Author Archives: Liz Timko

Most individual tax rates go down under the TCJA

The Tax Cuts and Jobs Act (TCJA) generally reduces individual tax rates for 2018 through 2025. It maintains seven individual income tax brackets but reduces the rates for all brackets except 10% and 35%, which remain the same.

It also makes some adjustments to the income ranges each bracket covers. For example, the 2017 top rate of 39.6% kicks in at $418,401 of taxable income for single filers and $470,701 for joint filers, but the reduced 2018 top rate of 37% takes effect at $500,001 and $600,001, respectively.

Below is a look at the 2018 brackets under the TCJA. Keep in mind that the elimination of the personal exemption, changes to the standard and many itemized deductions, and other changes under the new law could affect the amount of your income that’s subject to tax. Contact us for help assessing what your tax rate likely will be for 2018.

Single individuals

Heads of households

Married individuals filing joint returns and surviving spouses


Married individuals filing separate returns


© 2018

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.

© 2017

You may need to add RMDs to your year-end to-do list

As the end of the year approaches, most of us have a lot of things on our to-do lists, from gift shopping to donating to our favorite charities to making New Year’s Eve plans. For taxpayers “of a certain age” with a tax-advantaged retirement account, as well as younger taxpayers who’ve inherited such an account, there may be one more thing that’s critical to check off the to-do list before year end: Take required minimum distributions (RMDs).

A huge penalty

After you reach age 70½, you generally must take annual RMDs from your:

  • IRAs (except Roth IRAs), and
  • Defined contribution plans, such as 401(k) plans (unless you’re still an employee and not a 5%-or-greater shareholder of the employer sponsoring the plan).

An RMD deferral is available in the initial year, but then you’ll have to take two RMDs the next year. The RMD rule can be avoided for Roth 401(k) accounts by rolling the balance into a Roth IRA.

For taxpayers who inherit a retirement plan, the RMD rules generally apply to defined-contribution plans and both traditional and Roth IRAs. (Special rules apply when the account is inherited from a spouse.)

RMDs usually must be taken by December 31. If you don’t comply, you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t.

Should you withdraw more than the RMD?

Taking only RMDs generally is advantageous because of tax-deferred compounding. But a larger distribution in a year your tax bracket is low may save tax.

Be sure, however, to consider the lost future tax-deferred growth and, if applicable, whether the distribution could: 1) cause Social Security payments to become taxable, 2) increase income-based Medicare premiums and prescription drug charges, or 3) affect other tax breaks with income-based limits.

Also keep in mind that, while retirement plan distributions aren’t subject to the additional 0.9% Medicare tax or 3.8% net investment income tax (NIIT), they are included in your modified adjusted gross income (MAGI). That means they could trigger or increase the NIIT, because the thresholds for that tax are based on MAGI.

For more information on RMDs or tax-savings strategies for your retirement plan distributions, please contact us.

© 2017

Demystifying the audit process

Independent auditors provide many benefits to business owners and management: They can help uncover errors in your financials, identify material weaknesses in your internal controls, and increase the level of confidence lenders and other stakeholders have in your financial reporting.

But many companies are unclear about what to expect during a financial statement audit. Here’s an overview of the five-step process.

1. Accepting the engagement

Once your company has selected an audit firm, you must sign an engagement letter. Then your auditor will assemble your audit team, develop a timeline, and explain the scope of the audit inquiries and onsite “fieldwork.”

2. Assessing risk

The primary goal of an audit is to determine whether a company’s financial statements are free from “material misstatement.” Management, along with third-party stakeholders that rely on your financial statements, count on them to be accurate and conform to U.S. Generally Accepted Accounting Principles (GAAP) or another accepted standard.

Auditing rules require auditors to assess general business risks, as well as industry- and company-specific risks. The assessment helps auditors 1) determine the accounts to focus audit procedures on, and 2) develop audit procedures to minimize potential risks.

3. Planning

Based on the risk assessment, the audit firm develops a detailed audit plan to test the internal control environment and investigate the accuracy of specific line items within the financial statements. The audit partner then assigns audit team members to work on each element of the plan.

4. Gathering evidence

During fieldwork, auditors test and analyze internal controls. For example, they may trace individual transactions to original source documents, such as sales contracts, bank statements or purchase orders. Or they may test a random sample of items reported on the financial statements, such as the prices or number of units listed for a randomly selected sample of inventory items. Auditors also may contact third parties — such as your company’s suppliers or customers — to confirm specific transactions or account balances.

5. Communicating the findings

At the end of the audit process, your auditor develops an “opinion” regarding the accuracy and integrity of your company’s financial statements. In order to do so, they rely on quantitative data such as the results of their testing, as well as qualitative data, including statements provided by the company’s employees and executives. The audit firm then issues a report on whether the financial statements 1) present a fair and accurate representation of the company’s financial performance, and 2) comply with applicable financial reporting standards.

Reasonable expectations

Understanding the audit process can help you facilitate it. If your company doesn’t issue audited financials, this understanding can be used to evaluate whether your current level of assurance is adequate — or whether it’s time to upgrade. Contact us for additional information.

© 2017

Could the AMT boost your 2017 tax bill?

A fundamental tax planning strategy is to accelerate deductible expenses into the current year. This typically will defer (and in some cases permanently reduce) your taxes. But there are exceptions. One is if the additional deductions this year trigger the alternative minimum tax (AMT).

Complicating matters for 2017 is the fact that tax legislation might be signed into law between now and year end that could affect year-end tax planning. For example, 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 repeal the AMT for 2018 and beyond. But the bill would also limit the benefit of some deductions and eliminate others.

The AMT and deductions

Some deductions that currently are allowed for regular tax purposes can trigger the AMT because they aren’t allowed for AMT purposes:

  • State and local income tax deductions,
  • Property tax deductions, and
  • Miscellaneous itemized deductions subject to the 2% of adjusted gross income floor, such as investment expenses, tax return preparation expenses and unreimbursed employee business expenses.

Under traditional AMT strategies, if you expected to be subject to the AMT this year but not next year, to the extent possible, you’d try to defer these expenses until next year. If you ended up not being subject to the AMT this year, in the long-term you generally wouldn’t be any worse off because you could enjoy the tax benefits of these deferred expenses next year.

But under the November 2 version of the House bill, the state and local income tax deduction and certain miscellaneous itemized deductions would be eliminated beginning in 2018. And the property tax deduction would be limited. So if you were to defer such expenses to next year, you might permanently lose some or all of their tax benefit.

Income-related AMT triggers

Deductions aren’t the only things that can trigger the AMT. So can certain income-related items, such as:

  • Incentive stock option exercises,
  • Tax-exempt interest on certain private activity bonds, and
  • Accelerated depreciation adjustments and related gain or loss differences when assets are sold.

If you could be subject to the AMT this year, you may want to avoid exercising stock options. And before executing any asset sales that could involve depreciation adjustments, carefully consider the AMT implications.

Uncertainty complicates planning

It’s still uncertain whether the AMT will be repealed and whether various deductions will be eliminated or limited. The House bill will be revised as lawmakers negotiate on tax reform, and the Senate is releasing its own tax reform bill. It’s also possible Congress won’t be able to pass tax legislation this year.

With proper planning, you may be able to avoid the AMT, reduce its impact or even take advantage of its lower maximum rate (28% vs. 39.6%). But AMT planning is more complicated this year because of tax law uncertainty. We can help you determine the best strategies for your situation.

© 2017

Research credit can offset a small business’s payroll taxes

Does your small business engage in qualified research activities? If so, you may be eligible for a research tax credit that you can use to offset your federal payroll tax bill.

This relatively new privilege allows the research credit to benefit small businesses that may not generate enough taxable income to use the credit to offset their federal income tax bills, such as those that are still in the unprofitable start-up phase where they owe little or no federal income tax.

QSB status

Under the Protecting Americans from Tax Hikes Act of 2015, a qualified small business (QSB) can elect to use up to $250,000 of its research credits to reduce the Social Security tax portion of its federal payroll tax bills. Under the old rules, QSBs could use the credit to offset only their federal income tax bills. However, many small businesses owe little or no federal income tax, especially small start-ups that tend to incur significant research expenses.

For the purposes of the research credit, a QSB is generally defined as a business with:

  • Gross receipts of less than $5 million for the current tax year, and
  • No gross receipts for any taxable year preceding the five-taxable-year period ending with the current tax year.

The allowable payroll tax reduction credit can’t exceed the employer portion of the Social Security tax liability imposed for any calendar quarter. Any excess credit can be carried forward to the next calendar quarter, subject to the Social Security tax limitation for that quarter.

Research activities that qualify

To be eligible for the research credit, a business must have engaged in “qualified” research activities. To be considered “qualified,” activities must meet the following four-factor test:

1. The purpose must be to create new (or improve existing) functionality, performance, reliability or quality of a product, process, technique, invention, formula or computer software that will be sold or used in your trade or business.
2. There must be an intention to eliminate uncertainty.
3. There must be a process of experimentation. In other words, there must be a trial-and-error process.
4. The process of experimentation must fundamentally rely on principles of physical or biological science, engineering or computer science.

Expenses that qualify for the credit include wages for time spent engaging in supporting, supervising or performing qualified research, supplies consumed in the process of experimentation, and 65% of any contracted outside research expenses.

Complex rules

The ability to use the research credit to reduce payroll tax is a welcome change for eligible small businesses, but the rules are complex and we’ve only touched on the basics here. We can help you determine whether you qualify and, if you do, assist you with making the election for your business and filing payroll tax returns to take advantage of the new privilege.

© 2017

Draft of Tax Reform Bill Released by House Ways and Means Committee


The House Ways and Means Committee released its first draft of a tax reform bill that proposes a significant overhaul to the U.S. tax system. In the coming weeks, the legislation will be reviewed by a formal committee process and the House of Representatives will vote on whether to move the bill forward.  If it passes the House, the bill will go to the Senate, and if the Senate passes a bill that differs from the House bill, the bills will have to go to a conference committee to reconcile any differences prior to a version being signed into law. In general, the tax provisions would become effective for taxable years beginning after 2017. Changes are likely to occur during the committee markup and the Senate will likely provide its own version of tax reform legislation. http://bit.ly/2iUNsNs

The ins and outs of tax on “income investments” –

Many investors, especially more risk-averse ones, hold much of their portfolios in “income investments” — those that pay interest or dividends, with less emphasis on growth in value. But all income investments aren’t alike when it comes to taxes. So it’s important to be aware of the different tax treatments when managing your income investments.

Varying tax treatment

The tax treatment of investment income varies partly based on whether the income is in the form of dividends or interest. Qualified dividends are taxed at your favorable long-term capital gains tax rate (currently 0%, 15% or 20%, depending on your tax bracket) rather than at your ordinary-income tax rate (which might be as high as 39.6%). Interest income generally is taxed at ordinary-income rates. So stocks that pay dividends might be more attractive tax-wise than interest-paying income investments, such as CDs and bonds.

But there are exceptions. For example, some dividends aren’t qualified and therefore are subject to ordinary-income rates, such as certain dividends from:

  • Real estate investment trusts (REITs),
  • Regulated investment companies (RICs),
  •  Money market mutual funds, and
  • Certain foreign investments.

Also, the tax treatment of bond interest varies. For example:

  • Interest on U.S. government bonds is taxable on federal returns but exempt on state and local returns.
  •  Interest on state and local government bonds is excludable on federal returns. If the bonds were issued in your home state, interest also might be excludable on your state return.
  •  Corporate bond interest is fully taxable for federal and state purposes.

One of many factors

Keep in mind that tax reform legislation could affect the tax considerations for income investments. For example, if your ordinary rate goes down under tax reform, there could be less of a difference between the tax rate you’d pay on qualified vs. nonqualified dividends.

While tax treatment shouldn’t drive investment decisions, it’s one factor to consider — especially when it comes to income investments. For help factoring taxes into your investment strategy, contact us.

© 2017