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How Back-Up Withholding May Impact You

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IRS Pub. 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), is now available on www.irs.gov. It has been updated to reflect a key change made by the Tax Cuts and Jobs Act. As a result of this change, effective January 1, 2018, the backup withholding tax rate dropped from 28% to 24%. In general, backup withholding applies in various situations including, but not limited to, when a taxpayer fails to supply their correct Taxpayer Identification Number (TIN) to a payer. Usually, a TIN is a Social Security Number, but in some instances, it can be an Employer Identification Number. Backup withholding also applies, following notification by the IRS, where a taxpayer underreported interest or dividend income on their federal income tax return.
IRS Pub. 1281 contains information designed to help any payer required to impose backup withholding on any of their payees. Among other things, the publication features answers to 34 frequently asked questions (FAQs). One of them, FAQ 34, points out that a payer who mistakenly backup withheld at an incorrect rate (such as the old 28% tax rate, rather than the new 24% rate), need not refund the difference to the payee. However, a payer who chooses to refund the difference must do so before the end of the year and can then make appropriate adjustments to their federal tax deposits.
When backup withholding applies, payers must backup withhold tax from payments not otherwise subject to withholding. Payees may be subject to backup withholding if they:
• Fail to give a TIN,
• Give an incorrect TIN,
• Supply a TIN in an improper manner,
• Under-report interest or dividends on their income tax return, or
• Fail to certify that they’re not subject to backup withholding for under-reporting of interest and dividends.
Backup withholding can apply to most kinds of payments reported on Form 1099, including:
• Interest payments,
• Dividends,
• Patronage dividends, but only if at least half of the payment is in money,
• Rents, profits or other income,
• Commissions, fees or other payments for work performed as an independent contractor,
• Payments by brokers and barter exchange transactions,
• Payments by fishing boat operators, but only the portion that’s in money and represents a share of the proceeds of the catch,
• Payment card and third-party network transactions, and
• Royalty payments.
Backup withholding also may apply to gambling winnings that aren’t subject to regular gambling withholding. To stop backup withholding, the payee must correct any issues that caused it. They may need to give the correct TIN to the payer, resolve the underreported income and pay the amount owed, or file a missing return. Payers report any backup withholding on Form 945,
Annual Return of Withheld Federal Income Tax. The 2018 form is due January 31, 2019. For more information about depositing backup withholding taxes, see Publication 15, Employer’s Tax Guide. Payers also show any backup withholding on information returns that they furnish to their payees and file with the IRS.
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Tax Tips

IRS Issues Guidance On What Business Meals Are Deductible

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I often receive questions regarding what is a deductible business entertainment expenses, particularly with regard to business meals.  The IRS has recently issued guidance on this issue in light of some of the changes brought about by the 2018 tax law changes.  I hope you will find these examples helpful.
EXAMPLE ONE
Aaron invites Brad, a business contact, to a baseball game. Aaron purchases tickets for himself and Brad to attend the game. While at the game, Aaron buys hot dogs and drinks for himself and Brad. The baseball game is entertainment. Thus, the cost of the game tickets is a nondeductible entertainment expense. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense and is not subject to the IRC section 274(a)(1) disallowance rule. Therefore, Aaron may deduct 50% of the expenses associated with the hot dogs and drinks purchased at the game.
EXAMPLE TWO
Chris invites Dan, a business contact, to a basketball game. Chris purchases tickets for himself and Dan to attend the game in a suite, where they have access to food and beverages. The cost of the basketball game tickets, as stated on the invoice, includes the food and beverages. The basketball game is entertainment. Thus, the cost of the game tickets is a nondeductible entertainment expense. The cost of the food and beverages, which are not purchased separately from the game tickets, is not stated separately on the invoice. Thus, the cost of the food and beverages also is an entertainment expense that is subject to the IRC section 274(a)(1) disallowance rule. Therefore, Chris may not deduct any of the expenses associated with the basketball game.
EXAMPLE THREE
Assume the same facts as in Example #2, except that the invoice for the basketball game tickets separately states the cost of the food and beverages. As in Example #2, the basketball game is entertainment and, thus, the cost of the game tickets, other than the cost of the food and beverages, is a nondeductible entertainment expense. However, the cost of the food and
beverages, which is stated separately on the invoice for the game tickets, is not an entertainment expense and is not subject to the IRC section 274(a)(1) disallowance rule. Therefore, Chris may deduct 50% of the expenses associated with the food and beverages provided at the game.
If you have any questions, please contact Steve Siesser at ssiesser@verizon.net
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2019 SOCIAL SECURITY CHANGES

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Social Security and Supplemental Security Income (SSI) benefits for more than 67 million Americans will increase 2.8 percent in 2019, the Social Security Administration announced today.

The 2.8 percent cost-of-living adjustment (COLA) will begin with benefits payable to more than 62 million Social Security beneficiaries in January 2019. Increased payments to more than 8 million SSI beneficiaries will begin on December 31, 2018. (Note: some people receive both Social Security and SSI benefits). The Social Security Act ties the annual COLA to the increase in the Consumer Price Index as determined by the Department of Labor’s Bureau of Labor Statistics.

Some other adjustments that take effect in January of each year are based on the increase in average wages. Based on that increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $132,900 from $128,400.  The tax rate on Social Security wages and self-employed net income remain unchanged.

The 7.65% tax rate is the combined rate for Social Security and Medicare. The Social Security portion (OASDI) is 6.20% on earnings up to the applicable taxable maximum amount (see below). The Medicare portion (HI) is 1.45% on all earnings. Also, individuals with earned income of more than $200,000 ($250,000 for married couples filing jointly) pay an additional 0.9 percent in Medicare taxes. The tax rates mentioned above do not include the 0.9 percent.

Social Security and SSI beneficiaries are normally notified by mail in early December about their new benefit amount. This year, for the first time, most people who receive Social Security payments will be able to view their COLA notice online through their my Social Security account. People may create or access their my Social Security account online at www.socialsecurity.gov/myaccount.

If you have any questions regarding this info, please contact Steve Siesser at ssiesser@verizon.net

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Tax Tips

2018 Tax Law Changes

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With the sweeping tax package bill about to become law, taxpayers are scrambling to find out how it might impact them and what steps, if any, they should be taking before the end of 2017 to maximize tax savings opportunities this year and for next year.  The situation is further complicated by all the mis-information be disseminated by the media and so-called tax experts.

For example, one concern I’ve been hearing from entrepreneurs and self-employed people is that they would no longer be able to deduct ordinary business expenses like a home office or staples, for that matter.   The confusion comes from the fact that there are two ways in which taxpayers can claim the home office deduction and other business expenses.  The first is in connection with a legitimate business by a taxpayer who operates as is a sole-proprietor (or LLC) and files Schedule C with their 1040.

There are no changes to this rule for self-employed taxpayers.

The other method for deducting business expenses is if the taxpayer is an employee and incurs out-of-pocket, unreimbursed expenses on behalf of your employer.  In that case, you’ve been able to deduct such expenses on Schedule A, provided, 1) you are able to itemize your deductions and 2) only to the extent that your claimed business expenses exceed 2% of your adjusted gross income.

Thus, if the increased standard deduction takes away your ability to itemize deductions, then you, as employee with unreimbursed business expenses, would lose the potential ability to take a deduction.

If you have been following me on Twitter (@StevenSiesser), you already know:

  • The final version of the tax legislation includes a provision that would disallow a deduction in 2017 for any prepayment of 2018 property taxes or 2018 state and local income taxes (otherwise known as SALT)
  • The final bill leaves many education tax breaks untouched – the deduction for student loan interest, the Lifetime Learning Tax Credit and the American Opportunity Credit. The final bill does not touch a $250 tax break for teachers who buy their own school supplies.
  • If you’re subject to the alternative minimum tax or close to it, you probably won’t get a tax benefit for pre-paying your 2017 real estate tax bill or pre-paying your 4th quarter state income tax estimated voucher in December.
  • Interest on home equity loans will no longer be deductible beginning in 2018 under the tax bill so it may be beneficial to pay your January 2018 home equity loan payment and regular mortgage payment in December 2017 to get an increased interest deduction.

There are so many moving parts to this tax legislation that the only answer I can give clients is, “It depends on your specific situation.”

However, there are some general tips I can share with you:

  • The floor for deducting medical expenses on Schedule A will decrease from 10% in 2017 to the “old” 7.5% floor, but only for 2018 and 2019, returning to 10% in 2020. Therefore, if you’re expecting significant medical expenses in 2018, consider delaying incurring or paying any more medical expenses in 2017.
  • If you’re self-employed, hold off on invoicing or taking payments until 2018, when your tax bracket could be lower.
  • Consider giving more to charity in 2017 because there’s less tax benefit in 2018 if you’re in a lower bracket or you don’t qualify for itemizing your deductions. The best charitable gift is appreciated publicly traded stock since you would also avoid paying capital gains taxes.
  • Consider rolling any home equity loan into a refinancing of your current first mortgage.

One more important change:  Starting in 2019, alimony would no longer be deductible by the payor for new decrees and payments would be excluded from the recipient’s income.

Most importantly, be aware of the Alternative Minimum Tax.  The only change to AMT was to slightly increase the exemption for next year, meaning only that there is a slightly higher entry point to being subjected to it.  If you’re not sure whether you have been paying the AMT, simply look at your most recent Form 1040, Page Two, line 45 and/or Form 6251.

If you are subject to AMT in 2017, you have limited options for minimizing your taxes under the new tax package.

Bottom line:  Time is running short.  Please contact me if you wish to retain me to perform a detailed analysis of your specific situation.

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Financial Planning Tips

Why Do Stocks Split?

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Why do stocks split?  According to Wells Fargo Advisors, when a company feels its stock price is getting too expensive to appeal to individual investors, it can decide to do a stock split to lower its per-share price.  When this occurs, you now own more shares, yet the amount of equity you own in the company remains the same.

The stock split may not directly affect your portfolio. However, the lower-priced shares may eventually attract more buyers, eventually driving the stock price up over time. If that happens, you could benefit from the split and from the resulting share-price increase.  Unfortunately, stock splits are occurring less frequently than in prior years.

Here’s what you need to consider:

    • Don’t wait for a split. If you’re putting off buying stock in a particular company because you hope the stock will split and the per-share price will drop, don’t hold your breath. Buy stocks according to ongoing purchasing strategies upon which you and your Financial Advisor agree and that make sense for your portfolio.
    • Revisit your individual stock-buying strategy. It can be very satisfying to invest in certain companies you really like. However, individual stocks tend to be more volatile investments than aggregated funds such as an investment designed to track performance of the S&P 500® Index or Russell 2000 index. Be sure you have a well-diversified portfolio before and after you consider adding individual stocks.
    • Consider gifting differently to kids and grandkids. In the past, you may have enjoyed giving younger family members individual stocks — maybe in companies that made their favorite cereals or digital devices, for example. You can still do that, but with fewer splits happening over time, the per-share price could limit how many shares you can give. The 2017 annual gift tax exclusion of $14,000 will increase to $15,000 beginning in 2018.

If you have any questions regarding stock splits or gifts to family members, contact Steve Siesser at ssiesser@verizon.net

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