Tax Tips and Alerts
For tax purposes, December 31 means more than New Year’s Eve celebrations. It affects the filing status box that will be checked on your tax return for the year. When you file your return, you do so with one of five filing statuses, which depend in part on whether you’re married or unmarried on December 31.
More than one filing status may apply, and you can use the one that saves the most tax. It’s also possible that your status options could change during the year.
Here are the filing statuses and who can claim them:
- Single. This status is generally used if you’re unmarried, divorced or legally separated under a divorce or separate maintenance decree governed by state law.
- Married filing jointly. If you’re married, you can file a joint tax return with your spouse. If your spouse passes away, you can generally file a joint return for that year.
- Married filing separately. As an alternative to filing jointly, married couples can choose to file separate tax returns. In some cases, this may result in less tax owed.
- Head of household. Certain unmarried taxpayers may qualify to use this status and potentially pay less tax. The special rules that apply are described below.
- Qualifying widow(er) with a dependent child. This may be used if your spouse died during one of the previous two years and you have a dependent child. Other conditions also apply.
Head of household status
Head of household status is generally more favorable than filing as a single taxpayer. To qualify, you must “maintain a household” that, for more than half the year, is the principal home of a “qualifying child” or other relative that you can claim as your dependent.
A “qualifying child” is defined as someone who:
- Lives in your home for more than half the year,
- Is your child, stepchild, foster child, sibling, stepsibling or a descendant of any of these,
- Is under 19 years old or a student under age 24, and
- Doesn’t provide over half of his or her own support for the year.
Different rules may apply if a child’s parents are divorced. Also, a child isn’t a “qualifying child” if he or she is married and files jointly or isn’t a U.S. citizen or resident.
Maintaining a household
For head of household filing status, you’re considered to maintain a household if you live in it for the tax year and pay more than half the cost of running it. This includes property taxes, mortgage interest, rent, utilities, property insurance, repairs, upkeep, and food consumed in the home. Don’t include medical care, clothing, education, life insurance or transportation.
Under a special rule, you can qualify as head of household if you maintain a home for a parent of yours even if you don’t live with the parent. To qualify, you must be able to claim the parent as your dependent.
You must generally be unmarried to claim head of household status. If you’re married, you must generally file as either married filing jointly or married filing separately, not as head of household. However, if you’ve lived apart from your spouse for the last six months of the year and a qualifying child lives with you and you “maintain” the household, you’re treated as unmarried. In this case, you may be able to qualify as head of household.
If you have questions about your filing status, contact us.
Voting is open for the Yuma Sun’s 2019 Yuma’s Best Readers Choice Awards from December 1st through December 31st. Take a moment to vote for all your favorite local businesses. While you’re there, don’t forget to vote for Shippen, Pope & Associates in the Best Accounting/CPA Firm category.
Vote here: http://bit.ly/35SEjbw — we appreciate your support!
If you’re planning to sell assets at a loss to offset gains that have been realized during the year, it’s important to be aware of the “wash sale” rule.
How the rule works
Under this rule, if you sell stock or securities for a loss and buy substantially identical stock or securities back within the 30-day period before or after the sale date, the loss can’t be claimed for tax purposes. The rule is designed to prevent taxpayers from using the tax benefit of a loss without parting with ownership in any significant way. Note that the rule applies to a 30-day period before or after the sale date to prevent “buying the stock back” before it’s even sold. (If you participate in any dividend reinvestment plans, the wash sale rules may be inadvertently triggered when dividends are reinvested under the plan, if you’ve separately sold some of the same stock at a loss within the 30-day period.)
Keep in mind that the rule applies even if you repurchase the security in a tax-advantaged retirement account, such as a traditional or Roth IRA.
Although the loss can’t be claimed on a wash sale, the disallowed amount is added to the cost of the new stock. So, the disallowed amount can be claimed when the new stock is finally disposed of (other than in a wash sale).
Here’s an example
Let’s say you buy 500 shares of XYZ Inc. for $10,000 and sell them on November 5 for $3,000. On November 29, you buy 500 shares of XYZ again for $3,200. Since the shares were “bought back” within 30 days of the sale, the wash sale rule applies. Therefore, you can’t claim a $7,000 loss. Your basis in the new 500 shares is $10,200: the actual cost plus the $7,000 disallowed loss.
If only a portion of the stock sold is bought back, only that portion of the loss is disallowed. So, in the above example, if you’d only bought back 300 of the 500 shares (60%), you would be able to claim 40% of the loss on the sale ($2,800). The remaining $4,200 loss that is disallowed under the wash sale rule would be added to your cost of the 300 shares.
If you’ve cashed in some big gains in 2019, you may be looking for unrealized losses in your portfolio so you can sell those investments before year end. By doing so, you can offset your gains with your losses and reduce your 2019 tax liability. But don’t run afoul of the wash sale rule. Contact us if you have any questions.
A month after the new year begins, your business may be required to comply with rules to report amounts paid to independent contractors, vendors and others. You may have to send 1099-MISC forms to those whom you pay nonemployee compensation, as well as file copies with the IRS. This task can be time consuming and there are penalties for not complying, so it’s a good idea to begin gathering information early to help ensure smooth filing.
There are many types of 1099 forms. For example, 1099-INT is sent out to report interest income and 1099-B is used to report broker transactions and barter exchanges. Employers must provide a Form 1099-MISC for nonemployee compensation by January 31, 2020, to each noncorporate service provider who was paid at least $600 for services during 2019. (1099-MISC forms generally don’t have to be provided to corporate service providers, although there are exceptions.)
A copy of each Form 1099-MISC with payments listed in box 7 must also be filed with the IRS by January 31. “Copy A” is filed with the IRS and “Copy B” is sent to each recipient.
There are no longer any extensions for filing Form 1099-MISC late and there are penalties for late filers. The returns will be considered timely filed if postmarked on or before the due date.
A few years ago, the deadlines for some of these forms were later. But the earlier January 31 deadline for 1099-MISC was put in place to give the IRS more time to spot errors on tax returns. In addition, it makes it easier for the IRS to verify the legitimacy of returns and properly issue refunds to taxpayers who are eligible to receive them.
Hopefully, you’ve collected W-9 forms from independent contractors to whom you paid $600 or more this year. The information on W-9s can be used to help compile the information you need to send 1099-MISC forms to recipients and file them with the IRS. Here’s a link to the Form W-9 if you need to request contractors and vendors to fill it out: <a href=""undefined target=”_blank”>https://bit.ly/2NQvJ5O.
Form changes coming next year
In addition to payments to independent contractors and vendors, 1099-MISC forms are used to report other types of payments. As described above, Form 1099-MISC is filed to report nonemployment compensation (NEC) in box 7. There may be separate deadlines that report compensation in other boxes on the form. In other words, you may have to file some 1099-MISC forms earlier than others. But in 2020, the IRS will be requiring “Form 1099-NEC” to end confusion and complications for taxpayers. This new form will be used to report 2020 nonemployee compensation by February 1, 2021.
Help with compliance
But for nonemployee compensation for 2019, your business will still use Form 1099-MISC. If you have questions about your reporting requirements, contact us.
If you’re a small business owner or you’re involved in a start-up, you may want to set up a tax-favored retirement plan for yourself and any employees. Several types of plans are eligible for tax advantages.
One of the best-known retirement plan options is the 401(k) plan. It provides for employer contributions made at the direction of employees. Specifically, the employee elects to have a certain amount of pay deferred and contributed by the employer on his or her behalf to an individual account. Employee contributions can be made on a pretax basis, saving employees current income tax on the amount contributed.
Employers may, or may not, provide matching contributions on behalf of employees who make elective deferrals to 401(k) plans. Establishing and operating a 401(k) plan means some up-front paperwork and ongoing administrative effort. Matching contributions may be subject to a vesting schedule. 401(k) plans are subject to testing requirements, so that highly compensated employees don’t contribute too much more than non-highly compensated employees. However, these tests can be avoided if you adopt a “safe harbor” 401(k) plan.
Within limits, participants can borrow from a 401(k) account (assuming the plan document permits it).
For 2019, the maximum amount you can contribute to a 401(k) is $19,000, plus a $6,000 “catch-up” amount for those age 50 or older as of December 31, 2019.
Other tax-favored plans
Of course, a 401(k) isn’t your only option. Here’s a quick rundown of two other alternatives that are simpler to set up and administer:
1. A Simplified Employee Pension (SEP) IRA. For 2019, the maximum amount of deductible contributions that you can make to an employee’s SEP plan, and that he or she can exclude from income, is the lesser of 25% of compensation or $56,000. Your employees control their individual IRAs and IRA investments.
2. A SIMPLE IRA. SIMPLE stands for “savings incentive match plan for employees.” A business with 100 or fewer employees can establish a SIMPLE. Under one, an IRA is established for each employee, and the employer makes matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The maximum amount you can contribute to a SIMPLE in 2019 is $13,000, plus a $3,000 “catch-up” amount if you’re age 50 or older as of December 31, 2019.
Annual contributions to a SEP plan and a SIMPLE are controlled by special rules and aren’t tied to the normal IRA contribution limits. Neither type of plan requires annual filings or discrimination testing. You can’t borrow from a SEP plan or a SIMPLE.
These are only some of the retirement savings options that may be available to your business. We can discuss the alternatives and help find the best option for your situation.
As we head toward the gift-giving season, you may be considering giving gifts of cash or securities to your loved ones. Taxpayers can transfer substantial amounts free of gift taxes to their children and others each year through the use of the annual federal gift tax exclusion. The amount is adjusted for inflation annually. For 2019, the exclusion is $15,000.
The exclusion covers gifts that you make to each person each year. Therefore, if you have three children, you can transfer a total of $45,000 to them this year (and next year) free of federal gift taxes. If the only gifts made during the year are excluded in this way, there’s no need to file a federal gift tax return. If annual gifts exceed $15,000, the exclusion covers the first $15,000 and only the excess is taxable. Further, even taxable gifts may result in no gift tax liability thanks to the unified credit (discussed below).
Note: this discussion isn’t relevant to gifts made from one spouse to the other spouse, because these gifts are gift tax-free under separate marital deduction rules.
Gifts by married taxpayers
If you’re married, gifts to individuals made during a year can be treated as split between you and your spouse, even if the cash or gift property is actually given to an individual by only one of you. By “gift-splitting,” up to $30,000 a year can be transferred to each person by a married couple, because two annual exclusions are available. For example, if you’re married with three children, you and your spouse can transfer a total of $90,000 each year to your children ($30,000 × 3). If your children are married, you can transfer $180,000 to your children and their spouses ($30,000 × 6).
If gift-splitting is involved, both spouses must consent to it. We can assist you with preparing a gift tax return (or returns) to indicate consent.
“Unified” credit for taxable gifts
Even gifts that aren’t covered by the exclusion, and that are therefore taxable, may not result in a tax liability. This is because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $11,400,000 (for 2019). However, to the extent you use this credit against a gift tax liability, it reduces (or eliminates) the credit available for use against the federal estate tax at your death.
Giving gifts of appreciated assets
Let’s say you own stocks and other marketable securities (outside of your retirement accounts) that have skyrocketed in value since they were acquired. A 15% or 20% tax rate generally applies to long-term capital gains. But there’s a 0% long-term capital gains rate for those in lower tax brackets. Even if your income is high, your family members in lower tax brackets may be able to benefit from the 0% long-term capital gains rate. Giving them appreciated stock instead of cash might allow you to eliminate federal tax liability on the appreciation, or at least significantly reduce it. The recipients can sell the assets at no or a low federal tax cost. Before acting, make sure the recipients won’t be subject to the “kiddie tax,” and consider any gift and generation-skipping transfer (GST) tax consequences.
Annual gifts are only one way to transfer wealth to your loved ones. There may be other effective tax and estate planning tools. Contact us before year end to discuss your options.
In addition to the difficult personal issues that divorce entails, several tax concerns need to be addressed to ensure that taxes are kept to a minimum and that important tax-related decisions are properly made. Here are four issues to understand if you are in the process of getting a divorce.
- Alimony or support payments. For alimony under divorce or separation agreements that are executed after 2018, there’s no deduction for alimony and separation support payments for the spouse making them. And the alimony payments aren’t included in the gross income of the spouse receiving them. (The rules are different for divorce or separation agreements executed before 2019.)
- Child support. No matter when the divorce or separation instrument is executed, child support payments aren’t deductible by the paying spouse (or taxable to the recipient).
- Personal residence. In general, if a married couple sells their home in connection with a divorce or legal separation, they should be able to avoid tax on up to $500,000 of gain (as long as they’ve owned and used the residence as their principal residence for two of the previous five years). If one spouse continues to live in the home and the other moves out (but they both remain owners of the home), they may still be able to avoid gain on the future sale of the home (up to $250,000 each), but special language may have to be included in the divorce decree or separation agreement to protect the exclusion for the spouse who moves out.
If the couple doesn’t meet the two-year ownership and use tests, any gain from the sale may qualify for a reduced exclusion due to unforeseen circumstances.
- Pension benefits. A spouse’s pension benefits are often part of a divorce property settlement. In these cases, the commonly preferred method to handle the benefits is to get a “qualified domestic relations order” (QDRO). This gives one spouse the right to share in the pension benefits of the other and taxes the spouse who receives the benefits. Without a QDRO the spouse who earned the benefits will still be taxed on them even though they’re paid out to the other spouse.
A range of other issues
These are just some of the issues you may have to deal with if you’re getting a divorce. In addition, you must decide how to file your tax return (single, married filing jointly, married filing separately or head of household). You may need to adjust your income tax withholding and you should notify the IRS of any new address or name change. There are also estate planning considerations. We can help you work through all of the financial issues involved in divorce.
The Web has opened plenty of new avenues for criminal behavior. For example, you may have heard of cybersquatting. Someone registers a site’s domain name that includes a trademark and then tries to profit by selling that name to the trademark owner.
But are you familiar with typosquatting? You should be — because these schemes can make just about any organization, along with visitors to its website, the victims of fraud.
Like cybersquatting, typosquatting (also known as URL hijacking) involves the purchase of domain names in bad faith. It takes advantage of an inclination among users known as “fat fingers” — basically, our tendency to hit the wrong keys and enter misspelled trademarks or brands. For example, in a case involving the retailer Lands’ End, a typosquatter registered domains such as landswnd.com and lnadsend.com. Other human errors — for example, typing the wrong URL extension (.com instead of .org) or omitting punctuation marks such as hyphens — can also work to typosquatters’ advantage.
Some fraudsters seek to divert consumers away from competitors or just draw traffic to their own sites (often pornography or dating sites). A recent report from security firm DomainTools LLC says that major media outlets, including USA Today, the New York Times and the Washington Post, are frequently targeted. DomainTools found hundreds of fraudulent domain names related to these publications.
Other typosquatters go further. For example, the websites they divert to might feature a phishing scheme, whereby a visitor is induced to enter login information or download malware. Such tactics can make big money for fraud perpetrators — particularly if they target the right sites. Earlier this year, an anonymous typosquatter announced that he had stolen 200 bitcoins (then worth an estimated $760,000) from Dark Web sites over the previous four years.
Typosquatting can also be used for corporate espionage. In one case, a law firm sued a programmer who had obtained a domain name similar to its own, except for a minor typo. The law firm alleged that the defendant had used his doppelgänger domain name to create fake email accounts and intercept email sent to the firm.
When it comes to avoiding typosquatting, awareness is probably the best defense. Your company should regularly check various mistyped versions of its URLs and consider purchasing as many similar domain names as possible. Contact us if you’re worried about fraud — both on- and off-line.
Fraud experts have long suggested that the presence of three conditions, known as the “fraud triangle,” greatly increases the likelihood that an employee will commit fraud. Over the years, this conceptual framework has been expanded to become a “fraud diamond.” Understanding these models can help you protect your business.
The classic fraud triangle consists of:
1. Pressure. An individual experiences some type of pressure that motivates the fraud. Pressure can come from within the organization — for example, pressure to meet aggressive earnings or revenue growth targets. Or, the pressure could be personal, such as the need to maintain a high standard of living or pay off debt from credit cards, medical bills or gambling.
2. Rationalization. Perpetrators must be able to mentally justify their fraudulent conduct. They might tell themselves that they’ll pay back the money before anyone misses it, or reason that:
- They’re underpaid and deserve the stolen funds,
- Their employers can afford the financial loss,
- “Everybody” does it, or
- No other solution or help is available for their problems.
Under the fraud triangle theory, most employees who commit fraud are first-time offenders who don’t view themselves as criminals but as honest people caught up by circumstances.
3. Opportunity. Occupational thieves exploit perceived opportunities that they believe will allow them to go undetected. Poor internal controls, weak management oversight and ineffective or nonexistent audits all create opportunities for fraud. The opportunity leg represents the best avenue for preventing fraud because it’s within your organization’s control.
More recently, experts have proposed a conceptual framework that includes a fourth leg, “capability.” A capable individual is someone who may have the job position, intellectual capacity, confidence, resilience to stress and guilt, and ability to coerce and cajole others that make committing fraud easier.
A similar model to this diamond shape is MICE (Money, Ideology, Coercion and Ego). MICE retains the original three sides of the fraud triangle but shares the opportunity leg with a second triangle that also has sides for criminal mindset and arrogance.
Proponents of this model argue that perpetrators with characteristics matching the original fraud triangle are “accidental fraudsters.” This means that they wouldn’t commit fraud in the absence of motivation. Those on the side of the additional criminal mindset/arrogance/opportunity triangle are predators, or pathological fraud perpetrators. These individuals require only opportunity. This is another reason why focusing on the opportunity side is the best way to prevent fraud in your organization.
Designed to help
It’s important to remember that employees who seem to display fraud triangle or diamond characteristics won’t necessarily commit a crime. The models are designed to identify risk and eliminate fraud opportunities. Contact us for more information about protecting your organization from fraud.
- © 2019
Many business owners ask: How can I avoid an IRS audit? The good news is that the odds against being audited are in your favor. In fiscal year 2018, the IRS audited approximately 0.6% of individuals. Businesses, large corporations and high-income individuals are more likely to be audited but, overall, audit rates are historically low.
There’s no 100% guarantee that you won’t be picked for an audit, because some tax returns are chosen randomly. However, completing your returns in a timely and accurate fashion with our firm certainly works in your favor. And it helps to know what might catch the attention of the IRS.
Audit red flags
A variety of tax-return entries may raise red flags with the IRS and may lead to an audit. Here are a few examples:
- Significant inconsistencies between previous years’ filings and your most current filing,
- Gross profit margin or expenses markedly different from those of other businesses in your industry, and
- Miscalculated or unusually high deductions.
Certain types of deductions may be questioned by the IRS because there are strict recordkeeping requirements for them ― for example, auto and travel expense deductions. In addition, an owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can catch the IRS’s eye, especially if the business is structured as a corporation.
How to respond
If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS won’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.
Many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the harshest version, the field audit, requires meeting with one or more IRS auditors. (Note: Ignore unsolicited email messages about an audit. The IRS doesn’t contact people in this manner. These are scams.)
Keep in mind that the tax agency won’t demand an immediate response to a mailed notice. You’ll be informed of the discrepancies in question and given time to prepare. You’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.
If the IRS chooses you for an audit, our firm can help you:
- Understand what the IRS is disputing (it’s not always crystal clear),
- Gather the specific documents and information needed, and
- •Respond to the auditor’s inquiries in the most expedient and effective manner.
Don’t panic if you’re contacted by the IRS. Many audits are routine. By taking a meticulous, proactive approach to how you track, document and file your company’s tax-related information, you’ll make an audit much less painful and even decrease the chances that one will happen in the first place.
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About Yuma, AZ
First incorporated as Arizona City in 1871, Yuma was renamed in 1873 and is now the largest city in Arizona outside the metro areas of Phoenix and Tucson.