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Get Ready for Taxes: Important things to know about tax credits

With the tax filing season quickly approaching, the Internal Revenue Service recommends taxpayers take time now to determine if they are eligible for important tax credits.

This is the second in a series of reminders to help taxpayers Get Ready for the upcoming tax filing season. The IRS recently updated its Get Ready page with steps to take now for the 2020 filing season.

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a refundable federal income tax credit for working people with low to moderate incomes who meet certain eligibility requirements. Because it’s a refundable credit, those who qualify and claim EITC pay less federal tax, pay no tax or may even get a tax refund. EITC can mean a credit of up to $6,557 for working families with three or more qualifying children. Workers without a qualifying child may be eligible for a credit up to $529.

To get the credit, people must have earned income and file a federal tax return — even if they don’t owe any tax or aren’t otherwise required to file.

Taxpayers can use the EITC Assistant to find out if they are eligible for EITC, determine if their child or children meet the tests for a qualifying child and estimate the amount of their credit.

Child Tax Credit

Taxpayers can claim the Child Tax Credit if they have a qualifying child under the age of 17 and meet other qualifications. The maximum amount per qualifying child is $2,000. Up to $1,400 of that amount can be refundable for each qualifying child. So, like the EITC, the Child Tax Credit can give a taxpayer a refund even if they owe no tax.

The qualifying child must have a valid Social Security number issued before the due date of the tax return, including extensions. For tax year 2019, this means April 15, 2020, or if a taxpayer gets a tax-filing extension, Oct. 15, 2020.

The amount of the Child Tax Credit begins to reduce or phase out at $200,000 of modified adjusted gross income, or $400,000 for married couples filing jointly.

Credit for Other Dependents

This credit is available to taxpayers with dependents for whom they cannot claim the Child Tax Credit. These include dependent children who are age 17 or older at the end of 2019 or parents or other qualifying individuals supported by the taxpayer.

Publication 972, Child Tax Credit, available now on IRS.gov, has further details and will soon be updated for tax year 2019.

Education Credits

Two credits can help taxpayers paying higher education costs for themselves, a spouse or dependent. The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) are claimed on Form 8863, Education Credits. The AOTC is partly refundable.

To get either credit, the taxpayer or student usually must receive Form 1098-T, Tuition Statement, from the school attended. Some exceptions apply. See the instructions to Form 8863 for details.

Interactive Tax Assistant

The IRS urges taxpayers to use the agency’s Interactive Tax Assistant (ITA) to help determine if they can claim any of these credits. The ITA also provides answers to general questions on filing status, claiming dependents, filing requirements and other topics.

Start with IRS.gov for help that includes tools, filing options and other services and resources. Taxpayers increasingly use IRS.gov as their first resource for tax matters. Information in languages other than English is available under the language tab on IRS.gov.

Filing electronically is easy, safe and the most accurate way to file your tax return. There are a variety of free electronic filing options for most taxpayers including using IRS Free File for taxpayers with income below $66,000, or Fillable Forms for taxpayers who earn more. Taxpayers who generally earn $56,000 or less can have their return prepared at a Volunteer Income Tax Assistance site. Tax Counseling for the Elderly sites offer free tax help for all taxpayers, particularly those who are 60 years of age and older.

What Can You Be Doing Now?

Of course, it feels as if there is too much shopping and visiting and eating to be done this time of year to do anything extra. But be kind to your future January-self and do these things now. A little 4^th Quarter maintenance now will go a long way toward a relaxing new year!

Worker Maintenance

If you employ workers and/or independent contractors do this now so in January all you have to do is process and mail, because deadline for W-2s and 1099s is January 31, 2020

Verify current mailing address for all your employees both current and former
Make sure you have a W-9 on file for all your independent contractors

Clean Books = Happy Owner

Get your business’ books up to date now for this year. Nothing worse than racing the clock in the beginning of the year to clean up from the year passed!

Reconcile all your bank and credit card accounts
Make sure all income and expenses are input correctly
Review reports to date to check for errors or omissions

Dream Big

What do you want your next business year to look like? Are you hoping to invest in new equipment, a new product line, hire more employees? If you know what you want to accomplish in 2020 then plan now.

Tax planning – do you need to show more income in 2019 or possibly less income, or use some carryover from a previous year? Now is the time to decide so that when filings are due you are not scrambling.
What are your goals for your company? What needs to change in the new year to meet those goals? New product, increased prices, raises for staff?
When planning the benefits for your employees and the goals for your company don’t forget yourself! The years keep swinging by apace, are your retirement savings keeping up? Maybe the new year means time to start or increase an automatic deposit into a retirement account.

Don’t just plan in your head, write it down! Something happens when you commit your ideas to paper. You are much more likely to follow a plan you have written down and perhaps shared with key employees or someone close who can check in with your progress throughout the year. The most important thing is do what you can now to prepare for the next year.

HIRE INDEPENDENT CONTRACTORS, NOT EMPLOYEES?

Many corporations, large and small, use independent contractors rather than employees for some jobs. They can provide flexibility, cut costs and reduce paperwork. However, if you’re not careful how you use independent contractors, you may have a tax problem with the IRS or State unemployment authorities and other potential problems with the Department of Labor, Wage and Hour Division or State Workers Compensation officials.

Independent contractors may not have to be included in fringe benefit coverage, including vacations, holidays, sick days, 401(k) plans, funeral leave or retirement plans. But the big advantage in using them is in the area of payroll taxes. For employees, you must withhold part of each paycheck, match the withheld portion and send both sides to the IRS. There’s also the accounting time and costs involved.

For independent contractors, compensation is simpler: You send checks to the workers. At the end of each year, you send information reports (Form 1099) to the contract workers and to the IRS.

The IRS, however, prefers that you classify workers as employees rather than independent contractors because it likes to have payroll taxes come in automatically and on time. Therefore, if there’s any doubt at all, the IRS will likely re-classify independent contractors as employees.

Misclassification of an employee as independent contractor can be costly.
If your corporation has been paying workers as independent contractors, but the IRS or State unemployment compensation officials claim that they’re really employees, you’ll owe back taxes, interest and penalties and also face possible tax liens.

How can you tell the difference between an employee and an independent contractor?
First, use a written Independent Contractors Agreement and be sure your independent contractor and your corporation sign the agreement. Next, the most important factor is control. If you have the right to control how and when a person works, that person is most likely an employee.

Another important factor is a worker’s risk of loss. A person who pays none of his or her own business expenses and is guaranteed regular compensation is likely to be considered an employee, but one who pays some expenses, with uncertain earnings prospects, may be an independent contractor.

Independent contractor agreements let companies fill necessary yet temporary positions without having to hire a full or part-time employee while avoiding the need to provide training or supplies. Independent contractors typically have more urgency and reason (as entrepreneurs) to provide a higher quality of service to warrant earning continued business. A well-written agreement will protect both companies and independent contractors from liabilities and lawsuits by clearly specifying respective roles, duties, payments, deadlines, and dispute resolution, among other procedures relative to the project and working relationship.

ick here to get a quote to prepare or review your independent contractor agreement.

401(k) contribution limit increases to $19,500 for 2020; catch-up limit rises to $6,500

The Internal Revenue Service today announced that employees in 401(k) plans will be able to contribute up to $19,500 next year.

The IRS announced this and other changes in Notice 2019-59, posted today on IRS.gov. This guidance provides cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2020.

Highlights of changes for 2020

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $19,000 to $19,500.

The catch-up contribution limit for employees aged 50 and over who participate in these plans is increased from $6,000 to $6,500.

The limitation regarding SIMPLE retirement accounts for 2020 is increased to $13,500, up from $13,000 for 2019.

The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs and to claim the Saver’s Credit all increased for 2020.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or his or her spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor his or her spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase-out ranges for 2020:

For single taxpayers covered by a workplace retirement plan, the phase-out range is $65,000 to $75,000, up from $64,000 to $74,000.
For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $104,000 to $124,000, up from $103,000 to $123,000.
For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $196,000 and $206,000, up from $193,000 and $203,000.
For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The income phase-out range for taxpayers making contributions to a Roth IRA is $124,000 to $139,000 for singles and heads of household, up from $122,000 to $137,000. For married couples filing jointly, the income phase-out range is $196,000 to $206,000, up from $193,000 to $203,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $65,000 for married couples filing jointly, up from $64,000; $48,750 for heads of household, up from $48,000; and $32,500 for singles and married individuals filing separately, up from $32,000.

Key limit remains unchanged

The limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

Details on these and other retirement-related cost-of-living adjustments for 2020 are in Notice 2019-59, available on IRS.gov.

Hobby or Business – How Do I Know?

Many of us engage in pursuits outside of our “regular job” and sometimes that means making some money from those pursuits.

But when is it a hobby and when is it a business? Well, that sort of depends on your objective. Say, you are a big knitter. You just can’t stop knitting and when it gets cold all of your friends ask you where you got those great hot pink mittens, you tell them and they want you to make them a pair but insist on paying you.

Now, if you can knit a pair of mittens for $8 and you sell them to your friend for $20, you have just made $12 and yes, you are supposed to report that income on your taxes. But you can also deduct the cost of the yarn and needles to make them.

If you think to yourself, “That was nice, now I just have to make John and Emily their mittens and then I’m done. Phew!” Just as above, if you earn income you must report it, but it is still firmly in the hobby column. If, however, you think to yourself, “Wow, that was fun! I’m going to start an Etsy page and see if I can sell these to the public” then you have just started yourself a small business.

On The Right Track

There are some things that make it a business rather than a hobby outside the Etsy page though. The IRS lists nine things that make it a business. You should make sure you meet the criteria before you file the income and expenses from your knitting as a business on your taxes.

First is, do you keep proper books for your knitting? If you estimated that $8 cost and you spend your own money then you’re still in hobby zone. If you know it takes exactly three and a half skeins of yarn to make those fabulous mittens in wild colors and you have a separate bank account for or keep careful track of those expenses then you are properly accounting for your expenses and you may have yourself a business.

Another important distinction is how you treat the time you spend pursuing the endeavor. If you have scheduled yourself to knit evenings from 6-8 and Saturdays from 8-4 and you consistently show up and do the work then you are treating it like a business. Also, do you market your product or service? Do you have ads or place business cards in your local craft shop offering your services? Then you are in business.

Work Work Work

The most important thing is consistency and how you are managing your work and your business. It doesn’t matter so much that you make a profit, the IRS understands that starting a business is difficult and not always profitable within the first few years, but that you are trying to make a profit, that you are relying on that income to pay your expenses and that you are properly accounting for all your income and expenses and reporting those on your taxes.

And just as you learn more and more about your hobby and how to master it, so should you learn and grow in how you conduct business. The more you understand about how to properly run a business the more time you can spend knitting!

Get Ready for Taxes: Important things to know about tax credits

What Can You Be Doing Now?

HIRE INDEPENDENT CONTRACTORS, NOT EMPLOYEES?

401(k) contribution limit increases to $19,500 for 2020; catch-up limit rises to $6,500

Hobby or Business – How Do I Know?

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