Numerous tax limits affecting businesses have increased for 2020

An array of tax-related limits that affect businesses are annually indexed for inflation, and many have increased for 2020. Here are some that may be important to you and your business.

Social Security tax

The amount of employees’ earnings that are subject to Social Security tax is capped for 2020 at $137,700 (up from $132,900 for 2019).

Deductions

• Section 179 expensing:
  • Limit: $1.04 million (up from $1.02 million for 2019)
  • Phaseout: $2.59 million (up from $2.55 million)

• Income-based phase-out for certain limits on the Sec. 199A qualified business income deduction begins at:
  • Married filing jointly: $326,600 (up from $321,400)
  • Married filing separately: $163,300 (up from $160,725)
  • Other filers: $163,300 (up from $160,700)

Retirement plans

• Employee contributions to 401(k) plans: $19,500 (up from $19,000)
• Catch-up contributions to 401(k) plans: $6,500 (up from $6,000)
• Employee contributions to SIMPLEs: $13,500 (up from $13,000)
• Catch-up contributions to SIMPLEs: $3,000 (no change)
• Combined employer/employee contributions to defined contribution plans (not including catch-ups): $57,000 (up from $56,000)
• Maximum compensation used to determine contributions: $285,000 (up from $280,000)
• Annual benefit for defined benefit plans: $230,000 (up from $225,000)
• Compensation defining a highly compensated employee: $130,000 (up from $125,000)
• Compensation defining a “key” employee: $185,000 (up from $180,000)

Other employee benefits

• Qualified transportation fringe-benefits employee income exclusion: $270 per month (up from $265)
• Health Savings Account contributions:
  • Individual coverage: $3,550 (up from $3,500)
  • Family coverage: $7,100 (up from $7,000)
  • Catch-up contribution: $1,000 (no change)
• Flexible Spending Account contributions:
  • Health care: $2,750 (no change)
  • Dependent care: $5,000 (no change)

These are only some of the tax limits that may affect your business and additional rules may apply. If you have questions, please contact us.

Many taxpayers make charitable gifts — because they’re generous and they want to save money on their federal tax bills. But with the tax law changes that went into effect a couple years ago and the many rules that apply to charitable deductions, you may no longer get a tax break for your generosity.

Are you going to itemize?

The Tax Cuts and Jobs Act (TCJA), signed into law in 2017, didn’t put new limits on or suspend the charitable deduction, like it did with many other itemized deductions. Nevertheless, it reduces or eliminates the tax benefits of charitable giving for many taxpayers.

Itemizing saves tax only if itemized deductions exceed the standard deduction. Through 2025, the TCJA significantly increases the standard deduction. For 2020, it is $24,800 for married couples filing jointly (up from $24,400 for 2019), $18,650 for heads of households (up from $18,350 for 2019), and $12,400 for singles and married couples filing separately (up from $12,200 for 2019).

Back in 2017, these amounts were $12,700, $9,350, $6,350 respectively. The much higher standard deduction combined with limits or suspensions on some common itemized deductions means you may no longer have enough itemized deductions to exceed the standard deduction. And if that’s the case, your charitable donations won’t save you tax.

To find out if you get a tax break for your generosity, add up potential itemized deductions for the year. If the total is less than your standard deduction, your charitable donations won’t provide a tax benefit.

You might, however, be able to preserve your charitable deduction by “bunching” donations into alternating years. This can allow you to exceed the standard deduction and claim a charitable deduction (and other itemized deductions) every other year.

What is the donation deadline?

To be deductible on your 2019 return, a charitable gift must have been made by December 31, 2019. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” The delivery date depends in part on what you donate and how you donate it. For example, for a check, the delivery date is the date you mailed it. For a credit card donation, it’s the date you make the charge.

Are there other requirements?

If you do meet the rules for itemizing, there are still other requirements. To be deductible, a donation must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions.

And there are substantiation rules to prove you made a charitable gift. For a contribution of cash, check, or other monetary gift, regardless of amount, you must maintain a bank record or a written communication from the organization you donated to that shows its name, plus the date and amount of the contribution. If you make a charitable contribution by text message, a bill from your cell provider containing the required information is an acceptable substantiation. Any other type of written record, such as a log of contributions, isn’t sufficient.

Do you have questions?

We can answer any questions you may have about the deductibility of charitable gifts or changes to the standard deduction and itemized deductions.

The IRS announced it is opening the 2019 individual income tax return filing season on January 27. Even if you typically don’t file until much closer to the April 15 deadline (or you file for an extension), consider filing as soon as you can this year. The reason: You can potentially protect yourself from tax identity theft — and you may obtain other benefits, too.

Tax identity theft explained

In a tax identity theft scam, a thief uses another individual’s personal information to file a fraudulent tax return early in the filing season and claim a bogus refund.

The legitimate taxpayer discovers the fraud when he or she files a return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the tax year. While the taxpayer should ultimately be able to prove that his or her return is the valid one, tax identity theft can cause major headaches to straighten out and significantly delay a refund.

Filing early may be your best defense: If you file first, it will be the tax return filed by a would-be thief that will be rejected, rather than yours.

Note: You can get your individual tax return prepared by us before January 27 if you have all the required documents. It’s just that processing of the return will begin after IRS systems open on that date.

Your W-2s and 1099s

To file your tax return, you must have received all of your W-2s and 1099s. January 31 is the deadline for employers to issue 2019 Form W-2 to employees and, generally, for businesses to issue Form 1099 to recipients of any 2019 interest, dividend or reportable miscellaneous income payments (including those made to independent contractors).

If you haven’t received a W-2 or 1099 by February 1, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for help.

Other advantages of filing early

Besides protecting yourself from tax identity theft, another benefit of early filing is that, if you’re getting a refund, you’ll get it faster. The IRS expects most refunds to be issued within 21 days. The time is typically shorter if you file electronically and receive a refund by direct deposit into a bank account.

Direct deposit also avoids the possibility that a refund check could be lost or stolen or returned to the IRS as undeliverable. And by using direct deposit, you can split your refund into up to three financial accounts, including a bank account or IRA. Part of the refund can also be used to buy up to $5,000 in U.S. Series I Savings Bonds.

What if you owe tax? Filing early may still be beneficial. You won’t need to pay your tax bill until April 15, but you’ll know sooner how much you owe and can plan accordingly.

Be an early-bird filer

If you have questions about tax identity theft or would like help filing your 2019 return early, please contact us. We can help you ensure you file an accurate return that takes advantage of all of the breaks available to you.

If you save for retirement with an IRA or other plan, you’ll be interested to know that Congress recently passed a law that makes significant modifications to these accounts. The SECURE Act, which was signed into law on December 20, 2019, made these four changes.

Change #1: The maximum age for making traditional IRA contributions is repealed. Before 2020, traditional IRA contributions weren’t allowed once you reached age 70½. Starting in 2020, an individual of any age can make contributions to a traditional IRA, as long he or she has compensation, which generally means earned income from wages or self-employment.

Change #2: The required minimum distribution (RMD) age was raised from 70½ to 72. Before 2020, retirement plan participants and IRA owners were generally required to begin taking RMDs from their plans by April 1 of the year following the year they reached age 70½. The age 70½ requirement was first applied in the early 1960s and, until recently, hadn’t been adjusted to account for increased life expectancies.

For distributions required to be made after December 31, 2019, for individuals who attain age 70½ after that date, the age at which individuals must begin taking distributions from their retirement plans or IRAs is increased from 70½ to 72.

Change #3: “Stretch IRAs” were partially eliminated. If a plan participant or IRA owner died before 2020, their beneficiaries (spouses and non-spouses) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary’s life or life expectancy. This is sometimes called a “stretch IRA.”

However, for deaths of plan participants or IRA owners beginning in 2020 (later for some participants in collectively bargained plans and governmental plans), distributions to most non-spouse beneficiaries are generally required to be distributed within 10 years following a plan participant’s or IRA owner’s death. That means the “stretch” strategy is no longer allowed for those beneficiaries.

There are some exceptions to the 10-year rule. For example, it’s still allowed for: the surviving spouse of a plan participant or IRA owner; a child of a plan participant or IRA owner who hasn’t reached the age of majority; a chronically ill individual; and any other individual who isn’t more than 10 years younger than a plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancies.

Change #4: Penalty-free withdrawals are now allowed for birth or adoption expenses. A distribution from a retirement plan must generally be included in income. And, unless an exception applies, a distribution before the age of 59½ is subject to a 10% early withdrawal penalty on the amount includible in income.

Starting in 2020, plan distributions (up to $5,000) that are used to pay for expenses related to the birth or adoption of a child are penalty-free. The $5,000 amount applies on an individual basis. Therefore, each spouse in a married couple may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption.

Questions?

These are only some of the changes included in the new law. If you have questions about your situation, don’t hesitate to contact us.

As part of a year-end budget bill, Congress just passed a package of tax provisions that will provide savings for some taxpayers. The White House has announced that President Trump will sign the Further Consolidated Appropriations Act of 2020 into law. It also includes a retirement-related law titled the Setting Every Community Up for Retirement Enhancement (SECURE) Act.

Here’s a rundown of some provisions in the two laws.

The age limit for making IRA contributions and taking withdrawals is going up. Currently, an individual can’t make regular contributions to a traditional IRA in the year he or she reaches age 70½ and older. (However, contributions to a Roth IRA and rollover contributions to a Roth or traditional IRA can be made regardless of age.)

Under the new rules, the age limit for IRA contributions is raised from age 70½ to 72.

The IRA contribution limit for 2020 is $6,000, or $7,000 if you’re age 50 or older (the same as 2019 limit).

In addition to the contribution age going up, the age to take required minimum distributions (RMDs) is going up from 70½ to 72.

It will be easier for some taxpayers to get a medical expense deduction. For 2019, under the Tax Cuts and Jobs Act (TCJA), you could deduct only the part of your medical and dental expenses that is more than 10% of your adjusted gross income (AGI). This floor makes it difficult to claim a write-off unless you have very high medical bills or a low income (or both). In tax years 2017 and 2018, this “floor” for claiming a deduction was 7.5%. Under the new law, the lower 7.5% floor returns through 2020.

If you’re paying college tuition, you may (once again) get a valuable tax break. Before the TCJA, the qualified tuition and related expenses deduction allowed taxpayers to claim a deduction for qualified education expenses without having to itemize their deductions. The TCJA eliminated the deduction for 2019 but now it returns through 2020. The deduction is capped at $4,000 for an individual whose AGI doesn’t exceed $65,000 or $2,000 for a taxpayer whose AGI doesn’t exceed $80,000. (There are other education tax breaks, which weren’t touched by the new law, that may be more valuable for you, depending on your situation.)

Some people will be able to save more for retirement. The retirement bill includes an expansion of the automatic contribution to savings plans to 15% of employee pay and allows some part-time employees to participate in 401(k) plans.

Also included in the retirement package are provisions aimed at Gold Star families, eliminating an unintended tax on children and spouses of deceased military family members.

Stay tuned

These are only some of the provisions in the new laws. We’ll be writing more about them in the near future. In the meantime, contact us with any questions.

The number of people engaged in the “gig” or sharing economy has grown in recent years, according to a 2019 IRS report. And there are tax consequences for the people who perform these jobs, such as providing car rides, renting spare bedrooms, delivering food, walking dogs or providing other services.

Basically, if you receive income from one of the online platforms offering goods and services, it’s generally taxable. That’s true even if the income comes from a side job and even if you don’t receive an income statement reporting the amount of money you made.

IRS report details

The IRS recently released a report examining two decades of tax returns and titled “Is Gig Work Replacing Traditional Employment?” It found that “alternative, non-employee work arrangements” grew by 1.9% from 2000 to 2016 and more than half of the increase from 2013 to 2016 could be attributed to gig work mediated through online labor platforms.

The tax agency concluded that “traditional” work arrangements are not being supplanted by independent contract arrangements reported on 1099s. Most gig work is done by individuals as side jobs that supplement their traditional jobs. In addition, the report found that the people doing gig work via online platforms tend to be male, single, younger than other self-employed people and have experienced unemployment in that year.

Gig worker characteristics

The IRS considers gig workers as those who are independent contractors and conduct their jobs through online platforms. Examples include Uber, Lyft, Airbnb and DoorDash.

Unlike traditional employees, independent contractors don’t receive benefits associated with employment or employer-sponsored health insurance. They also aren’t covered by the minimum wage or other protections of federal laws, aren’t part of states’ unemployment insurance systems, and are on their own when it comes to training, retirement savings and taxes.

Tax responsibilities

If you’re part of the gig or sharing economy, here are some considerations.

1. You may need to make quarterly estimated tax payments because your income isn’t subject to withholding. These payments are generally due on April 15, June 15, September 15 and January 15 of the following year.
2. You should receive a Form 1099-MISC, Miscellaneous Income, a Form 1099-K or other income statement from the online platform.
3. Some or all of your business expenses may be deductible on your tax return, subject to the normal tax limitations and rules. For example, if you provide rides with your own car, you may be able to deduct depreciation for wear and tear and deterioration of the vehicle. Be aware that if you rent a room in your main home or vacation home, the rules for deducting expenses can be complex.

Recordkeeping

It’s critical to keep good records tracking income and expenses in case you are audited. Contact us if you have questions about your tax obligations as a gig worker or the deductions you can claim. You don’t want to get an unwelcome surprise when you file your tax return next year.

If you’re adopting a child, or you adopted one this year, there may be significant tax benefits available to offset the expenses. For 2019, adoptive parents may be able to claim a nonrefundable credit against their federal tax for up to $14,080 of “qualified adoption expenses” for each adopted child. (This amount is increasing to $14,300 for 2020.) That’s a dollar-for-dollar reduction of tax — the equivalent, for someone in the 24% marginal tax bracket, of a deduction of over $50,000.

Adoptive parents may also be able to exclude from their gross income up to $14,080 for 2019 ($14,300 for 2020) of qualified adoption expenses paid by an employer under an adoption assistance program. Both the credit and the exclusion are phased out if the parents’ income exceeds certain limits, as explained below.

Adoptive parents may claim both a credit and an exclusion for expenses of adopting a child. But they can’t claim both a credit and an exclusion for the same expense.

Qualified adoption expenses

To qualify for the credit or the exclusion, the expenses must be “qualified.” These are the reasonable and necessary adoption fees, court costs, attorney fees, travel expenses (including amounts spent for meals and lodging) while away from home, and other expenses directly related to the legal adoption of an “eligible child.”

Expenses in connection with an unsuccessful attempt to adopt an eligible child can qualify. However, expenses connected with a foreign adoption (one in which the child isn’t a U.S. citizen or resident) qualify only if the child is actually adopted.

Taxpayers who adopt a child with special needs get a special tax break. They will be deemed to have qualified adoption expenses in the tax year in which the adoption becomes final in an amount sufficient to bring their total aggregate expenses for the adoption up to $14,300 for 2020 ($14,080 for 2019). In other words, they can take the adoption credit or exclude employer-provided adoption assistance up to that amount, whether or not they had $14,300 for 2020 ($14,080 for 2019) of actual expenses.

Phase-out for high-income taxpayers

The credit allowable for 2019 is phased out for taxpayers with adjusted gross income (AGI) of $211,160 ($214,520 for 2020). It is eliminated when AGI reaches $251,160 for 2019 ($254,520 for 2020).

Taxpayer ID number required

The IRS can disallow the credit and the exclusion unless a valid taxpayer identification number (TIN) for the child is included on the return. Taxpayers who are in the process of adopting a child can get a temporary number, called an adoption taxpayer identification number (ATIN), for the child. This enables adoptive parents to claim the credit and exclusion for qualified expenses.

When the adoption becomes final, the adoptive parents must apply for a Social Security number for the child. Once obtained, that number, rather than the ATIN, is used.

We can help ensure that you meet all the requirements to get the full benefit of the tax savings available to adoptive parents. Please contact us if you have any questions

With Thanksgiving behind us, the holiday season is in full swing. At this time of year, your business may want to show its gratitude to employees and customers by giving them gifts or hosting holiday parties. It’s a good idea to understand the tax rules associated with these expenses. Are they tax deductible by your business and is the value taxable to the recipients?

Customer and client gifts

If you make gifts to customers and clients, the gifts are deductible up to $25 per recipient per year. For purposes of the $25 limit, you don’t need to include “incidental” costs that don’t substantially add to the gift’s value, such as engraving, gift wrapping, packaging or shipping. Also excluded from the $25 limit is branded marketing collateral — such as small items imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4.

The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (for example, a gift basket for all team members of a customer to share) as long as they’re “reasonable.”

Employee gifts

In general, anything of value that you transfer to an employee is included in his or her taxable income (and, therefore, subject to income and payroll taxes) and deductible by your business. But there’s an exception for noncash gifts that constitute a “de minimis” fringe benefit.

These are items small in value and given infrequently that are administratively impracticable to account for. Common examples include holiday turkeys or hams, gift baskets, occasional sports or theater tickets (but not season tickets), and other low-cost merchandise.

De minimis fringe benefits aren’t included in your employee’s taxable income yet they’re still deductible by your business. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.

Important: Cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and subject to payroll tax withholding regardless of how small and infrequent.

Throwing a holiday party

Under the Tax Cuts and Jobs Act, certain deductions for business-related meals were reduced and the deduction for business entertainment was eliminated. However, there’s an exception for certain recreational activities, including holiday parties.

Holiday parties are fully deductible (and excludible from recipients’ income) so long as they’re primarily for the benefit of non-highly-compensated employees and their families. If customers, and others also attend, holiday parties may be partially deductible.

Spread good cheer

Contact us if you have questions about giving holiday gifts to employees or customers or throwing a holiday party. We can explain the tax rules.

As we all know, medical services and prescription drugs are expensive. You may be able to deduct some of your expenses on your tax return but the rules make it difficult for many people to qualify. However, with proper planning, you may be able to time discretionary medical expenses to your advantage for tax purposes.

The basic rules

For 2019, the medical expense deduction can only be claimed to the extent your unreimbursed costs exceed 10% of your adjusted gross income (AGI). You also must itemize deductions on your return.

If your total itemized deductions for 2019 will exceed your standard deduction, moving or “bunching” nonurgent medical procedures and other controllable expenses into 2019 may allow you to exceed the 10% floor and benefit from the medical expense deduction. Controllable expenses include refilling prescription drugs, buying eyeglasses and contact lenses, going to the dentist and getting elective surgery.

In addition to hospital and doctor expenses, here are some items to take into account when determining your allowable costs:

1. Health insurance premiums. This item can total thousands of dollars a year. Even if your employer provides health coverage, you can deduct the portion of the premiums that you pay. Long-term care insurance premiums are also included as medical expenses, subject to limits based on age.

2. Transportation. The cost of getting to and from medical treatments counts as a medical expense. This includes taxi fares, public transportation, or using your own car. Car costs can be calculated at 20¢ a mile for miles driven in 2019, plus tolls and parking. Alternatively, you can deduct certain actual costs, such as for gas and oil.

3. Eyeglasses, hearing aids, dental work, prescription drugs and professional fees. Deductible expenses include the cost of glasses, hearing aids, dental work, psychiatric counseling and other ongoing expenses in connection with medical needs. Purely cosmetic expenses don’t qualify. Prescription drugs (including insulin) qualify, but over-the-counter aspirin and vitamins don’t. Neither do amounts paid for treatments that are illegal under federal law (such as marijuana), even if state law permits them. The services of therapists and nurses can qualify as long as they relate to a medical condition and aren’t for general health. Amounts paid for certain long-term care services required by a chronically ill individual also qualify.

4. Smoking-cessation and weight-loss programs. Amounts paid for participating in smoking-cessation programs and for prescribed drugs designed to alleviate nicotine withdrawal are deductible. However, nonprescription nicotine gum and patches aren’t. A weight-loss program is deductible if undertaken as treatment for a disease diagnosed by a physician. Deductible expenses include fees paid to join a program and attend periodic meetings. However, the cost of food isn’t deductible.

Dependent expenses

You can deduct the medical costs that you pay for dependents, such as your children. Additionally, you may be able to deduct medical costs you pay for other individuals, such as an elderly parent. If you have questions about medical expense deductions, contact us.

For tax purposes, December 31 means more than New Year’s Eve celebrations. It affects the filing status box that will be checked on your tax return for the year. When you file your return, you do so with one of five filing statuses, which depend in part on whether you’re married or unmarried on December 31.

More than one filing status may apply, and you can use the one that saves the most tax. It’s also possible that your status options could change during the year.

Here are the filing statuses and who can claim them:

1. Single. This status is generally used if you’re unmarried, divorced or legally separated under a divorce or separate maintenance decree governed by state law.
2. Married filing jointly. If you’re married, you can file a joint tax return with your spouse. If your spouse passes away, you can generally file a joint return for that year.
3. Married filing separately. As an alternative to filing jointly, married couples can choose to file separate tax returns. In some cases, this may result in less tax owed.
4. Head of household. Certain unmarried taxpayers may qualify to use this status and potentially pay less tax. The special rules that apply are described below.
5. Qualifying widow(er) with a dependent child. This may be used if your spouse died during one of the previous two years and you have a dependent child. Other conditions also apply.

Head of household status

Head of household status is generally more favorable than filing as a single taxpayer. To qualify, you must “maintain a household” that, for more than half the year, is the principal home of a “qualifying child” or other relative that you can claim as your dependent.

A “qualifying child” is defined as someone who:

• Lives in your home for more than half the year,
• Is your child, stepchild, foster child, sibling, stepsibling or a descendant of any of these,
• Is under 19 years old or a student under age 24, and
• Doesn’t provide over half of his or her own support for the year.

Different rules may apply if a child’s parents are divorced. Also, a child isn’t a “qualifying child” if he or she is married and files jointly or isn’t a U.S. citizen or resident.

Maintaining a household

For head of household filing status, you’re considered to maintain a household if you live in it for the tax year and pay more than half the cost of running it. This includes property taxes, mortgage interest, rent, utilities, property insurance, repairs, upkeep, and food consumed in the home. Don’t include medical care, clothing, education, life insurance or transportation.

Under a special rule, you can qualify as head of household if you maintain a home for a parent of yours even if you don’t live with the parent. To qualify, you must be able to claim the parent as your dependent.

Marital status

You must generally be unmarried to claim head of household status. If you’re married, you must generally file as either married filing jointly or married filing separately, not as head of household. However, if you’ve lived apart from your spouse for the last six months of the year and a qualifying child lives with you and you “maintain” the household, you’re treated as unmarried. In this case, you may be able to qualify as head of household.

If you have questions about your filing status, contact us.