Category: IRS

Business Owner Retirement Plans

Posted on January 16, 2019February 20, 2019 by PM Editor

Retirement Plan Options For Business Owners

Business owners, who are often burdened with many challenges building and running their businesses, too often miss special retirement plan opportunities available to businesses, instead electing to rely on their personal retirement plans instead. Below are a few options that business owners should consider.

Profit-Sharing Plan (DPSP)

A profit–sharing plan, also known as a deferred profit–sharing plan or DPSP, is a defined contribution plan under which the plan may provide, or the employer may determine, annually, how much will be contributed to the plan (out of profits or otherwise). Under this plan, an employee receives a percentage of a company’s profits based on its quarterly or annual earnings. The plan contains a formula for allocating to each participant a portion of each annual contribution. A profit-sharing plan may include a 401(k) feature.

Simplified Employee Pension Plan (SEPs)

SEP plans are ones in which an employer contributes on a tax-favored basis to IRAs owned by its employees. If the employer meets certain conditions, it isn’t subject to the reporting and disclosure requirements of most retirement plans. One of the distinctive advantages of a SEP plan, is that they can be established in one year and contributions are deductible as late as the due date of income tax returns for the previous year, including extensions.

Per the IRS rules regarding participation, Employees must be included in the SEP plan if they have:

attained age 21;
worked for your business in at least 3 of the last 5 years;
received at least $600 in compensation (in 2016 – 2019) from your business for the year.

Your plan may use less restrictive requirements, for example age 18 or three months of service, to determine which employees are eligible.

Defined Benefit Plans

Also known as a traditional pension plan, Defined Benefit plans promise the participant a specified monthly benefit at retirement. These plans can state an exact dollar amount (e.g. $1000 per month at retirement) with a maximum annual benefit capped at $220,000 (as of 2018) or 100% of the average earned income for the highest three consecutive years, whichever is less. Most often, the benefit amount is calculated through a plan formula that considers such factors as salary and service. Like SEPs, business owners and plan participants can make deductible contributions until the due date of income tax returns for the previous year, including extensions.

Retirement planning can be a daunting task for even the most sophisticated business owners, therefore it is always a good idea to consult a tax professional like those found at TaxPM who can help you review, and if necessary revise your retirement planning strategies.

IRS confirmed it will process tax returns beginning Jan. 28

Posted on January 8, 2019February 20, 2019 by PM Editor

Despite the ongoing government shutdown, Office of Management and Budget Director Russell Vought issued a statement yesterday that tax refunds will go out as scheduled, unlike in previous shutdowns. The Internal Revenue Service has given the green light to processing returns as it set the date to being accepting returns beginning Jan 28th.

IRS Commissioner Chuck Rettig said on Monday, “we are committed to ensuring that taxpayers receive their refunds notwithstanding the government shutdown. I appreciate the hard work of the employees and their commitment to the taxpayers during this period.” The IRS doesn’t normally issue refunds during a shutdown, however Rettig said the IRS has “consistently been of the view that it has the authority to pay refunds despite a lapse in annual appropriations.”

The IRS closure during the partial government shutdown couldn’t have come at worse time for taxpayers looking for answers to the changes brought about by the Tax Cuts and Jobs Act of 2017 signed by President Donald Trump on Dec. 20, 2017. With almost 90% of the IRS workforce on furlough it’s unlikely that many taxpayers will be able to reach the IRS for help during the ongoing shutdown.

The filing deadline to submit 2018 tax returns is Monday, April 15 for most taxpayers. Taxpayers in in Maine and Massachusetts are granted a couple of extra days due to the Patriots’ Day holiday on April 15, likewise those residing in the District of Columbia where Emancipation Day holiday is being observed on April 16 also do not have to file until April 17th.

Significant changes to Personal Exemptions & Standard Deduction

Posted on January 4, 2019February 20, 2019 by PM Editor

The Tax Cuts and Jobs Act (TCJA) passed late 2017 has brought with it some significant changes to both personal exemptions and standard deduction for tax years 2018 through 2025 which are outlined below.

No More Personal Exemptions

By and large personal tax exemptions and the standard deduction have looked the same for quite some time. However, with the passage of the Tax Cuts and Jobs Act (TCJA) many individual taxpayers may find themselves confused by the changes.

For 2017, taxpayers can claim a personal exemption of $4,050 each for themselves, their spouses and any dependents. If they choose not to itemize, they can take a standard deduction based on their filing status: $6,350 for singles and separate filers, $9,350 for head of household filers, and $12,700 for married couples filing jointly.

For 2018 through 2025, the TCJA suspends personal exemptions but roughly doubles the standard deduction amounts to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. The standard deduction amounts will be adjusted for inflation beginning in 2019.

For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions and possibly even provide some additional tax savings. But for those with many dependents or who are used to itemizing deductions, these changes could result in a higher tax bill — depending in part on the extent to which they can benefit from family tax credits.

IRS Tax Penalties

Posted on December 20, 2018February 20, 2019 by PM Editor

Avoid these common types of IRS Penalties

Filing Extensions

One of the most common errors that taxpayers make every year is assuming that filing for an extension buys them more time to file their return and paying any taxes owed. Filing for extensions are easy whether you are missing crucial forms (e.g. 1099’s or K1’s) or it’s due to simple procrastination and you want to buy more time to file, there is no explanation required. What is required however, is that taxpayers remit with their extension an approximate amount they will owe, failure to do so will result in taxpayers being subject to “penalties and interest“!

Estimated Tax Miscalculation

Quarterly tax payments are due four times a year, failure to make these payments could result in an “estimated tax penalty”. This is a fairly common penalty as the IRS assessed this penalty to more than 10 million taxpayers in 2017. Although it is most common among people who are self-employed or retirees who have investments, taxpayers who don’t withhold enough taxes from their paycheck could also be subject to an estimated tax penalty. On the bright side, the penalty is one of the more reasonable ones assessed by the IRS as it generally equates to interest owed on a taxpayers underpaid funds (as of April 2018 the IRS interest rate is 5%).

Failure-to-file & failure-to-pay

The failure-to-file penalty is generally more than the failure-to-pay penalty. The IRS may remove or abate these penalties if you can show that you had reasonable cause for not filing or paying your taxes by the deadline (e.g. casualty, fire or other interventions). If the taxpayer cannot provide an acceptable reason for filing or paying late, they may be able to apply for a first-time penalty abatement (FTA) waiver. To qualify for this type of relief, the following requirements must be met 1) received no penalties (other than estimated tax penalties) for the three tax years preceding the tax year in which you received a penalty, 2) filed all required returns or filed a valid extension of time to file, and 3) paid, or arranged to pay, any tax due. Taxpayers can also reduce the failure-to-pay penalty by setting up a payment plan with the IRS commonly known as an “installment agreement”, these payment plans can cut a taxpayers penalties by as much as 50%. There are many types of installment plans offered by the IRS, therefore it is always a good idea to consult a tax professional like those found at TaxPM who can help you determine which plan is most suitable for you.

Tax Filing Inaccuracy

Although some tax filing inaccuracies are forgivable (e.g. incorrect birth date or address entry), others like substantial underpayment or negligently prepared returns will not be treated so favorably and will in most cases trigger penalties and interest due. If the IRS determines that your tax return was filed inaccurately due to negligence (e.g. inadequate record keeping, or other gross understatement of taxes due) they can assess penalty for negligence. If the IRS deems that the inaccuracies or substantial underpayment are a result of an intentional attempt at fraud or evasion then civil and or criminal penalties can be assessed.

Regardless for the reason of the inaccuracies on the tax return the IRS will almost always assess interest penalties (these are in addition to any other penalty assessed) on the balance of taxes owed, and unlike other penalties that have limits, there are no maximum amount of interest (compounds daily) that can assessed! If you receive a notice from the IRS regarding a penalty or interest being assessed against you and are unsure how to proceed or simply prefer to have more experienced person address the IRS on your behalf, contact the professionals at TaxPM™ today!

Understanding The New Tax Code: Estate Planning 2018

Posted on December 10, 2018February 20, 2019 by PM Editor

2018 Estate Planning

Most of the media coverage and attention on the new tax code, The Tax Cuts and Jobs Act (TCJA), have been focused on changes to income taxes (individual and corporate) and their respective brackets. Although the new law did not “repeal” the Federal Estate Tax, it does include some provisions that could impact some tax payers and their estate planning.

Exemption Increases

The biggest change in the new tax code regarding estate planning is that it more than doubles the exemption amounts for gift and estate tax exemptions and the generation-skipping transfer (GST) tax exemption, from $5.49 million for 2017 to $11.18 million (or $20 million for married couples with proper planning) for 2018. The top marginal rate for all three taxes remains at 40% — only three percentage points higher than the top income tax rate.

This is good news for those with large estates, however absent congressional action, the exemptions will revert to their 2017 levels (adjusted for inflation) in 2026. Although these “doubled exemption” amounts only affect a small population of taxpayers, it is important for those with estates in the roughly $6 million to $11 million range (double that for married couples) to consider making tax-free asset and wealth transfers prior to 2026 when the higher exemption amounts are set to expire.

It is important to consider however for taxpayers not affected by the above exemption amounts it may behoove them to hold assets until death. Specifically, when a a taxpayer gives away an appreciated asset the recipient takes over their tax basis in the asset which would trigger a capital gains tax should the recipient turnaround and sell it. On the contrary, when an appreciated asset is inherited, the recipient’s basis is “stepped up” to the asset’s fair market value on the date of death, which could significantly reduce (or even erase) the capital gain. Hence, retaining appreciating assets for taxpayers with estates less than $11 million ($22 million for married couples) can you save your heirs a significant amount of income taxes.

It is also important to keep in mind that some states have their own estate taxes whose exemption amounts are almost always lower than the federal amounts.

Updates to Section 529 plans

Another key change brought with the new tax code has been the expansion in tax benefits for 529 plans. Many tax professionals have long been proponents for families using 529 plans to grow money tax-free for their children’s education. Previously, 529 plans could only be used for eligible colleges and universities, but the TCJA now allows them for private, public, and religious kindergarten through 12th grade – up to $10,000 per year per child. This lucrative savings method for families can also be extended to other relatives like grandparents who can pare down their estates by making contributions to 529 plans while benefiting their grandchildren and their education.

The complexity of estate planning can be a daunting task for even the most sophisticated taxpayer, therefore it is always a good idea to consult a tax professional like those found at TaxPM who can help you review, and if necessary revise your estate planning strategies.