Category: News and Updates

This year’s federal tax act is called the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, Public Law No. 116-94.  Its focus was on qualified retirement plans of various kinds, and many of the changes made are very technical. 

Here are some of the changes that may affect the most people:

• Participants in 401(k) and other defined contribution plans, including traditional IRAs, had to take distributions from their plans at age 70-1/2 under the old law (“required minimum distribution”).  Under the new law, participants can leave money in the plan until age 72.  (Assuming they don’t need the money.)
• Participants in traditional IRAs can continue contributing money to their plans past age 70-1/2.  The old law didn’t allow further contributions after that age.
• Parents now can withdraw up to $5,000 from their individual 401(k) or similar qualified plan for childbirth or adoption expenses, and avoid paying the 10% penalty that normally is assessed for an early distribution.
• For graduate students, stipends and non-tuition fellowship payments can now be counted as compensation and be used as the basis for IRA contributions.
• Long-term part-time employees now must be given a chance to participate in a 401(k) plan that the employer offers.  To be eligible, an employee needs to put in either 1,000 hours in 1 year (as it was under old law) or 500 hours in 3 consecutive years of service.

For further details, there are several websites offering detailed explanations.  Here is one from the National Association of Plan Advisors.

There are only a few days left to go before the year ends, but here are some actions you may take before the end of the year to improve your 2019 tax position.  (Courtesy of Thomson Reuters/Tax & Accounting, with some editorial comments by me.) 

Increase 2019 itemized deductions via a “bunching strategy.”  Many taxpayers who claimed itemized deductions in prior years will no longer be able to do so. That’s because the standard deduction has been increased and many itemized deductions have been cut back or abolished. Paying some otherwise-deductible-in-2020 itemized deductions in 2019 can decrease taxable income in 2019 and will not increase 2020 taxable income if 2020 itemized deductions would otherwise have still been less than the 2020 standard deduction. For example, a taxpayer who expects to itemize deductions in 2019 but not 2020, and usually contributes a total of $1,500 to charities each year, should consider making a total of $3,000 of charitable contributions before the end of 2019 (and skipping charitable contributions in 2020). 

(Editor’s Note:  Compared with the Federal standard deduction of $12,200 for single and $24,400 for joint filers, the Hawaii standard deduction is much lower — $2,200 for single or $4,400 for joint, for example — so most folks should itemize for Hawaii income tax anyway.)

Have an extra amount of withholding in order to solve an underpayment of estimated tax problem. Employees may discover that their prepayments of tax for 2019 have been too small because, for example, their estimate of income or deductions was off and they are underwithheld, or they failed to make estimated tax payments for unanticipated income, such as gains from sales of stock. Or they may be facing a penalty for underpayment of estimated tax because of the additional 0.9% Medicare tax and/or the 3.8% surtax on unearned income. To ward off or reduce an estimated tax underpayment penalty, employees can ask their employers to increase withholding for their last paycheck or paychecks to make up or reduce the deficiency. Employees can file a new Form W-4 or simply request that the employer withhold a flat amount of additional income tax. Increasing the final estimated tax payment for 2019 (due on Jan. 15, 2020) can cut or eliminate the penalty for a final-quarter underpayment only. It doesn’t help with underpayments for preceding quarters. By contrast, tax withheld on wages can wipe out or reduce underpayments for previous quarters because, as a general rule, an equal part of the total withholding during the year is treated as having been paid on each quarterly estimated payment date.

Take a retirement plan distribution in order to solve an underpayment of estimated tax problem. An individual can take an eligible rollover distribution from a qualified retirement plan before the end of 2019 if he or she is facing a penalty for underpayment of estimated tax and the extra withholding option described above is unavailable or won’t sufficiently address the problem. Unless the taxpayer chooses no withholding, the withholding rate for a nonperiodic distribution (a payment other than a periodic payment) that is not an eligible rollover distribution is 10% of the distribution. The taxpayer can also ask the payer to withhold an additional amount using Form W-4P. The taxpayer can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2019, but the withheld tax will be applied pro rata over the full 2019 tax year to reduce previous underpayments of estimated tax. 

Be sure to take required minimum distributions (RMDs). Taxpayers who have reached age 70-½ by Dec. 31, 2019 should be sure to take their 2019 RMD from their IRAs or 401(k) plans (or other employer-sponsored retired plans). Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Those who turned age 70-½ in 2019 can delay the first required distribution to 2020. However, taxpayers who take the deferral route will have to take a double distribution in 2020-the amount required for 2019 plus the amount required for 2019. This strategy could make sense if the taxpayer will be subject to a lower tax rate next year. 

Caution.  Section 114 of the SECURE Act (P.L. 116-94), that was signed into law on December 20, changes the required beginning date for minimum distributions from a rule based on the calendar year in which the taxpayer attains age 70 1/2 to a rule based on the calendar year in which the taxpayer attains age 72. However, this law change is effective for distributions required to be made after Dec. 31, 2019, with respect to individuals who attain age 70-1/2 after that date. Thus, the change will not affect year-end 2019 planning.

(Editor’s Note:  We’ll be following up with further posts describing the changes made by the SECURE Act.)

Establish a Keogh plan.  A self-employed person who wants to contribute to a Keogh plan for 2019 must establish that plan before the end of 2019. If that is done, deductible contributions for 2019 can be made as late as the taxpayer’s extended tax return due date for 2019.

Use IRAs to make charitable gifts. Taxpayers who have reached age 70-½ by the end of 2019, own IRAs, and are thinking of making a charitable gift should consider arranging for the gift to be made by way of a qualified charitable contribution, or QCD-a direct transfer from the IRA trustee to the charitable organization. Such a transfer (not to exceed $100,000) will neither be included in gross income nor allowed as a deduction on the taxpayer’s return. But, since such a distribution is not includible in gross income, it will not increase AGI for purposes of the phaseout of any deduction, exclusion, or tax credit that is limited or lost completely when AGI reaches certain specified level.

A qualified charitable contribution before year end is a particularly good idea for retired taxpayers who don’t need all of their as-yet undistributed RMD for living expenses. That’s because a charitable contribution distribution reduces the amount of the RMD that must be withdrawn, resulting in tax savings.

Observation.  The SECURE Act change noted in the Caution above has no effect on this rule. That is, the rule continues to apply to taxpayers who have reached age 70-1/2 by the end of the tax year.

Make year-end gifts. A person can give any other person up to $15,000 for 2019 without incurring any gift tax. The annual exclusion amount increases to $30,000 per donee if the donor’s spouse consents to gift-splitting. Anyone who expects eventually to have estate tax liability and who can afford to make gifts to family members should do so. Besides avoiding transfer tax, annual exclusion gifts take future appreciation in the value of the gift property out of the donor’s estate, and they shift the income tax obligation on the property’s earnings to the donee who may be in a lower tax bracket (if not subject to the kiddie tax).

A gift by check to a noncharitable donee is considered to be a completed gift for gift and estate tax purposes on the earlier of:

1. the date on which the donor has so parted with dominion and control under local law so as to leave the donor with no power to change its disposition, or
2. the date on which the donee deposits the check (or cashes it against available funds of the donee) or presents the check for payment, if it is established that:

… the check was paid by the drawee bank when first presented to the drawee bank for payment;

… the donor intended to make a gift;

… the donor was alive when the check was paid by the drawee bank;

… delivery of the check by the donor was unconditional; and

… the check was deposited, cashed, or presented in the calendar year for which completed gift treatment is sought and within a reasonable time of issuance.

Thus, for example, a $15,000 gift check given to and deposited by a grandson on Dec. 31, 2019 is treated as a completed gift for 2019 even though the check doesn’t clear until 2020 (assuming the donor is still alive when the check is paid by the drawee bank).

Watch out for the use-it-or-lose-it rule. Unused cafeteria plan amounts left over at the end of a plan year must generally be forfeited (use-it-or-lose-it rule). A cafeteria plan can provide an optional grace period immediately following the end of each plan year, extending the period for incurring expenses for qualified benefits to the 15th day of the third month after the end of the plan year. Benefits or contributions not used as of the end of the grace period are forfeited. Under an exception to the use-it-or-lose-it rule, at the plan sponsor’s option and in lieu of any grace period, employees may be allowed to carry over up to $500 of unused amounts remaining at year-end in a health flexible spending account.

Taxpayers thus should make sure they understand their employer’s plan and should make last-minute purchases before year end to the extent that not doing so will result in losing benefits. In most cases, a trip to the drug store, dentist or optometrist, for goods or services that the taxpayer would otherwise have purchased in 2020, can avoid “losing it.”

Paying by credit card creates deduction on date of credit card transaction.  Taxpayers should consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase their 2019 deductions even if they don’t pay their credit card bill until after the end of the year.

(Editor’s note:  The following is for non-U.S. individuals only.)  Renew ITINs that expire on Dec. 31.  Any individual filing a U.S. tax return is required to state his or her taxpayer identification number on that return. Generally, a taxpayer identification number is the individual’s Social Security number (SSN). However, IRS issues Individual Taxpayer Identification Numbers (ITINs) to individuals who are not eligible to be issued an SSN but who still have a U.S. tax filing obligation.

Unlike SSNs, ITINs expire if not used on a return for three consecutive years or after a certain period. For example, ITINs issued in 2011 and 2012 (i.e., those with middle digits 83, 84, 85, 86, and 87) will expire on December 31, 2019.

Anyone whose ITIN is expiring at the end of 2019 needs to file a complete renewal application, Form W-7, Application for IRS Individual Taxpayer Identification Number.

I’ll be co-instructing a seminar on Hawaii General Excise and Use Tax on February 23.  I’ll be doing it with Ray Kamikawa, former Hawaii Director of Taxation.

If you or a colleague want to attend, please use Priority Code 15999 and Discount Code C1416416 for 50% Off!

Now that the federal tax overhaul has passed, you might want to talk with your tax advisor about doing a few things before year-end (not much time left).

Prepay State Taxes.

Under Trump Tax, individuals only may deduct $10,000 of state and local taxes per year.  For us in Hawaii, that includes state income tax and real property tax.

If you pay more than that in a year, consider paying some taxes in 2017 so they can be deducted under 2017 rules.  Take, for example, the estimated income tax payment due on January 20th.  If you as an individual can pay it by the end of the year, then it can be deducted in 2017 when you might be able to get a bigger benefit from it.

By the way, this won’t work for 2018 taxes that you pay in 2017.

Prepay Miscellaneous Itemized Deductions.

Many of the miscellaneous itemized deductions — the ones that need to be over 2% of adjusted gross income to count — are going away next year.  If you have some of these, you may want to consider prepaying them this year to get a 2017 benefit.

Some of these deductions include:

• Tax return preparation fees
• Investment advisory fees
• Safe deposit box fees
• Unreimbursed employee business expenses such as job travel, union dues, job education

Charitable Contributions.

The following is a summary of important tax developments that have occurred in the past three months courtesy of Thompson Reuters’ Checkpoint.

President Trump and key lawmakers reveal tax reform plan. The Trump Administration and select members of Congress have released a “unified framework” for tax reform. The document provides more detail than a number of other tax reform documents that have emerged from the Administration over the past few months, but it still leaves many specifics to be worked out by the tax-writing committees (i.e., the House Ways and Means Committee and the Senate Finance Committee).

Plan provisions affecting individuals would:

• Increase the standard deduction to $24,000 for married taxpayers filing jointly, and $12,000 for single filers;
• Eliminate the personal exemption and the additional standard deductions for older/blind taxpayers;
• Reduce the number of tax brackets from seven to three: 12%, 25%, and 35%;
• Increase the child tax credit;
• Repeal the individual alternative minimum tax;
• Largely eliminate itemized deductions, but retain the home mortgage interest and charitable contribution deductions; and
• Repeal both the estate tax and the generation-skipping transfer tax.

Plan provisions affecting businesses would:

• Provide a maximum 25% tax rate for “small” and family-owned businesses conducted as sole proprietorships, partnerships and S corporations;
• Reduce the corporate tax rate to 20% (down from the current top rate of 35%);
• Provide full expensing for five years;
• Partially limit the deduction for net interest expense incurred by C corporations;
• Repeal most deductions and credits, but retain the research and low-income housing credits;
• Modernize special tax rules that apply to certain industries and sectors;
• Provide a 100% exemption for dividends from foreign subsidiaries; and
• To protect the U.S. tax base, tax the foreign profits of U.S. multinational corporations at a reduced rate and on a global basis.

Disaster tax relief legislation. On September 29, President Trump signed into law the “Disaster Tax Relief and Airport and Airway Extension Act of 2017” (P.L. 115-63). The Act provides temporary tax relief to victims of Hurricanes Harvey, Irma, and Maria. Relief for individuals includes, among other things, loosened restrictions for claiming personal casualty losses, tax-favored withdrawals from retirement plans, and the option of using current or prior year’s income for purposes of claiming the earned income and child tax credits. Businesses that qualify for relief may claim a new “employee retention tax credit” of 40% of up to $6,000 of “qualified wages” paid by employers affected by Hurricanes Harvey, Irma, and Maria (for a maximum credit of $2,400 per employee). In addition to the new law, IRS has granted specific administrative hurricane relief, for example, extending various deadlines, encouraging leave-based donation programs for hurricane victims, and allowing retirement plans to make hardship distributions.

Treasury to roll up myRA program. On July 28, the Treasury Department announced that it would begin winding down the myRA (my Retirement Account) program—a type of government-administered Roth IRA initially offered by Treasury beginning in 2014. Noting that demand for and investment in the myRA program had been extremely low, Treasury stated that it would phase out the program over the following months. The myRA program would no longer accept new enrollments, but existing accounts were to remain open and accessible, so that individuals could continue to manage their accounts until further notice. Individuals could make deposits, and their accounts would continue to earn interest. Funds in myRA accounts remained in an investment issued by the Treasury Department.

Simplified per-diem increase for post-Sept. 30, 2017 travel. An employer may pay a per-diem amount to an employee on business-travel status instead of reimbursing actual substantiated expenses for away-from-home lodging, meal and incidental expenses (M&E). If the rate paid doesn’t exceed the IRS-approved maximums, and the employee provides simplified substantiation, the reimbursement isn’t subject to income- or payroll-tax withholding and isn’t reported on the employee’s Form W-2. Instead of using actual per-diems, employers may use a simplified “high-low” per-diem, under which there is one uniform per-diem rate for all “high-cost” areas within the continental U.S. (CONUS), and another per-diem rate for all other areas within CONUS. The IRS released the “high-low” simplified per-diem rates for post-Sept. 30, 2017, travel. Under the optional high-low method for post-Sept. 30, 2017 travel, the high-cost-area per diem is $284 (up from $282), consisting of $216 for lodging and $68 for M&IE. The per-diem for all other localities is $191 (up from $189), consisting of $134 for lodging and $57 for M&IE.

Honest mistake no excuse for incorrectly claimed advance premium tax credit. In what appears to be the first case of its kind—although others are likely to follow—the Tax Court ruled that taxpayers who didn’t qualify for the premium tax credit under the Affordable Care Act (Obamacare) because their modified adjusted gross income exceeded 400% of the federal poverty level had to repay all the advance premium tax credit paid on their behalf to their insurer. A sympathetic Tax Court noted that while their state health insurance Marketplace may have incorrectly informed the taxpayers that they were eligible for the credit for 2014, the Court’s hands were tied by the Code and regs. The simple fact was that the taxpayers’ income exceeded eligible levels and that they had to repay the advance premium tax credit payments.

Safe harbor for financially distressed homeowners extended. The IRS has extended through 2021 guidance on the tax consequences of programs that involve payments made to or on behalf of financially distressed homeowners, including a safe harbor method for computing a homeowner’s deduction for payments made on a home mortgage. For tax years 2010 through 2021, an eligible homeowner (i.e., one who meets the requirements of Code Sec. 163 (dealing with deducting interest) and Code Sec. 164 (dealing with deducting taxes), and participates in a State program in which the program payments could be used to pay interest on the home mortgage) may deduct the lesser of:

1. The sum of all payments on the home mortgage that the homeowner actually makes during a tax year to the mortgage servicer or the State housing finance agency; or
2. The sum of amounts shown on Form 1098, Mortgage Interest Statement, for mortgage interest received, real property taxes, and, if deductible for the tax year, mortgage insurance premiums.

(The deduction for mortgage insurance premiums under Code Sec. 163(h)(3)(E) expired at the end of 2016, but it is one of those tax provisions that have been repeatedly extended in the past.)

The IRS also extended penalty relief related to information reporting for mortgage servicers and state housing finance agencies.

On November 22, just days away from a December 1, 2016 effective date for new overtime regulations, a federal judge issued a nationwide injunction, bringing the process to a halt.

A federal judge in Texas on Tuesday blocked new Department of Labor rules that would have expanded the number of workers eligible for overtime pay.

U.S. District Judge Amos Mazzant of the Eastern District of Texas granted a preliminary injunction in combined lawsuits filed by 21 states and business groups. The rule would have allowed workers earning up to $47,476 a year to be eligible for time-and-a-half overtime pay after working 40 hours a week.

Currently, nonexempt employees making less than $23,660 are eligible for overtime pay.  The salary threshold was last updated in 2004.

Mazzant said the U.S. Department of Labor didn’t have statutory authority to set a salary threshold or to automatically update the amount.

Liberal groups were swift to denounce Mazzant’s decision. “This is an extreme and unsupportable decision and is a clear overreach by the court,” said Ross Eisenbrey, vice president of the left-leaning Economic Policy Institute, who helped the Labor Department develop the regulation. Eisenbrey called it “a disappointment to millions of workers who are forced to work long hours with no extra compensation” and “a blow to those Americans who care deeply about raising wages and lessening inequality.”

But the U.S. Chamber of Commerce was jubilant. “We are very pleased that the court agreed with our arguments,” said Randy Johnson, the Chamber’s senior vice president of labor, immigration and employee benefits. The rule, he said, “would have caused many disruptions in how work gets done” and “reduced workplace flexibility, remote electronic access to work, and opportunities for career advancement.”

This year marks a particularly important year for filers, as the deadline for submitting Form W-2 to the SSA and Form 1099-MISC to the IRS has changed significantly.

Due to changes in the law wrought by the Protecting Americans from Tax Hikes (PATH) Act, beginning in 2017 (for the 2016 reporting year), filers must send W-2 and 1099-MISC recipient copies and submit to the SSA/IRS by January 31, regardless of method (paper or e-file).

Historically, filers were required to provide W-2 and 1099-MISC forms to recipients by January 31; however, they were not required to submit the forms to the SSA/IRS until February 28 (paper) or March 31 (e-file).

The new filing deadline, as it relates to Form 1099-MISC, only affects filers reporting nonemployee compensation payments in box 7. Although the overwhelming majority of 1099-MISC filers will report information in box 7, there is bound to be some confusion.

Also, the IRS eliminated the automatic 30-day extension of time to file W-2 forms. Previously, filers could obtain an automatic 30-day extension by submitting Form 8809 to the IRS on or before January 31. Filers could also request an additional 30-day extension, pushing their e-file deadline to the end of May. A single 30-day extension still can be applied for on Form 8809, but it is no longer automatic.

This year’s collection of 10 year-end tax planning tips come from accounting firm Grant Thornton and the website accountingtoday.com, with occasional editorial commentary by me. Most of the tips are familiar, but there are a few new ones.

1. Accelerate Deductions and Defer Income

It sometimes makes sense to accelerate deductions and defer income. There are plenty of income items and expenses you may be able to control. Consider deferring bonuses, consulting income or self-employment income. On the deduction side, you may be able to accelerate state and local income taxes, interest payments and real estate taxes.

2. Bunch Itemized Deductions

Many expenses can be deducted only if they exceed a certain percentage of your adjusted gross income (AGI). Bunching itemized deductible expenses into one year can help you exceed these AGI floors. Consider scheduling your costly non-urgent medical procedures in a single year to exceed the 10 percent AGI floor for medical expenses (7.5 percent for taxpayers age 65 and older). This may mean moving a procedure into this year or postponing it until next year. To exceed the 2 percent AGI floor for miscellaneous expenses, bunch professional fees like legal advice and tax planning, as well as unreimbursed business expenses such as travel and vehicle costs.

3. Make Up a Tax Shortfall with Increased Withholding

Don’t forget that taxes are due throughout the year. Check your withholding and estimated tax payments now while you have time to fix a problem. If you’re in danger of an underpayment penalty, try to make up the shortfall by increasing withholding on your salary or bonuses. A bigger estimated tax payment can leave you exposed to penalties for previous quarters, while withholding is considered to have been paid ratably throughout the year.

[Editor’s Note: Estimated tax problems can be created not only when times are good, but also when times are tough. Example: Mr. X has a job and also receives some investment income, and is paying some estimated tax. Mr. X gets laid off, and starts a new job at 80% of his old salary three months later. Because Mr. X’s estimated tax was calculated on the withholding tax amount for his old job assuming he would be employed for the whole year and his new job doesn’t withhold as much, Mr. X might wind up the year underwithheld. The moral of the story is to update your tax estimates while there is still time in the year to fix any problems. Here, the fix can be made by having Mr. X’s new employer withhold more.]

4. Leverage Retirement Account Tax Savings

It’s not too late to increase contributions to a retirement account. Traditional retirement accounts like a 401(k) or individual retirement accounts (IRAs) still offer some of the best tax savings. Contributions reduce taxable income at the time that you make them, and you don’t pay taxes until you take the money out at retirement. The 2016 contribution limits are $18,000 for a 401(k) and $5,500 for an IRA (not including catch-up contributions for those 50 years of age and older).

5. Reconsider a Roth IRA Rollover

It has become very popular in recent years to convert a traditional IRA into a Roth IRA. This type of rollover allows you to pay tax on the conversion in exchange for no taxes in the future (if withdrawals are made properly). If you converted your account this year, reexamine the rollover. If the value went down, you have until your extended filing deadline to reverse the conversion. That way, you may be able to perform a conversion later and pay less tax.

[Editor’s Note: You don’t get a do-over at the voting booth, but you can get one here.]

6. Get Your Charitable House in Order

If you plan on giving to charity before the end of the year, remember that a cash contribution must be documented to be deductible. If you claim a charitable deduction of more than $500 in donated property, you must attach Form 8283. If you are claiming a deduction of $250 or more for a car donation, you will need a contemporaneous written acknowledgement from the charity that includes a description of the car. Remember, you cannot deduct donations to individuals, social clubs, political groups or foreign organizations.

7. Give Directly from an IRA

Congress finally made permanent a provision that allow taxpayers 70½ and older to make tax-free charitable distributions from IRAs. Using your IRA distributions for charitable giving could save you more than taking a charitable deduction on a normal gift. That’s because these IRA distributions for charitable giving won’t be included in income at all, lowering your AGI. You’ll see the difference in many AGI-based computations where the below-the-line deduction for charitable giving doesn’t have any effect. Even better, the distribution to charity will still count toward the satisfaction of your minimum required distribution for the year.

8. Zero Out AMT

Some high-income taxpayers must pay the alternative minimum tax (AMT) because the AMT removes key deductions. The silver lining is that the top AMT tax rate is only 28 percent. So you can “zero out” the AMT by accelerating income into the AMT year until the tax you calculate for regular tax and AMT are the same. Although you will have paid tax sooner, you will have paid at an effective tax rate less than the top regular tax rate of 39.6 percent. But be careful, this can backfire if you are in the AMT phase-out range or the additional income affects other tax benefits.

[Editor’s Note: AMT should be a concern for anyone making a decent amount of money in Hawaii, because our tax rate is high and the state tax deduction (for federal purposes) is a tax preference item. For state income tax purposes, we have no AMT but the deduction for state income tax is disallowed for taxpayers whose AGI is too high.]

9. Don’t Squander Your Gift Tax Exclusion

You can give up to $14,000 to as many people as you wish in 2016, free of gift or estate tax. You get a new annual gift tax exclusion every year, so don’t let it go to waste. You and your spouse can use your exemptions together to give up to $28,000 per beneficiary.

[Editor’s Note: At the state level, Hawaii has no gift tax but it does have an estate tax.]

10. Leverage Historically Low Interest Rates

Many estate and gift tax strategies hinge on the ability of assets to appreciate faster than the interest rates prescribed by the IRS. An appreciating market and historically low rates create the perfect atmosphere for estate planning. The past several years presented a historically favorable time, and the low rates won’t last forever.