New Jersey Enacts Shared Responsibility Payment for Tax Payers

The New Jersey Health Insurance Market Preservation Act, replaces the shared responsibility payment established by the federal Affordable Care Act (ACA), which has been repealed for tax years beginning after 2018, with its own very similar shared responsibility payment. (​ L. 2018, A3380​, effective for tax years beginning on or after January 1, 2019.)

Under pre-Tax Cuts and Jobs Act (TCJA) law, for each tax year, the shared responsibility payment (penalty) imposed by ​IRC § 5000A​ was the lesser of (a) the sum of the monthly penalty amounts, or (b) the sum of the monthly national average bronze plan premiums for the shared responsibility family plan. The monthly penalty amount for any taxpayer for any month during which a failure occurred was equal to 1/12 of the greater of the flat dollar amount or the excess income amount. The flat dollar amount was generally equal to the lesser of (1) the sum of the applicable dollar amounts for all individuals included in the taxpayer’s shared responsibility family, or (2) 300% of the applicable dollar amount for the calendar year the tax year ends. The applicable dollar amount for the 2017 tax year was $695 for adults and $347.50 for persons under age 18. The excess income amount was the product of the excess of the taxpayer’s household income over the taxpayer’s applicable filing threshold multiplied by 2.5%.  For tax years beginning on or after January 1, 2019, the TCJA eliminated the shared responsibility payment for individuals.

The amount of the New Jersey shared responsibility tax is the same as the above pre-TCJA federal rules except that instead of the sum of the national average bronze plan premiums, the the New Jersey average premium for qualified health plans which provide a bronze-level of coverage is used.

The law requires the State Treasurer to establish a program for determining whether to certify that an individual is entitled to an exemption from either the individual responsibility requirement or the shared responsibility tax by reason of religious conscience or hardship. The threshold to qualify for a hardship exemption is determined based on an individual’s required contribution for health insurance coverage under the ACA as it was in effect on December 15, 2017, i.e., prior to the TCJA. For the 2017 tax year, the instructions to Form 8965 (Health Coverage Exemptions)  state that coverage was unaffordable if the cost of the coverage exceeded 8.16% of the taxpayer’s household income. Thus, if coverage cost even $1 more than 8.16% of the taxpayer’s household income, the shared responsibility payment rules did not apply.

The law requires the State Treasurer to determine the income threshold for minimum essential coverage to be considered unaffordable. The shared responsibility tax is not imposed for any month during a calendar year if the taxpayer’s gross income is below the state minimum taxable threshold. If a taxpayer is subject to the state shared responsibility tax and the federal penalty, the taxpayer is allowed a credit against the taxpayer’s state gross income tax obligation for that taxable year, in the amount of the taxpayer’s federal penalty payment, but not to exceed the amount of the taxpayer’s state tax imposed by the bill in the taxable year. For purposes of administering the tax, the bill requires applicable entities, including employers, insurers, and the Department of Human Services (with respect to the Medicaid and NJ FamilyCare programs), that provide minimum essential coverage to an individual during a calendar year to submit a return to the State Treasurer with information about individuals and their coverage. To minimize the reporting burden, the return may also be in the form of a return required under the pre-TCJA ACA. Finally, the bill requires the State Treasurer, in consultation with the Commissioner of Banking and Insurance, to send a notification containing information on the services available to obtain minimum essential coverage to each gross income taxpayer who files a gross income tax return indicating that the taxpayer or one of their dependents is not enrolled in what is classified as minimum essential coverage.

The shared responsibility payment will not be applicable for any tax year in which the premium tax credit is repealed.

3 things you need to know about the Tax Cuts and Jobs Act

On December 22, 2017, President Donald Trump signed the Tax Cuts and Jobs Act (TCJA) into law. This law provides sweeping changes to the tax landscape in the United States and has had taxpayers and accountants alike analyzing and discussing what this new law means for their personal tax position and the positions of their clients. Below are three significant ways the law will impact individual taxpayers.

Tax Rates, Standard Deductions, and Personal Exemptions

By now, it’s common knowledge that the TCJA has nearly doubled the standard deduction. On the surface, this is great news; however, the offset to this is that the personal exemptions enjoyed by taxpayers have now been set to zero. This is still great news for some taxpayers, as the increase in the standard deduction more than offsets the loss of personal exemptions. The situation may not be as positive for some families who were able to claim several exemptions under prior law.

The TCJA also changes the tax brackets. From 2018 to 2025, the tax brackets will range from 10% to 37% (down from 39.6% under prior law), with most tax brackets enjoying a lower tax rate than under prior law. This will help to offset the loss of personal exemptions for taxpayers who did not come out ahead from that change.

Itemized Deductions

With the increase in the standard deduction, fewer taxpayers are expected to itemize beginning in 2018. Those who do continue to itemize should be aware of a new limitation on home mortgage interest deductions. Under the new law, taxpayers are allowed to claim an itemized deduction for qualified interest on up to $750,000 of mortgage debt ($375,000 if you are married filing separately). This is down from $1 million under prior law ($500,000 for married taxpayers filing separately). This change does not impact any home purchased or under binding contract before December 16, 2017.

Another common itemized deduction is for charitable donations. Prior law limited deductions for charities to 50% of adjusted gross income (AGI). The TCJA increases that limit to 60%. However, under the new law, if a donation entitles you to receive (directly or indirectly) the right to buy tickets to college athletic events, a charitable deduction will not be permitted. While many provisions of the TCJA are slated to sunset in 2025, the change for athletic events is permanent.

Alternative Minimum Tax

Prior to the issuance of the final law, there had been speculation that the alternative minimum tax (AMT) would be repealed. Although the AMT was repealed for corporations, individuals may still be subject to it. While the AMT may still be around for individuals, between 2018 and 2025 the AMT exemptions are significantly higher than they were under prior law. As a result, far fewer taxpayers should find themselves subject to the AMT. The AMT exemption for 2018 is $70,300 for unmarried individuals and $109,400 for married individuals who file a joint return. Under the TCJA, the exemptions will not begin to phase out until unmarried taxpayers reach alternative minimum taxable income (AMTI) of $500,000 or joint filers reach AMTI of $1,000,000. This is in sharp contrast to the 2017 phase outs of $120,700 for individuals and $160,900 for joint filers.

How Will the New Republican Tax Bill Affect You?

Recently, the New York Times released an article discussing how the new Republican Tax Bill will cut taxes for roughly 75 percent of filers. The final plan is different than previous plans were for individuals, but there is a lot of variation as to how the bill will affect families across the country. For example, how families earned their money, if they made sizable donations to charity or various other factors can affect how they will be impacted by the new bill.

The new bill also expands the standard deduction. For individuals, the new standard deduction will be $12,000; while the standard deduction for families will be $24,000. It is expected that more people will take the standard deduction with the expansion. If you chose to take the standard deduction, you will no longer be able to deduct charitable donations, mortgage interest and state and local taxes from your tax bill.

The new bill for 2018 will also lower the top marginal rate, expand the child income tax credit, allow $10,000 in state and local taxes to be deducted and raise the exemption for the alternative minimum tax, so fewer people will pay it.

When it comes to seeing how the new bill will affect you, the use of the financial calculator can be extremely helpful. The step by step approach allows you to plug in your information so you can have an idea of what to expect when tax season rolls around. The financial calculator will not be able to predict changes in the economy or how people’s behavior may change in response to the new bill.

As far as the changes to the tax code with the new bill, most of them will expire after 2025. This will cause a tax increase for most families after this point. Republicans are claiming that they will not allow these provisions to expire, but predicting what will happen almost a decade from now is challenging.

SD Associates also offers numerous financial calculators to help determine how to plan for any of life’s financial decisions. To take advantage of the numerous financial calculators SD Associates offer, visit our website today so you can get a head start on tax season.

End of the Year Tax Tips for Individuals and Businesses

With the most comprehensive tax reform we have seen in years right around the corner, tax planning is a priority. As the year is winding down, we at SD Associates P.C. want to remind our clients and business owners of several tips you can do now, to help maximize your tax refund and minimize the taxes you may owe in the upcoming year.

    1. Tax deductions – A smart and generous way to lower your tax bill is by increasing your deductions before the year ends.  Tax-deductible charitable contributions can help reduce your taxable income. Contributing appreciated securities has multiple benefits: you receive a tax deduction for making the gift, and avoid a future capital gain tax liability from your investments. The charitable organization gets the same benefit and doesn’t owe taxes upon receipt or sale of the shares.

 

    1. Reduce taxable income through pre-tax contributions to a company retirement plan, self-employed retirement account or IRA.

 

    1. Defer your income – Does your employer provide an end of the year or holiday bonus? If so, you can potentially defer additional income in 2017 by taking the bonus in 2018.

 

    1. Minimizing capital gains and realizing investment losses can help reduce your tax burden. Be sure to review any personally managed investment accounts. If you sell a security at a loss, you can’t re-purchase the same or any “substantially identical” investment for 30 days, or you risk triggering a wash sale and foregoing the loss.

 

    1. Other deductions that are good options to pull into 2017 include estimated state and local income taxes due January 15 and property taxes due early next year. There are two important points to keep in mind. First, pulling deductions into 2017 can be a big mistake if you are impacted by the alternative minimum tax. Second, if a new tax bill passes and eliminates some or all of the itemized deductions, then this might be your last chance to benefit by accelerating them into 2017.

 

  1. The IRS warns taxpayers about the dangers of identity theft and fraudulent returns. It’s still important to be vigilant and take every opportunity to protect your personal information.

 

Whether you are a business owner or an individual, saving money is always important. At SD Associates P.C., we partner with our clients to ensure that we are always saving you money and educating you on ways to help your bottom line.  We are a full-service CPA and business advisory firm in Montgomery County, serving clients in Philadelphia and neighboring counties (Montgomery County, Bucks County, and Delaware County). For more information on our services contact SD Associates P.C. today at www.sdaccounting.com or call 215-517-5600.

2018 Q1 tax calendar: Key deadlines for businesses and other employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements. January 31 File 2017 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees. Provide copies of 2017 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required. File 2017 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS. File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2017. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 12 to file the return. File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2017. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 12 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944,“Employer’s Annual Federal Tax Return.”) File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2017 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 12 to file the return. February 28 File 2017 Forms 1099-MISC with the IRS if 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is April 2.) March 15 If a calendar-year partnership or S corporation, file or extend your 2017 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2017 contributions to pension and profit-sharing plans.

Accelerate your retirement savings with a cash balance plan

Business owners may not be able to set aside as much as they’d like in tax-advantaged retirement plans. Typically, they’re older and more highly compensated than their employees, but restrictions on contributions to 401(k) and profit-sharing plans can hamper retirement-planning efforts. One solution may be a cash balance plan. Defined benefit plan with a twist The two most popular qualified retirement plans — 401(k) and profit-sharing plans — are defined contribution plans. These plans specify the amount that goes into an employee’s retirement account today, typically a percentage of compensation or a specific dollar amount. In contrast, a cash balance plan is a defined benefit plan, which specifies the amount a participant will receive in retirement. But unlike traditional defined benefit plans, such as pensions, cash balance plans express those benefits in the form of a 401(k)-style account balance, rather than a formula tied to years of service and salary history. The plan allocates annual “pay credits” and “interest credits” to hypothetical employee accounts. This allows participants to earn benefits more uniformly over their careers, and provides a clearer picture of benefits than a traditional pension plan. Greater savings for owners A cash balance plan offers significant advantages for business owners — particularly those who are behind on their retirement saving and whose employees are younger and lower-paid. In 2017, the IRS limits employer contributions and employee deferrals to defined contribution plans to $54,000 ($60,000 for employees age 50 or older). And nondiscrimination rules, which prevent a plan from unfairly favoring highly compensated employees (HCEs), can reduce an owner’s contributions even further. But cash balance plans aren’t bound by these limits. Instead, as defined benefit plans, they’re subject to a cap on annual benefit payouts in retirement (currently, $216,000), and the nondiscrimination rules require that only benefits for HCEs and non-HCEs be comparable. Contributions may be as high as necessary to fund those benefits. Therefore, a company may make sizable contributions on behalf of owner/employees approaching retirement (often as much as three or four times defined contribution limits), and relatively smaller contributions on behalf of younger, lower-paid employees. There are some potential risks. The most notable one is that, unlike with profit-sharing plans, you can’t reduce or suspend contributions during difficult years. So, before implementing a cash balance plan, it’s critical to ensure that your company’s cash flow will be steady enough to meet its funding obligations. Right for you? Although cash balance plans can be more expensive than defined contribution plans, they’re a great way to turbocharge your retirement savings. We can help you decide whether one might be right for you. © 2017

2017 might be your last chance to hire veterans and claim a tax credit

With Veterans Day on November 11, it’s an especially good time to think about the sacrifices veterans have made for us and how we can support them. One way businesses can support veterans is to hire them. The Work Opportunity tax credit (WOTC) can help businesses do just that, but it may not be available for hires made after this year.

As released by the Ways and Means Committee of the U.S. House of Representatives on November 2, the Tax Cuts and Jobs Act would eliminate the WOTC for hires after December 31, 2017. So you may want to consider hiring qualifying veterans before year end.

The WOTC up close

You can claim the WOTC for a portion of wages paid to a new hire from a qualifying target group. Among the target groups are eligible veterans who receive benefits under the Supplemental Nutrition Assistance Program (commonly known as “food stamps”), who have a service-related disability or who have been unemployed for at least four weeks. The maximum credit depends in part on which of these factors apply:

  • Food stamp recipient or short-term unemployed (at least 4 weeks but less than 6 months): $2,400
  •  Disabled: $4,800
  • Long-term unemployed (at least 6 months): $5,600
  • Disabled and long-term unemployed: $9,600

The amount of the credit also depends on the wages paid to the veteran and the number of hours the veteran worked during the first year of employment.

You aren’t subject to a limit on the number of eligible veterans you can hire. For example, if you hire 10 disabled long-term-unemployed veterans, the credit can be as much as $96,000.

Other considerations

Before claiming the WOTC, you generally must obtain certification from a “designated local agency” (DLA) that the hired individual is indeed a target group member. You must submit IRS Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” to the DLA no later than the 28th day after the individual begins work for you.

Also be aware that veterans aren’t the only target groups from which you can hire and claim the WOTC. But in many cases hiring a veteran will provided the biggest credit. Plus, research assembled by the Institute for Veterans and Military Families at Syracuse University suggests that the skills and traits of people with a successful military employment track record make for particularly good civilian employees.

Looking ahead

It’s still uncertain whether the WOTC will be repealed. The House bill likely will be revised as lawmakers negotiate on tax reform, and it’s also possible Congress will be unable to pass tax legislation this year. Under current law, the WOTC is scheduled to be available through 2019.

But if you’re looking to hire this year, hiring veterans is worth considering for both tax and nontax reasons. Contact us for more information on the WOTC or on other year-end tax planning strategies in light of possible tax law changes.

© 2017

3 mid year tax planning strategies for individuals

In the quest to reduce your tax bill, year end planning can only go so far. Tax-saving strategies take time to implement, so review your options now. Here are three strategies that can be more effective if you begin executing them midyear:

1. Consider your bracket

The top income tax rate is 39.6% for taxpayers with taxable income over $418,400 (singles), $444,550 (heads of households) and $470,700 (married filing jointly; half that amount for married filing separately). If you expect this year’s income to be near the threshold , consider strategies for reducing your taxable income and staying out of the top bracket. For example, you could take steps to defer income and accelerate deductible expenses. (This strategy can save tax even if you’re not at risk for the 39.6% bracket or you can’t avoid the bracket.)

You could also shift income to family members in lower tax brackets by giving them income-producing assets. This strategy won’t work, however, if the recipient is subject to the “kiddie tax.” Generally, this tax applies the parents’ marginal rate to unearned income (including investment income) received by a dependent child under the age of 19 (24 for full-time students) in excess of a specified threshold ($2,100 for 2017).

2. Look at investment income

This year, the capital gains rate for taxpayers in the top bracket is 20%. If you’ve realized, or expect to realize, significant capital gains, consider selling some depreciated investments to generate losses you can use to offset those gains. It may be possible to repurchase those investments, so long as you wait at least 31 days to avoid the “wash sale” rule.

Depending on what happens with health care and tax reform legislation, you also may need to plan for the 3.8% net investment income tax (NIIT). Under the Affordable Care Act, this tax can affect taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 for joint filers). The NIIT applies to net investment income for the year or the excess of MAGI over the threshold, whichever is less. So, if the NIIT remains in effect (check back with us for the latest information), you may be able to lower your tax liability by reducing your MAGI, reducing net investment income or both.

3. Plan for medical expenses

The threshold for deducting medical expenses is 10% of AGI. You can deduct only expenses that exceed that floor. (The threshold could be affected by health care legislation. Again, check back with us for the latest information.)

Deductible expenses may include health insurance premiums (if not deducted from your wages pretax); long-term care insurance premiums (age-based limits apply); medical and dental services and prescription drugs (if not reimbursable by insurance or paid through a tax-advantaged account); and mileage driven for health care purposes (17 cents per mile driven in 2017). You may be able to control the timing of some of these expenses so you can bunch them into every other year and exceed the applicable floor.

These are just a few ideas for slashing your 2017 tax bill. To benefit from midyear tax planning, consult us now. If you wait until the end of the year, it may be too late to execute the strategies that would save you the most tax.

© 2017

Keep real estate separate from your business’s corporate assets to save tax

It’s common for a business to own not only typical business assets, such as equipment, inventory and furnishings, but also the building where the business operates — and possibly other real estate as well. There can, however, be negative consequences when a business’s real estate is included in its general corporate assets. By holding real estate in a separate entity, owners can save tax and enjoy other benefits, too.

Capturing tax savings

Many businesses operate as C corporations so they can buy and hold real estate just as they do equipment, inventory and other assets. The expenses of owning the property are treated as ordinary expenses on the company’s income statement. However, if the real estate is sold, any profit is subject to double taxation: first at the corporate level and then at the owner’s individual level when a distribution is made. As a result, putting real estate in a C corporation can be a costly mistake.

If the real estate is held instead by the business owner(s) or in a pass-through entity, such as a limited liability company (LLC) or limited partnership, and then leased to the corporation, the profit on a sale of the property is taxed only once — at the individual level.

LLC: The entity of choice

The most straightforward and seemingly least expensive way for an owner to maximize the tax benefits is to buy the real estate outright. However, this could transfer liabilities related to the property (such as for injuries suffered on the property ) directly to the owner, putting other assets — including the business — at risk. In essence, it would negate part of the rationale for organizing the business as a corporation in the first place.

So, it’s generally best to put real estate in its own limited liability entity. The LLC is most often the vehicle of choice for this. Limited partnerships can accomplish the same ends if there are multiple owners, but the disadvantage is that you’ll incur more expense by having to set up two entities: the partnership itself and typically a corporation to serve as the general partner.

We can help you create a plan of ownership for real estate that best suits your situation.

© 2017

“Bunching” medical expenses will be a tax-smart strategy for many in 2017

Various limits apply to most tax deductions, and one type of limit is a “floor,” which means expenses are deductible only if they exceed that floor (typically a specific percentage of your income). One example is the medical expense deduction.

Because it can be difficult to exceed the floor, a common strategy is to “bunch” deductible medical expenses into a particular year where possible. If tax reform legislation is signed into law, it might be especially beneficial to bunch deductible medical expenses into 2017.

The deduction

Medical expenses that aren’t reimbursable by insurance or paid through a tax-advantaged account (such as a Health Savings Account or Flexible Spending Account) may be deductible — but only to the extent that they exceed 10% of your adjusted gross income. The 10% floor applies for both regular tax and alternative minimum tax (AMT) purposes.

Beginning in 2017, even taxpayers age 65 and older are subject to the 10% floor. Previously, they generally enjoyed a 7.5% floor, except for AMT purposes, where they were also subject to the 10% floor.

Benefits of bunching

By bunching nonurgent medical procedures and other controllable expenses into alternating years, you may increase your ability to exceed the applicable floor. Controllable expenses might include prescription drugs, eyeglasses and contact lenses, hearing aids, dental work, and elective surgery.

Normally, if it’s looking like you’re close to exceeding the floor in the current year, it’s tax-smart to consider accelerating controllable expenses into the current year. But if you’re
far from exceeding the floor, the traditional strategy is, to the extent possible (without harming your or your family’s health), to put off medical expenses until the next year, in case you have enough expenses in that year to exceed the floor.

However, in 2017, sticking to these traditional strategies might not make sense.

Possible elimination?

The nine-page “Unified Framework for Fixing Our Broken Tax Code” that President Trump and congressional Republicans released on September 27 proposes a variety of tax law changes. Among other things, the framework calls for increasing the standard deduction and eliminating “most” itemized deductions. While the framework doesn’t specifically mention the medical expense deduction, the only itemized deductions that it specifically states would be retained are those for home mortgage interest and charitable contributions.

If an elimination of the medical expense deduction were to go into effect in 2018, there could be a significant incentive for individuals to bunch deductible medical expenses into 2017. Even if you’re not close to exceeding the floor now, it could be beneficial to see if you can accelerate enough qualifying expense into 2017 to do so.

Keep in mind that tax reform legislation must be drafted, passed by the House and Senate and signed by the President. It’s still uncertain exactly what will be included in any legislation, whether it will be passed and signed into law this year, and, if it is, when its provisions would go into effect. For more information on how to bunch deductions, exactly what expenses are deductible, or other ways tax reform legislation could affect your 2017 year-end tax planning, please contact us.

© 2017