Time for a “Paycheck Check-up” – IRS Issues New W-4 Form and Updated Withholding Calculator

With the passage of the Tax Cuts and Jobs Act, you might be receiving a higher net amount of money in your paycheck. To ensure you’re having the right amount of funds withheld in order to avoid a surprise during next year’s tax season, please follow the recommended steps in this message from the IRS:

“The Tax Cuts and Jobs Act made changes to the tax law, including increasing the standard deduction, removing personal exemptions, increasing the child tax credit, limiting or discontinuing certain deductions and changing the tax rates and brackets.

If changes to withholding should be made, the Withholding Calculator gives employees the information they need to fill out a new Form W-4, Employee’s Withholding Allowance Certificate. Employees will submit the completed W-4 to their employer.

The withholding changes do not affect 2017 tax returns due this April. However, having a completed 2017 tax return can help taxpayers work with the Withholding Calculator to determine their proper withholding for 2018 and avoid issues when they file next year.

Steps to Help Taxpayers: Do a ‘Paycheck Checkup’ 

The IRS encourages employees to use the Withholding Calculator to perform a quick ‘paycheck checkup.’  An employee checking their withholding can help protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time in 2019. It can also prevent employees from having too much tax withheld; with the average refund topping $2,800, some taxpayers might prefer to have less tax withheld up front and receive more in their paychecks.

The Withholding Calculator can be used by taxpayers who want to update their withholding in response to the new law or who start a new job or have other changes in their personal circumstances in 2018.

As a first step to reflect the tax law changes, the IRS released new withholding tables in January. These tables were designed to produce the correct amount of tax withholding — avoiding under- and over-withholding of tax — for those with simple tax situations. This means that people with simple situations might not need to make any changes. Simple situations include singles and married couples with only one job, who have no dependents, and who have not claimed itemized deductions, adjustments to income or tax credits.

People with more complicated financial situations might need to revise their W-4.  With the new tax law changes, it’s especially important for these people to use the Withholding Calculator on IRS.gov to make sure they have the right amount of withholding.

Among the groups who should check their withholding are:

  • Two-income families.
  • People with two or more jobs at the same time or who only work for part of the year.
  • People with children who claim credits such as the Child Tax Credit.
  • People who itemized deductions in 2017.
  • People with high incomes and more complex tax returns.

Taxpayers with more complex situations might need to use Publication 505, Tax Withholding and Estimated Tax, expected to be available on IRS.gov in early spring, instead of the Withholding Calculator.  This includes those who owe self-employment tax, the alternative minimum tax, or tax on unearned income from dependents, and people who have capital gains and dividends.

Plan Ahead: Tips for Using the Withholding Calculator

The Withholding Calculator asks taxpayers to estimate their 2018 income and other items that affect their taxes, including the number of children claimed for the Child Tax Credit, Earned Income Tax Credit and other items.

Take a few minutes and plan ahead to make using the calculator on IRS.gov as easy as possible. Here are some tips:

  • Gather your most recent pay stub from work. Check to make sure it reflects the amount of Federal income tax that you have had withheld so far in 2018.
  • Have a completed copy of your 2017 (or possibly 2016) tax return handy. Information on that return can help you estimate income and other items for 2018.  However, note that the new tax law made significant changes to itemized deductions.
  • Keep in mind the Withholding Calculator results are only as accurate as the information entered. If your circumstances change during the year, come back to the calculator to make sure your withholding is still correct.
  • The Withholding Calculator does not request personally-identifiable information such as name, Social Security number, address or bank account numbers. The IRS does not save or record the information entered on the calculator. As always, watch out for tax scams, especially via email or phone calls and be especially alert to cybercriminals impersonating the IRS. The IRS does not send emails related to the calculator or the information entered.
  • Use the results from the Withholding Calculator to determine if you should complete a new Form W-4 and, if so, what information to put on a new Form W-4. There is no need to complete the worksheets that accompany Form W-4 if the calculator is used.
  • As a general rule, the fewer withholding allowances you enter on the Form W-4 the higher your tax withholding will be. Entering “0” or “1” on line 5 of the W-4 means more tax will be withheld. Entering a bigger number means less tax withholding, resulting in a smaller tax refund or potentially a tax bill or penalty.
  • If you complete a new Form W-4, you should submit it to your employer as soon as possible. With withholding occurring throughout the year, it’s better to take this step early on.”

If you have any questions about your specific situation, please consult with your tax advisor. If you do not currently have a tax advisor, we welcome the opportunity to serve you. Please call 215-723-4881 or contact us online.

Free Tax Reform Webinar: What Church Leaders Should Know for 2018

2018 is underway and with this new tax year comes a number of changes to the tax law. What does it mean for your church and your staff?
We’re here to help. That’s why we’re inviting you to attend this free webinarTax Reform and Tax Law Changes: What Church Leaders Should Know for 2018. This hour-long webinar, presented by Church Tax & Law church attorney and CPA Richard R. Hammar will cover what churches and church leaders need to understand about these changes for 2018 and beyond. As always, if you have any questions about your payroll and taxes under these changes, please contact us.

Prepay Your Property Taxes? It Depends

You’ve probably seen or heard news reports about prepaying 2018 state and local real estate taxes in reaction to the recently-passed Tax Cuts and Jobs Act.

With this new legislation, beginning in 2018, taxpayers will be allowed to deduct up to $10,000 of state and local taxes paid, including property taxes and either income taxes or sales taxes. The bill will preserve the deduction for existing home mortgages and cap it at $750,000 for newly purchased homes starting January 1, 2018. The plan will also end the deduction for interest on home equity loans.

So, can you prepay your 2018 real estate taxes in 2017? Yes, and no. If you live in Montgomery or Bucks counties in Pennsylvania, the answer is “No.” Montgomery County has posted the following statement on their website:

The county has received a number of inquiries from individuals seeking to prepay their 2018 county real estate taxes. While the county understands and supports these efforts, Montgomery County is not permitted under Pennsylvania Law to accept such prepayments. Unlike Philadelphia, Delaware, and Allegheny counties, which are governed by Home Rule charters and thus permitted to allow the prepayment of taxes, Montgomery County, as well as Bucks, Chester, and other counties which are not Home Rule, must work within the confines of the tax collection requirements imposed by the Commonwealth. As these requirements explicitly prohibit the prepayment of real estate taxes, Montgomery County is prohibited from accepting 2018 real estate taxes until after the first of the year.

If you pay property taxes in a region where prepayment is permitted, you may only do so if you’ve received your 2018 tax assessment, as this article from Yahoo Finance explains:

But many residents trying to avoid that deduction limit on their state and local taxes will be disappointed: the IRS on Wednesday announced that taxpayers can prepay their 2018 property taxes only if they have already received a tax assessment from their local government and they make payment by the end of the year.

As always, we are here to help. If you have any questions, or would like to discuss your tax plan for 2018, please contact us online or call 215-723-4881.

The Tax Cuts and Jobs Act Has Passed: What You Need to Know

The Tax Cuts & Jobs Act Bill (H.R. 1) has now passed the House and Senate and is on its way to the White House for the President’s signature to become law.

Here is a summary of some of the major provisions that will affect both Individuals and Businesses after this Bill becomes law. Most changes will be effective January 1, 2018; however, there are certain specific changes which will take effect before 2018.

Changes for Individuals

Individual Rates: The top individual rate will be 37 percent for individuals earning $500,000 and above and joint filers earning at least $600,000. There will be seven tax brackets: 10, 12, 22, 24, 32, 35, and 37 percent. The tax bill will nearly double the standard deduction, increasing it to $24,000 for a couple filing jointly and to $12,000 for single taxpayers. The tax rates and standard deduction expansion will expire in 2026.

Mortgage Interest Deduction: The bill will preserve the deduction for existing home mortgages and cap it at $750,000 for newly purchased homes starting January 1, 2018. The plan will also end the deduction for interest on home equity loans.

State and Local Tax Deduction: Taxpayers will be allowed to deduct up to $10,000 of state and local taxes paid, including property taxes and either income taxes or sales taxes.

Child Tax Credit: The child tax credit will be increased to $2,000 from the current $1,000 per child credit, with up to $1,400 of it being refundable.

Medical Expense Deduction: The bill will allow taxpayers to deduct medical expenses exceeding 7.5 percent of adjusted gross income for 2017 and 2018.

Individual Mandate: The plan would zero out the penalties for not obtaining health coverage for individuals and families.

529 College Accounts: 529 Accounts can now be used for elementary, secondary, and higher education.

Individual Alternative Minimum Tax: The individual AMT will increase to apply to individual filers earning more than $500,000 or joint filers earning $1 million or more.

Changes for Businesses

Corporate Rate: The corporate rate will be reduced to 21 percent starting January 1, 2018.

Pass-through Taxation: Pass-through entity owners that meet certain conditions will be eligible for a 20 percent deduction on their business income.

Business Expensing: Full expensing of new and used capital investments will be permitted for five years. After 2022, the 100 percent allowance will be phased down by 20 percent each year. Section 179 expensing, which doubles the amount eligible for the special small business investment write-offs, will also be made permanent.

Corporate Alternative Minimum Tax: The corporate AMT will be repealed.

Other Changes

Estate Tax: The exemption is doubled for estates worth approximately $11 million for individuals and $22 million for couples. The exemptions will revert to current levels after 2025.

International Business: Eliminates incentives that now reward companies for shifting jobs, profits, and manufacturing plants abroad. These incentives will prevent American jobs, headquarters, and research from moving overseas.

For even more information, here is a summary of the policy highlights as provided by the Joint House and Senate Conference Committee for your review.

If you have any questions about how this tax bill will affect your specific tax situation, please contact us online or call 215-723-4881 to set up a time to review the effects of these changes with you.

Disclaimer: This communication contains general tax information and should not be construed as specific tax advice for your situation.


New Tax Laws Affecting All Partnerships Starting January 1, 2018

While much of the recent news has focused on the proposed tax reform currently making its way through Congress, there are new mandatory laws affecting all partnerships starting in January 2018.

What is changing?

As you are aware, a partnership is a “flow-through” entity. In other words, the income from a partnership flows through to the individual partners, and they pay tax on the income.  Therefore, there is no tax assessed at the partner level. Under current (soon-to-be-old) law, in an examination, the IRS is required to keep each partner’s liability for partnership operations separate. This most often resulted in many, if not all, of the individual partner’s returns being examined as well.

In these new laws, Congress intended to make a streamlined, efficient system to examine partnerships and collect accessed deficiencies from them. As a result, the IRS may now collect tax at the partnership level as a result of an audit. The IRS will no longer need to keep track of individual partner’s tax liability.

While this sounds like an administrative home run, unfortunately, there are a few hidden issues with the new law.

Potential Pitfalls

First and foremost, the tax assessed to the partnership will be assessed at the highest income tax rate applicable. With the pending House bill, that would retain the 39.6% rate for individual taxpayers with over $1M in taxable income. The current Senate version has a top rate of 38.5% for individual taxpayers with over $1M in taxable income. Obviously, most owners of partnerships do not fall into these tax brackets. Therefore, settling deficiencies in examination at the partnership level will most likely be very costly.

Second, under the new law, any new partners to partnerships could pay tax on additional income assessed for when they were not a partner.  Since the tax deficiency is assessed at the partnership level as it exists at the time of assessment, current partners only will be burdened by that tax.

New Partnership Representative Must Be Designated

In addition to the above, the new law mandates all partnerships must designate a “partnership representative.”  This representative has very broad, and very powerful, responsibilities. A partnership representative does not need to be a partner in the partnership.  While an entity can be assigned as a representative, an individual must still be appointed to act on that entity’s behalf. This representative will have the power to bind the partnership and the individual partners.  Also, neither the IRS nor the partnership representative are required to notify the partners of partnership matters, including an examination. The representative will have ultimate authority with the IRS. If the partnership does not elect a partnership representative, the IRS will have the authority to designate one.

Potential to Elect Out

Certain eligible partnerships can decide annually if they wish to elect out of the new laws. If the partnership elects out of the new treatment, essentially, each partner will be responsible for his or her share of any deficiency assessed. If a partnership does not expressly elect out of the treatment on a timely filed tax return, it is required to conform to the new laws.

The elect out decision, if available, will obviously be made based on individual facts and circumstances. However, as a rule, partnerships with a smaller number of partners will want to strongly consider electing out. For example, a partnership with only four partners may want to elect out and most likely pay less tax on any deficiency assessed. Those four partners may be willing to tolerate the administrative burden.  However, a partnership with 50 partners may find it easier and less costly to pay the tax at the partnership level as opposed to each partner undergoing an audit.

What You Need to Do Immediately

All partnerships need to evaluate and amend their partnership agreement. Questions to be addressed in the agreement include:

  • Who appoints or removes the partnership representative?
  • What procedures should be implemented to limit the partnership representative’s authority within the partnership (i.e., establish a voting committee)?
  • When should the partnership representative give written notice to all of the partners in the case of certain events (audit notices, elections, )?
  • To what extent should the partnership representative exercise due diligence with respect to elections available?
  • Who is responsible for determining whether to elect out annually?
  • Should partners be precluded from transferring their interests in the partnership to ineligible partners?
  • If the partnership unintentionally fails one of the electing out criteria, what is the outcome?
  • Must partners who left the partnership reimburse the partnership for amounts owed for audit years in which they were partners?
  • Should new partners have to pay taxes related to a tax year they were not partners?
  • How to true-up partners when inequities exist among the partners as a result of paying the tax on the partnership level vs. the individual level.
  • How to fund the payment (i.e., partner capital contributions, cash reserve, financing, )
  • Should the Partnership Representative make a “push out” election if available?

As you can see, there are quite a few fiduciary responsibilities and duties of the partnership representative. Without guidance in the partnership agreement, the representative is at risk for a number of potential “self-interest” accusations and lawsuits. Such representatives should carefully consider an indemnification agreement if they decide to serve as a representative.

We encourage you to have a conversation with us as soon as possible to start addressing some of these issues in your partnership agreement. As always, we will help guide you through the implementation of these new regulations and work to put you in the best position possible in the event of an exam. Contact us online or call 215-723-4881.

Did Your Accountant Ignore The Most Dramatic Change in Tax Law Since 1986?

What if we had the most dramatic change to the for-profit tax law since the 1986 overhaul and yet over two-thirds of tax preparers ignored it? Or, even worse, two-thirds of tax preparers didn’t even know about the change? What if the tax law was literally changing while tax returns were in the process of being prepared and filed?  What if the tax law changes allowed “epic” write-offs and were extremely favorable to the taxpayers – all while two-thirds of tax preparers ignored it?

Sounds a little unbelievable, but that’s exactly what happened during the 2015 tax season.

The tax law change that took place is referred to as the “Tangible Property Regulations” (TPRs) or “The Repair Regulations.”  This change in tax law created unique and unprecedented challenges during January-April 2015’s tax season, as tax preparers were busy preparing 2014 tax returns.  The TPRs focused on three major areas that apply to just about every operating business: Materials and Supplies, Maintenance and Repairs, and Capital Expenditures (aka fixed assets).

How Could The Most Dramatic Tax Law Change Since 1986 Be Ignored by Two-thirds of Tax Preparers? 

Well, this change was a long time in the making.  The origins of the law go as far back as 2004 – over ten years ago. Since 2004, numerous drafts have been issued, followed by temporary regulations, proposed regulations, even more drafts – you get the idea. The final regulations were at long last passed in August 2014. However, they were made effective retroactive to January 2014 – a full eight months prior.  Add to this that most of the nation’s tax preparers were spending most of 2014 focused on Obamacare and its implementation.  Many state tax societies, legislators, educators and the like simply didn’t have their eye on the ball or didn’t do a good job communicating the developments or their interpretations of TPRs to the tax preparer community.

In addition, various Revenue Procedures (how to logistically interpret the new regulations) were not issued until September 2014, January 9, 2015 and February 13, 2015.  Yes, that’s correct.  Guidance on how to implement the new law was not issued until a full 14 months after it had taken effect, a full month and a half into tax season when the affected tax returns were in the process of being filed.  Lastly, the IRS did not issue answers to the frequently asked questions on their website until March 5, 2015 – a mere 10 days prior to the corporate filing deadline.  As I said before, this was an unprecedented challenge for tax return preparers.

The Practical Effects of This Change in Tax Law

Here at Canon Capital, we lost weeks – not days – in January 2015 going through educational courses on the new law and its requirements.  In essence, this law was unique in that it required businesses to restate the accounting books and records as if this law had always been in effect.  That’s right, we had to go back from the beginning of time for every living taxpayer on our client list, and restate their books as if this was the law from the beginning.  To say this created a Herculean task would be accurate.  This new law also arrived with unique filing requirements to specifically document the changes, leaving tax preparers like us with the additional challenge of determining how to track and handle these requirements within our internal policies and procedures.

Long story short, I’m happy to say Canon Capital rose to the occasion.  I also got to witness the goodwill created with our clients over the years and was humbled by the trust that our clients place in us.  Remember when I said the FAQs didn’t come out until a mere 10 days prior to the corporate filing deadline?  As a firm, clearly we didn’t feel comfortable finalizing returns in the midst of such chaos.  Therefore, we recommended to every last one of our firm’s corporate clients to extend their returns.  After many, many conversations all but one of those clients agreed to follow our suggestion.  This was truly a humbling reminder of the trust that is placed upon us.

What Are The TPRs?

So, what are the TPRs anyway?  As stated, they affect the three main areas of business operation: Materials and Supplies, Repairs and Maintenance, and Capitalized Expenditures. Despite the inconvenience, the changes incorporated are actually VERY favorable to the taxpayer.  The new law adopts a much more liberal definition of “repair” and a stricter definition of “capital assets.” This change allows many more items to be expensed immediately as repairs or maintenance vs. the previous requirement that they be capitalized and written off (depreciated) over a number of years.

Remember that I also said everyone’s books and records had to be restated as if this was always the law?  Well, the new law allowed for an immediate write-off of the remaining basis of any capitalized items from the past.  This led to HUGE write-offs for many, many taxpayers.  For instance, suppose a taxpayer owns a rental property and had the roof replaced in 2010 for $20,000.  The roof was required to be capitalized at the time and deducted over future tax returns via depreciation.  If the taxpayer wrote off $2,000 from 2010 to 2013 – then there would be $18,000 left to write off as of January 1, 2014.  Assuming the roof would qualify as a repair, under the new TPRs, the taxpayer could take a $18,000 deduction on their 2014 return.  Nice!  This law led to the opportunity for many taxpayers to write off millions and millions of dollars.

Did Your Accountant Do That?

Well, the new law required additional filings to be able to write off prior assets.  Form 3115 – Application for Change in Accounting Policy – needed to be filed with the 2014 returns.  They also needed to be filed in duplicate with one copy going with the return and a second copy being mailed to the IRS through traditional postal service.  Both required additional signatures.

If you didn’t have a conversation with your accountant, sign additional forms, or mail anything separate to the IRS – then you most likely missed the opportunities described above for 2014.

If your accountant missed the implementation of the TPRs, he or she is exposed to potential unreasonable tax return positions, willful or reckless conduct, and due diligence issues.

As a result, you have an “uncertain tax position” by inherent definition that must be disclosed as part of the financial statements if they are issued to a lender.  Needless to say, this isn’t a positive reflection on your business.  In addition, you are at risk for PERMANENT loss of deductions for items that should have been written off but weren’t.  Under examination, the auditor basically has a “free pass” to handle items in a manner that would result in the least favorable treatment for you or your company.  And, obviously, you have missed the opportunity to write off any items that were unique for the 2014 filing year.

Needless to say, none of the items above are inconsequential.

All of that being said, for those who may be somewhat familiar with the TPRs, the IRS did pass what they touted as “relief” in March of 2015.  This relief was the ability to adopt these new laws on a prospective basis vs. a retroactive basis if you were a small business.  However, the relief did not include audit protection for certain items.  As a result, Canon Capital decided to only take the “relief” option for clients under very limited circumstances.

Well, as the summer passed and we wrapped up filing all 2014 returns – we kept on top of the developments.  We also received our first glance of what other firms did in response to the new law.  Our unofficial estimate as a firm is that two-thirds of other accounting firms either mishandled, or totally ignored, the new law.  Large firms, small firms, it didn’t matter.  It seemed like it was an even experience across the board regardless of size, location, or type of entity.

This past fall, I recently completed a certificate course specifically developed for the TPRs and the current law.  This certificate course involved close to 40 hours of education and two final exams.

I can honestly say with much pride, we, Canon Capital, handled the Tangible Property Regulations as well as any firm I know of and consistent with the information recently provided in that 40 hours of training.

If you have questions about any of this or would like to discuss becoming a client, please contact us online or call 215-723-4881.