Tax Reform in Action
Now that we have completed our first tax season of the year and got to see the Tax Cuts and Jobs Act (TCJA) in action, here are some key highlights of the tax reform to be aware of.
Estimated Tax Penalty Relief
There is good news for self-employed taxpayers. The IRS announced that it is waiving the estimated tax penalty for many taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year. This waiver covers taxpayers whose total withholding and estimated tax payments are equal to, or greater than, 80% of their taxes owed. The IRS also provided procedures for requesting the waiver and procedures for taxpayers who have already paid underpayment penalties but who now qualify for relief may request a refund.
Employer Identification Number (EIN)
Starting May 13, 2019 only individuals with tax identification numbers may request an Employer Identification Number (EIN) as the “responsible party” on the EIN application. Individuals named as responsible party must have either a Social Security number (SSN) or an individual taxpayer identification number (ITIN). They are required to include taxpayer identifying numbers on returns, statements, or other documents filed with the IRS.
Electric Car Credit Declines
During the fourth quarter of 2018, General Motors (GM) reached a total of more than 200,000 sales of vehicles eligible for the plug-in electric drive motor vehicle credit. Accordingly, the credit for all new qualified plug-in electric drive motor vehicles sold by GM have begun to phase out. Qualifying vehicles from GM purchased for use or lease are eligible for a $7,500 credit if acquired before April 1, 2019. Beginning April 1, 2019, the credit will be $3,750 for GM’s eligible vehicles. Beginning October 1, 2019, the credit will be reduced to $1,875. After March 31, 2020, no credit will be available.
Deduction for Back Alimony
The Tax Court held that an ex-husband’s payment of alimony arrearages resulted from a contempt order by a Family Court was not a “money judgment,” and so qualified as deductible alimony. With respect to divorce instruments executed before January 1, 2019, amounts received as alimony or separate maintenance payments are taxable to the recipient and deductible by the payer in the year paid.
Qualified Business Income Deduction
The IRS issued final regulations for determining the amount of the qualified business income deduction of up to 20% of income. This applies to a domestic business operated as a sole proprietorship or through a partnership, S-corporation, trust, or estate. The regulations cover a wide range of topics and discuss the operational rules, including definitions, computational rules, special rules, and other requirements.
Calculating W-2 wages
For any taxable year, a taxpayer must calculate W-2 wages using one of the three methods provided by IRS. The first method (the unmodified Box method) allows for a simplified calculation, while the second and third methods (the modified Box 1 method and the tracking wages method) provide greater accuracy.
Rental real estate safe harbor
The IRS provided a safe harbor under which a rental real estate enterprise will be treated as a trade or business for purposes of the qualified business income deduction. This provides a deduction of up to 20% of the taxpayer’s qualified business income from each of the taxpayer’s qualified trades or businesses.
Options for Those Unable to Pay Taxes
The IRS advised taxpayers who don’t have cash to pay the balance due on their returns to file for an extension of time. This enables taxpayers to avoid penalties, but not interest, if the IRS approves the extension. However, such extensions merely postpone the day of reckoning for the period of the extension (generally, six months). The IRS has outlined other ways in which financially distressed clients may be able to defer paying their income taxes, including installment agreements and an offer in compromise with the IRS.