Are You Talking to Clients About the New For W4?

As you know, this year we welcomed a new Form W-4 with the new tax law. While the IRS is not requiring employers to obtain new W-4s from employees, it’s definitely something employers need to be aware of. Your W-4 is what determines how much federal tax is withheld – which makes it a very important document. If not enough taxes are withheld, the taxpayer will owe. If too much tax is taken out, the taxpayer will get a refund but will have less take home money on their paychecks throughout the year.

Filling out the original W-4 was already a problem for taxpayers. This new form  adds to the confusion when it comes to withholding. As a tax professional and trusted advisor, it’s important to keep clients educated and informed so there are no surprises at tax time. Are you reaching out to your business clients? Are you coaching your individual clients? Here are some things to discuss with them.

2018 W4 Form

Goodbye Personal Exemptions

The new tax law eliminated personal exemptions – which means filling out Form W-4 is no longer putting 1 for you, 1 for spouse, and 1 for dependents and calling it a day. There’s a lot more to it!

How to Perform a Paycheck Checkup

Because of the drastic changes, it’s going to be important for taxpayers to review their withholding – especially for taxpayers who itemize deductions, own a home, are self-employed or are in any other situation that complicates their tax return.

Employers should educate employees on how to perform a paycheck checkup and encourage them to use the new withholding calculator.

Special situations include:

  • Filers with multiple jobs or working spouses need to read Two-Earners Multiple Jobs Worksheet
  • Non-Wage Income –Interest Dividends, K-1 may require estimated payments
  • Self-Employed person should read publication 505
  • Non-Resident Aliens see Notice 1392, Supplemental Form W-4 Instructions for Non-Resident Aliens

Child Tax Credit

The recent changes to the Child Tax Credit will affect most parents and guardians. For starters, the credit has been doubled from $1,000 to $2,000 per qualifying child. It’s important to note that this is a credit and not a tax deduction. That means taxpayers get the reduction directly off their tax bill rather than having the money deducted from their taxable income.

There’s also a $500 “family credit” for other dependents.

Other Credits/Converting credits

In addition to filling out the Child Tax Credit section, there’s a credit conversion worksheet to fill out for the following credits:

  • Lifetime Learning (MAGI must be less than $57,000; $114,000 if married filing jointly)
  • American Opportunity Tax Credit
  • Retirement Savings Contribution Credit (MAGI must be less than $31,500 ($63,000 if married filing jointly; $47,250 if head of household)
  • Adoption Credit (MAGI must be less than $247,140)
  • Earned Income Credit – eligible if:
    • Three or more children lived with you and you earned less than $49,194 ($54,884 if married filing jointly),
    • Two children lived with you and you earned less than $45,802 ($51,492 if married filing jointly),
    • One child lived with you and you earned less than $40,320 ($46,010 if married filing jointly), or
    • A child didn’t live with you and you earned less than $15,270 ($20,950 if married filing jointly).

Itemized Deductions

Some itemized deductions have been eliminated, such as Unreimbursed Employee Business Expenses. The biggest change to itemized deductions will be due to the fact that the standard deduction has been nearly doubled. Taxpayers should use the Deductions, Adjustments and Additional Income Worksheet of the new W4 to determine if itemized deductions will affect them.

Nonwage Income

There are also several types of “nonwage income” that should be reviewed. Nonwage income includes:

  • Interest
  • Dividends
  • K-1
  • Self-Employment
  • Gambling Winnings
  • Capital Gains-Stocks, Property Sales
  • Retirement Distributions -including IRA’s

When to Change Withholding Allowances

It’s always a good idea to remind clients of the instances where withholding allowances should be changed.

  • Lifestyle changes (marriage, children, divorce etc.)
  • Wage or income changes
  • A change in the amount of taxable income not subject to withholding
  • A change in adjustments to income (capital gains, self-employment income, etc.)
  • A change in the amount of itemized deductions (medical expenses, taxes, gifts to charity, etc)

This year (and beyond), communicating with clients about the changes to the law and how they will affect their specific tax situation will be crucial. Encourage clients to make tax planning appointments with you to ensure they make the right moves.

Want to know more details about the new W-4 Form? Stay tuned! We’ll be hosting a webinar that reviews the form line by line in the next few weeks.




Federal Reserve’s interest rate hike affects home loans, credit card balances and tax bills


The only folks cheering the Federal Reserve’s expected decision to hike its benchmark federal funds rate by a quarter-percentage point — to a range between 1.75 percent and 2 percent — are those with savings that earn interest.

But relatively speaking, there aren’t that many of us. Plus, we all know that banks and other financial institutions are going to be slow to increase the interest they pay us for holding our money and when they do, the hikes will be small.

Meanwhile, if you are trying to get a mortgage, don’t panic but move that process along as quickly as you can. Interest rates on home loans — new ones, as well as home equity loans and adjustable rate mortgages already in place — will rise.

If you carry a credit card or other revolving account balance, consider paying as much as you can as quickly as you can. Even if you don’t buy another thing with that plastic (fat chance!), your credit card bill will be going up because of the increased interest rates.

One estimate is that consumers will face an additional $2.2 billion in interest payments annually on their credit card debt thanks to the rate hikes.

Tax bills affected, too: The coming higher interest rates also could affect your taxes.

I’m not just talking about the tax bills you pay on the more expensive to use credit cards. I’m talking about taxes that, for whatever reason, you don’t pay at all or on time.

We’re all well aware that Uncle Sam collects more money from us in penalties and interest when we mess up our tax filings or payments. While in some cases the Internal Revenue Service can waive or lessen penalties, that’s not necessarily the case with interest.

Interest cannot be abated for reasonable cause. Interest charged on a penalty will be reduced or removed only when the associated penalty is reduced or removed. If an unpaid balance remains on your account, interest will continue to accrue until the account is full paid.

And the rate that the IRS charges for our tax transgressions is based on the federal short-term rate. It takes that rate and adds 3 percent.

When the federal funds mark hovered barely above zero in recent quarters (and years, notably from 2012 through 2015), that meant that the IRS interest rate the IRS interest rate settled in at 3 percent.

It edged up a percent point in the second quarter of 2016. Then earlier this year, it was bumped, for most tax situations, to 5 percent.

On June 8, the IRS announced that 5 percent rate will remain in place for the calendar quarter beginning July 1. Specifically, those rates are:

  • 5 percent for over payments, 4 percent in the case of a corporation;
  • 2.5 percent for the portion of a corporate over payment exceeding $10,000;
  • 5 percent for underpayments; and
  • 7 percent for large corporate underpayments. 

These most recent interest rates were calculated from the federal short-term rate determined during April 2018. You can read the details on that math in IRS Revenue Ruling 2018-18, which will become official when it is published in Internal Revenue Bulletin 2018-26, dated June 25, 2018.

When you owe penalties: These latest rates and any higher ones that are likely since the Fed has made it clear it thinks it needs to raise rates to stave off inflation mean bigger tax bills if you owe.

The interest is part of it, but there also are those pesky penalties.

Tax penalties typically are assessed when you fail to pay your taxes at all or are late in paying the U.S. Treasury. You also get whacked when you owe taxes and don’t file a return.

Here’s what the IRS says about when the most common penalties apply:

  • Failure to file: When you don’t file your tax return by the April return due date or the extended due date if you properly sought that additional time (until Oct. 15) to submit your return.
  • Failure to pay: When you don’t pay the taxes reported on your return in full by the April due date. An extension to file your tax return forms doesn’t extend the time to pay.
  • Failure to pay proper estimated tax: When you don’t pay enough taxes due for the year with your quarterly estimated tax payments, which are due the 15th of April, June, September and January of the following year.

How much you’ll owe in penalties: OK, you know you’re going to get whacked by the IRS for not paying or filing on time. Just how big will the ding be?

The failure to file penalty is 5 percent of unpaid tax required to be reported. If you face both failure to file and failure to pay penalties, the filing penalty is reduced by the nonpayment penalty amount for any month where both penalties apply. In addition, the failure to file penalty:

  • Is charged each month or part of a month the return is late, up to five months.
  • Applies for a full month, even if the return is filed less than 30 days late.
  • Is assessed on income tax returns that are filed more than 60 days after the return due date, including extensions. The minimum penalty is the lesser of 100 percent of the tax due or specific dollar amount that is adjusted annually for inflation. For returns due after January 2018, that’s $210.

The failure to pay penalty is 0.5 percent of tax not paid by the April tax filing due date. It is a recurring charge on the remaining unpaid tax each month or part of a month following the due date, until the tax is fully paid or until 25 percent is reached. The full monthly charge applies, even if the tax is paid before the month ends.

The failure to pay tax penalty is assessed again unpaid tax on your original return that is not paid in full within 21 days of the date you receive notice and demand from the IRS. That payment period is cut to 10 business days if the amount the IRS says you owe is $100,000 or more. In these cases, the penalty is 0.5 percent of the unpaid tax. As in other penalty situations, this is a recurring charge on the remaining unpaid tax each month or part of a month following the due date, until the tax is fully paid and applies for the full month even if the tax is paid before the month ends.

The failure to pay proper estimated tax penalty is calculated by the IRS separately for each of the four required installment periods. The number of days late is first determined and then multiplied by the effective interest rate for the installment period.

When you take these penalty amounts and then added interest, the costs to delinquent taxpayers could be substantial.

And that amount will only grow as the Fed, as it has indicated, increases rates over the near term.

So if you owe, pay as much as you can as soon as you can. Any amount you remit to the IRS will reduce your penalty and interest charges, which are only going to increase.

You also might find these items of interest:




June 15 tax deadlines loom


June’s a busy month for me. Lots of family birthdays. Father’s Day. Graduations. Taxes.

Yep. Taxes. In June. Specifically, June 15.

The midpoint of the first month of summer is a major tax deadline.

Estimated taxes: The biggie for a lot of taxpayers (including me) is the second installment of 2018’s estimated taxes. June 15.

You have several ways to make this payment — six, actually, according to the current Weekly Tax Tip. I’ll let you check out the details in that other post at your leisure, but here are some of the more popular options:

  1. Credit or debit card payments by phone or online,
  2. Direct Pay via direct online transfer from a checking or savings,
  3. Cash at a local participating convenience store,
  4. Electronic Federal Tax Payment System, or EFTPS, if you’re already signed up for this program,
  5. IRS2Go mobile app, or
  6. Check or money order that’s snail mailed with a postmark by at least June 15.

Time’s up for taxpayers abroad: If you’re a U.S. taxpayer who’s living or working out of the country, Uncle Sam hopes you’re enjoying your international experience. However, he still wants you to complete your Form 1040 filing task by June 15.

Taxpayers qualify for the June 15 filing deadline if both their tax home and abode are outside the United States and Puerto Rico. This also applies to folks serving in the military and who are posted outside the U.S. and its nearby island territory.

Note, however, if you owe any tax that wasn’t paid by the April deadline (the 18th this year), that balance has been accruing interest charges. But at least your location abroad forestalls the late filing penalty.

More on these situations is available in the When To File and Pay section of Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

June tax tasks for businesses, too: The middle of June also is important for business filers.

The IRS reminds affected companies that they must deposit payroll taxes for May if the monthly deposit rule applies.

If instead your company follows the IRS’ semiweekly deposit rule, payroll tax for payments on June 9 through 12 are due by the end of this week.

And corporate estimate tax installment #2, paid using Form 1120-W, also is due by June 15.

If any of these individual or corporate tax situations apply to you, get busy ASAP. June 15 is almost here!

You also might find these items of interest:




NHL, NBA champions parade in advance of NJ sports bets

Capitals sweater and mini Stanley Cup and Zambonis_IMG_1120

Our home’s celebration of the 2018 Stanley Cup Champion Washington Capitals.

It’s champions day at our house!

I spent the morning watching the Washington Capitals, the new National Hockey League champions, parade down Constitution Avenue showing the Stanley Cup to their long-suffering fans.

Then I switched over to watch the Golden State Warriors, the National Basketball Association’s back-to-back champs, celebrate with their fans along the downtown Oakland parade route.

It’s fitting that the latest major league champs on both U.S. coasts had their parades today. Their festivities come on the heels of expanded sports betting across the country.

N.J. sports betting finally is on: On Monday, June 11, Democratic Gov. Phil Murphy’s signature made sports betting in New Jersey legal.

You can place your bets within the state’s borders on your favorite teams as soon as this Thursday.

New Jersey’s effort to broaden the appeal of — and revenue collected from — the state’s casinos and other betting establishments started under the Murphy’s predecessor, Republican Gov. Chris Christie.

Christie led New Jersey’s challenge, which began in 2014 and ultimately was supported by almost two dozen other states, to the federal Professional and Amateur Sports Protection Act (PAPSA).

The states finally won the legal right to accept sports wagers when the U.S. Supreme Court ruled 7-2 last month that PAPSA had effectively limited sports betting to Nevada for more than a quarter century was unconstitutional.

Now that the required state legislative actions have been completed, Monmouth Park racetrack in Oceanport, New Jersey, says at 10:30 a.m. June 15 it will become the first place in the Garden State to accept bets on professional and college sports games.

In another good-for-gamblers calendar coincidence, the World Cup also begins on Thursday, June 15.

Learning betting and tax rules: If you’re new to wagering, has prepared a lesson on placing bets in New Jersey.

And that’s my cue to remind the folks who might be new to winning wagers that they’ll have to pay tax on those bets that pay off.

Long-time blog readers know I tend to post about this tax-paying responsibility whenever there’s a major sports event because, although most major league and college officials hate it (the NBA’s Adam Silver is the exception), sports bets are incredibly popular.

My most recent gambling tax tutorial came after the National Football League’s Philadelphia Eagles pulled off its Super Bowl LII upset, dethroning the New England Patriots.

While paying tax on gambling proceeds — and this includes not just winning wagers on sporting events, but also lucky lottery tickets and other prize proceeds — is not good news for gamblers, they at least still have a way to reduce their taxable winnings and thereby lower their potential tax bill.

The Tax Cuts and Jobs Act eliminated many tax breaks, but it left in place the itemized deduction section where gamblers can report their gambling losses. Even under the new tax law, these bad bets can be used to offset winnings.

Note, though, that the gambling losses law stays the same. You can only zero out any winnings. You cannot use losing bets to create a loss to reduce other income.

And you still need to keep very good records in case the Internal Revenue Service has any questions about your gambling luck or lack thereof.

Our Capitals hockey puck display_IMG_1123

More of our Capitals and other hockey paraphernalia.

You also might find these items of interest:




Summer home rentals net some owners tax-free income

Florida beach rental via
School’s out. Summer is here, at least unofficially judging by the temperatures.

And thousands of Americans are planning vacations.

There also are a sizable number of homeowners hoping to make some extra bucks off all those seasonal travelers.

Home rental popularity: Alternative accommodation, as the segment is known in the industry, appeals to those looking to immerse themselves in a new place culturally.

Other opt for such lodging for the privacy (no paper-thin hotel walls), convenience (cooking meals instead of always eating out; use of the owner’s Wi-Fi or streaming services) or amenities (a private pool) of a personal home or apartment.

And, in some cases, vacation home rentals are more cost effective.

They also can be a great source of tax-free income, in certain cases, for the folks leasing their homes.

Short term, no tax: When you rent your primary home or vacation residence short-term, you don’t have to report that rental money as income. The time limit is renting the place for 14 or fewer days in a year.

Such short-term rentals are most common when there’s a special event — presidential inauguration, big sporting event (Super Bowl, college basketball tournament) or music festival — in an area.

Locals want to escape the crazy and crowds, so they make money off the tourists eager for lodging during a time when traditional accommodations are scarce.

Three rental and tax situations: Other homeowners, however, opt for more rental days and use the Internal Revenue Code to minimize the taxes due on such accommodation offerings.

Basically, there are three second-home tax situations:

  1. You rent the property to others most of the year.
  2. You rent the property to others for a very short time.
  3. You use the property yourself and rent it when you’re not there.

Each rental circumstance has tax implications. Option number 2, as noted earlier, offers the best tax result. Added income, no tax bill.

The other options, while they do produce taxable rental income, also can be profitable. However, they take some work and record keeping.

Defining a rental property: First off, lets clear up what can count as a vacation rental. It could be a true vacation home, but it doesn’t have to be.

The IRS says your vacation home also may be an apartment, condominium, mobile home, RV or boat.

As with the home definition for the more traditional deductions (mortgage interest, real estate taxes), as long as it has sleeping, cooking and toilet facilities, it’s a home.

Second home, full-time rental: If you do have a cabin on the lake or a chalet on the ski slopes or a beach house, but you don’t use it any more, you can sell it and pocket the profit. That, of course, will mean you’ll pay capital gains on the sale profit.

Or you can rent it out as much as possible.

Vacation home owners who have a mortgage on the property often find that rental income covers most of those bank payments. If the retreat is paid off, that’s even better. It means more money for you.

In either case, though, you’ll owe tax on the income since the place will be leased by lodgers for more than two weeks during the year. As in other tax situations, you can help reduce the amount of taxable income by deducting common rental expenses.

The IRS says these include advertising, cleaning and maintenance, commissions for brokers, depreciation, insurance, legal and other professional fees, repairs, utilities and even the property taxes on the vacation home.

Your and others’ stays: If you still use your vacation home (or primary residence) but also rent it out for more than the no-tax two-week period, taxes get a bit trickier.

This is where meticulous record keeping come into play.

As with full-time rentals, you can reduce taxes on any rent you collect by deducting eligible expenses. But since you were there part of the time, you’ll have to allocate those costs for the shared personal and rental use.

Say, for example, you spent 60 days last year during ski season at your mountain cabin and rented the property for another 180 days. You can deduct three-quarters of your vacation home’s eligible rental expenses against rent you collect since the 180 rental days divided by 240 total days of property use comes to 75 percent.

Note, however, that the most this will get you is zeroing out your rental income.

When the rented property also is used as your personal home, the rental expense deduction is limited to the amount of rent received. You can’t claim rental losses in these hybrid home occupancy/rental situations.

Home, vacation rental tax help: Yes, renting your home or vacation property can get complicated.

You’ll have a new form, Schedule E, to report your rental income and expenses. Rental income also may be subject to the 3.8 percent Net Investment Income Tax (NIIT).

Tax software can help.

The IRS also has online information you can peruse:

I suggest, however, that you get help from a tax professional who’s experienced in the nuances of real estate taxation.

Not only will he or she help you pay the least amount of tax on your primary or second home rentals, remember those legal and other professional fees that can be deducted.

You also might find these items of interest:




Auto tariffs could cost low-income earners tax cut money

Cars lot imports

Donald J. Trump arrived in Quebec for the G-7 meeting with some controversial ideas (notably, letting Russia back in the club) and he left the international meeting the same way.

Tweeting from Air Force One as he headed to Singapore to meet with North Korea’s Kim Jung Un, Trump gave notice he’s ready to escalate trade disagreements with Canada by imposing automobile tariffs.

The initial reaction has been what such a move could actually mean to the U.S. automotive industry.

Tax cut tariff costs: But auto tariffs also could undermine any gains from the TCJA, according to a Washington, D.C.-based tax policy think tank.

And the taxpayers who would feel the negative effects most are low-income households.

“We estimate that increasing tariffs on automobile imports would reduce the gain in after-tax income for households in 2018 derived from the Tax Cuts and Jobs Act while making the tax code less progressive,” says Erica York, an analyst with the Tax Foundation.

York notes in her article posted at the tax policy nonprofit’s website that economists generally agree that free trade increases the level of economic output and income, and conversely, that trade barriers like tariffs reduce economic output and income.

The full effect of any tariffs would be long-term, but if ultimately imposed, York says “these automobile tariffs would fall more on middle- and lower-income taxpayers, reducing the increase in income these households would see because of the Tax Cuts and Jobs Act, and making the distribution of the tax burden less progressive.”

How much so is shown in the Tax Foundation table below:

Auto tariff projected impact on TCJA gains

Bigger tax break, less tariff effect: Overall, the Tax Foundation projects that new tariffs on automobiles reduce after-tax income gains for all taxpayers by 0.47 percent or a 16 percent change.

Those in the bottom 80 percent of earnings, however, would see their after-tax income gains from the new tax law cut by 0.49 percent or a negative impact of 49 percent on their tax change earnings.

That’s almost half of the 1 percent income gain those households are expected to get from the TCJA.

And that’s why the 0.49 percent potential TCJA tariff bite is this week’s By the Numbers figure.

It could be that Trump’s tariff talk is primarily bluff and bluster, as he doubled-down while en route to the meeting with Kim. As his advisors noted, he wants to appear as strong as possible for those discussions.

But trade matters have been a major political plank for Trump from the get-go of his political career. So, as Trump is fond of saying, we’ll see.

You also might find these items of interest:




Calculating your new tax law bill

Calculators used to play Despacito_YouTube screenshot

The Republican’s new tax law is expected to be the focus of the coming midterm elections.

GOP candidates are telling taxpayers that they — or most of them, anyway — will owe the U.S. Treasury less in 2018 thanks to the Tax Cuts and Jobs Act (TCJA).

Democrats running for office, however, argue that any individual tax cuts under the new law are relatively small and, unless their colleagues across the aisle can change things in the next few months, are temporary. That ending date is Dec. 31, 2025.

So who’s telling the truth? It depends — wait for it — on your individual income, family and tax circumstances.

This week’s Saturday Shout Out goes to four calculators that should help you judge the political rhetoric that will be heating up as Nov. 6 nears.

They are:

Personally, I like the Tax Foundation’s and Tax Policy Center’s online tax calculation tools.

They offer more variables, such as investment earnings, lower-taxed capital gains and of self-employment earnings instead of just W-2 wages.

The costs of ending exemptions, deductions: Both these calculators, however, have bad news for me. My tax bill actually goes up a bit under the new law. The main reason is the loss of full property tax and Texas sale tax (no income tax here in the Lone Star State) claims on Schedule A.

And making things worse, the hubby and I, like all taxpayers, lose our personal exemptions on our 2018 return.

True, the personal exemption, at least for the single or married joint filers, essentially is rolled into the TCJA’s new increased standard deduction amounts.

But itemizers used to be able to use their larger Schedule A claims plus the personal exemption amount, too. That was extra amounts for the taxpayer, his or her spouse and their dependents (usually children) they claimed.

For the hubby and me, the end of exemptions means a loss of more than $8,000 that we used to be able to subtract from our adjusted gross income. That was a big help in getting our AGI to a lower taxable income amount.

Itemized vs. standard deductions: The calculators’ one bit of good news is, thanks to some increased medical deductions for 2018, itemizing is still the better route for the hubby and me this tax year.

Our projected tax bill on our 2018 income still will be bigger under the new tax law than it would have been if the old law had been left in place.

But the calculators tell us that our projected TCJA bill when we file our return next year, will be smaller if we again itemize, even without all the old deductions and exemptions

We’ll see if that remains the case when the medical expense threshold goes from 7.5 percent this tax year to 10 percent in 2019 through 2025.

And yes, I keep referring to tax year 2025 because that’s the last one, as noted in this post’s earlier citing of Democrats’ anti-TCJA arguments, that the new law’s individual tax provisions are in effect.

Give the calculators a try and see what they say about your taxes under TCJA. The result could prompt you to contact your lawmakers, or at least think a bit harder about which candidates you’ll vote for in a few months.

You also might find these items of interest: