Income tax

Tax Cutting Strategies For The Home Stretch

With the end of the tax year fast approaching, taxpayers are heading into the home stretch in the area of tax planning. Although there is less than a month left in 2018, there may well be some last minute opportunities available for saving valuable tax dollars. Because of the new higher standard deduction, several of these possibilities involve bundling deductions in order to make use of the tax advantage provided by itemizing. Others include making use of various tax sheltered accounts and managing capital gains. No matter what tax saving measures are employed, it is almost certain that ignoring such opportunities will result in paying a higher tax bill than would otherwise be the case.

The following are some tax saving measures that might be used to help to save tax dollars in the last few weeks of 2018:

·        Maximize the Tax Benefits of Realizing Capital Gains and Losses

Since the IRS allows taxpayers to deduct up to $3000 of short-term capital losses against ordinary income, the end of the year is a good time to examine investment accounts to see if there are any losers that need to be dumped. In addition, taxpayers should look at potential capital losses with an eye toward canceling out capital gains that have been realized during the year. As always timing is important in making capital gains decisions. Whenever possible, net capital gains should be realized in years of lower income and net capital losses in years of higher income, a consideration that becomes especially important as the calendar year comes to a close.

·        Utilize the Full Tax Benefits Provided by Retirement Accounts

IRA contributions, which are available to anyone who has earned income for the tax year in question, are tax deductible at both the federal and the state levels. This being the case, valuable tax dollars can be saved by maximizing the annual IRA contribution limit of $5,500. The same is true for 401(k) contributions which have an annual contribution limit of $18,500 with a limit of $55,000 for contributions from all sources. Since contributions to 401(k) plans are made with pretax dollars, they provide a valuable tax break by reducing a contributing taxpayer’s annual income by the exact amount of the contribution. Contributions to both traditional and Roth IRAs can be made up until the 2019 April 15th filing deadline while 401(k) contributions must normally be made on or before December 31st.

·        Consider Bundling Tax Deductions

While the increase of the standard deduction from $6,350 in 2017 to $12,000 in 2018 provides a tax break to those who claim it, the increase makes it harder to achieve a tax advantage by itemizing deductions. As a result, many taxpayers are looking at the possibility of bunching into a single year tax deductions that would normally be spread over several years. Such deductions include such tax deductible items as mortgage payments, property taxes, medical expenses and charitable contributions, among other things. In every case, thought should be given to tax brackets as well as both present and future income before making a decision to postpone or accelerate any given tax deduction.

The licensed accountants and bookkeepers at Las Vegas Bookkeeping are experts in the area of tax planning and can help you implement tax strategies that will save you valuable tax dollars. Receive a free, no obligation consultation by emailing us at tina@lasvegasbookkeeping.com or calling us at (702) 514-4048. Don’t hesitate! Let the tax professionals at Las Vegas Bookkeeping help you get your financial affairs in order so you can achieve that maximum possible tax advantage for 2018!

Some Important Capital Considerations

Capital gains taxes often amount to a sizable part of an individual’s tax burden. With this being the case, it is important for taxpayers to be familiar with the various tax planning strategies that are available for reducing the impact of capital gains taxes on the overall tax obligation. Although these strategies are important all year long, they are especially important during the fourth quarter when there is still time to make certain tax saving moves that will reduce tax dollars owed for the current year. Such moves include the pairing and timing strategies discussed below in addition to certain more sophisticated moves most often used by high income individuals or those who have experienced a significant taxable event.

Pairing Strategies

Capital gains can be used to offset ordinary income and/or capitals losses according to certain IRS guidelines described below.

·        Up to $3000 in capital losses can be used to offset ordinary income with the ability to carry forward into future tax years any capital losses that are not used to offset capital gains.

·        Since long term capital gains tax brackets range from 0% to 20% (to be indexed for inflation after 2018) while ordinary income tax brackets range from 0% to a high of 39.6%, the greatest tax advantage is obtained by pairing capital losses with ordinary income up to the $3000 limit.

·        Capital losses in excess of $3000 are used to offset capital gains, with short term losses used to cancel short term capital gains and long term capital losses used to offset long term gains. Once this is accomplished any leftover gains or losses are simply paired against each other.

·        Since short term capital gains are taxed as ordinary income rather than at the lower capital gains tax rates, assets that have realized a gain should be held a minimum of twelve months whenever possible.

Timing Strategies

Because capital gains tax rates are based on income, timing can be an important consideration in realizing capital gains and losses, especially when an expected increase or decrease in income is on the horizon.

·        A taxpayer who expects to realize a net capital loss for the year would probably want or realize that loss in the current tax year if a decrease in income is projected for the upcoming year. If an increase in income is projected, the loss might be better realized in the current year. These considerations are typically less critical for long term capital gains where the income limits for the various tax brackets are much broader than those for ordinary income.

·        In the same way, taxpayers who are expecting to realize a net capital gain would want to realize the gain in the current tax year when an increase in income is projected and in the next year if a decrease in income is projected. Again, for long term capital gains, these considerations are only important when the gain would push the taxpayer into the next higher capital gains tax bracket. 

·        A final timing consideration comes into to pay with respect to the Net Investment Income Tax that is still in effect. This surtax of 3.8% applies to the lesser of net investment income for the year or the amount by which the taxpayer’s adjusted gross income exceeds the threshold of $200,000 ($250,000 for a married couple). Timing decisions related to the realizing of capital gains should attempt to avoid this extra tax whenever possible.

The Certified Public Accountants and Enrolled Agents Las Vegas Bookkeeping are familiar with all of various tax planning strategies available for reducing capital gains taxes and are prepared to help each client apply them to achieve the maximum tax advantage possible for their specific situation. Don’t delay! Contact the tax professionals at Las Vegas Bookkeeping today discuss possible year-end tax planning strategies. Schedule a free, no obligation consultation by emailing us at Tina@lasvegasbookkeeping.com or calling us at (702)514-4048.

Paying Your Income Tax Bill

With the close of Tax Season 2017 less than a month away, it is likely that many taxpayers will end up being faced with a tax bill in excess of what they are able to pay. When this situation occurs and your tax bill exceeds your available financial resources, the best approach is to face the situation head on. To ignore the problem and hope that it will go away will only make matters worse. Not only will this approach result in an increased back tax balance due to the continued accumulation of penalties and interest, but it could ultimately result in the initiation of a tax lien or some other type of enforced collection activity by the IRS.

One of the easiest options for paying a tax bill when the necessary funds are not immediately available is to request short term administrative extension. This agreement postpones the payment of the tax amount due for 120 days, at which time the balance must be paid in full. However, although payment of the tax balance is postponed, a failure-to-pay penalty of one-half of one percent of the tax amount due will be charged each month during the grace period. Other no hassle payment options include charging the tax debt to a credit card, withdrawing the necessary funds from a retirement account or taking out a bank loan to cover the tax amount owed. When considering any of the aforementioned choices, the cost of borrowing should be weighed against any interest or penalties that will be assessed by the IRS or state tax agency.

In the absence of a borrowing alternative, a taxpayer who is short on financial resources can request setting up an IRS Installment Agreement. Such an agreement provides a means of paying off a back tax balance by making regular monthly installment payments. Although a small origination fee is charged, approval for this tax settlement option is almost automatic as long as the requesting taxpayer owes less than $10,000 and is in otherwise good standing with the IRS. The taxpayer is normally allowed to set the amount of the monthly installment payment as long as it will result in the full balance of the tax debt being paid off within five years form the date the agreement is initiated.  

Tax resolution options which involve settling a tax debt for less than full amount owed are harder to obtain but may be a viable alternative for taxpayers who meet certain specific qualifying criteria set by the IRS. Such partial payment tax settlement options include the IRS Offer in Compromise and the IRS Partial Payment Installment Agreement, among others. In general, the IRS only grants these tax settlement options when they determine that the taxpayer in question is very unlikely to be able to pay the full balance of the tax debt they have accumulated within a reasonable period of time.

The licensed accountants and bookkeepers at Las Vegas Bookkeeping have the knowledge and expertise to help your business run smoothly and efficiently. Contact us by phone at (702)945-2757 or by email at tina@lasvegasbookkeeping.com to receive a free, no obligation consultation. Don’t wait! Streamline your business operations by contacting the professionals at Las Vegas Bookkeeping today

How to Handle an Income Tax Penalty

The IRS imposes tax penalties for a variety of reasons including failure to meet a filing deadline, failure to pay a tax balance due, failure to make required estimated tax payments and submission of an inaccurate tax return. Since all of these penalties were created for the purpose of enforcing tax compliance, they are normally waived only when a taxpayer can document certain extenuating circumstances that have resulted in a deviation from the tax code. Listed below are some of the common tax penalties handed down by the IRS together with some suggested procedures for obtaining a penalty waiver.

Failure to File Penalty

·        Tax Consequences: Any taxpayer who does not file a completed tax return or a request for a tax extension by the IRS filing deadline will be assessed a Failure to File Penalty equal to 5% of the tax balance owed for each month or partial month that the return is late. This penalty can accrue up to a maximum of 25% of the unpaid tax balance. In addition, any person who fails to submit a tax return within 60 days of the IRS filing deadline will be assessed a minimum penalty of $135 or 100% of the tax balance owed, whichever is less.

·        Penalty Abatement Procedures: The IRS will normally negate the Failure to File Penalty for any taxpayer who has had a clean filing and paying history for the previous three years. A penalty waiver may also be granted when the taxpayer can document certain specific conditions that may have resulted in the tax return not being submitted by the filing deadline. Such conditions, which are collectively labeled as Reasonable Cause Relief, include such events and circumstances as death, a serious illness, a natural disaster, the inability to secure necessary tax information or faulty advice from the IRS or a tax professional.

Failure to Pay Penalty

·        Tax Consequences: A taxpayer who submits a tax return but does not pay the full balance of the taxes owed will be assessed a Failure to Pay Penalty of 0.5% of the tax amount due for each month or partial month that the taxes remain unpaid. This penalty can accrue up to a maximum of 25% of original back tax balance. In any given month, if both the Failure to File and Failure to Pay penalties apply, the combined tax penalty assessment cannot exceed 5% of the tax amount owed.

·        Penalty Abatement Procedures: A Failure to Pay penalty waiver may be granted for the same reasons as those described above under Failure to File. However, it important to note that, although a Failure to Pay or a Failure to File penalty abatement may be granted, the interest on any taxes owed will continue to accrue until the back tax balance is paid in full.

Penalty for the Underpayment of Estimated Tax

·        Tax Consequences: Taxpayers who earn or receive income that is not subject to withholding tax must make quarterly estimated tax payments to cover the tax amounts due for this income. When these payments are not made or are not sufficient to cover the taxes owed, the IRS assesses a Penalty for the Underpayment of Estimated Tax. This is generally equal to 5% of the tax amount owed for each month or partial month that the tax balance is overdue.

·        Penalty Abatement Procedures: The IRS normally waives the Penalty for Underpayment of Estimated Tax if the total amount of the unpaid tax balance is less than $1000 or if at least 90% of the tax balance shown on the current year’s tax return or 100% of that shown on the previous year’s return has been paid. Outside of these conditions, the IRS may abate the Penalty for the Underpayment of Estimated Tax when the taxpayer can prove that it has been calculated incorrectly or that calculating it by a different method would either reduce or eliminate it. This penalty will also generally be waived when the underpayment of estimated taxes is due to extenuating circumstances rather than willful neglect.

Inaccurate Tax Return Penalty

·        Tax Consequences: The IRS may assess a tax penalty when various inaccuracies such as negligence or the understatement of taxes result in an underreporting of the tax amount due. Generally, this penalty is only imposed when the amount shown on a tax return is more than 10% or $5000 less than amount of taxable income that should be shown.

·        Penalty Abatement Procedures: The Inaccurate Tax Return Penalty can sometimes be abated when a taxpayer is able to provide sufficient documentation to show that an error was made despite reasonable efforts to exercise ordinary care and prudence in preparing the return.

Take heart! Although it is best to avoid tax penalties altogether, receiving one is not the end of the world! Consult a certified tax professional to investigate the options available for obtaining a penalty waiver.

The licensed accountants and bookkeepers at Las Vegas Bookkeeping have the knowledge and expertise to help your business run smoothly and efficiently. Contact us by phone at (702)945-2757 or by email at tina@lasvegasbookkeeping.com to receive a free, no obligation consultation. Don’t wait! Streamline your business operations by contacting the professionals at Las Vegas Bookkeeping today.

The Future of the Federal Estate Tax

The federal estate tax is a tax assessed by the federal government on assets that are passed on to a person’s heirs at the time of their death. While numerous proposals to abolish this tax have been introduced by legislators over the years, a repeal seems more likely now that Donald Trump has been elected President. As recently as this last week, Trump reemphasized, to those in attendance at the Conservative Political Action Conference, his desire reduce taxes on the middle class. Although the particulars about how he will accomplish this remain unclear, it is fairly certain that the elimination of the federal estate tax will be part of any tax plan he introduces. 

·        The Recent History of the Federal Estate Tax

The modern estate tax was established by the Revenue Act of 1916 which created a tax on wealth transferred from an estate to its beneficiaries. Although there have been many changes to this tax since that time, the trends since 1997 when Congress passed the Taxpayer Relief Act have been fairly steady. Over that 20 year period, the estate tax exemption amount has steadily increased from $600,000 in 1997 to $5,490,000 in 2017. During that same time period, the top estate tax rate has decreased from a high of 55% in 1997 to 40% in the current year. An exception to this decline was a blip in the years 2010 to 2012 when the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act reduced it to 35%. It then went back up to 40% in 2013 when the American Taxpayer Relief Act failed to make the reduction permanent.

·        The Current Status of the Federal Estate Tax

The estate tax exemption amount for 2017 is $5,490,000, up from $5,450,000 in 2016. Estates above this amount are subject to an estate tax of 18% to 40%, depending on the amount of the overage. However, because the federal estate tax is structured as a unified tax credit instead of allowing the exemption to reduce the amount of the taxable estate, all estates are essentially taxed at the top rate of 40%. This being the case, the 11 lower estate tax brackets are rendered somewhat useless except for calculating the amount of the credit.

·        The Use of Gifting to Reduce the Federal Estate Tax

In addition to the annual lifetime exclusion amount there is an annual gift tax exclusion of $14,000 per person per year. This gift exclusion allows each individual to make tax free gifts of $14,000 per year to any number of recipients. Couples can make gifts of $28,000 per year. Over time, such nontaxable gifts can can be used to significantly reduce the amount of a person’s estate while they are still alive.  Gifts above these limits are added to the value of a person’s estate at the time of death.

·        Replacing the Revenue Generated by the Federal Estate Tax

As might be expected, only a very small percentage of the population is actually affected by the federal estate tax. For example, in 2015, estate tax returns were filed on behalf of less than 0.5 % of all decedents and, of that number, only half had estates valued at more than the exemption limit. However, in spite of the small percentage of estates that actually owe federal estate taxes, abolishing this tax would necessarily result in a loss of federal tax revenue. Because of this, some favor coupling the repeal of the estate tax with some modification to the step-basis that is granted to estates. This pairing would replace some or all of the lost estate tax revenue with capital gains taxes paid by the recipients of estate assets.

The licensed accountants and bookkeepers at Las Vegas Bookkeeping have the knowledge and expertise to help your business run smoothly and efficiently. Contact us by phone at (702)945-2757 or by email at tina@lasvegasbookkeeping.com to receive a free, no obligation consultation. Don’t wait! Streamline your business operations by contacting the professionals at Las Vegas Bookkeeping today.

The Jock Income Tax and the 2017 Superbowl

When visitors earn money in a city or state they are visiting, they may be required to pay local and state income taxes on any money they earn in that jurisdiction. This income tax is often called the “jock tax” because it originated in 1991 when the State of California assessed the earnings of Chicago Bulls players who were visiting Los Angeles to play the Lakers in the NBA finals. Following this, Illinois instituted its own “jock tax” but only imposed it on out-of-state players who originated from states that imposed a state income tax on athletes from Illinois. At the present time, most states levy an income tax on visiting athletes. The exceptions are the District of Columbia, which is prohibited by law from taxing nonresidents who work there, and Florida, Texas and Washington, the three states that have no personal income tax.

Fast forward to the Super Bowl 2017 game that was played in Houston, Texas. The fact that Texas does not have a state income tax means that none of the visiting players will be required to pay the “jock tax” on their play-off winnings. This amounts to a very significant tax savings for players of the New England Patriots who earned $107,000 each for their winning Super Bowl performance. Had Super Bowl 51 been played at Levi Stadium in Santa Clara, California, the location of Super Bowl 50, each of these players would have had to pay $14,231 of their winnings in state income tax. Atlanta Falcons players, who earned $53,000 each for their Super Bowl participation, will realize a tax savings of over $7000 compared to what they would have earned if the game had been played in California as it was in 2016.

Although all itinerant workers could technically be charged a state income tax for income earned outside of their state of residence, it is virtually impossible to track all of the thousands of visiting workers who earn income in any given state. Thus, the “jock tax” targets only high profile, high income earners, most of whom are professional athletes. It is this inequitable enforcement that critics point to as one of the major flaws of this particular state income tax assessment. Another major criticism is the difficult burden the “jock tax” places on the athletes who must pay it. For example, professional NFL players play 16 games in a season and receive 16 different checks. Although federal and state income taxes are withheld from each payment, there is much room for an overpayment or underpayment error. Also, since the each player must file a “jock tax” return with most states where they play as a visitor as well as a state income tax return with their state of residence, the tax filing process has the potential to become quite complex.

The licensed accountants and bookkeepers at Las Vegas Bookkeeping have the knowledge and expertise to help your business run smoothly and efficiently. Contact us by phone at (702)945-2757 or by email at tina@lasvegasbookkeeping.com to receive a free, no obligation consultation. Don’t wait! Streamline your business operations by contacting the professionals at Las Vegas Bookkeeping today.

Trump's Income Tax Reform Just Around the Corner

Trump’s Income Tax Reform Just around the Corner

Donald Trump has announced that he will begin a major overhaul of the United States tax system as soon as he takes office on January 20th. He maintains that the changes he is suggesting will simplify the tax code, provide tax relief to American taxpayers and benefit the economy by making condition’s more favorable for businesses. According to his plan, these changes will be revenue neutral. They will be paid for by certain other changes to the tax code which will actually increase tax revenue. In particular, his proposal recommends eliminating many of the deductions that are currently available to high income taxpayers as well as closing a number of corporate tax loopholes.

The following are some of the major changes proposed by Trump’s tax plan:

·         Simplifying the tax code for individuals

Trump’s tax plan outlines a simpler tax code by proposing that the number of tax brackets be reduced to four (0%, 10%, 20% and 25%) instead of seven. Individuals earning less than $25,000 and couples earning less than $50,000 would not pay any tax at all, with the net result that over 50% of the population would effectively be removed from all income tax obligations. Taxpayers paying the 10% income tax rate would keep almost all of their current deductions while those in the 20% and 25% brackets would lose some of theirs. In addition to simplifying tax brackets and eliminating deductions, Trump’s tax plan proposes terminating both the Alternative Minimum Tax and the marriage penalty.

·         Eliminating of the death tax

Under current estate tax laws, individual estates in excess of $5,490,000 are subject to taxation with a maximum estate tax rate of 40% when the amount of the taxable estate exceeds $1,000,000. Under Trump’s tax plan, the estate tax will be eliminated altogether.

·         Making the tax code more attractive for business

One of the main components of Trump’s tax plan is to make America more attractive to business by reducing the corporate income tax rate to 15%, a significant reduction from its current rate of over 35%. In addition, it proposes providing pass-through entities with a matching rate by intoducing a special business tax rate within the tax guidelines for personal tax returns. Owners of partnerships, LLCs and certain other business structures are currently taxed at their personal income tax rates which are often in excess of 15%.

·         Eliminating certain loopholes and deductions

A final important part of Trump’s tax plan involves generating income tax revenue by eliminating certain tax loopholes and deductions for wealthy taxpayers and special interests. Included in this list of suggested changes is decreasing the income threshold for the Pease Limitation on itemized deductions and the phase out of personal exemptions and phasing out the life insurance interest deduction for wealthy taxpayers. The proposal also recommends putting a cap on interest deductions for business expenses as well ending tax deferrals for corporate income earned on foreign soil.

The licensed accountants and bookkeepers at Las Vegas Bookkeeping have the knowledge and expertise to help your business run smoothly and efficiently. To learn more about the services we provide, visit us at www.lasvegasbookkeeping.com.  Contact us by phone at (702)945-2757 or by email at tina@lasvegasbookkeeping.com  to receive a free, no obligation consultation. Don’t wait! Streamline your business operations by contacting the professionals at Las Vegas Bookkeeping today.