Clergy Tax Benefits Under Fire

Section 107 of the Internal Revenue Code provides that a minister of the gospel’s gross income doesn’t include the rental value of a home (parsonage) provided; if the home itself isn’t provided, a rental allowance paid as part of compensation for ministerial services is excludable. The benefit is generally referred to as a parsonage allowance. Thus, a minister can exclude the fair rental value (FRV) of the parsonage from income under IRC Sec. 107(1), or the rental allowance under Sec. 107(2), for income tax purposes. The Sec. 107(2) rental allowance is excludable only to the extent that it is for expenses such as rent, mortgage payments, utilities, repairs, etc., used in providing the minister’s main home, and only up to the amount of the FRV of the home.

However, either type of parsonage allowance is only excludable for income tax purposes and is subject to self-employment taxes, although for years before 2018 and after 2025, the amount subject to self-employment tax can be reduced by the minister of the gospel’s employee business expenses.

Back in October 6, 2017, in the US District Court for the Western District of Wisconsin, Judge Barbara B. Crabb, in Gaylor v. Mnuchin (the treasury secretary), concluded that Section 107(2) of the Internal Revenue Code is unconstitutional. Specifically, she concluded that this code section violates the Establishment Clause of the First Amendment because it does not have a secular purpose or effect and because a reasonable observer would view the statute as being an endorsement of religion.

The code section under judicial fire is the part of code Sec. 107 allowing churches and other religious organizations the ability to provide tax-free housing to their ordained ministers, even though the housing is not provided in kind by the church or the religious organization. This provision of the code was envisioned to provide ministers of the gospel with modest tax-free housing. However, it contains no limitations on its application and, as a result, also applies to:

  • Televangelists like Joel Osteen, who uses this tax provision to live tax-free in his multi-million dollar mansion.
  • Other ordained ministers working in church-affiliated schools as teachers and administrators who also benefit from the provision.

It has been estimated that the government foregoes in excess of $800 million in tax revenues because of the provision.

Judge Crabb, in issuing her decision, directed the parties to file supplemental materials regarding what additional remedies are appropriate, if any. The judge subsequently stayed injunctive relief until 180 days after the final resolution of all appeals. The additional time will allow Congress, the IRS and affected individuals and organizations to adjust to the substantial change. This case will certainly be appealed to the circuit court and eventually to the Supreme Court. So, we will need to keep our eyes on this case and see how it plays out in the long run.

It should be emphasized that Sec. 107(1), which permits an amount equal to the rental value of a parsonage furnished to a minister as part of his or her compensation to be excluded from income, is not affected by Judge Crabb’s ruling; thus, this benefit continues to be income-tax free.

Ministers of the gospel will also feel one of the negative aspects of the Tax Cuts & Jobs Act of 2017 (aka tax reform), which suspended the deduction for employee business expenses. Thus, beginning in 2018 and through 2025, ministers of the gospel will no longer be able to reduce the amount of their housing allowance by their employee business expenses when computing their self-employment taxes.

If you have questions related to taxation issues for ministers of the gospel, please call us.

How Some High-Income Taxpayers Can Maximize the New 20% Pass-through Business Deduction

Taxpayers with higher 1040 taxable incomes who are self-employed but are not “specified service businesses” may find it beneficial to structure new businesses, or restructure an existing business, as an S corporation to avoid taxable income limitations that apply to the new 20% Sec. 199A pass-through deduction.

To make up for the tax reform’s reduction of the C corporation tax rate to 21%, from which other forms of business activities do not benefit, Congress created a new deduction and code section: 199A. The 199A deduction is for taxpayers with other business activities – such as sole proprietorships, rentals, partnerships and S corporations – since, unlike C corporations, which are directly taxed on their profits, the income from the other business activities flows through to the owner’s tax return and is taxed at the individual level, i.e., at the individual’s tax rate, which can be as high as 37%.

This new Sec. 199A deduction is 20% of the pass-through income from these business activities. But not every owner of these flow-through businesses will benefit from this deduction because, as in all things tax, there are limitations.

Whether or not a taxpayer will benefit from the deduction will depend in great part upon the taxpayer’s 1040 taxable income figured without the Sec. 199A deduction. Married taxpayers with a taxable income below $315,000 (or below $157,500, for others) will benefit from the full 20% deduction.

However, limitations begin to apply when a taxpayer’s 1040 taxable income exceeds those amounts. The most restrictive limitation is the one placed on “specified service businesses.” Once married taxpayers filing jointly have a 1040 taxable income exceeding $415,000 (or above $207,500, for others), they receive no Sec 199A deduction benefit from any pass-through income derived from a specified service business. Specified service businesses include trades or businesses involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services or any trade or business in which the principal asset of the trade or business is the reputation or skill of one or more of its employees or owners. Note that an engineering or architecture business is not a specified service business for this deduction.

On the other hand, a taxpayer can still benefit from pass-through income from other business activities, even when the taxpayer’s 1040 taxable income exceeds the $415,000/$207,500 limits, provided the business activity pays wages and/or has qualified business property, the combination of which make up what is referred to as the wage limitation. Without getting too complicated, the Sec. 199A deduction is the lesser of 20% of one’s pass-through income or the wage limitation. If the wage limit is zero, then the Sec. 199A deduction would also be zero for these high-income taxpayers. The wage limitation itself is the greater of 50% of the wages paid by the business activity or 25% of the wages paid plus 2.5% of the cost of qualified business property. Perhaps this is best explained by example.

Example #1: Peter and his wife have a 1040 taxable income of $475,000. Peter has a self-employed business (not a specified service business), from which he has a net profit of $300,000, and his tentative 199A deduction is $60,000 (20% of $300,000). However, because his taxable income exceeds $415,000, his Sec. 199A deduction is the lesser of $60,000 or the wage limit. Peter has no employees or qualified business property, so his wage limitation is zero; thus, his Sec. 199A deduction is also zero.

Example #2: Same as example #1, except Peter’s business is organized as an S corporation. Of his net profit of $300,000, it is determined that a reasonable compensation (wage) for the services Peter provides to the S corporation is $150,000, which the S Corporation pays as a salary to Peter. The other $150,000 is pass-through income. Now, Peter’s Sec. 199A deduction is the lesser of 20% of the pass-through income – $30,000 (20% of $150,000) – or the wage limitation, which is 50% of the wages paid by the S Corporation or $75,000 (50% of $150,000).

This demonstrates how a business activity can benefit from being organized as an S corporation, since S corporations are required to pay working shareholders a reasonable wage for their services provided in operating the business. They are able to divide the pass-through income between reasonable wages and pass-through income to enable a 199A deduction for a higher-income taxpayer. Other business entities do not provide this option, which is the reason why high-taxable-income taxpayers might explore the benefits of organizing new businesses as, or reorganizing their existing businesses into, an S corporation.

Of course, there are other issues involved as well, and some sole proprietors may not find it worth the expense or effort to switch to a different type of business entity. However, the higher the taxpayer’s income, the more beneficial it becomes. The same issues also apply to partnerships. To see if organizing or reorganizing your business activity into an S corporation can reduce your tax liability, call us for an appointment.


A Mid-Year Tax Checkup May Be Appropriate

Taxes are similar to vehicles, in that they sometimes need a check-up to make sure they are performing as expected. That is especially true for 2018, with all of the changes brought about by tax reform.

One area of major concern is the amount of taxes individuals are withholding from their wages. Tax reform was passed late in 2017, and there was a considerable amount of confusion among employers related to the amount of taxes to withhold in 2018. It took the IRS a couple of months to come out with a revised Form W-4 (Employee’s Withholding Allowance Certificate) and withholding tables, and even then, there were concerns about whether the revised and more complicated W-4s were being filled out correctly by employees and whether the revised W-4s were actually being submitted to employers at all. The IRS has even been issuing notices cautioning taxpayers to be sure they are withholding enough.

While most people will see an overall tax reduction as a result of the tax reforms, the amount of their refund or tax due hinges on the amount of pre-payments, which include withholding and estimated tax payments. All this confusion related to withholding can lead to unpleasant surprises at tax time. If you count on a refund each year, it might be appropriate to have this office run a mid-year tax projection to ensure that the projected refund will be as expected.

This is also true for retirees receiving pensions and Social Security benefits and for self-employed taxpayers who are making pre-payments via estimated taxes. You obviously do not want to pay too much and generally don’t want to end up with a huge tax liability. A mid-year check-up will allow adjustments to the 3rd- and 4th-quarter estimated tax payments so that the end result will be as desired.

Married couples with two working spouses, individuals with multiple jobs and situations in which taxpayers are both wage earners and self-employed cause the most difficulty in getting the prepayments correct. If you would like a mid-year projection and withholding check-up, please call for an appointment.

There are a number of other circumstances that can impact your taxes, and you probably should not wait until tax time to see the results. You could even be missing opportunities to decrease your prepayments and obtain more cash flow. With mid-year tax planning, you may be able to take steps to mitigate the tax impact of certain events and thus avoid unpleasant surprises before it is too late to address them. Here are some events that can significantly impact your tax liability:

  • Getting married or divorced, or becoming widowed
  • Changing jobs or your spouse starting to work
  • Having a substantial increase or decrease in income
  • Having a substantial gain from the sale of stocks or bonds
  • Buying or selling a rental
  • Starting, acquiring, or selling a business
  • Buying or selling a main or vacation home
  • Retiring or going to retire this year
  • Being the beneficiary of an inheritance
  • Giving birth to or adopting a child
  • Making significant business purchases
  • Having substantial investment income or gains from the sale of investment assets
  • Making unplanned withdrawals from an IRA or pension plan

If you anticipate or have already encountered any of the above events or conditions, it may be appropriate to consult with us—preferably before the event and definitely before the end of the year.

Taxpayers Find Gift Tax Reporting Confusing

Gift taxes were created to prevent wealthy taxpayers from transferring their estates to their beneficiaries via gifts and thus avoid estate taxes when they pass away. But that does not mean only wealthy taxpayers need to be concerned with the gift tax provisions as, under many circumstances, even lower-income taxpayers may find they are liable for filing a gift tax return.

The government uses the gift tax return to keep a perpetual record of a taxpayer’s gifts during their lifetime, and gifts exceeding the amount that is annually exempt from the gift tax reduce the taxpayer’s lifetime estate tax exclusion, which is currently $11.18 million (nearly a two-fold increase from the 2017 exclusion as a result of the Tax Cuts and Jobs Act of 2017).

So what does this have to do with me you ask, since your estate is significantly less than $11.18 million? Well, your estate may be less than $11.18 million now, but what will it be when you pass away? You never know. Another concern is that the IRS requires individuals to file gift tax returns if their gifts while living exceed the annual exemption amount.

Annual Gift Tax Exemption – Under the gift tax rules, there is an annual amount that is exempt from the gift tax, which allows each taxpayer to give up to the specified amount each year to as many individuals as they would like without having to file a gift tax return or pay any gift tax. The annual amount is inflation adjusted, and for 2018 that amount is $15,000 (up from $14,000 in 2017). The recipients of the gifts do not need to be related to the person making the gift.

Example 1: A taxpayer with four children can gift $15,000 to each child for a total of $60,000 without having to file a gift tax return. If the taxpayer is married, each spouse can gift $15,000 to each child, for a total for the couple of $120,000, without having to file a gift tax return.

Example 2: A single taxpayer has one child, a son. In 2018, he gives the son $20,000 to use for a down payment on a home he is purchasing. Because the gift was more than $15,000, the taxpayer needs to file a gift tax return. As long as the amount of the cumulative gifts made by the taxpayer during his lifetime that have exceeded the annual gift tax exclusion amounts in the current and other gifting years is less than $11,180,000, the generous dad won’t be liable for any gift tax on his 2018 gift tax return.

Additional Exclusions – In addition to the annual exemption amount, a donor may make gifts that are totally excluded from the gift tax and gift tax reporting under the following circumstances:

  • Payments made directly to an educational institution for tuition (payments to Sec 529 qualified state tuition saving plans are not direct). This exclusion includes college and private primary education but does not include books or room and board.
  • Payments made directly to any person or entity providing medical care for the donee (recipient).

In these cases, it is crucial that the payments be made directly to the educational institution or health care provider. Reimbursement paid to the donee will not qualify for the exclusion. The tuition/medical exclusion is often overlooked, and these expenses can be quite significant. Parents, grandparents, and others interested in reducing the value of their estate should strongly consider these gifts.

Please give us a call if you have questions.

The Most Common Accounting Mistakes Small Business Owners Make and How to Avoid Them

Most small business owners are an expert in their field, but not necessarily in the accounting aspects of building a business. And, with this comes a few common mistakes. Yet, even simple small business accounting mistakes can prove to be financially limiting and costly down the road. With the help of an accounting professional, it is possible to overcome at least some of these mistakes. Take a look at some of the most common mistakes and how to avoid them.

#1: Choosing the Right Accounting Software for My Business
You’ve purchased small business accounting software. You assume it will be ideally matched to your business and easy enough to jump into. It’s not. The problem is, each business requires a carefully selected and even customized accounting method. There are always risks related to regulatory compliance when the wrong accounting software is used or information is overlooked.

To resolve this, work with a professional that listens to your needs, learns about your business, and modifies your bookkeeping methods to meet your goals.

#2: Your Business Has Poor Organization and Recordkeeping
It’s quite common for small business owners to lack the time and skills to effectively manage small business recordkeeping and bookkeeping. There’s much to do and it takes time away from your business. And, there are dozens of apps and cloud accounting options present. Which do you use?

The good news is all of those options are a good thing. It means there are no longer excuses for not getting your business organized. With a bit of help, it is possible to set up a system that streamlines your business operations.

#3: Cash Flow Versus Profit-Loss Statement
Many small businesses are making money on paper, but they end up going under if their float to getting paid is too long. This is financially limiting and stunts your growth as well.

It’s important to understand how this impacts your business. Cash flow is a critical component of any business operation — it determines how much you end up borrowing and paying for, too. Learn the best methods for managing cash flow.

#4: Not Understanding Standard Accounting Procedures and Terminology
Many small business owners don’t understand key business accounting terms and procedures. What does setting up controls mean? What about bank reconciliation? What are your balance sheets and when are they updated? Profit and loss statements are filled with very specific terminology you need to get right.

It’s possible to learn these terms and methods on your own. There’s plenty of information available. However, it takes time to learn it all. More importantly, you may find applying specific procedures and tax laws to your business challenging. To overcome this, work with a tax professional you can depend on.

#5: The Small Business Budget
A budget provides financial insight. It offers guidance to you about where your business is right now and what your goals are. That’s because a budget — which many small business owners lack — creates key goals for your company to manage. Flying blind, on the other hand, is a common small business mistake.

Creating a budget takes some time and a good amount of dedication. Once it is in place, it can be modified each month to meet current needs. Software is available to help with this, but an accounting professional is also an option.

#6: Too Much DIY
To be frank, one of the biggest mistakes small business owners make is simply trying to save money by doing it themselves. Yes, it is true this will cut your accounting costs, but it also creates a scenario in which you have absolutely no control over “what you don’t know.” In other words, just because you can enter it doesn’t mean you should.

Working with a bookkeeping and accounting service capable of handling these tasks for you is the best option. In nearly every situation, these services will work to save you money, far overlapping any DIY savings you are creating.

#7: Lack of Tax Planning
Taxes are not something you should do just one time a year. Year-long tax planning for small businesses is necessary. It’s not just important to pay your taxes, but also to plan for them and plan for savings options.

If you lack a tax planning strategy, work to improve this by simply working with a tax professional. Create a plan for ways you can invest and cut your tax burden.

#8: Lack of Modernization
Are you still balancing your books using pen and paper? It is no longer considered ideal to do so. Yet, many small business owners see the investment in modernization and cloud accounting to be too costly. In fact, moving to a digital accounting system is likely to save you time and money. It doesn’t have to be challenging to implement this system either.

#9: Not Realizing True Profit and Loss
You may have a profit and loss sheet, but you may not have a lot of insight into what each line means. More so, you may not know enough about methods for reducing costs or viewing profit potential.

The investment in an accounting service can alleviate this. We are happy to talk to you about methods to save you money or boost your profit margins with simple changes to your methods.

Most small business accounting mistakes come from a lack of insight into the industry. The good news is solutions are available to help you overcome nearly all of them. Please call us if you have any questions.

Is an Inheritance Taxable?

A frequent question is whether inheritances are taxable. This is a frequently misunderstood question related to taxation and can be complicated. When someone passes away, all of their assets will be subject to inheritance taxation, and whatever is left over after paying the inheritance tax passes to the decedent’s beneficiaries.

Sound bleak? Don’t worry, very few decedents’ estates ever pay any inheritance tax, primarily because the code exempts a liberal amount of the estate from taxation; thus, only very large estates are subject to inheritance tax. In fact, with the passage of the Tax Cuts & Jobs Act (tax reform), the estate tax deduction has been increased to $11,180,000* for 2018 and is inflation adjusted in future years. That generally means that estates valued at $11,180,000* or less will not pay any federal estate taxes and those in excess of the exemption amount only pay inheritance tax on amounts in excess of the exemption amount. Of interest, there are less than 10,000 deaths each year for which the decedent’s estate exceeds the exemption amount, so for most estates, there will be no estate tax and the beneficiaries will generally inherit the entire estate.

* Note that, as with anything tax-related, the exemption is not always a fixed amount. It must be reduced by prior gifts in excess of the annual gift exemption, and it can be increased for a surviving spouse by the decedent’s unused exemption amount.

Because the value of an estate is based upon the fair market value (FMV) of the assets owned by the decedent on the date of their death (or in some cases, an alternative valuation date six months after the decedent’s date of death, which is rarely used), the beneficiaries will generally receive the inherited assets, with a basis equal to the same FMV determined for the estate. What this means to a beneficiary is if they sell an inherited asset, they will measure their gain or loss from the inherited basis (FMV and date of death).

Example #1: Joe inherits shares of XYZ Corporation from his father. Because XYZ Corporation is a publically traded stock, the FMV can be determined by what it is trading for on the stock market. Thus, if the inherited basis was $40 per share and the shares are later sold for $50 a share, the beneficiary will have a taxable gain of $10 ($50 – $40) per share. In addition, the gain will be a long-term capital gain, since all inherited assets are treated as being held long-term by the beneficiary. On the flip side, if the shares are sold for $35 a share, the beneficiary would have a loss of $5 per share.

Example #2: Joe inherits his father’s home. Like other inherited property, Joe’s basis is the FMV of the home on the date of his father’s death. However, unlike the stock, whose FMV could be determined from the trading value, the home needs to be appraised to determine its FMV. It is highly recommended that a certified appraiser do the appraisal. This is something that is frequently overlooked and can cause some problems if the IRS challenges the amount used for the basis.

This FMV valuation of inherited assets is frequently referred to as a step-up in basis, which is really a misnomer because the FMV can, under some circumstances, also be a step-down in basis.

If the decedent was married at the time of death and resided in a community property state, and if the property was held by the couple as community property, the beneficiary spouse will generally receive a 100% basis equal to the FMV of the property, even though the spouse will have only inherited the deceased spouse’s share.

Not all inherited assets received by the beneficiary fall under the FMV regime. If the decedent held assets that included deferred untaxed income, those assets will be taxable to the beneficiary. Examples of those include inherited:

  • Traditional IRA Accounts – These are taxable to the beneficiaries, but the special rules generally allow a beneficiary to spread the income over five years or take it over their lifetime.
  • Roth IRAs – Qualified distributions are not taxable to the beneficiary.
  • Compensation – Amounts received after the decedent’s death as compensation for his or her personal services.
  • Pension Payments – These are generally taxable to the beneficiary.
  • Installment Sales – Whoever receives an installment obligation as a result of the seller’s death is taxed on the installment payments the same as the seller would have been, had the seller lived to receive the payments.

This is just an overview of issues related to being the beneficiary of an inheritance. If you have questions related to the tax ramifications of a potential or actual inheritance, please give us a call.

Credit for Family and Medical Leave Benefits

The Tax Cuts and Jobs Act that was passed last year included a new tax credit for employers that allows them to claim a credit based on wages paid to qualifying employees while they are on family and medical leave.

To qualify for the credit, an employer must have a written policy that provides at least two weeks of paid family and medical leave annually to all qualifying employees who work full time, which can be prorated for part-time. The wages paid during the leave period cannot be less than 50 percent of what the employee is normally paid.

The credit is variable. It begins at 12.5% and increases by 0.25%, up to a maximum of 25%, for each percentage point that the rate of payment exceeds 50% of the employee’s normal pay.

Example: ABC, Inc. has qualifying written policy to pay an employee 70% of their normal wage while on family or medical leave. The rate of 70% is 20 percentage points above the 50% credit threshold. Thus the credit is increased by 5% (.25 x 20), which when added to the base credit of 12.5% results in a credit percentage of 17.5% (12.5% plus 5%). Assuming the total leave wages paid for the year were $15,000, the credit would be $2,625 (.175 x $15,000).

A qualifying employee for this credit is any employee who has been employed for one year or more and who had compensation that did not exceed a specified amount for the preceding year. For 2018, the employee must not have earned more than $72,000 in 2017. Thus leave benefits for higher income taxpayers will not qualify for this credit.

For the purposes of this credit, “family and medical leave” is leave for one or more of the following reasons:

  • Birth of an employee’s child and to care for the newborn.
  • Placement of a child with the employee for adoption or foster care.
  • Care for the employee’s spouse, child or parent who has a serious health condition.
  • A serious health condition that makes the employee unable to perform the functions of his or her position.
  • Any qualifying event due to an employee’s spouse, child or parent being on covered active duty — or being called to duty — in the Armed Forces.
  • Care for a service member who is the employee’s spouse, child, parent or next of kin.

The credit only applies to qualified leave wages paid to a qualifying employee for up to 12 weeks per taxable year, and the employer must reduce its deduction for wages or salaries paid or incurred by the amount determined as a credit. Any wages taken into account in determining any other general business credit may not be used toward this credit.

CAUTION – CREDIT TIME LIMITED
The credit is generally only effective for wages paid in taxable years of the employer beginning after December 31, 2017. It is not available for wages paid in taxable years beginning after December 31, 2019

The credit is part of the general business credit, where business incentive credits are combined into one “general business credit” for purposes of determining each credit’s allowance limitation for the tax year. A general business credit is generally limited to the taxpayer’s tax liability for the year (excluding self-employment tax), and any excess over the tax liability is carried back one year and forward 20 years. “Carrying back” means, in most instances, amending the return of the year to which the credit is carried; if no return was filed for that year, then the carryback credit would be claimed on an original late-filed return for that year.

If you have any questions relating to this credit, please give us a call.

Solar Tax Credit – The Dark Side

There are TV ads, telemarketing phone calls and sales people at your front door all promoting the benefits of solar power, and one of the key considerations and a frequently mentioned benefit is the 30% federal tax credit.

What isn’t included in the ads — and something most potential buyers are unaware of — is that the solar credit is a nonrefundable tax credit, meaning the credit can only be used to offset your tax liability. This can come as a very unpleasant surprise and is often a financial hardship when the purchaser of a home solar system finds out that the credit is nonrefundable and that they won’t get the full credit.

For example, a married couple with three children, all under age 17, and an annual income of $78,000 installed a solar system costing $20,000 in 2018, expecting a $6,000 credit on their tax return. Their standard deduction in 2018 is $24,000, leaving them with a taxable income of $54,000. The tax on the $54,000 is $6,099. They are also entitled to a $2,000 child tax credit for each child, which reduces their tax liability by $6,000 and results in a tax liability of $99. Since the solar credit is nonrefundable, the only portion of the credit they can use is $99, not the $6,000 they had expected.

On top of that, the family is probably financing the solar system, which significantly adds to the system’s cost. If the entire $20,000 cost were financed by a 5% home equity loan for 20 years, then the interest on that loan over its term would be $11,678, bringing the total cost of the solar system to $31,678 or a monthly cost of $132.

Some municipalities even allow home energy improvements to be financed through the property tax system by adding the payments to the quarterly or semi-annual property tax bills. Interest rates on these arrangements are generally higher than home equity loans, reaching levels of 9 to 10%. If the loan in our prior example would have been at 9%, then the interest on the loan over 20 years would be $23,187, bringing the total cost to $43,187 or a monthly cost of $180. It is also a common misconception that solar system payments added to the property tax bill can be deducted as property taxes. That is incorrect; however, the interest portion of the loan payment is generally deductible as home acquisition debt interest. The lender should supply a loan amortization schedule indicating the annual interest amount.

The unused credit does carry over from year to year as long as the solar energy credit is available. Currently, the credit is being phased out, and 2021 is the last year it can be claimed. Furthermore, the credit percentage rate is being phased down, with the 30% continuing through 2019 and then dropping to 26% in 2020 and 22% in its final year.

In lieu of purchasing a solar system, some homeowners opt to lease a system. This arrangement is not eligible for the solar credit.

As you can see, there is a lot to consider before making the final decision to install a solar system. Is it worth it, and is it the right thing financially for you? Please call for a consultation before signing any contract to make sure a solar system is appropriate for you.

Should I Use a Credit Card to Pay My Taxes?

With tax filing season out of the way, paying off those tax bills that weren’t paid by April 18th is the next major concern for people. While there are a few options for payment agreements if you can’t afford to write a check for the full amount immediately, there’s also the option of paying your tax bill with a credit card. It can be less confusing than navigating IRS payment plans, and if your credit card has a nice rewards program, then it’s something to think about.

Depending on how much you owe in taxes and what terms your credit card offers, it may or may not be worth putting your tax bill on your credit card. Here are some of the pros and cons of using a credit card to pay your taxes and why you would or wouldn’t want to pursue this option.

Processing Fees

Legally, the IRS cannot directly accept credit card payments so they use three different approved payment processors for taking credit and debit card payments. At the time of writing, the processor with the most favorable rate is pay1040.com. Their minimum processing fee is $2.59, otherwise charging 1.87% of your balance. So, if you owe $2,000 in taxes, then you’d be charged a total of $2,037.40.

Keep in mind that this processing fee is steeper the bigger that your outstanding balance is, and you need to pay it on top of whatever you’ll owe in interest. If you go on a payment plan and pay by direct debit or check, you’ll only pay the IRS interest rate and any applicable penalties with no processing fees.

Interest Rates and Balance Transfers

Interest rate varies by the credit card that you have, but the average rate is 15.07%. For the first quarter of 2018, the IRS interest rate on underpayments is 4% (expected to go up to 5% for the second quarter.) This interest rate is in addition to any applicable penalties like the .0.50% late fee that applies every month until the balance has been paid off. But the interest rate the IRS charges is a lot less than the average credit card interest rate.

If you anticipate paying your balance off over time, you will definitely pay a lot more interest with a credit card even if it’s less confusing to calculate than the IRS interest rates, which change more often. However, if you open a new credit card intended for balance transfer if your credit’s good, then you can get a few months to a whole year to pay off your balance at a 0% interest rate which both buys time and saves money. But if you’re late on the payments eventually and/or your credit isn’t that great, this isn’t a likely option.

Credit Card Rewards

Credit card rewards, like cash rebates and frequent flier miles, are what often makes the extra fees and interest tempting to put your tax balance on your credit card: Why not get a free vacation for paying your taxes?

But financial experts estimate that most credit card rewards only net you about 1% back of what you purchase. It’s worth sitting down and doing the math on how much the IRS interest rates and forgoing processing fees would save you so you can take that vacation out of pocket instead. Unless you plan on paying off your entire balance immediately and the reward offered is worth what you’ll pay in fees, reward programs aren’t likely to completely defray the costs of using a credit card for your taxes.

Tax Bills and Your Credit Report

Ultimately, if you need extra time to pay your taxes, you are better off with an IRS installment or short-term payment agreement since owing money on these plans does not appear on your credit report. However, carrying a balance will appear once you shift the responsibility from the IRS to your credit card company. In addition to impacting your available credit, it also affects your credit utilization score based on how much of your available credit is being used.

If you’re looking for housing, more credit, or other situations that warrant your credit report being pulled, then you’ll want to avoid paying your taxes with a credit card.

Ultimately, it’s up to you to weigh the risks and benefits of using a credit card to pay your taxes. If you’re taking a longer-term approach, an installment agreement is likely to cost you less both upfront and in the long run. If you have any questions related to the pros and cons of using a credit card to pay your taxes, please give us a call.

Summer Employment For Your Child

Summer is just around the corner, and your children may be looking for summer employment. With the passage of the most recent tax reform, the standard deduction for single individuals jumped from $6,350 in 2017 to $12,000 in 2018, meaning your child can now make up to $12,000 from working without paying any income tax on their earnings.

In addition, they can contribute the lesser of $5,500 or their earned income to an IRA. If they contribute to a traditional IRA, they could earn up to $17,500 tax free, since the combination of the standard deduction and the maximum allowed contribution to an IRA for 2018 is $5,500. However, looking forward to the future, a Roth IRA with its tax-free accumulation would be a better choice.

Even if your child is reluctant to give up any of their hard-earned money from their summer or regular employment, if you have the financial resources, you could gift them the funds to make the IRA contribution, giving them a great start and hopefully a continuing incentive to save for retirement.

With vacation time just around the corner and employees heading out for their summer vacations, if you are self-employed, you might consider hiring your children to help out in your business. Financially, it makes more sense to keep the family employed rather than hiring strangers, provided, of course, that the family member is suitable for the job.

Rather than helping to support your children with your after-tax dollars, you can instead hire them in your business and pay them with tax-deductible dollars. Of course, the employment must be legitimate and the pay commensurate with the hours and the job worked. A reasonable salary paid to a child reduces the self-employment income and tax of the parents (business owners) by shifting income to the child.

Example: You are in the 25% tax bracket and own a self-employed business. You hire your child (who has no investment income) and pay the child $15,000 for the year. You reduce your income by $15,000, which saves you $3,750 of income tax (25% of $15,000), and your child has a taxable income of $3,000 ($15,000 less the $12,000 standard deduction) on which the tax is only $300 (10% of $3,000).

If the business is unincorporated and the wages are paid to a child under age 18, the pay will not be subject to FICA (Social Security and Medicare taxes) since employment for FICA tax purposes doesn’t include services performed by a child under the age of 18 while employed by a parent. Thus, the child will not be required to pay the employee’s share of the FICA taxes, and the business won’t have to pay its half either.

Example: Using the same information as the previous example, and assuming your business profits are $130,000, by paying your child $15,000, you not only reduce your self-employment income for income tax purposes, but you also reduce your self-employment tax (HI portion) by $402 (2.9% of $15,000 times the SE factor of 92.35%). But if your net profits for the year were less than the maximum SE income ($128,400 for 2018) that is subject to Social Security tax, then the savings would include the 12.4% Social Security portion in addition to the 2.9% HI portion.

A similar but more liberal exemption applies for FUTA, which exempts from federal unemployment tax the earnings paid to a child under age 21 while employed by his or her parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his or her parents. However, the exemptions do not apply to businesses that are incorporated or a partnership that includes non-parent partners. Even so, there’s no extra cost to your business if you’re paying a child for work that you would pay someone else to do anyway.

If you have questions related to your child’s employment or hiring your child in your business, please give us a call.