemize, the itemized deduction phase-out for high-income taxpayers is eliminated.
  • Personal exemptions are eliminated. As a “consolation prize” a credit of up to $500 per qualified dependent is available. Qualified dependent does not include your spouse.
  • Taxpayers who itemize deductions will see many changes. One big change is the new $10,000 deduction cap that was imposed on the total of all state and local taxes. If you don’t have that memorized, that total  includes state income taxes, real estate taxes and personal property taxes,
  • Qualified residence loan interest is limited to $750,000 of total indebtedness for first and second homes acquired after December 15, 2017 ($375K if married filing separately). Indebtedness that existed prior to that date is “grandfathered” and not subject to the new limit.
  • Miscellaneous itemized deductions are generally eliminated, including employee business expenses, tax preparation fees, investment advisory fees, and safe deposit box fees. Moving expense deductions are also eliminated other than for active duty military.

I thoroughly enjoyed my time at the Arlington County Public Library helping a very engaged group of interested taxpayers gain awareness of individual tax changes. This important information was enthusiastically received. Thanks to the Library and its incredible Research Librarian for making this event happen for the community!

Business Taxes for Start-ups

Workshops are great opportunities to share valuable information that business owners can use immediately. Last week, I was asked to talk about business taxes with a roomful of entrepreneurs in various stages of starting up their businesses. In spite of being at the start-up stage, they asked some pretty sophisticated questions. Quite impressive.

Entrepreneurs start their businesses because they have expertise in their profession, not because they know about business taxes. That’s why my workshop focused on some basics that every business owner should understand to make good choices. Here are three of the tax topics covered in last week’s workshop that might be valuable for you and your business:

Filing Requirements by Business Type

Many small businesses form an LLC, which allows for three options regarding business type. Each business type has different filing requirements:

  • Operating as a Sole Proprietor is the simplest form of business for one person. It requires no legal paperwork. Net business profits from the business are reported on a separate schedule on the owner’s IRS Form 1040 and taxed at the owner’s individual rate.
  • Two or more people can form a Partnership by executing an operating agreement and requesting a tax ID from the IRS. Partnerships are required to file IRS Form 1065, “U.S. Return of Partnership Income”. Partners receive an IRS Form K-1 to report the allocated portion of income and expenses on her or his individual return.
  • An option for one person or up to 100 domestic entities is to form a Subchapter S Corporation. Sub S Corporations are required to file an IRS Form 1120S, “U.S Income Tax Return for a Sub S Corporation”. Shareholders receive a K-1 to report the allocated portion of income and expenses on her or his individual return.

New Tax Law Highlights

The tax rules are complex and numerous. They can also change, like we saw with the Tax Cuts and jobs Act of 2017. There are more, but these are the “big three” changes that business owners need to be aware of:

  • Qualifying pass-through businesses get a deduction of 20% of qualifying net business income (IRS link to more info – https://bit.ly/2Mg97wK ). Special rules apply for services that depend on reputation or skill of high-income owner/employees.
  • Higher limits for business asset depreciation that generally result in higher deductions (IRS link to more info – https://bit.ly/2skk9FG).
  • Losses from pass-through businesses can no longer offset other income, such as wages, investments or another business (IRS link to more info – https://bit.ly/2M18MLR).

Other Tax Considerations

Businesses of any type are obligated to register in their state and local jurisdiction and pay the required taxes and fees. Depending on location, that could involve an annual business license and business property taxes.

Last week’s business start-up workshop was filled with valuable information that attendees could use immediately. These three basic topics are a great start for every business owner to make good choices about business taxes.

Are you Eligible for the EITC?

Everything you hear about the new tax law is bad news – state and local taxes capped at $10,000 and miscellaneous deductions eliminated. It seems like a lot of tax benefits are gone or reduced. Isn’t there any good news?

Yes, there is good news about taxes! Some tax benefits have been retained, including one that helps hard-working people who deserve a financial break. It’s called the Earned Income Tax Credit, or EITC, a valuable benefit for working people with low-to-moderate income. Eligibility for the credit and the credit amount depend on your earned income and number of children in your household.

A tax credit is even better than a tax deduction because it’s a dollar-for-dollar reduction of your tax liability, not a reduction of your taxable income. Even better, the EITC is a refundable credit. The EITC could take your tax liability to a “negative” amount, meaning that your refund is even more than just paying back all of your federal taxes due for the year.

To qualify for EITC, you must have earned income (e.g., wages or self-employment income). Your income cannot exceed a specified amount that is adjusted annually by the IRS. To get the credit, you must file an income tax return, even if you do not owe any tax or are not required to file.

Some people don’t know about this credit or do not know that they qualify. Not taking a credit you qualify for? That’s just like giving away money! Who wants to do that?

Don’t miss your EITC refund. Don’t let your friends and family miss their EITC refund. Each year, 30% of the EITC-eligible population is new to this valuable tax credit, many of whom don’t know about it.

Need help? Get details about income limits and credit amounts at www.irs.gov/eitc. Made less than $55K in 2018? Check if you qualify for a larger federal tax refund at www.irs.gov/eitc.

Did you get the hint that you should look into the EITC on the IRS website? Great! Make sure you check it out and keep your friends, family and neighbors from missing a tax credit because they don’t know about EITC. They will thank you.