Is your long-term care policy tax qualified?

Posted on May 30, 2019 by ORRPC

A long-term care insurance policy supplements your traditional health insurance by covering services that assist you or a loved one with one or more activities of daily living. Such activities include eating, bathing, dressing, toileting, and transferring (in and out of bed, for example).

Long-term care coverage is relatively expensive, but it may be possible to reduce the cost by purchasing a tax-qualified policy. Generally, benefits paid in accordance with a policy are tax-free. In addition, if a policy is tax-qualified, your premiums are deductible (as medical expenses) up to a specified limit if you qualify.

To qualify, a policy must:

Be guaranteed renewable and noncancelable regardless of health,
Not delay coverage of pre-existing conditions for more than six months,
Not condition eligibility on prior hospitalization,
Not exclude coverage based on a diagnosis of Alzheimer’s disease, dementia, or similar conditions or illnesses, and
Require a physician’s certification that you’re either unable to perform at least two of six ADLs or you have a severe cognitive impairment and that this condition has lasted or is expected to last at least 90 days.

It’s important to weigh the pros and cons of tax-qualified policies. The primary advantage is the premium deduction. But keep in mind that medical expenses are deductible only if you itemize and only to the extent they exceed 10% of your adjusted gross income for 2019, so some people don’t have enough medical expenses to benefit from this advantage.

It’s also important to weigh any potential tax benefits against the advantages of nonqualified policies, which may have less stringent eligibility requirements.

Additional Resources

Reconsidering Your Business Entity Choice?

Posted on May 30, 2019 by ORRPC

Company-Growth-sidebar Reconsidering Your Business Entity Choice?

For tax years beginning in 2018 and beyond, the Tax Cuts and Jobs Act (TCJA) created a flat 21% federal income tax rate for C corporations. Under prior law, C corporations were taxed at rates as high as 35%.

Meanwhile, the TCJA also reduced individual income tax rates, which apply to sole proprietorships and owners of pass-through entities, including partnerships, S corporations, and, typically, limited liability companies (LLCs). The top rate, however, dropped only slightly, from 39.6% to 37%.

What does all of this mean for business owners? Among other things, it means now might be a good time to reconsider your company’s entity choice — if not this year, then perhaps for the 2020 tax year. On the surface, switching to (or staying) a C corporation may seem like a no-brainer. But there are many other considerations involved.

Conventional Wisdom

Under prior tax law, conventional wisdom was that most small businesses should be set up as sole proprietorships or pass-through entities to avoid the double taxation of C corporations. A C corporation pays entity-level income tax and then shareholders pay tax on dividends — and on capital gains when they sell the stock. For pass-through entities, there’s no federal income tax at the entity level.

Although C corporations are still potentially subject to double taxation under the TCJA, their new 21% tax rate helps make up for it. This issue is further complicated, however, by another provision of the TCJA that allows noncorporate owners of pass-through entities to take a deduction equal to as much as 20% of qualified business income (QBI), subject to various limits. But, unless Congress extends it, the break is available only for tax years beginning in 2018 through 2025.

Scenarios to Ponder

There’s no one-size-fits-all answer when deciding how to structure a business. The best choice depends on your company’s distinctive circumstances, as well as your financial situation and objectives as owner.

For instance, if your business consistently generates tax losses, there’s no advantage to operating as a C corporation. Losses from C corporations can’t be deducted by their owners. So, converting to a pass-through entity may make sense because, as their name indicates, these business structures allow losses to pass through to the owners’ personal tax returns.

Another example involves companies that distribute profits to owners. For a profitable business that does so, operating as a pass-through entity generally will be better if significant QBI deductions are available. If not, it’s probably a toss-up in terms of tax liability.

Many Considerations

These are only a few of the issues to consider when rethinking your company’s business structure. We can help you evaluate your options. Give us a call.

Innocent Spouse Tax Rules

Posted on April 29, 2019 by ORRPC

Must one spouse pay the tax resulting from a fabrication or omission by another spouse on a jointly filed tax return? It depends. If the spouse qualifies, he or she may be able to avoid personal tax liability under the “innocent spouse” rules.

Joint filing status

Generally, married taxpayers benefit overall by filing a joint tax return on the federal level. This is particularly the case when one spouse earns significantly more than the other. Filing jointly may also help the couple maximize certain income tax deductions and credits.

But joint filing status comes with a catch. Each spouse is “jointly and severally” responsible for any tax, interest and penalties attributable to the return. And this liability continues to apply even if the couple gets a divorce or one spouse dies. In other words, the IRS may try to collect the full amount due from one spouse, even if all the income reported on the joint return was earned by the other spouse.

Basic rules

However, the tax law provides tax relief for an “innocent spouse.” Under these rules, one spouse may not be liable for any unpaid tax and penalties, despite having signed the joint return.

To determine eligibility for relief, the IRS imposes a set of common requirements. The spouses must have filed a joint return that has an understatement of tax, and that understatement must be attributable to one spouse’s erroneous items. For this purpose, “erroneous items” are defined as any deduction, credit or tax basis incorrectly stated on the return, as well as any income not reported.

From there, the other (“innocent”) spouse must establish that, at the time the joint return was signed, he or she didn’t know — or have reason to know — there was an understatement of tax. Finally, to qualify, the IRS needs to find that it would be unfair to hold one spouse liable for the understatement after considering all the facts and circumstances.

Additional notes

For many years, innocent spouse relief had to be requested within two years after the IRS first began its collection activity against a taxpayer. But, in 2011, the IRS announced that it would no longer apply the two-year limit on collection activities.

In addition, by law, when one spouse applies for innocent spouse relief, the IRS must contact the other spouse or former spouse. There are no exceptions even for victims of spousal abuse or domestic violence.

Help is available.

Historically, courts haven’t been particularly generous about upholding claims under the innocent spouse rules. State laws can also complicate matters. If you’re wondering whether you’d qualify for relief, please contact us for help.

Sidebar: What does the IRS consider?

The IRS considers “all facts and circumstances” in determining whether it would be inequitable to hold an “innocent” spouse liable for taxes due on a jointly filed tax return. One factor that may increase the likelihood of relief is that the taxes owed are clearly attributable to one spouse or an ex-spouse who filled out the errant return.

If one spouse was deserted during the marriage, or suffered abuse, it may also improve the chances that innocent spouse relief will be granted. In some cases, the IRS may examine the couple’s situation to determine whether the spouse applying for relief knew about the erroneous items.

Tax Break for Kid’s Camp

Posted on April 29, 2019 by ORRPC

Among the many great challenges of parenthood is what to do with your kids when school lets out. Do you keep them at home and try to captivate their attention yourself or with the help of sitters? Or do you send them off to the wide variety of day camps now in operation? There’s no one-size-fits-all answer, but if you choose the latter option, you might qualify for a tax break!

Dollar-for-dollar savings

Day camp — but, to be clear, not overnight camp — is a qualified expense under the child and dependent care tax credit, which is worth 20 percent of qualifying expenses (more if your adjusted gross income is less than $43,000), subject to a cap. For 2019, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more.

Remember that tax credits are particularly valuable because they reduce your tax liability dollar-for-dollar — $1 of tax credit saves you $1 of taxes. This differs from deductions, which simply reduce the amount of income subject to tax. For example, if you’re in the 24-percent tax bracket, $1 of deduction saves you only $0.24 of taxes. So, it’s important to take maximum advantage of the tax credits available to you.

Qualifying for the credit

A qualifying child is generally a dependent under age 13. (There’s no age limit if the dependent child is unable physically or mentally to care for him- or herself.) Special rules apply if the child’s parents are divorced or separated or if the parents live apart.

Eligible costs for care must be work-related. This means that the childcare is needed so that you can work or, if you’re currently unemployed, look for work.

If you participate in an employer-sponsored child and dependent care Flexible Spending Account (FSA), also sometimes referred to as a Dependent Care Assistance Program, you can’t use expenses paid from or reimbursed by the FSA to claim the credit.

Determining eligibility

Additional rules apply to the child and dependent care credit.

If you’re not sure whether you’re eligible, contact us. We can assist you in determining your eligibility for this credit and other tax breaks for parents.

Should you be worried about an IRS audit?

Posted on April 26, 2019 by ORRPC

man-frustrated_LI Should you be worried about an IRS audit?

Now that you’ve likely filed your 2018 tax return, one troubling afterthought may come to mind: Could I get audited?

The mere notion strikes fear into most people’s hearts. And for good reason — under a worst-case scenario, an audit could take up lots of your time, create an enormous amount of stress and leave you with a hefty bill from the federal government in unpaid tax, penalties, and interest.

Now let’s take a deep breath. An audit can also be a rather routine process that results in zero additional liability or even a refund. What’s more, the IRS is performing audits much less frequently than it used to.

Basically, the higher your income and more complex your return, the greater the likelihood that it will be audited. The IRS uses something called a Discriminant Inventory Function (DIF) score to rate the potential for change in a return, based on past IRS experience with similar returns. The agency also uses an Unreported Income Discriminant Index Formula (UIDIF) score to rate each tax return’s potential to indicate unreported income.

If you happen to be a business owner, the IRS may subject your return to intensified scrutiny in years it decides to target a category that your company falls into. Examples might include sole proprietorships with many cash transactions or companies that rely heavily on independent contractors.

By and large, the answer to the question posed in our headline is: Probably not. The best way to prevent a targeted audit or prepare for one you can’t avoid is to get sound guidance from a CPA before filing your return every year.

Give us a call if you have questions or would like to review your return(s).

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