Individual Income Tax

Planning to Pay Individual Estimated Tax

Some individuals have to pay estimated taxes or face a penalty in the form of interest on the amount underpaid. Self-employed persons, retirees and nonworking individuals most often must pay estimated tax to avoid the penalty. This is an issue that is not confined to just higher-income individuals. Any employee may need to pay them if the amount of tax withheld from wages is not sufficient to cover the tax on other income. The potential tax owed on investment income also may increase the need for paying estimated tax, even among wage earners. While the idea may sound daunting, paying quarterly taxes can be a good thing.

The trick with estimated taxes is to pay a sufficient amount of estimated tax to avoid a penalty but not to overpay. That’s because while the IRS will refund the overpayment when you file your return, it won’t pay you interest on it. Individual estimated tax payments are generally made in four installments. For the typical individual who uses a calendar tax year, payments generally are due on April 15, June 15, and September 15 of the tax year, and January 15 of the following year (or the following business day when it falls on a weekend or other holiday).

Generally, you must pay estimated taxes in 2018 if (1) you expect to owe at least $1,000 in tax after subtracting tax withholding (if you have any) and (2) you expect that your withholding and credits to be less than the smaller of 90 percent of your 2018 taxes or 100 percent of the tax on your 2017 return. There are special rules for higher income individuals.

Usually, there is no penalty if your estimated tax payments plus other tax payments, such as wage withholding, equal either 100 percent of your prior year’s tax liability or 90 percent of your current year’s tax liability. However, if your adjusted gross income for your prior year exceeded $150,000, you must pay either 110 percent of the prior year tax or 90 percent of the current year tax to avoid the estimated tax penalty. For married filing separately, the higher payments apply at $75,000.

Estimated tax is not limited to income tax. In figuring your installments, you must also take into account other taxes such as the alternative minimum tax, penalties for early withdrawals from an IRA or other retirement plan, and self-employment tax, which is the equivalent of social security taxes for the self-employed.

Suppose you owe only a relatively small amount of tax? There is no penalty if the tax underpayment for the year is less than $1,000. However, once an underpayment exceeds $1,000, the penalty applies to the full amount of the underpayment.

What if you realize you have miscalculated before the year ends? An employee may be able to avoid the penalty by getting the employer to increase withholding in an amount needed to cover the shortfall. The IRS will treat the withheld tax as being paid proportionately over the course of the year, even though a greater amount was withheld at year-end. The proportionate treatment could prevent penalties on installments paid earlier in the year.

What else can you do? If you receive income unevenly over the course of the year, you may benefit from using the annualized income installment method of paying estimated tax. You should also contact your tax professional who will be up-to-date with the latest rules on this topic and help to make sure you stay in the clear.

deductibles checklist

Checklist of Commonly Missed Business Deductions

Many business taxpayers fail to deduct otherwise eligible business expenses or fail to fully deduct qualifying business expenses. As a result, millions of dollars are overpaid to the Internal Revenue Service every year.

While tax reporting season still seems far off, it’s a good idea to start identify and gathering receipts now in preparation for April. This can be a pain-free way to make sure you get the most money back on your taxes.

Some business owners swear by apps like Evernote Scannable or Expensify which keep track of your receipts. Using the camera on your mobile device you take a picture of the receipt, and you can save it to the Cloud or application that works the best for you.

Below is a listing of commonly missed deductions or deductions that you may not be fully utilizing. You may wish to carefully examine your records to determine if you may be missing any of these deductions. Remember though, according to the Business Expenses document put out by the IRS (Publication 535), your business expenses must be ordinary and necessary in order to be deducted from your taxes.

  • Home Office Deduction: If you use part of your home as a home office, you may be entitled to deduct expenses related to the home office based on the percentage of square footage the home office occupies. Related expenses include mortgage interest, property taxes, utilities, and repairs, etc.
  • General Business Expenses: If you use your personal funds for business expenses such as office supplies, these are qualifying business expenses, which you may deduct. Some travel expenses are also deductible, if you meet the burden of proof.
  • Imputed Interest on Shareholder Loans: If you have loaned money to your business, you are required to charge interest on the loan or interest will be imputed to you. While you are required to report the interest as income on your personal return, your business is permitted a deduction for the interest paid. If any of the interest amount is improperly characterized as wage income to you, your business may be overstating its employment tax liability. By recharacterizing these amounts as interest expense, your business may be able to reduce its employment taxes and possibly obtain a refund.
  • Meal Expenses: Business meal expenses that you pay with your personal funds  may qualify as a business deduction, subject to limitations.
  • Personal Assets Converted to Business Use: If you have contributed personal assets, such as a computer, the fair market value of these assets qualify as a business deduction, subject to depreciation limitations, beginning with the date of conversion.
  • Self-Employed Health Insurance: As a self-employed taxpayer, you may deduct 100 percent of health insurance premiums for you, your spouse and your children. The deduction may also include eligible long-term care premiums for a long-term care insurance contract.
  • Communications Expenses: Expenses related to the business use of your personal telephones, cellular phones, and internet connections may be deducted.
  • Automobile Expenses: Mileage and other related automobile expenses may be deducted when your personal vehicle is used for business purposes.

If after examining your records you feel that you have missed some qualifying business deductions or if you have any questions about your business deductions or whether certain expenses qualify as business deductions, please be sure to work with your tax professional, they’ll be able to guide you in the right direction.

Valuing Your Employee’s Personal Use of Business Auto

Whether your company supplies business autos to employees primarily as “perks” or as necessary tools to help them get their work done, their personal use of the auto has tax implications for them and for you. That’s because an employee’s personal use of a company auto generally must be treated as non-cash taxable fringe benefit that is also subject to social security taxes. Fortunately, the tax rules give you some flexibility in valuing personal usage of the company car.

Just as there is many leading car brands to chose from, based on your business situation, you can choose from among four valuation methods:

  1. The general fair market value method, which is based on what a person would pay locally to lease a comparable auto for a period of time comparable to the period of time the employee has use of the car;

  2. The lease value method, which assigns an IRS-determined annual lease value to the auto depending on its value when first provided for the employee’s personal use;

  3. The mileage rate method, which values each personal-use mile at a standard business mileage rate designated by the IRS for the year (54.5 cents per mile for 2018); or

  4. The $1.50 per one-way commuting method.

You cannot use the mileage rate method for an automobile (any four-wheeled vehicle, such as a car, pickup truck, or van) if its value when you first make it available to any employee for personal use is more than an amount determined by the IRS as the maximum automobile value for the year. For example, you cannot use the cents-per-mile rule for an automobile that you first made available to an employee in 2017 if its value at that time exceeded $27,300 for a passenger automobile or $31,000 for a truck or van.

You can only use the commuting method if all the following requirements are met.

  • You provide the vehicle to an employee for use in your trade or business and, for bona fide non-compensatory business reasons, you require the employee to commute in the vehicle. You will be treated as if you had met this requirement if the vehicle is generally used each workday to carry at least three employees to and from work in an employer sponsored commuting pool.

  • You establish a written policy under which you do not allow the employee to use the vehicle for personal purposes other than for commuting or de minimis personal use (such as a stop for a personal errand on the way between a business delivery and the employee’s home). Personal use of a vehicle is all use that is not for your trade or business.

  • The employee does not use the vehicle for personal purposes other than commuting and de minimis personal use.

  • If this vehicle is an automobile (any four-wheeled vehicle, such as a car, pickup truck, or van), the employee who uses it for commuting is not a director or highly compensated employee.

The best method for your situation will depend on factors such as the number of annual personal miles driven, value of the car, and the ratio of personal miles to total miles. Sorting through the maze of these rules is not easy. To ensure you find your way through be sure to contact a tax professional who will guide you and also show you how to minimize associated paperwork.

Travel Expense Deductions: Your Burden of Proof

A first step in avoiding costly hassles with the IRS is identifying potential red flags before filing your business tax return. For example, a common source of audit conflict between the IRS and small businesses is the documentation of travel expenses. The IRS often has the edge in these disputes because the tax law spells out detailed rules about how these expenses must be verified and documented. Most companies sincerely attempt to comply and stay out of trouble with the IRS, but often fall short anyway.

Fortunately, that is one problem for which some relief is available due to a provision in the tax law that waives otherwise rigorous substantiation rules when a particular expense is below a certain minimum dollar level. Put simply, employees don’t technically need receipts for non-lodging expenses of under $75 that are reimbursed by their employers. Although this is a big break, it doesn’t mean that all record keeping can be ignored. Receipts are still needed for all lodging expenses (even if the cost is under $75), unless the company pays traveling employees only the IRS-approved per-diem rate. Those incurring the expense still have to record the time, place, business reason, and amount of each travel expenditure (unless a per-diem is used, in which case amounts don’t have to be recorded at all). Businesses should note that an expense for more than $75 unaccompanied by a receipt does not receive a minimum $74.99 deduction by default; an IRS examiner will treat the expense as $0.00 instead.

With this in mind, you may want to consider reviewing your travel expense record keeping and substantiation procedures as you adjust your record keeping practices. Setting up separate procedures for your own internal tracking of expenses probably makes sense, too. For example, you may want to require employees to show you receipts for non-lodging expenses costing less than $75 before approving them, even though businesses are not required to keep them.

Don’t let managing your travel expenses become a horror story for your business. Work with your accounting professional to establish a bookkeeping system that will keep you safe and ensure that you’re appropriately all of your and your employees expenses.

Property Acquired by Gift or Through an Estate

Receiving a gift or a bequest or other inheritance can be unexpected. These types of events, do, however, carry a unique set of federal income, gift, and estate tax rules that must be observed and apply to everyone, not just high-income individuals. Knowing the ruleswill help you prepare for any tax consequences that may ensue upon the ultimate sale or other disposition of the property

The IRS says the recipient of a gift or a bequest pays no gift or estate tax. Those taxes, if they are due, are payable by the donor (the person making the gift) or the estate in the case of a decedent. Generally, no gift tax is due for gifts to any one person that do not exceed $15,000 for 2018 ($30,000 if the gift is given jointly by a husband and wife). Gift tax payable over those amounts can also be avoided by the donor using the unified estate and gift tax lifetime exclusion which the IRS set at $11.2 million for 2018.

Gifts to noncitizen spouses and foreign gifts. The first $152,000 of gifts in 2018 to a spouse who is not a U.S. citizen is not included in taxable gifts. A U.S. person receiving aggregate foreign gifts in excess of $16,076 in 2018 must file an information return.

Basis. The basis of property received by gift or bequest is used by the recipient to determine whether there is gain or loss on a subsequent sale or other disposition of the property. These rules can be complex.

Gifts. If a property has been acquired by gift, the basis to the donee (the recipient) for income tax purposes is the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift (carryover basis). However, the basis for loss is the lower of the carryover basis or the fair market value of the property at the time of the gift. In some cases, there is neither gain nor loss on the sale of property received by gift because the selling price is less than the basis for gain and more than the basis for loss.

In the case of a gift on which gift tax is paid, the basis of the property is increased by the amount of gift tax attributable to the net appreciation in value of the gift. The net appreciation for this purpose is the amount by which the fair market value of the gift exceeds the donor’s adjusted basis immediately before the gift.

Bequests or through intestacy. Property received from a decedent under a will or by operation of law generally enjoys a “stepped-up” basis set at the property’s fair market value at the date of death (or several months after that at the election of the executor). Most recipients of property from an estate find the stepped-up basis advantageous since it lowers the potential amount of capital gain tax due upon the sale of the asset. Depending upon the age of the donor, the advantage of stepped-up basis, therefore, can figure significantly into planning whether to give gifts during a lifetime or wait to pass property through your estate.

Remember, gift giving in the modern world can be tricky for both the giver and the receiver. When you’re faced with these types of situations, it may be best to contact your tax professional.

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