Small-Business Owners: Don’t Forget Special Pandemic Tax Breaks

Whatever shape your business is in, here are tax moves to consider now

If you’re a small-business owner, don’t overlook tax breaks that could help this year—whether your business is on the ropes or is booming.

The coronavirus pandemic has left millions of small businesses like restaurants and shops struggling to survive. Nearly two million American firms, mostly small ones, have already closed their doors in 2020, says Raymond Greenhill, president of Oxxford Information Technology, which tracks about 32 million U.S. businesses of all sizes. At the same time, some small firms, like cleaning services and bike stores, are straining to meet demand.

Either way, harried owners who have focused mainly on the Paycheck Protection Program and payroll tax deferrals allowed this year may be unaware of other provisions that could aid them. Several were prompted by the pandemic, while others are longstanding but newly relevant.

“Tax strategies aren’t top of mind during a crisis, but they make a difference. Some of them provide cash that many owners need,” says Bill Smith, an attorney who leads CBIZ MHM’s national tax office. One allows owners to sell stock in smaller companies tax free.

Whatever shape your small business is in, here are tax moves to consider now. Note: All are likely to require professional help but could provide big benefits.

Claim 2020 losses on 2019 tax returns. Section 165(i) of the tax code lets individuals and businesses claim some losses on last year’s tax return if a federal disaster has been declared. The intent is to get cash to victims as soon as possible.

Disaster declarations are usually for events like hurricanes or earthquakes, but this year the pandemic qualifies. For example, a restaurant owner who had a good year in 2019 might be able deduct 2020 pandemic expenses for food spoilage on the 2019 tax return and reduce taxes owed or get a refund. Alternately, these losses can be claimed on 2020 returns, which are due as late as Oct. 15, 2021.

Not all pandemic costs are deductible, and it’s not clear which ones qualify because the pandemic differs from other disasters. Write-offs may need to be for “casualty” losses as defined by the tax code, which typically requires them to be both sudden and caused by the disaster.

Valrie Chambers, a CPA who studies casualty losses and teaches at Stetson University, thinks that a revenue drop for a restaurant due to capacity limits wouldn’t count. She thinks that added costs for deep-cleaning or a payment to get out a lease because of the pandemic could count.

The Internal Revenue Service hasn’t issued guidance on pandemic disaster losses, but a spokesman says the agency is aware of the issues.

Next year, carry 2020 losses back up to 5 years. The 2017 tax overhaul ended the ability of many firms to use current operating losses to offset prior-years’ taxes, but this spring’s Cares Act allows a five-year carryback of net losses for 2018, 2019 and 2020. It also removed other restrictions on their use, making this provision highly valuable to some taxpayers.

A broad array of losses are allowed under this provision, because it applies when business deductions outstrip income. However, this benefit takes longer to get than the one for disasters because 2020 losses can’t be claimed until returns are filed next spring.

The expanded carryback benefit can be used both by corporations, including S corporations, and by owners of pass-through entities such as partnerships.

Switch to cash accounting to defer taxes. The 2017 overhaul allowed firms averaging less than a certain amount of revenue over three years to use “cash accounting” rather than “accrual accounting.” This means they won’t owe the IRS until customers pay, rather than owing when the customers commit to pay.

Mr. Smith says that this year some smaller firms have seen revenues drop enough to lower their average below the current $26 million threshold for several years going forward, enabling them to switch to cash accounting.

Get generous treatment for losses from failed businesses. Tax code section 1244 provides a benefit for some failed businesses that’s often overlooked, says Dr. Chambers. Certain owners who sell can use up to $50,000 of net losses—$100,000 for a married couple filing jointly—to offset current or future ordinary income such as wages.

Without this provision, the losses would count as capital losses that only offset capital gains, plus $3,000 of ordinary income a year. Such losses could take a long time to use.

The requirements to claim this break apply to many investors in small firms. The business must be organized as a C or S Corp oration, not a partnership, and the break often doesn’t apply if more than $1 million in capital was invested at the firm’s outset. It can only be used by original investors, not subsequent ones.

Sell a business, tax-free. Owners who sell at a profit have a terrific opportunity if they can use code section 1202. In that case, some or even all of the gains on the sale may be tax-free.

To be eligible, the business must be a C corporation, and the seller must have held the stock in it for more than five years. The business can’t have had more than $50 million in assets when it was started. If the conditions are met, says Mr. Smith, the owners can often eliminate capital-gains tax on at least $10 million of profits on their sale, and sometimes far more.


Last Tax Season Was a Mess. Now’s Time to Prepare for This One.

If you didn’t change the tax withholding in your paycheck, you still have time to avoid another unpleasant surprise — or even a fine.

 
 

The first tax season under the Republican-sponsored overhaul brought an odd combination of pleasant and unpleasant surprises: lower tax burdens, but also lower refunds — and, for some, an unexpected bill.

Anyone who didn’t take a proactive approach after getting a big tax bill last time around could end up in that situation again, only worse: That filer is more likely to have to pay a penalty.

For 2019, taxpayers who didn’t generally withhold at least 90 percent of their liability from their paychecks may be required to pay a fine. That threshold is back up from 80 percent, where it was set last year as everyone adjusted to the new rules.

If you didn’t change your withholding by filling out a new W-4 form with your employer, there are still steps you can take to try to avoid the extra charge.

If a withholding calculator — like the one on the Internal Revenue Service’s website — shows you’re significantly short, you have options. There may be time to have an extra amount withheld from your final paycheck to get you over the threshold, although that will require filling out a W-4 now and another later to reverse that change. Or you can make what’s called an estimated tax payment directly to the I.R.S.

You’ll also want to think about how to handle the rest of the tax balance.

“You can start planning for that now by setting aside money in savings accounts or planning ahead for an installment agreement with the I.R.S. so you can pay over a period of time,” said Nathan Rigney, lead tax research analyst at H&R Block’s Tax Institute.

Most households did pay a bit less because of the overhaul: Individuals’ total tax liability dropped nearly 5.8 percent, or $70 billion, according to I.R.S. data on tax returns filed through July.

But it didn’t feel that way for some taxpayers. The number of refunds issued hardly budged — they were down 0.3 percent — but refunds for many were smaller. Refunds for those who earned between $100,000 and $250,000, for example, dropped by about 11 percent, according to the I.R.S.

Many people were surprised to learn that they owed the government money even if their situation hadn’t changed.

 
Why? After the law went into effect, the government told employers how to tweak the amount of tax withheld from workers’ paychecks. It mostly suggested decreases, and, in some cases, filers didn’t have enough withheld. (Over all, however, the average refund amount declined only 1.3 percent last year.)

“It’s safe to say taxpayers were caught off guard by the impact of those changes,” said Brian Ellenbecker, a certified financial planner and senior vice president at Baird, a financial services firm in Milwaukee.

The new law simplified the tax lives of many households because it doubled the standard deduction. About 90 percent of taxpayers used the standard deduction on their 2018 tax return, the I.R.S. said, up sharply from 70 percent in 2017.

But that doesn’t mean there aren’t some simple strategies to consider to lower your tax bill, and there’s still time left in the year to put them to work.

For 2019, the standard deductions are up a little, to $24,400 for married couples filing jointly and $12,200 for single filers. For most people, that will do nicely.

But if your itemized deductions — including mortgage interest, state and local taxes (known as SALT, now capped at $10,000), and charitable contributions — are just shy of topping the standard amount, you might think about bunching certain deductions into alternating years.

Consider a family that gives $5,000 to charity at the end of every year. Instead of making that donation this month, it could do so in January, then make another as usual next December. The family would then have $10,000 in itemized deductions for the 2020 tax year.

 
The same logic can be applied to certain medical expenses. In 2019, you can deduct the portion of your expenses that exceed 10 percent of your adjusted gross income (if you itemize). So if you plan to have elective surgery, for example, it may make sense to consider the timing.

“Dental bills,” said Larry Pon, a certified public accountant in Redwood City, Calif. “Those are big ones.”

There’s a way for some older taxpayers to get a break using charitable contributions even if they don’t itemize. Those over 70½ can make what’s known as qualified charitable distributions — a direct donation from an individual retirement account to an eligible charity. The benefits are twofold: Donations, up to $100,000 annually, are not included in their taxable income but count toward the prescribed amount they must take out each year (also known as a required minimum distribution).

“This opportunity was a good deal before tax reform, and now it can be even more relevant and useful,” said Joe Musumeci, a certified public accountant with Rowles & Company in Baltimore.

There aren’t many pay periods left, but workers can reduce their taxable income by contributing more to their employer-sponsored retirement account, such as a 401(k), before the end of the year. Contribution limits to such accounts are $19,000 in 2019, or $25,000 if you’re 50 or older.

And there’s still plenty of time to contribute to I.R.A.s. Contributions to traditional I.R.A.s may also provide a tax deduction, as long as you meet the income limits and other rules. For 2019, contributions to traditional and Roth I.R.A.s can be made until the April 15, 2020, tax deadline. (Just be sure to tell your provider that the contribution is for the 2019 tax year.)

The same goes for self-employed people contributing to a SEP I.R.A., which allows contributions up to 25 percent of compensation up to $56,000 for 2019, said Lisa Greene-Lewis, a certified public accountant at TurboTax.

If you plan on contributing to a 529 college savings plan, you probably want to do so before Dec. 31.

That’s the deadline to qualify for many of the state tax breaks offered by more than 30 of these plans. (Some states’ deadlines stretch into the new year.) Contributions are made with money that has already been taxed, and it’s withdrawn free of capital gains and income taxes as long as it pays for qualified expenses.

It won’t exactly cut your tax bill, but it would be a missed opportunity to not use money you’ve put into a health care flexible spending account or a dependent care account. Be sure to check your balances and put that pretax money to use.

Plan rules vary, but some employers require you to spend F.S.A. money by Dec. 31 or lose it. Others provide more flexible options: a grace period (often until about March 15) to incur any new expenses, or the option to carry $500 into the new year.

Dependent care accounts aren’t as flexible; the money has to be spent by Dec. 31. Still have a balance? Day camps during your child’s holiday break count — just be sure to get a receipt.

Taxpayers have been expected to report and pay tax on any gains from the trading of cryptocurrencies, but this year the I.R.S. is planning a direct approach with a new question on your 1040 form: “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”

If you did, it could be a taxable event. The rules are complicated, so be sure to check out the latest guidance on the I.R.S. site, which includes a list of frequently asked questions.

 
Finally, remember to check your withholding — yes, again — early next year. The I.R.S.’s Tax Withholding Estimator will be updated again soon, and that’ll be the time to make sure you’re on track for the 2020 tax year.

If you find that you’re not withholding enough, submit a new W-4. The I.R.S. released a new version of the form on Thursday.


New, confusing W-4 form is coming for 2020: What to do now to get bigger tax refund

, Detroit Free Press as in USA Today

Published 5:00 a.m. ET June 20, 2019

If you grumbled about the size of your tax refund or even writing a huge check for your federal income taxes in April, don't expect things to change without tinkering with a W-4. 

And if you think the current W-4 form is a headache, get ready for a migraine with a new form for 2020 and beyond.

Many people still should take time now to withhold more money out of their paychecks to cover their 2019 federal income taxes. Setting aside more money now through the rest of the year can trigger a bigger refund when you file your 2019 return – or you might avoid owing money to the federal government. 

If you're paid every two weeks, you could have a dozen or so paychecks ahead in 2019. It's enough to make a good dent.

Remember, not everyone was thrilled back in April

While many did see lower tax bills as part of the Trump tax cuts, some had to hand over money for federal income taxes in April because they had begun seeing slightly more money in their paychecks last year. 

"If they owed money and they were a little surprised by that, they might want to have their withholding adjusted with their employer," said Sandra Shecter, certified public accountant and principal for Rehmann in Troy. 

Throughout 2018, the Internal Revenue Service and others encouraged taxpayers to do a "Paycheck Checkup" to see if their withholding amount was on track. Many people didn't do that – and more likely than not, they're still dragging their feet in 2019.

How to fix that W-4 

The IRS calculator for a Paycheck Checkup can help you take a detailed look at your tax situation and better adjust your withholding amount when you file another W-4 form. You would need your most recent pay stubs, as well as a copy of your most recent tax return. 

And you'd need some time to fill out the online worksheet. 

Want a short-hand trick? Pull out your own regular calculator. 

If you owed $2,400 in April for your 2018 federal income taxes, for example, you might have an extra $200 a paycheck withheld beginning in late June if you're paid every two weeks. Figure out the number of paychecks you have left in the year and then divide the that number into what you owed.

See Line 6 of the current W-4 form and plug in a number for the "additional amount, if any, you want withheld from each paycheck." 

A little simple division may not be as precise as the online calculator but it's far better than throwing up your hands and doing nothing. 

Are you in one of these vulnerable groups?

Some groups are particularly vulnerable to not having enough money withheld now after the tax changes. They include households with two-income families, high incomes, homeowners who live in high property tax states, families who claim the child tax credit and those who lost deductions under the Trump tax reform, such as tax breaks related to unreimbursed employee expenses. 

For 2018, the IRS waived any penalties related to withholding too little in taxes during the year. In 2019, we can expect those penalties to return.

Shecter noted that some taxpayers will want to pay attention to the rules that could help them avoid penalties. Normally, no penalty applies if tax payments during the year meet one of the following tests: 

  • The person’s tax payments were at least 90% of the tax liability for 2019 
  • Or the person’s tax payments were at least 100% of the prior year’s tax liability or 2018. However, the 100% threshold is increased to 110% if a taxpayer’s adjusted gross income is more than $150,000 or $75,000 if married and filing a separate return. 

Now, of course, is as good of a time as any to reevaluate how much you're having withheld from each check. 

New design is supposed to simplify the W-4

Later this year, we can expect to hear more about the ongoing effort by the IRS to redesign form W-4 for determining how much money your employer should withhold for federal income taxes out of your paycheck. 

The "near-final draft" is expected to be released in July, according to the IRS, while the final version is expected to be released in November in time for 2020.

It's a vast understatement to say that no one, really, will ever use the word "simple" when referring to the revised, five-step W-4 form.

"This essentially is a mini-tax return," said Melanie Lauridsen, senior manager for tax policy and advocacy at the American Institute of CPAs.

The new form attempts to take into account the significant changes that were part of the Tax Cuts and Jobs Act of 2017.

On the plus side, the new form offers a line to reflect how many children you have in your family that are under the age 17 and how many dependents may be older. You'd see Step 3 on the new W-4 to take those ages into account. The age breakdown is important because the dollar amount for the actual tax credits related to children and dependents will vary based on age under the Trump tax revisions.

"In some respects, they've simplified it," Shecter said. 

A chance to disclose more, but should you?

Where things could get really tricky, though, is with Step 4 on the new W-4 form.

If you really want to be exact on the amount withheld, there's a section that offers optional adjustments. 

The optional adjustments can reflect other income, maybe from retirement income or dividends. 

The question, of course, becomes do you want your employer to know all your financial business?

"You wouldn't want your employer to know I've got millions in my bank account," said Lauridsen, at the American Institute of CPAs.

So you might not want to disclose on a W-4 that you've got $25,000 or more in "other income" on Line 4a. 

And if you're going beyond claiming the standard deduction, well, you'd be supplying more detailed information on Line 4b for deductions. That would include itemized deductions, such as mortgage interest, charitable contributions, as well as limited deductions for state and local income taxes and medical expenses. And that would reflect other deductions, such as for student loan interest. 

"I guess people will be hiring CPAs to fill out their W-4s," said George W. Smith, a certified public accountant with his own firm in Southfield.

"Good luck to the non-tax expert trying to fill this out," Smith said.

He and others are particularly focused on the format for calculating other income and deductions. How do you correctly project what your deductions – or extra income – will be in the year ahead? 

"In fairness to them, the IRS is trying its hardest to prevent the under withholding of federal income taxes by taxpayers due to the new tax laws in place," Smith said. 

Strategies for filling out the new W-4          

To be sure, there are some shortcuts that you could take with the new W-4.

Employees who have already submitted a form W-4 would not be required to submit a new one simply because of the redesign. If you're taking a new job at a new employer in 2020, though, you're going to have to fill out one of the new W-4 forms. 

To make things really simple, it would be possible to fill out only Step 1 on the new W-4 form and sign it. If that's done, your withholding would only be based on the standard deduction that applies to your filing status and the appropriate tax rates. The risk is that you could owe more than you'd expect once you file your tax return.  

Some who want to increase their withholding and still take a shortcut could just fill out Line 4c to enter "any additional amount you want withheld each pay period." 

Essentially, the new methodology of withholding is meant to account for taxable events or situations such as dual income spouses, interest income, dividends, capital gains, any taxable retirement income.

"The changes attempt to determine what the taxpayer’s actual taxable income and tax may be for the year and withhold accordingly," said James P. O’Rilley, CPA and tax director for Doeren Mayhew in Troy. 

"This is especially important to avoid penalties for underpayment of tax."

Employers had to use new withholding tables in early 2018 in order to get some of the benefits of tax cuts into the hands of the public throughout the year.

But many taxpayers ended up wondering what had happened to their typical refund. 

"In reality, they received a portion with each paycheck," O'Rilley said. "It tends to not feel the same when you get an extra $100 to $200 per month versus a $1,200 to $2,400 refund in April," he said.

Or worse yet, some owed money for the first time in years.


New W-4 Form Aims to Prevent Tax Refund Surprises, IRS Says

Upset with a smaller-than-anticipated tax refund this year? The IRS has a remedy for that.

The Internal Revenue Service is redesigning the key tax withholding form, the W-4, which tells employers how much to take out of your paycheck. The form is critical for filers to calculating withholding that wasn’t updated to reflect the new facets of the 2017 tax overhaul.

“The new design reduces the form’s complexity and increases the transparency and accuracy of the withholding system,” according to a Treasury Department fact sheet. “While it uses the same underlying information as the old design, it replaces complicated worksheets with more straightforward questions that make accurate withholding easier for employees.”

In the most recent filing season, some taxpayers expressed concerns that their refunds were much smaller than in past years. The old W-4, which hadn’t been updated to reflect all the changes to the law, is responsible for some of the surprises.

The new form, which was released as a draft on Friday, will be finalized in about a month and becomes effective on Jan. 1, 2020, a Treasury Department official said in a call with reporters. That means the forms won’t be available to help calculate withholding for the 2019 tax year.

The IRS released a draft of a revised W-4 last June but decided to rework it after concerns about the amount of information required if a worker had a second job, a Treasury official said.

The new form will be given to workers who start new jobs starting next year. Employees who do not switch employers aren’t required to fill out a new form, but can if they choose.

The new W-4 will reflect changes made in the 2017 tax cut law, which raised the standard deduction, lowered tax rates and altered available credits and deductions for taxpayers. The law also got rid of personal exemptions, an amount of money taxpayers could deduct for themselves and dependents.

The form will require taxpayers to fill out whether household members hold multiple jobs, dollar amounts for other income not automatically subject to withholding, such as pay from freelance work and anticipated tax credits and deductions. The form also allows for taxpayers to instruct their employer to take out additional money each pay period.

Employers then use that information to calculate how much tax to keep out of their workers’ paychecks and send to the IRS throughout the year. Employees who have more withheld than what they owe get a refund when they file their tax return the following year. Those who don’t have enough taken out end up owing the IRS the difference during tax season.

Confusion over whether the form would be revised before the first filing season under the new tax law kept many taxpayers from checking and adjusting their withholding rates, tax professionals have said.

The IRS is encouraging all workers to check their withholding using an online calculator so they aren’t surprised next year with their refund size.

Taxpayers should increase their withholding if they have multiple jobs or if they and their spouse are both employed, according to the Treasury fact sheet. People can reduce their withholding if they are eligible for tax credits and deductions, such as the child tax credit, the sheet said.

This year, the average refund was about 1.7% less than last year. In total, the IRS sent out about $7.5 billion less in refunds this year, according to agency data from earlier this month.

W-4s can be changed throughout the year and re-submitted to employers to reflect unexpected changes in income, or life events such as the birth of a child or a marriage.


‘I’m not American’: How a complicated Trump tax law created huge bills for foreign citizens

June 18, 2019

For some U.S. citizens, the Trump administration’s 2017 tax cuts provided an economic boost. But for Carrie, a 50-year-old doctor living in Amsterdam, they have added to a slow-moving financial disaster that threatens a six-figure debt.

Carrie says that when she finally explained her circumstances to an accountant earlier this year, she heard panic in the professional’s voice.

“He said: ‘This is bad. This is bad.’ He kept repeating it,” Carrie said.

Carrie is now expecting to be hit not only by an Obama-era tax change that is compelling thousands of U.S. citizens around the world to file taxes for the first time but also by another, more complicated and less-noticed change made during the Trump administration.

And although that change was made with U.S. corporations in mind, foreign individuals like her may feel the hardest impact.

Her accountant currently estimates a U.S. tax bill of at least $107,000 — a sum that Carrie fears would wipe out much of the savings designed to send her children to college.

To her, it feels surreal. “I’m not American,” she added. “Well, by your rules I am. But it doesn’t feel like that.”

Carrie, who asked that her full name not be used as she is still in the process of coming into compliance with U.S. tax law, is one of thousands of U.S. citizens who live abroad who have found themselves entangled in U.S. tax laws in recent years. Her accountant issued a statement that confirmed the current estimates of her tax bill.

Like many, her citizenship is an accident of birth — she was born in the United States when her Dutch parents were living there during a six-month sabbatical from work. Her parents were not U.S. citizens. Neither were her siblings.

Although she did apply for a U.S. passport when she was 18, it is long expired, never used.

Foreign governments are starting to take notice of the situation, but they have little leverage to lobby on behalf of their own citizens. The laws that target people like Carrie are designed to target U.S. citizens — whether those people are also foreign citizens or not.

Some countries have sent high-level delegations to push the United States on the issue. Menno Snel, the Dutch state secretary for finance, was in Washington last month to meet members of Congress and officials from the Treasury Department and Internal Revenue Service.

Snel has built an ambitious agenda at home for trying to change the Dutch reputation as a tax haven. He is now trying to protect Dutch citizens from becoming collateral damage in a U.S. battle against evasion.

“Most countries in the world have a different system,” Snel said of the United States in an interview.

The United States is one of only two countries in the world that bases its taxation policies on citizenship rather than residence, according to the Tax Foundation; the other is Eritrea. The U.S. practice is a relic of the Civil War and the Revenue Act of 1862, which sought to punish men who fled to avoid joining the Union army.

Recent changes to the U.S. tax system have increased its global impact. In 2010, the United States passed the Foreign Account Tax Compliance Act (FATCA), which requires all non-U.S. foreign financial institutions to search their records for U.S. citizens and permanent residents and report them to the Treasury.

FATCA was designed to catch tax evaders; in theory, tax treaties exempt anyone from paying U.S. taxes if they have already paid them in the country in which they live. Many do not have enough assets to be required to report them in the U.S. and the IRS can offer an exclusion for roughly $100,000 of income.

Snel said that bilateral tax treaties designed to prevent double taxation and a $50,000 [SIC as it actually $10,000] threshold on what has to be reported under FATCA meant that 90 percent of those targeted don’t pay additional taxes.

“There’s just a lot of fuss and rules and bureaucracy,” he said.

But when the sums are bigger, or the tax systems don’t align, it can cause costly and sometimes high-profile problems.

Boris Johnson, the former British foreign secretary who was born in the United States, renounced his U.S. citizenship in 2017 after paying a hefty capital gains tax on a home in London on which he had already paid British property tax.

Foreign institutions have until the end of the end of this year to become fully compliant with FATCA. Activists say that banks have already refused bank accounts and loans to potential U.S. citizens for fear of fines from the U.S. Treasury.

“We all keep quiet because we’re scared,” Carrie said.

To come into compliance with U.S. tax laws, dual nationals may have to deal with mundane but complex aspects of U.S. bureaucracy — acquiring a Social Security number as a nonresident, for example.

“Someone who was not brought up in the U.S., often doesn’t even speak English well, has to go to a U.S.-based tax adviser,” said Daan Durlacher, the Dutch American founder of the group Americans Overseas, adding that legal fees add up to thousands of dollars.

Although she was already facing costs due to the Obama-era FATCA, Carrie’s problem has been made far more complicated and expensive by Trump’s tax cuts — signed into law in the Tax Cuts and Jobs Act of 2017.

That law allowed a one-time tax on assets that U.S.-controlled businesses have accumulated overseas, whether or not they repatriate them to the United States.

The aim was to persuade major American firms to bring assets back to the United States, but it was indiscriminate, requiring huge businesses like Google and small entrepreneurs alike to announce and pay tax on money they had accumulated over decades.

“It offered benefits, exemptions and the application of foreign tax credits to corporations,” said Richard Barjon, the U.S. Individual Tax Practice leader at PwC Switzerland. He added that individuals did not qualify for the same deductions and usually did not have the cash on hand to settle quickly, although the law does provide the possibility of paying in installments.

“It's not favorable at all for individuals,” said Eric Toder, co-director of the Tax Policy Center at the Urban Institute. “Had they thought about it, they probably would have thought of some clause to prevent this from happening."

The issue is particularly acute in countries such as the Netherlands, where the health-care system encourages doctors and other health-care workers to register private limited companies to charge for their services to different hospitals.

Carrie, a medical specialist, had set up three separate private companies and kept her profits in them as a form of savings, which made her circumstances particularly complicated. She estimates that she will spent tens of thousands of dollars just in fees to lawyers and accountants aside from her tax bill.

Other health-care workers are running into the problem, too. Last year, a Dutch TV show interviewed a dentist, also born in the United States, who said he expected to potentially have to pay tens of thousands of dollars in U.S. taxes under the transition tax.

U.S. citizenship had become “a nightmare” in recent years, the dentist, Jan Willem Vaartjes, said.

If it were a different country making these complicated requests, foreign governments like the Netherlands might just ignore them. Two members of French Parliament said in May that the country should consider pulling out of its tax treaty with Washington if more is not done to help French citizens.

But the United States is an economic behemoth, and most countries already have binding tax treaties in place. Speaking in Washington, Snel said he was advocating for a less drastic approach.

“Let’s put our minds and heads together to find a solution,” Snel said in May.

A spokeswoman for the Ministry of Finance, speaking on background in accordance with government practice, said that contact with the IRS has intensified since Snel’s visit but that there were “no solutions yet.”

Many are not optimistic. The Treasury Department and the IRS have limited leeway to change tax rules without congressional approval. So far, legislative efforts to change FATCA and other U.S. tax laws have stalled. “In complex legislation, there are mistakes and things that need to be fixed after the fact,” said Toder.

Technically, Carrie is represented in Congress by the last place she had residence in the United States — in her case, a place she left as a baby. Peter Spiro, an expert on dual citizenship at Temple University School of Law, said this is one reason Americans overseas have little clout in the U.S. political system.

“Their representation in Congress is watered down,” Spiro said.

The simplest option for Carrie may be following Johnson and thousands of others who renounce their citizenship — a growing trend that comes with its own financial burdens, including a potential “exit tax” on high earners. But she hopes to find a way to keep her citizenship.

“I love the United States,” she said.


Another tax headache ahead: IRS is changing paycheck withholdings, and it'll be a doozy

Janna Herron  for USA TODAY.com on 1:25 PM EDT Apr 11, 2019
 
You finally finished your taxes and are learning – for better or worse – the ins and outs of the new law.

But wait, the law isn’t done with you. There’s another complication coming out later this year: The Internal Revenue Service is changing how you adjust your paycheck withholdings, and early indicators show it won’t be easy.

The agency plans to release a new W-4 form that better incorporates the changes ushered in by the new tax law so that the amount held back for taxes in each of your paychecks is more accurate.

The agency’s goal: A taxpayer shouldn’t owe or be owed come tax time.

But the changes won’t be simple, says Pete Isberg, head of government affairs at ADP, the payroll and human resources company.

Filling out the new form will be a lot like doing your taxes again.

“It’ll be a much bigger pain,” he says. “The accuracy will be 100 percent, but the ease-of-use will be zero.”

What’s changing?

While the new form hasn’t been released yet, the IRS last summer put out a draft version and instructions  seeking feedback from tax preparation companies and payroll firms. Instead of claiming a certain amount of allowances based on exemptions – which have been eliminated – the draft form asked workers to input the annual dollar amounts for:

  • Nonwage income, such as interest and dividends
  • Itemized and other deductions
  • Income tax credits expected for the tax year
  • For employees with multiple jobs, total annual taxable wages for all lower paying jobs in the household

“It looked a lot more like the 1040 than a W-4,” Isberg says.

The new form referenced up to 12 other IRS publications to fill it out. It was so complex and different from the previous W-4 form that Ernst & Young worried employees would struggle to fill it out correctly and employers may need to offer training beforehand.

Why is it taking so long?

The tax and payroll community expressed many concerns about the draft form aside from its complexity.

Many cited privacy issues because the form asked for spousal and family income that workers might not want to share with their employers. Other employees may not want to disclose they have another job or do side work outside their full-time job.

To avoid disclosing so much private information, taxpayers instead could use the IRS withholding calculator, but it’s “not easy to use, and the instructions are confusing,” according to feedback from the American Payroll Association.

In September, the IRS scrapped plans to implement the new W-4 form for 2019 and instead is planning to roll it out for 2020.

What to expect

Another draft version of the new W-4 is expected by May 31, according to the IRS, which will also ask for public comment.

“We encourage taxpayers to take advantage of that opportunity and send us comments on the redesign,” says agency spokeswoman Anny Pachner.

The IRS will review the comments and plans to post a second draft later in the summer. The final W-4 version will be released by the end of the year in time for the 2020 tax year.

Once it arrives, you’ll probably need the following information on hand, says Kathy Pickering, executive director of H&R Block’s Tax Institute. That may mean lugging in past 1099 forms, paystubs or last year’s tax returns to fill it out correctly.

  • Your filing status
  • Number of dependents
  • Information about your itemized deductions such as home mortgage interest, state and local taxes, and charitable deductions
  • Earnings from all jobs
  • Information about nonwage income such as business income, dividends, and interest.

“If you’re married, and both you and your spouse work, it will also be helpful to know information about your spouse’s income,” she says.

You may also need to fill out a new state income withholding form. Many states use the current W-4 for withholding, but they may need to release their own forms, too.

 


The 8 Most Common 2019 Tax Return Questions, Answered by Experts

The most important changes to the tax code in decades have taken effect — and filers are confused. We asked CPAs and other tax-prep pros to simplify things.

By Tara Siegel Bernard and Ron Lieber on Feb. 13, 2019 in the New York Times

Some level of bafflement attends tax-filing season every year. But in 2019, as Americans examine their returns for the first time under the full effect of the sweeping new Republican tax law, the situation is the most cryptic in memory. Some tax breaks have been erased or capped, while others have been expanded or introduced.

This is equal-opportunity anxiety. Blue-state professionals feel micro-targeted by new limits on state and local tax deductions, while filers elsewhere can’t figure out why they’re no longer getting a fat refund, if the law was supposed to be so good for them.

We asked accountants across the country to tell us their clients’ most common queries. Here are some answers.

For many people living in high-tax states like New York, California, New Jersey and Connecticut, there’s one overriding reason their tax bills have risen: Their state and local tax deduction, known as SALT, will be capped at $10,000. This includes state and local income taxes, as well as real estate taxes.

 

New York City residents, for example, often have state and city taxes that total nearly 10 percent of their income, she added. So if your state and local taxes already exceed the $10,000 limit, you lose the ability to deduct any of your property taxes.

As a result, some families may find that instead of itemizing, it’s better to take the larger standard deduction. “But even if you can still itemize, your total deductions will be limited regardless,” said Ms. Salandra, “which may likely result in higher taxes.”

Her property-owning clients with incomes in the $200,000 to $400,000 range are feeling the most significant pinch. Though their tax rates have decreased, that usually does not make up for the loss of their largest itemized deductions.

In early 2018, the I.R.S. took its best shot at offering guidance to employers about how to change tax withholding from paychecks. In general, it suggested decreases, since the 2017 law was supposed to be a cut. That should have resulted in bigger paychecks for most people.

But if you were an employee receiving those checks, you may not have noticed the increase. If that was the case, you won’t be seeing the usual April refund: You’ve already gotten it, just parceled out into slightly higher 2018 paychecks.

Want to get a refund next year? If that’s your goal, Julie A. Welch, a Leawood, Kan., accountant, suggests using the I.R.S. withholding calculator to adjust your paycheck. Most people never bother.

Before breaking down what’s changed, let’s back up and explain the basics: Taxpayers are entitled to take a standard tax deduction amount, or they can itemize their deductions individually; they can deduct whichever amount is higher, resulting in a lower tax bill.

Under the new tax law, the standard deduction has doubled (to $12,000 for individuals and $24,000 for joint filers), while several itemized deductions have been eliminated or limited. TurboTax estimates that as a result, nearly 90 percent of taxpayers will now take the standard deduction, up from about 70 percent in previous years. To help you figure out the best choice, the company has posted a three-step interactive tool on its blog.

  • Dependent exemption: Under the previous law, families were able to claim a $4,050 exemption for each qualifying child, but that deduction has been eliminated. Instead, if you have children under the age of 17, you may qualify for the child tax credit, which was raised to $2,000 from $1,000 for each child. More people will qualify now that the credit begins to phase out at $400,000 in income for joint filers ($200,000 for individuals), according to Claudell Bradby, a certified public accountant with TurboTax Live. The law also introduced a $500 credit for other dependents, which could include elderly parents or children over the age of 17.

  • Mortgage interest: If you itemize, you can deduct the interest paid on the first $750,000 in mortgage indebtedness on loans taken out after Dec. 15, 2017 (on first and second homes). Older loans are grandfathered: You can still generally deduct interest on up to $1 million in mortgage debt on loans taken out before Dec. 16, 2017.

  • Interest on home equity loans or lines of credit are now only deductible if the debt is used to “buy, build or substantially improve” the home that secures the loan. You can no longer deduct the interest if you pay off credit card debt, for example.

  • Alternative minimum tax: Far fewer people are expected to be snared by it because so many of the old tax breaks that set off the so-called A.M.T. have been eliminated or reduced. In addition, the minimum exemption level has increased to $109,400 for joint filers, up from $84,500; and to $70,300 for individual filers, up from $54,300. The exemption begins to phase out at $500,000 for single filers and $1 million for joint filers.

  • Unreimbursed employee expenses: A number of employees’ business expenses that weren’t reimbursed by their employers — like classes and seminars — are no longer deductible.

  • Moving expenses: Workers moving for a new job were once able to deduct related expenses. That has been wiped away, except for members of the military.

  • Tax preparation fees: If you itemized, you could typically deduct the amount your tax preparer charged or similar tax-related expenses, like software bought to file electronically. This is no longer possible, unless you are self-employed.

It depends, said Tyler Mickey, a tax senior manager at Moss Adams in Wenatchee, Wash.

Under the previous law, spouses paying alimony could deduct those payments on their returns, while the recipients had to include the income on theirs. That remains the case for divorce agreements finalized on or before Dec. 31, 2018 (unless a couple changes the agreement after then). Therefore it’s true for returns filed this year.

But for divorces completed in 2019 and later, alimony payments will no longer be deductible, and recipients will not have to include them on their returns, added Mr. Mickey, who is also a member of the American Institute of Certified Public Accountants’ personal finance specialist committee.

It’s half true, said Carol McCrae, a certified public accountant in Brooklyn. You can no longer deduct entertainment or amusement, generally defined as taking a client to, say, a basketball game. But you can still deduct 50 percent of what you spend on meals, as long as you are dining with clients, traveling for business or attending a business convention (or something along those lines). The meals cannot be lavish or extravagant — so forget about the tasting menu at Le Bernardin. Providing meals to employees for an office party or a meeting, she added, is still 100 percent deductible.

There are specific rules you may need to follow. If you paid for a show and dinner on one bill, for example, it must be itemized — and the amount paid for meals must be clearly stated. If it’s not, she added, then no deduction is allowed.

The new tax laws allow some business owners — those who are set up as so-called “pass-through” companies — to deduct 20 percent of their qualified business income. Cue the rush to the tax professionals.

Most of Russell Garofalo’s clients at Brass Taxes are self-employed, but many of those who have asked him about the new rules don’t realize that they are already pass-throughs, where income passes through the business to the owner’s personal tax returns. “If you earn money without taxes being taken out, poof, you’re in business,” he said.

Anyone like that in any profession who is set up as a sole proprietorship, partnership or an S corporation (but not a C corporation) qualifies, as long as they are making less than $315,000 and filing taxes jointly, or under $157,500 for other taxpayers. Beyond those income levels and tax structures, it gets complicated and many professions get excluded. The Internal Revenue Service, the Tax Policy Center and the American Institute of Certified Public Accountants have all published good primers.

The estate tax affects wealthy people. The amount that people can pass on to heirs without federal tax consequences has roughly doubled. In 2019, it’s $11.4 million per person.

But in 2026, unless Congress acts, it goes back to $5 million (adjusted for inflation), which is what it was in 2017. State estate taxes can cloud the picture too.

Micaela Saviano, a senior manager at Deloitte Tax in Chicago, said that, especially, if you hold an investment that is likely to increase in value, it may be better to hand it down to the next generation now. That way, the growth accrues to the younger person’s estate.

And paying the federal gift tax now may make sense. Otherwise, the estate may have to pay estate taxes later, using part of the estate itself.


Anger, Confusion Over Dwindling Refunds. Is Trump's Tax Plan To Blame?


Smaller Tax Refunds Surprise Those Expecting More Relief

By Tara Siegel Bernard on Feb. 12, 2019 in the New York Times

The tax preparers at H&R Block had to take a new class before their busy season started this year: empathy training.

They listened to a mock exchange between an employee and a customer whose refund would not just shrink but disappear. The fictitious client had received a $1,500 refund last year, but this year would owe $575.

The playacting was prescient. The tax overhaul that took effect last year promised relief, but now that returns are being filed, some people are baffled. They’re getting smaller refunds — or sometimes having to write a check — even though nothing in their situation seems to have changed.

The average refund among early filers was down 8.4 percent, according to the Internal Revenue Service. The smaller checks, in some cases, stem from the loss of certain deductions. For others, it’s because less money is being withheld from their paychecks. The I.R.S., in trying to more closely match the amount held out of paychecks with the amount that taxpayers will owe, changed its withholding tables.

The result is that taxpayers may be paying less over all but still getting a bill after filing their return. That has caught many people off guard.

Ashley Alt, who works in information technology in Illinois, said she was floored when her tax program spit out her $4,800 bill. “I was expecting to get less of a refund or maybe owe a little bit,” she said. “I did not expect to owe two months of take-home pay.”

The overhaul has been President Trump’s signature accomplishment. It lowered tax rates for businesses and individuals, and it provided a break to self-employed people and those with so-called pass-through businesses, where income passes through the business to the owner’s personal tax returns.

But it also eliminated or cut back some popular deductions, most notably capping the deduction for state and local taxes at $10,000 — a provision that drew significant criticism from residents of high-tax states. Although most people will see their tax burden decline, the Government Accountability Office expected about four million people to pay more.

Taxpayer frustration has taken on a political dimension. Some Democrats, including Senator Kamala Harris of California, a presidential candidate, seized on the issue to hound Mr. Trump, calling the overhaul a tax hike on the middle class to “line the pockets of already wealthy corporations.” Online outrage has led to a #GOPTaxScam hashtag on Twitter just as taxpayers, trying to navigate the new rules, have encountered roadblocks because of the month long government shutdown.

On Monday, the Treasury Department pushed back against reports of smaller refunds, saying it was still early in the filing season. “Refunds are consistent with 2017 levels and down slightly from 2018 based on a small initial sample from only a few days of data,” the department wrote on Twitter.

And tax experts said some people who would receive larger refunds — those claiming the earned-income tax credit — aren’t getting their checks yet.

The confusion over the new rules underscores the harried nature of this year’s tax season. The I.R.S. is getting back up to speed after the shutdown, which began just as its workers were preparing for the arrival of returns. And some accountants are still going through training to understand all the changes.

Many tax professionals said they had tried to prepare their clients as best as they could by having them adjust the amount they have withheld from their checks.

Ms. Alt, 36, said she and her wife had not adjusted their withholdings, and believed that was the reason for the reversal from last year’s refund. The bill is big enough that she hasn’t filed her return yet.

“I need to figure out a way to get all the money together,” she said.

Since the overhaul took effect, tax professionals have expected filers who face high state and local taxes to be hit hard by the cap on those deductions. But the legislation did away with a number of other deductions that have created surprises for many.

Nancy Bay, a 65-year-old bookkeeper from Garrett, Ind., was disheartened to learn how the new rules would affect her and her husband, a truck driver. While they usually receive a refund of about $1,500, they will have to pay about $400 this year.

Ms. Bay blamed the withholding issue, and the loss of her husband’s ability to deduct his business expenses, which are not reimbursed by the trucking company he works for. Even the larger standard deduction did not make up for it, Ms. Bay said.

“He cannot come home to eat each night to save money,” she said. “He has to pay for showers. He has a cellphone that he used for business — we used to be able to deduct part of that.”

The speed from bill to law and from law to how it works in practice has made for a steep learning curve.

Matthew Horowitz, a certified public accountant in Columbia, Md., was taking continuing education courses to learn more about a new tax rule that allows some business owners and self-employed people to deduct 20 percent of their “qualified business income.”

“I would never take continuing ed during tax season,” he said. “But we’re all going for three hours on Friday — it’s on nothing but the Section 199A deduction.”

Janet Lee Krochman, an accountant from Costa Mesa, Calif., said she was also still learning about how the rule worked.

“We weren’t expecting to get 180 pages of regulations on the 18th of January, 10 days to the opening of filing season,” she said.

There have been other complexities. Tax filers in places that require their state and federal returns to mirror each other — for example, if they take the standard deduction on their federal return, they must do the same on their state return — may end up owing more to their states than in the past. The reason: Standard deductions in states like Kansas, Virginia and Maryland are on the lower end. (Lawmakers in states including Virginia and Maryland have voted to raise their standard deductions to help compensate.)

As a result, tax pros in these states are suggesting running multiple sets of calculations. It may be worth sacrificing the larger federal standard deduction to itemize on the state level and get a bigger return there.

“If you are single with significant state income or real estate taxes, by choosing to deduct the lower amount of itemized deductions on your federal return you may reduce your overall federal and state tax due to the increased deduction on your Kansas return,” said Julie Welch, an accountant in Leawood, Kan. “It pays to run the calculation.”

Despite the confusion, some accountants have had the pleasure of delivering good news. Conor Barnes, an accountant at Egan Tax & Books in New York, prepares returns for many renters who typically don’t have enough individual deductions to itemize their returns. Instead, those filers take the standard deduction, which has doubled.

“Now that the standard deduction is higher than what it has been,” Ms. Barnes said, “people without mortgage interest and real estate taxes are seeing a tax benefit they haven’t seen in prior years.”

She also works with a lot of freelance workers, including photographers, who didn’t realize they would receive a nice tax benefit from the new qualified business income deduction.

Jackson Hewitt, a tax preparer that caters to moderate-income clients, said it was seeing more filers with lower tax liabilities and higher refunds. Some were taking an immediate advance that would be paid back when their check arrived from the government.

“Our refunds are better right now,” said Mark Steber, the company’s chief tax officer. “But we have those customers because we have a product where you can get your money that day. We are predispositioned to get those customers.”

Even some people who knew they would be on the hook for more come tax time have been unpleasantly surprised.

Robin Baker Williams, 44, and her husband expected a bigger tax bill because she was returning to the work force, taking a job as a high school history teacher. The Virginia couple got a $2,000 tax refund last year. But this time around, the loss of some deductions and lower withholdings from her husband’s checks meant they owe $3,000 on their federal return — a $5,000 swing.

“We were expecting to have to pay something,” she said. “But we weren’t thinking it was going to be such a huge difference.”


Government shutdown stymied frozen tax refunds, tied up IRS phone lines, report shows

Janna Herron  USA TODAY
Published 9:28 PM EST Feb 12, 2019
 

The longest-ever federal shutdown created an even tougher environment at the Internal Revenue Service, hampering an agency already understaffed and underfunded, according to a new report from Nina Olson, the head of the Taypayer Advocate Service.

Taxpayers couldn’t get frozen refunds, present hardship cases while facing fines, or resolve audits of past tax returns. Only a handful of calls from taxpayers were answered during the 35-day lapse in funding, and the rate didn’t substantially improve during the first week of the filing season when the government reopened.

The shutdown aside, the agency was still dealing with a backlog of unfinished items from the previous tax-filing season and was behind on integrating the new tax law changes.

“The five weeks could have not have come at a worse time for the IRS – facing its first filing season implementing a massive new tax law, with a completely restructured form,” Olson wrote.

The Taxpayer Advocate Service (TAS) is a government office that helps taxpayers solve their problems with the IRS.

The report itself – typically delivered to Congress in December – was also delayed because of the shutdown. In a statement, the IRS said its leadership plans to review the details of this report.

Shutdown backlog

During the first part of the shutdown, no IRS employees could answer telephone lines, issue refunds, release liens and levies, create installment agreements or review pending IRS actions. Under a new IRS plan on Jan. 22, some IRS employees could answer phone lines, issue refunds and create installment agreements.

By the time the shutdown ended, the IRS faced the following:

  • More than 5 million pieces of mail that hadn’t been batched for processing.
  • 80,000 unaddressed responses to Earned Income Tax Credit (EITC) audits from the previous tax season, some of which included frozen tax refunds.
  • 87,000 amended returns that still needed to be processed.

The agency also couldn’t keep up with the 170,000 orders for forms W-2 and W-3 that employers are required to distribute to their workers by the end of January. The agency instead recommended that employers consider filing an extension, meaning that some taxpayers could get these forms late.

Telephone chaos

IRS customer assistance over the phone was also disrupted and was not near full capacity one week after the shutdown ended, also the first week of the filing season.

Just under half of the calls to the accounts management line and 38 percent to the automated collection system were answered in that week. Only one out of every 15 calls to the installment agreement and balance due line were answered, and only after an almost 81-minute average wait time.

“This means for that week 93.3 percent of the taxpayers calling to make payment arrangements were unable to speak to a live assistor,” the report said.

In a statement, the IRS noted that it had "successfully reopened operations" and is experiencing "a good start to the 2019 filing season."

"We are continuing to assess the impact of the shutdown on our various operations across the agency and remain proud of the many IRS employees who have risen to the resulting challenges," the statement said.

Hardship cases

Taxpayers who desperately needed their frozen tax refunds or required relief from an IRS penalty had nowhere to turn during the shutdown, the report found. No IRS employee or TAS employee – which advocate for taxpayers – were authorized to work to assist a taxpayer experiencing a hardship because of the IRS.

The IRS chief counsel said that these functions didn’t meet the requirements for the “safety of life” exception under the Anti-Deficiency Act.

“Neither of these exceptions would allow personnel to be excepted to issue a refund or release a levy in order to allow the taxpayer to obtain access to funds to receive a life-saving operation, for example,” the report stated. “Nor could the IRS use resources to release a levy where it is depriving the taxpayer of funds to pay for basic living expenses, even if the levy could leave the taxpayer homeless.”

Old technology

Even without the shutdown, the IRS was struggling. The report notes that the agency is using information technology systems that are the oldest in the federal government. “For the last 25 years the IRS has tried – and been unable – to replace them,” the report said. Taxpayer information is stored in 60 different systems, making it impossible for the agency to have a “360-degree view of taxpayer data.”

In its statement, the IRS said that modernizing its IT infrastructure remains a top priority for the agency and says it's "critical to the future of our nation’s tax system."

"We will continue our efforts to upgrade this infrastructure, so that we have the technology needed to run day-to-day operations, enhance the taxpayer experience throughout the agency, monitor and continually improve cybersecurity and continue safeguarding taxpayer data," the agency statement said.

New tax law changes

The IRS was also under stress to roll out new tax law changes that required replacing three tax returns forms – the 1040, 1040A and 1040EZ – with one new form 1040, along with creating six new schedules for certain credits and deductions. The IRS had to publish new instructions, notices and FAQs to help the public navigate the new tax code.

Because of this work, the IRS did not provide the electronic filing requirements to tax software companies like TurboTax and H&R Block until September, much later than in previous years.

“As we document in these pages, the IRS is wrestling with its workload," the report states. "With the best of intentions – namely, trying to do its job – it is making strategic decisions that ultimately burden taxpayers (and) increase its own rework. And it is experiencing a ‘cycle of frustration’ as it tries to soldier on with its important work in the midst of shutdowns and funding stops and starts.”