Now is a great, if not extraordinary, time to start (or to continue operating) a small business, or to shift from W-2 (employee) status to 1099 (independent contractor) status. The new small business tax breaks in effect beginning 1/1/18 are almost unbelievable.
Even doctors, accountants, attorneys and other “professionals”, (who typically pay more tax than other small business owners), with married household NET income at or below $315,000, will qualify for ALL of the most lucrative new tax breaks ($157,500 for single filers). And ALL small business owners, regardless of net income thresholds or “professional” status, will enjoy the new top pass-through tax bracket of 25% on all business income.
Although higher earners will continue to be subject to Alternative Minimum Tax (AMT), AMT income thresholds are significantly higher under the new law, therefore, for most, AMT should generate much less of a tax burden than in prior years.
For a small business owner to truly take advantage of current tax law, he or she should consider filing taxes as an S-Corp. Georgia companies (as in most states) registered as an LLC, PC, or other corporate structure, can maintain their existing corporate status and, at any time, elect to file taxes as an S-Corp. Unless you have serious legal tax problems, the S-Corp election is almost always allowed by the IRS.
Filing as an S-Corp can significantly reduce self-employment tax (SE tax). SE tax is (essentially) social security and Medicare tax paid by a small business owner when filing his or her 1040 (annual income taxes). When a small business owner prepares his or her personal income taxes, SE is calculated automatically on 100% of business net income, and is nearly impossible to avoid. However, S-Corp owners DO NOT pay SE tax; instead, S-Corp’s typically pay a significantly reduced social security and Medicare tax. One caveat to filing taxes as an S-Corp: since S-Corp operating and accounting/tax prep expenses are significantly higher than for non-S-Corps, Doorstep Mobile Tax suggests that all of our clients delay S-Corp tax status until net business income (income after expenses) is anticipated to be $17,000 – $20,000, or higher for the current year. Note that higher income = greater S-Corp tax savings; therefore, when net business income exceeds $20K – $30K, not filing taxes as an S-Corp could be very costly.
Caution: Be aware that many other factors, such as your industry (what your company does), and owner’s profession, are extremely important factors that must be considered when determining the optimum time to file taxes as an S-Corp. You can, however, request S-Corp status at any time after your business has started, so no worries for existing business owners who wish to take advantage when the time is right.
Unfortunately, the IRS rarely allows retro-S-Corp status to cover prior periods, with the exception of an approximate 5 month lookback (see example below):
Example: In May 2018 you determine that you want to qualify all business income earned since 1/1/18 as S-Corp income. S-Corp status requests filed in May 2018 or earlier are almost always retro-approved to 1/1/18 (unless you request a later S-Corp start date). Although there is no “true” S-Corp election cutoff date, S-Corp status requests filed in June 2018 or after would risk being assigned a much later S-Corp start date (sometime after 1/1/18). In such a case you’d pay SE tax on all income earned prior to your S-Corp start date (a 2018 start date that the IRS would randomly assign), and file a separate S-Corp tax return for business income earned after the assigned S-Corp start date.
Regardless of the caveats, startup expenses and learning curve (i.e. headaches), electing optimal S-Corp status, combined with the tax new laws, is a home run for almost all small business owners!
Due to tax law changes anticipated to go into effect for tax year 2018, many individual tax deductions, credits and exemptions that will benefit you during the upcoming tax season (TY2017), will provide little or no benefit for tax year 2018 and after.
However, some deductible expenses that you would typically remit during 2018 can be prepaid on or before 12/31/17; these pre-paid items can be deducted on your 2017 tax return (upcoming tax season). For many of you, prepaying will generate a significant additional tax break that you will lose if you delay payment.
Note that only select pre-payments of 2018 expenses are eligible to be claimed on your 2017 tax return; common deductible pre-payments include:
Small Business Clients:
Beginning 1/1/18, many tax changes will go into effect for small businesses; however, to-date (12/18/17), important FINAL details have not been published by the US House Ways and Means Committee or by the US Senate. Once these changes are released to the public, Doorstep Mobile will contact our clients via e-mail and blog updates.
Give us a call, email or text if you have further questions. In the meantime, for many of you (but not all), it would be advisable to pre-pay as much of the above-referenced expenses as you are able. Best practice would be to contact your county tax commissioner and mortgage lender to ensure that any pre-payments of property tax, PMI and mortgage interest are reported properly on your 2017 mortgage statement. To be eligible as a deduction on your upcoming 2017 tax return, pre-payments much be recorded on your 2017 mortgage statement and other relevant tax documents.
The following deductions: State and Local Tax (SALT), mortgage interest, property tax, PMI and charitable contributions are combined as a single itemized deduction. Your itemized deduction can include other items, but those referenced above make up approximately 99% of itemized deductions claimed by most taxpayers under existing tax law. Increasing the standard deduction to $24,000 under the new tax law means that virtually all middle and upper-middle class married couples will claim the standard deduction and will no longer elect to itemize (everyone has the option to take the standard deduction or to itemize – obviously most taxpayers will elect to claim the larger of the two deductions). Most taxpayer’s itemized deductions typically fall far short of $24,000.
However, under the new law, allowing the SALT deduction and all other itemized deductions to remain on the books WILL benefit those with excessively high value homes and higher salaries (i.e. the wealthy). SALT is a deduction for state income tax paid (i.e. withholding from your W-2, or voluntary quarterly tax payments by small businesses owners and 1099 contractors). With the exception of home owners living in states that do not assess income tax, wealthy persons pay more SALT tax, property taxes and mortgage interest than the rest of us; therefore, if SALT and all other itemized deductions (mortgage, interest, PMI, charitables) continue as part of the itemized deduction computation, only wealthy taxpayers will be able to claim a deduction greater than the new $24,000 standard deduction.
So, it is no wonder why Mitch McConnell and his Republican henchmen are now, at the 11th hour of tax reform , pushing through the SALT deduction to be included as part of the new tax law; he, his friends and his family will be the beneficiaries! Although there are expectations that there will be a $10,000 cap on the property tax portion of itemized deductions, very few home owners in the US pay more than $10K in property tax (with the exception of expensive homes in large metro areas such as NYC, LA, SF, etc). Even with a $10,000 cap on the property tax deduction, as proposed in the upcoming new tax law, a wealthy household’s combined itemized deduction will continue to exceed the $24,000 standard deduction.
Of course, the wealthy pay AMT ( an additional tax on higher incomes), and part of the EXISTING AMT tax calculation is to disallow some itemized deductions; therefore, we should all keep a close eye on how the NEW AMT will be calculated. Although I despise cliche’s, the devil of tax law truly is in the details; if the new AMT is watered down (as is expected), wealthy taxpayers would continue to benefit from itemized deductions, providing them with a deduction in excess of the $24,000 deduction limit that will, by default, be imposed on the rest of us.
Wow, and most Americans supporting the Republican party do so for what reason? Because either they are ill-informed; are type-A boneheads, or… they are wealthy. Unfortunately, most Republicans are not wealthy, but they do gobble up the BS being shoveled to them on Fox news and the like. They like supporting powerful and boisterous men and women, they enjoy hearing how the Dems use our tax dollars in excess to help the poor (which, I agree, is true of our broken welfare system which encourages laziness and apathy, providing fish but no instruction on how to become a good fisherman).
But being pro-business and supporting clamp-downs on the welfare system is not why most Republicans choose their party; supporting the Republican party makes party advocates feel as if they are a part of some elite club – the big boys, big boys and girls with booming voices; type-A’s. Being on the side of the so-called “tough guys” makes your average Republican feel safe, supported, riding on strong shoulders. Meanwhile, the big boys are laughing at these supporters and pissing on all of our lawns!
Trump is in ALL of our faces, letting us know full well that the billionaire boys club members are the only truly important people on this planet. Every day he and his family promote their twisted “Heart of Darkness” Camelot outreach program. Yes, we’ve always known that our government is corrupt, at least those of us with half a brain, but now McConnell is in our faces with his latest comment: when asked why the tax reform is not more balanced in favor of the middle class McConnell stated, with a snicker and his trademark wry smile, that giving more tax breaks to the middle class, and I quote, “would be impossible”. Hmm, and the middle class Republican supporters are not taken aback by such a statement (and so many others that clearly say, “FU American worker”)? How is it possible that most Republican supporters cannot understand what is at the top of the Republican Senate’s wish list? In short the Republicans are on a slow but steady trek to turn our country into a Wealthy vs Poor state, similar to Mexico (and if you didn’t know, Mexico is not a poor country, but all of its wealth is concentrated, much more so than in the US; that is why so many Mexicans cross the boarder). If things continue as they are, one day, many of us may be attempting to cross the border into Canada, but by that time, the Canadian boarders will likely be closed.
To be fair, there is no way that our Democratic leaders are much better than the Republican leadership; Democratic leadership is almost as equally bought-and-paid-for, but the Dems are better by a slim margin. Under Trump, and the Republican tour-de-force, that slim margin is growing exponentially. Unfortunately, trading the Trump era Republicans for the Dems is kind of like trading an incurable brain tumor for a slow moving, more “manageable” form of cancer. At least you have a chance with some cancers; but with brain tumors, eh, not much of a chance at all.
Under the Senate’s proposed new tax law, which is expected to go into effect for all taxable income (line 43 of current tax returns), that you earn Jan 1, 2018 and after, most married taxpayers with a combined TAXABLE income between $45,000 and $250,000 would receive an approximate 13% – 15% reduction in income tax vs. tax that would have been due under the old laws (see Table 1 below).
For households with taxable income less than approximately $75,000, the savings will be readily apparent, especially for those without mortgages or state income tax, and all others who typically do not itemize tax deductions. However, households with taxable income over approximately $75,000 will continue to be subject to an additional tax: AMT (alternative minimum tax), which will significantly reduce income tax savings outlined in Table 1 below. Note that income tax and AMT are separate taxes, calculated differently and separately, on earned and unearned income.
Due to its complexity and uncertainty of how AMT will be calculated under the new tax laws, AMT, although expected to significantly increase taxes on taxable income over $75,000, is not figured into the amounts listed in Table 1.
AMT is an additional tax which is added to income tax when income exceeds a threshold level. As well, when calculating AMT, itemized deductions are often disregarded or significantly reduced. The proposed new tax laws have not raised the AMT threshold very much, therefore AMT will likely continue to over-tax upper middle class households; although taxable income at or above $75,000 is subject to AMT, the proposed AMT threshold is expected to remain heavily skewed against household incomes between approximately $190,000 – $480,000.
Although the dirty details of the new AMT have not been revealed, based on what information has been released to-date (recently leaked), the new AMT will continue to disproportionately over-tax high-level professionals with earnings in this range. Professionals such as engineers and scientists, computer programmers and accountants (with the exception of Wall Street, insurance company and banking slugs), who earn salaries between $190,000 and $480,000 are the unrecognized backbone of the US economy; however, the tax system (both new and old) treats these well-educated, hard working men and women, who are integral to wealth-generation for all of us, as nothing more than tax-load-bearing pack mules.
The proposed new tax laws will increase the child tax credit from $1,000 to $2,000, but will eliminate the $4,000+ dependent deduction. A deduction of $4,000, for most taxpayers, is the same as a credit of $1,000; therefore, for households with approximately $75,000 of taxable income or less who in the past were eligible to claim the credit, nothing changes – it is a “wash” so to speak. However, if under the new laws income thresholds for child tax credits remain relatively unchanged, households with taxable income above approximately $75K will lose out big time.
Why? Because you will lose the tax credit AND the dependency deduction. In the past, due to your income being too high, you may not have received a child tax credit or your credit may have been insignificant; however, under the old law higher income did not not limit your ability to claim a child or relative dependency deduction. Under the new law, there are only credits (no dependent deduction) and if credits remain income dependent, bang, gotcha! You will pay approximately $1,000 more in tax for each child or other dependent that you claimed in prior years. Now there is not only a marriage penalty, but a child penalty (if your income is high enough, which includes most educated technical workers and professionals).
So, what about married households with children and taxable income under $75,000? Unless there is something in the final tax bill for which we are currently unaware (which I would not doubt), married households with $45,000 to $75,000 of taxable income will hit the tax savings trifecta! You will get the full $2,000/child tax credit (or a high % of the full credit) and you will benefit from the new, very high, $24,000 standard deduction. When a couple’s combined mortgage interest, property taxes, PMI and state income tax have not been high enough in prior years to itemize (i.e. you typically claim a standard deduction), that couple would have taken the much lower standard deduction. Under the new law renting is not a tax negative, so rent on!
Many households with income between $45,000 and $100,000 who typically DO itemize are expected to enjoy a tax decrease; however, the decrease will not be as significant as those with similar incomes who did not itemize in the past. Bottom line: owning a middle to upper-middle class home will very likely have $0 positive impact on your income tax for income earned 1/1/18 and after. This is actually a fair deal for non-homeowners; in the past many renters paid more tax than non-renters, which, in my humble opinion, was unfair. Why should a renter, who is losing equity by not owning, pay more income tax because he or she cannot itemize mortgage interest, PMI and property taxes? There is no reasonable “why” logic here, silly, this is tax law!
If you earn income from investments and do not have to work to live, you will continue to pay significantly less tax than those of us who work to create all of the good and services that you gobble up every day! Congratulations, you are sucking us dry and paying less tax for doing so. If you earned the money that you have invested, from which you are reaping such rewards, congratulations, you deserve it! If you inherited all of your income and you don’t work, don’t want to contribute, etc., well, you are a worthless loser regardless of what your friends tell you. But, hey, the system still loves you, so what does it matter what the masses think of you, right!
(Table 1) Married Taxpayers Filing Joint Tax Returns for tax year 2017 (old tax laws) vs 2018 (new tax laws). Due to additional tax (Alternative Minimum Tax) which will be added to income tax for couples with TAXABLE income of $75,000 or more, the tax savings listed below will likely be far less, and significantly less for households with taxable income over $175,000.
Note also that single persons with income under approximately $480,000 will enjoy significantly greater tax savings than their married counterparts (i.e. the new tax laws do not eliminate the archaic marriage penalty). Yes, you will save 10’s of thousands of dollars in your lifetime, possibly hundreds of thousands, simply by living with your significant other vs getting married. Yes, this is fact for almost everyone (but for the very wealthy).
Although under the new tax laws, some high income ranges are slated to enjoy an 18% – 20% income tax reduction (i.e. around $320,000 in taxable income seems to be the sweet spot), the additional AMT tax due will significantly or completely erode these higher earner’s tax savings. Remember, income tax and AMT are two separate taxes, calculate separately and differently, and no clear data has been released to-date regarding the AMT calculation details, but that AMT will remain and that the income thresholds to pay the additional tax are ridiculously low and unfair.
Free services provided by your business, free passes and complementary service i.o.u’s should NEVER be reported in your books as a “discount” to revenue, nor should they ever be reported as an “expense”. Doing either is an IRS auditor’s wet dream. However, if you want to simply track the value of your free services, coupon redemption or free passes given and redeemed, keep reading, there is a simple solution. Reporting free services as expenses or revenue discounts would illegally reduce net income (net taxable income). That would be great if you could get away with it, but under audit you’d lose. If you give away free goods, or if free goods or incidental items are included as part of a free service, you’d expense the goods at cost or LCM (and reduce your inventory accordingly), but, again, there would be no expense or revenue discount entry for the actual free service – never, ever.
To track service giveaways, create a liability account called, for example, “Free Passes Given” and a second liability account (to be used as a contra liability) called “Free Pass Redeemed”. You can name the accounts anything that you like, but you must ensure that both are categorized as liability accounts. At the time when you begin providing a free service or you issue free passes or i.o.u.’s for free services, you would credit the “Free Passes Given” account and debit the “Free Pass Redeemed” account for the standard $ amount that you would have charged for each service unit or free pass given. When the service is completed, or when a free pass is redeemed, you’d debit “Free Passes Given” and credit “Free Pass Redeemed”.
Example (Free Passes): A skating rink sponsors skating races and gives away a total of 20 free entry passes to the 1st, 2nd and 3rd place finishers. Normally the rink would charge a $3 entry fee per person (per pass). To account for the free passes when given to the racers you would credit $60 (3 x 20) to “Free Passes Given” and debit $60 to “Free Pass Redeemed”. At a later date, when one of the racers redeems a free pass, you’d credit $3 to “Free Pass Redeemed” and debit $3 to “Free Passes Given”. At any time the credit balance of “Free Passes Given” would be the amount of outstanding passes not yet redeemed; the credit balance of “Free Pass Redeemed” would be the total value of passes that have been redeemed.
If you provide a free service and do not issue free passes or service i.o.u.’s, but you want to track your time/forgone revenue for free services, you’d use the same method as provided in the magazine clipper coupon example above; to calculate the correct credit and debit entries, you’d simply multiply the number of complementary hours worked X your hourly rate and and use the same method for reporting flat-fee based services.
You may wonder, why use a liability account to track free services? Two good reasons are as follows: 1) The passes (or agreement to provide a free service) are liabilities of sorts (you are liable to provide the service promised). 2) Use of a liability and contra liability account will ensure that, at any time, you will have an accurate and timely record of all passes issued and of all passes redeemed, without ever accidentally making confusing entries into your asset or equity accounts, or falsifying your balance sheet, income statement or statement of cash flows.
If a customer present you with a discount coupon, you would NOT use the above method. You would complete the following:
Example (coupon redemption): Bob owns a carpet care business. For a job that he just completed, he would normally charge $200; however, the customer presents a $50 discount coupon that she clipped from a magazine ad. Bob would report a $200 (cr) in his normal revenue account and $200 (dr) in his normal receivable account; $50 (dr) in a contra-revenue account called “Coupons Redeemed”, a $50 (cr) to a contra-receivable account called “Coupon Discounts”. When the customer pays $150 for the discounted service, Bob would record a $50 (dr) to the contra receivable account, and $150 to his bank account (dr). At any time, including at year end when preparing taxes, the debit balance in the “Coupon Redemption” account would be total discounts provided to-date.
Note that in a Nevada, Texas, Washington and Ohio, state income tax is calculated as a small % of gross income; all other states and the IRS tax net income (after expenses). In these four states, and states that have franchise tax, state law may require that you include all free services as part of gross revenue for calculating these taxes. In such cases, review the state’s laws and, if free services are required to be included in gross income, it would be prudent to use the coupon redemption (outlined above) for reporting both free services AND discount coupon redemption.
This should do it. Any further questions contact Troy Bryant, Doorstep Mobile Tax, LLC (Atlanta, GA Metro). email@example.com or 404.786.6309.
Contributions: Monies invested into a Roth IRA.
Original Contribution Date: January 1st of the original (first) Roth IRA contribution year.
Earnings (gains): Capital gains, passive income or dividends earned from a Roth investment.
Over the past few years, Bill’s wife, Julie, contributed $50,000 to her Roth IRA; since inception on 12/4/12, earnings from the investment total $36,000, for a total account balance to-date of $86,000. Bill received the Roth in a divorce settlement and immediately made withdrawals from the account. Note that had Julie not been ordered to give her IRA to Bill, the following guidance would be exactly the same for withdrawals made by Julie.
At any time, Bill can withdraw up to $50,000 (Julie’s total contribution), tax and penalty free. Brokers, by law, are required to report distributions in chronological order as: contribution amount first (always tax and penalty free), earnings second (see below for tax and/or penalty exemptions).
To cover his expenses, Bill needs to immediately withdraw both the original contribution of $50K and the $36,000 earnings that have accrued; again, the first $50K will automatically be reported tax and penalty free. Bill can withdraw the additional $36K earnings tax and penalty free, but only when two hurdles, both “A” and “B” below, are met:
A. The date of his wife’s first Roth contribution was > 5 years from the date of Bill’s first withdrawal of
the $36,000 earnings.
Bill’s wife opened her first Roth on 12/4/2012. Today’s date is 7/17/17. Although less than 5
years since her first Roth contribution, Bill would pass the 5 year rule.
Why? Because the IRS considers a Roth contribution anytime 1/1/12 through 4/15/13, to have originated
on 1/1/12 (retro start date). Therefore the 5 year clock began ticking as of 1/1/12 and the five year
rule was met on 1/1/17. A withdrawal of earnings on 7/17/17 would pass the 5 year rule.
B. Although Bill has passed the crucial 5 year test, one more hurdle must be passed for the $36,000 earnings
distribution to be tax and penalty free.
1. Bill was 59 ½ or older on the date or withdrawal, or
2. Bill is disabled (would need confirmation from the SSA), or
3. Bill uses the earnings for a first time home purchase (restricted to a maximum of $10,000)
• If both “A” and “B” above are satisfied, Bill can withdraw the $36,000 earnings tax and penalty
free. Again, “A” and “B” are not required for exemption of the first $50K withdrawn.
• When the 5 year rule has not been met, TAX would be due on the $36,000 earnings withdrawn, even if Bill
is over the age of 59 1/2.
When the 5 year rule is not met, tax will always be due on withdrawn earnings; however, the 10% early
withdrawal penalty can be waived in certain situations (see below).
Tom opened his first Roth on 9/4/14 when he was 57 years old; therefore, his 5 year clock began 1/1/14 (retro start date). On 5/5/17, Tom’s contribution balance was $15,000, with an earnings balance of $3,000 for a total of $18,000 total Roth balance.
At any time Tom could withdraw up to $15,000 with no penalty or interest being incurred. Although on 5/5/17 Tom is over the age of 59 ½, 5 years has not passed since Tom’s first Roth contribution date of 1/1/14 (retro date); therefore amy amount of Tom’s $3,000 Roth earnings, if withdrawn before 1/1/19, would be subject to tax (at the taxpayer’s tax bracket rate) and the 10% early-withdrawal penalty.
Note: when the 5 year rule has not been met, being disabled would not relieve Tom from owning tax or penalty on his $3,000 Roth earnings.
The 5 year test is the first, and most important, hurdle – without passing this test, and with no exceptions, Tom would owe tax on all amounts withdrawn in excess of his original Roth contribution.
When the 5 year rule is not met, tax will always be due on withdrawn Roth earnings; however, the 10% early withdrawal penalty can be waived under the following circumstances:
• The distributions are part of a series of substantially equal payments (minimum five years or until the
Roth IRA owner reaches age 59½, whichever is longer).
• When used to pay out-of-pocket medical expenses in excess of 7.5% of your Adjusted Gross Income (AGI).
• When used to pay medical insurance premiums after losing your job.
• When used to pay qualified higher education expenses (for yourself or eligible family members).
• The distribution is due to an IRS levy of the qualified plan.
• The distribution is a qualified reservist distribution.
• The distribution is a qualified disaster recovery assistance distribution.
• The distribution is a qualified recovery assistance distribution.
Any further questions contact Troy Bryant, Doorstep Mobile Tax, LLC (Atlanta, GA Metro). firstname.lastname@example.org or 404.786.6309.
A 529 plan is an education savings plan that earns tax exempt yields. (i.e. dividends/capital gains). 529 funds earn dividends through investments in relatively conservative (safe) portfolios and most plans allow you to pick from an array of investments from safe (low risk) to more aggressive (higher risk) funds. You can withdraw from a 529 plan at any time to fund trade school or college coursework for your own education, your children’s education (or any designated beneficiary). We do not promote any particular 529 plan; however, there are many from which to choose. Georgia is an excellent 529 state!
529 Plan Facts:
Each year that you withdraw from your 529 plan you will receive a form 1099-Q tax form from the fund provider (broker). You may need this form to complete your personal tax return.
Each year that you wish to withdraw and use 529 funds from your account, you will be required to estimate the maximum 529 withdrawal required to cover all education expenses for that calendar year. If you withdraw an amount beyond what is necessary to cover education cost + room and board, you will be taxed and assessed an additional 10% penalty on a portion of the excess withdrawal…unless you notify your 529 provider and return the excess amount.
Over a 5 year period, you and your spouse contribute a total of $50K into a 529 plan. After five years the total 529 account balance (contributions + gains) = $62,000. At the beginning of the 6th year your child begins college and you project total ANNUAL cost as follows: classes + fees + books + ALLOCABLE ROOM AND BOARD EXPENSE totaling $27,500.
All colleges will provide you with anticipated OFF-CAMPUS room and board expense. This is called ALLOCABLE ROOM AND BOARD EXPENSE. You will use the school’s calculation for ALLOCABLE ROOM AND BOARD EXPENSE, regardless of how much you actually spend for off-campus room and board.
If your child will be living ON CAMPUS, you’d simply include in your total cost the actual room and board cost from the college’s price list for dorm room and meal plans.
1. If your child will not receive scholarships or grants, you can withdraw the entire $27,500 projected annual cost from your 529 plan, tax exempt.
2. If you projected $27,500, but your child’s actual expenses are $24,000 and you did not re-contribute the additional $3,500 back to the 529 plan, you would be subject to tax AND a 10% penalty on the earnings portion of the excess $3,500. The taxable earnings portion of the $3,500 over-withdrawal would be calculated as follows by your tax accountant (or self-prep software) after entering all relevant data from your 1099-Q tax form.
[total 529 plan gains]/[total 529 balance at year end] = [529 average gain %]
$12,000/$62,000 = .1935 (19.35%)
[529 average gain %] x [Total over withdrawal] = [taxable over withdrawal]
.1935 x $3,500 = $677.25 (taxable amount)
In this scenario you’d pay tax (when you file your tax return) at your normal income tax rate + 10% penalty on the $677.25 earnings portion of the $3,500 over-withdrawal. At a typical 33% marginal tax rate + 10%, tax and penalty would be $291.
3. If your projection of $27,500 total annual college expense were correct and you withdrew that amount from your 529 plan, but later discovered that your child received $3,500 in scholarships and grants for the year, you would pay tax on the $677.25 gains portion of the $3,500 over-withdrawal; however, because the over-withdrawal is due to receipt of scholarships and grants, the additional 10% penalty WOULD NOT apply. Therefore, if you child receives a full ride scholarship, you can withdraw all 529 funds without penalty and pay tax only on the 529 account earnings (yields/capital gains). This is exactly how traditional IRAs are taxed at retirement.
American Opportunity Credit (AOC)
Although the gains portion of 529 withdrawals cannot be counted towards the AOC, if your income is between $160,000 – $180,000 (Married Filing Jointly), the contribution portion of your 529 withdrawals + any other out-of-pocket paid towards classes, fees and books, can be used to calculate your AOC.
Any further questions contact Troy Bryant, Doorstep Mobile Tax, LLC (Atlanta, GA Metro). email@example.com or 404.786.6309.
2016 Personal Tax Checklist
Use the following list to help gather your 2016 tax documents.All items apply to the primary taxpayer and spouse.
If your current CPA or tax preparer is not asking the following questions, they should be doing so.
☐ 1099-MISC (Contractor and Small Business Income Statements)
☐ 1099-R (Retirement Income, Early Distributions and Rollovers)
☐ 1099-INT (Banking Interest Income)
☐ 1099-DIV (Dividend Income)
☐ 1099 Other (Capital Gains, Tax Exempt Bonds)
☐ K-1’s (Partnership and S-Corp Income; Trust Distributions)
☐ Foreign-source income (wages, small business, investments)
☐ Small Business Income & Expenses
(See Small Business Checklists)
☐ Rental Property Income & Expenses
(See Rental Property Checklist)
☐ Held foreign bank accounts (checking, savings, portfolio, trust)
☐ Other Income (Royalties, etc.)
☐ Prunes repulse me, but may one day be my friend
☐ 1095 Proof of Healthcare Coverage
☐ 1098 Mortgage Interest/Tax Statement (Primary, 2nd Home and Rental Properties)
☐ I expect to report one or more child or student dependents on my tax return
☐ I expect to report one or more parents as dependents on my tax return
☐ I expect to report one or more non-family member dependents on my tax return
☐ 1098-T Education Expenses (self, spouse or dependents)
☐ Student Loan Interest (Primary taxpayer or spouse only) – dependent interest cannot be claimed on parent’s tax return.
☐ 1099-Q Withdrawals from education savings plan or E-Bonds
☐ Education Book Expense (self, spouse or dependents)
☐ I paid for Childcare
☐ My employer reimbursed for childcare, or provided childcare facilities
☐ I provided significant financial support for someone other than spouse, child, parents or close family
☐ A dependent earned income in excess of $6,300 in 2016
☐ Charitable Contributions
To claim non-cash contributions in excess of $500, you will need to have documented self-appraised big-ticket items such as appliances, furniture, automobiles, electronics, Jewelry, etc.
You can draft your own charitable contribution appraisal by referencing 3 similar items on Craigslist, Thrift Store or similar retail listing, print pictures of the Craigslist (or take pictures at a Thrift). On the picture or in a log, record the asking price for the Craigslist items.
Take a picture of your donated item, staple pictures of your item and the related Craigslist item together.
Report the most likely value of your item by averaging the selling price for the 3 similar Craigslist items or performing a similar valuation calculation.
☐ I contributed to an IRA separately from my employer’s retirement plan
☐ I received form 1099-SA Healthcare Savings Plan Distributions
☐ I received form 5498-SA Healthcare Savings Plan Contributions
☐ I paid out-of-pocket medical expenses and/or premiums
☐ I love chicken wings and beer, mainly beer
☐ I purchased or exercised stock options (ESOPS, SARs or other)
☐ Educator expenses (teachers/professors only)
☐ I moved due to job relocation
(See Moving Expense Checklist)
☐ I have job search expenses (first time and new career job search expense are not deductible – very strange tax law)
☐ My employer did not reimburse me for all business mileage related to my job or other work-related
expenses such as travel, work gear, specialty work clothing or safety equipment, etc.
Note: commuting mileage is not deductible; additional job-related mileage may be deductible.
☐ I adopted a child in 2016
☐ Children drain your soul, but somehow that is an acceptable loss.
☐ A valuable item that I own was damaged or stolen in 2016 (i.e. home, auto, jewelry, collectible,
business asset, etc.)
☐ I purchased energy-star appliances, windows, doors or insulation for my primary or second home
☐ I own a boat or RV with a kitchen and restroom facility onboard
☐ I hate checklists!
Once we have reviewed your checklist we will discuss all items checked to ensure that all relevant tax documents are available.
Contact Doorstep Mobile Tax for a .PDF or Microsoft Word version of this checklist.
Any further questions contact Troy Bryant, Doorstep Mobile Tax, LLC (Atlanta, GA Metro). firstname.lastname@example.org or 404.786.6309.
By: Troy Bryant, CEO, Doorstep Mobile Tax
Likely Effects of a Higher Minimum Wage:
1. More productive workers will keep their job; poor performers will lose jobs:
Employers mandated with a higher minimum wage will most certainly move quickly to dismiss underperforming employees and assign additional tasks to more motivated workers. Some employers may elect to pay a few hours of overtime to a more select workforce and eliminate other workers; while in companies where a substantial number of minimum wage employees currently enjoy overtime, employers may opt to hire additional workers, eliminate overtime and potentially reduce full-time status for others. Regardless of the method used, aggressive employers will push back against the new wage laws, crunch numbers and adjust as necessary to optimize employee cost. Many minimum wage workers, likely most of them, will suffer the consequences. Since higher minimum wages will most certainly affect a sudden decrease in job openings, those who keep their jobs will be forced to succumb to employers’ stricter demands or face potential job loss.
2. Although thinning out his or her employee base, reducing overtime or other direct employee cost adjustments will help to offset the effect of higher minimum wages, head count adjustments alone will not fully reduce the sting of a higher minimum wage. As a result, technology innovators, from fast food to janitorial, retail and manufacturing suppliers, will aggressively begin to offer new innovations for automating tasks currently performed by minimum wage workers. Currently the threshold for some of these technologies may not be cost effective for a business owner to implement. However, with the proposed wage hike, these new technologies may be more cost effective than paying a much higher minimum wage.
Note: An increase from $7.25/hour to only $12/hour for a 40 hour work week, per employee, plus the increase in employer FICA tax matching would increase an employers WEEKLY per employee cost by approximately $220 (would be slightly higher or lower based on employers’ State). Wow, imagine how much of an immediate negative impact this would have on a business with low gross margins and a significant number of minimum wage employees!
3. Some businesses would likely move from a higher minimum wage state into a lower minimum wage state, or move operations to another country. This would not likely be a viable option for the fast food and other retail industries. However, although the minimum wage argument has focused on “fast food” and “retail” workers, a significant number of minimum wage workers do not work in fast food or retail; therefore, moving operations would likely upset the economies of states adopting higher wages, and provide a boost for states that maintain a lower minimum wage.
4. Skilled and semi-skilled workers currently earning the equivalent of the proposed minimum wage (or wages near to the proposed increased minimum wage) will become disgruntled and demand higher pay, further affecting an employer’s move to offset the sudden new expense by reducing head count and further implementation of new technology to replace workers.
5. Currently, minimum wage workers at $7.25/hour earn about $14,500 per year gross salary ($29,000 for married couples) before deductions for social security and medicare, based on a 40 hour work week and 50 weeks worked per year). Current workers earning at or near this amount receive substantial “earned income” and “child tax credits”, which means that they pay NO income tax; the tax credits often total near $10,000 per couple, per year (and approach $6,000 for single parents). Although these “Credits” are reported on the tax return as a “Refund”, in fact this is free money given by the government to low wage workers. As a direct result of their “low wage” status, these workers are also eligible for food stamps, subsidized housing, SNAP Cash (free $300/mo cash), free healthcare, free or deeply discounted education costs and other benefits. By earning higher wages many will no longer qualify for substantial tax credits and other freebies. As well, many will likely owe a small amount of income tax.
6. Prices for goods and services will increase. Although a substantial minimum wage increase may result in increased consumer prices, it is unlikely that such an increase will be significant, as doing so will be perceived as “to risky” for most business owners – why panic and risk losing customers to competitors who do not increase their prices? Therefore, it is likely that the first move by most business owners will be to cut costs, and not to pass on the added wage expense to their customers.
Conclusion: Initially increasing minimum wage for unskilled workers will have significantly negative consequences for both workers and employers with little impact on consumer prices. However, potential loss of low-wage jobs, tax credits and other incentives for minimum wage workers, may act as a wakeup call for the unskilled work force, hopefully prompting an enrollment boost at vocational schools and colleges.
Should the impact of higher minimum wages reduce the number of available minimum wage job openings, unskilled workers seeking higher-level vocational training or a college degree, over the long term, should have a positive effect on the overall economy… but don’t count on it! Lazy is as lazy does! It is more likely that policy makers will adjust tax credits and other freebies so that, in the end, those who remain employed will enjoy no real increase or decrease in his or her standard of living. Of course, fewer minimum wage workers will most surely be employed.
Likely winners from increased minimum wages: technology innovators (startups), business strategists and the government.
Likely losers from increased minimum wages: many (but not all) low-wage and semi-skilled workers. Regardless, such a change will be a paradigm shift.