Thursday, Sept. 3 IRS webinar focuses on Opportunity Zones

webinar-IRS

IR-2020-198, August 31, 2020

WASHINGTON — The Internal Revenue Service is holding a free webinar designed to give an overview of Opportunity Zones and to discuss related tax benefits for investors. Opportunity Zones are an economic development tool that allows people to invest in distressed areas in the United States.

webinar-IRSThis free 75-minute webinar will take place on Thursday, September 3 at 2 p.m. Eastern Time. It is open to investors, tax professionals, government agencies and anyone else interested in the tax rules that affect Opportunity Zones.

In addition to the overview, topics to be covered include:

  • Investor reporting elections
  • Annual investor reporting requirements
  • Impact of disaster relief on Opportunity Zones

The webinar will feature a live question and answer session and will be closed captioned for viewers who are deaf or hearing impaired. Anyone interested in attending can register online.

For more information on Opportunity Zones, visit the general Opportunity Zones page and the Opportunity Zones Frequently Asked Questions.

Archived versions of past IRS webinars are available at www.irsvideos.gov.

 

Originally Published: https://www.irs.gov/newsroom/thursday-sept-3-irs-webinar-focuses-on-opportunity-zones

Millions of taxpayers receive a tax refund interest payment

IRS Tax Tip

IRS TAX TIP 

IRS Tax Tip

COVID Tax Tip 2020-111, August 31, 2020

In mid-August interest payments were sent to nearly 14 million individual taxpayers. People who got these payments filed their 2019 federal income tax returns by the July 15 deadline and were owed refunds.

These interest payments averaged about $18. The IRS issued most of the payments separately from tax refunds.

Most taxpayers who received their refund by direct deposit had their interest payment sent to the same account. Everyone else received a check. A note on the check reads “INT Amount.” This identifies it as a refund interest payment.

These interest payments are taxable. Taxpayers who received a payment must report it on their 2020 federal income tax return next year. The IRS will send a Form 1099-INT in January 2021, to anyone who gets a payment of at least $10.

This interest payment is due to the IRS postponing this year’s filing deadline to July 15. The new deadline was related to COVID-19 and is considered a disaster-related postponement. Therefore, the law requires the IRS to pay interest calculated from the original April filing deadline. The taxpayer must have filed their 2019 federal income taxes by the July 15, 2020, deadline to get an interest payment.

This refund interest only applies to individual taxpayers. Businesses aren’t eligible.

Visit IRS.gov for details on how the interest payments are figured.

Originally posted: https://www.irs.gov/newsroom/millions-of-taxpayers-receive-a-tax-refund-interest-payment

Earning side income: Is it a hobby or a business?

taxes on side income

IRS Tax Tip 2020-108, August 25, 2020

Whether it’s something they’ve been doing for years or something they just started to make extra money, taxpayers must report income earned from hobbies in 2020 on next year’s tax return.

What the difference between a hobby and a business? A business operates to make a profit. People engage in a hobby for sport or recreation, not to make a profit.

taxes on side incomeHere are nine things taxpayer must consider when determining if an activity is a hobby or a business:

  • Whether the activity is carried out in a businesslike manner and the taxpayer maintains complete and accurate books and records.
     
  • Whether the time and effort the taxpayer puts into the activity show they intend to make it profitable.
     
  • Whether they depend on income from the activity for their livelihood.
     
  • Whether any losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.
     
  • Whether they change methods of operation to improve profitability.
     
  • Whether the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business.
     
  • Whether the taxpayer was successful in making a profit in similar activities in the past.
     
  • Whether the activity makes a profit in some years and how much profit it makes.
     
  • Whether the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity.

The IRS has many resources to help taxpayers report their income correctly. See the more information section below for additional guidance.

More Information:

Originally Published Here: https://www.irs.gov/newsroom/earning-side-income-is-it-a-hobby-or-a-business

Financial safety is an important part of disaster preparedness

checklist for financial safety in a disaster

IRS Tax Tip 2020-99, August 10, 2020

Before a natural disaster strikes, taxpayers are encouraged to prepare, if possible. This includes developing evacuation plans, putting together kits of essential supplies and putting financial safety measures in place. 

To help protect their financial safety in a disaster situation, taxpayers should:

  • Update emergency plans. A disaster can strike at any time. Personal and business situations are constantly evolving, so taxpayers should review their emergency plans annually.
     
  • Create electronic copies of documents. Taxpayers should keep documents in a safe place. This includes bank statements, tax returns and insurance policies. This is especially easy now since many financial institutions provide statements and documents electronically. If original documents are available only on paper, taxpayers can use a scanner and save them on a USB flash drive, CD or in the cloud.
     
  • Document valuables. Documenting valuables by photographing or videotaping them before a disaster strikes makes it easier to claim insurance and tax benefits, if necessary. IRS.gov has a disaster loss workbook that can help taxpayers compile a room-by-room list of belongings.
     
  • Know what tax relief is available in disaster situations. Information on Disaster Assistance and Emergency Relief for Individuals and Businesses is available at IRS.gov. Taxpayers should also review the itemized deduction for casualty and theft losses. Net personal casualty and theft losses are deductible only to the extent they’re attributable to a federally declared disaster. Claims must include the FEMA code assigned to the disaster.
     
  • Remember the IRS is ready to help. In the case of a federally declared disaster, people can visit Around the Nation on IRS.gov and click on their state to review the available disaster tax relief. Taxpayers who live in counties qualifying for disaster relief receive automatic filing and payment extensions for many currently due tax forms and don’t need to contact the agency to get relief. People with disaster-related questions can call the IRS at 866-562-5227 to speak with an IRS specialist trained to handle disaster issues. They can request copies of previously filed tax returns and attachments by filing Form 4506, order transcripts showing most line items through Get Transcript on IRS.gov or call 800-908-9946 for transcripts.

More information:

Originally published: https://www.irs.gov/newsroom/financial-safety-is-an-important-part-of-disaster-preparedness

Tax credits help business owners recover the cost of providing Coronavirus-related leave

If you’re a small and medium size business owner, this one’s for you. The IRS announced important refundable payroll tax credits that are much less talked about in the shuffle of COVID-19 relief efforts. These credits will continue to be important to businesses especially after states fully reopen, and employees may continue to find themselves to be sick with COVID-19, need to care for family members who are sick with Covid-19, and/or cannot come to work due to lack of childcare due to Covid-19.

Chris Strand, managing accountant at Ballast Tax and Business Services breaks down what small business owners need to know about this plan which has the goal to swiftly recover the cost of providing Coronavirus-related leave.

“There are two pieces to this tax credit which is available only to small and medium size business owners,” says Strand. “The paid sick leave credit and the paid family leave credit reimburses employers who provide up to 80 hours of sick leave for employees who are sick with Covid 19 or who must care for a family member with Covid 19. Secondly, it also reimburses employers who pay employees up to 10 weeks who must miss work due to the lack of available child care due to COVID-19.”

According to the IRS, not only does this cover wages, but It also covers health care costs for the employee, and employers are not required to pay FICA taxes on those wages.

“This is also available to self employed individuals,” says Strand. “The credit is refundable and the funds can be obtained quickly.”

In order to take advantage of the credit, the IRS states, employers simply deduct the credit amount from their payroll tax deposits for the current period. If there are more credits than payroll tax deposits, they can file to receive a check right away, not wait until the end of the year by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.

“To be clear, this only applies to wages paid to employees who come down with, or care family members who come down with, Covid 19. Or to wages paid to employees who lose their child care due to Covid 19,” Strand adds. “This pandemic has brought about challenges never before seen and rarely even foreseen in our business community. This tax credit can potentially provide a significant aid to those business owners striving to meet these challenges.”

For details about these credits and other relief, contact Ballast Tax and Business Services.

 

The Economic Injury Disaster Loan (EIDL) program

SBA disaster loan application form on the wooden surface.

The SBA’s Economic Injury Disaster Loan (EIDL) program provides vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing as a result of the COVID-19 pandemic. Federal Disaster Loans are available for Businesses, Private Nonprofits, Homeowners, and Renters. This isn’t new – it’s a similar program to other loans available to declared victims of disasters such as hurricanes, tornados, earthquakes, fires, etc. However, for COVID-19, the program has been expanded and provides emergency grants of up to $10,000 – theoretically within three days – and low-interest loans up to $2 million.  

Who qualifies?

This program is for any small business with less than 500 employees (including sole proprietorships, independent contractors and self-employed persons), private non-profit organization or 501(c)(19) veterans organizations affected by COVID-19.

Businesses in certain industries may have more than 500 employees if they meet the SBA’s size standards for those industries.

What are the Loan terms?

According to the SBA, no matter the amount you apply for, the Economic Injury Disaster Loan advances funds (up to $10,000) and will be made available within days of a successful application.  This loan advance will not have to be repaid, so in other words, the first $10k of the loan is effectively a grant. 

The amount of your grant (up to $10,000), which you request when you fill out your EIDL application, is determined by the number of employees you have at $1,000 per employee with a maximum grant of $10,000. For example: If you have three employees, you will receive $3,000. That amount will be deducted from the loan forgiveness amount of any PPP loan you receive and should arrive within days of your EIDL loan application, according to the SBA.

You can apply for an EIDL of up to $2 million to provide working capital for expenses such as fixed debt and payroll costs. The interest rate is 3.75% and the loan term can be as long as 30 years. The COVID-19 EIDL includes an automatic one-year deferral on repayment, though interest begins to accrue when the loan is disbursed.

How to Apply

Unlike the Paycheck Protection Program, which requires you apply with a local lender, for an EIDL loan, you don’t have to go through a bank. You can apply through the SBA on their website.

The application process has been streamlined and the SBA says it should take you two hours and ten minutes or less to complete.

The application can be found on the SBA Disaster Assistance web page. You must apply no later than Dec. 16, 2020 in most states. A few have extended the deadline to Dec. 21.

You Can Apply for a PPP Loan Too

SBA guidance allows you to apply for a PPP loan in addition to an EIDL, so long as you don’t use the funds from each loan for the same expenses.

For example, if you decide to apply for a PPP loan and use those funds strictly for payroll, you cannot subsequently use funds from an EIDL for payroll, as well. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.

Sources: https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/economic-injury-disaster-loan-emergency-advance, https://www.congress.gov/bill/116th-congress/house-bill/748/text

Please Note:Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized tax advice from Ballast Tax Services.   To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Ballast Tax Services is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.  

Ballast Tax and Business Services does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Ballast Tax’s  website or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

PPP (Paycheck Protection Program) Loans Summary

Paycheck Protection Program PPP Loan. Wooden cubes on the desk.

Paycheck Protection Program (PPP) is part of the $349 billion Federal stimulus package designed to provide access to cash so that businesses can keep paying their employees and other expenses such as health insurance premiums, rent or mortgage payments and utilities.

Paycheck Protection Program PPP Loan. Wooden cubes on the desk.

Who qualifies?

If you own a business, 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or Tribal business concern with under 500 employees and have been affected by Coronavirus (COVID-19) you may be eligible. Also, if you’re a sole proprietor, independent contractor, or self-employed you also may be eligible for these loans. You also had to be in business as of February 15, 2020. 

How do you apply?

Since the program opened, April 3, there have been a flood of applications, the SBA recommends that you first consult with a local lender with whom you already have an existing lending relationship, as to whether it is participating in the program.

However, you can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating.

You only can apply once, so if you try and apply with multiple banks, ask for a guarantee that the lenders will contact you before submitting your file, so you are not triggered for fraud.

If you wish to begin preparing your application, you can download a copy of the PPP borrower application form to see the information that will be requested from you when you apply with a lender. The program is available now through June 30, 2020.

Loan Details and Forgiveness

According to the SBA, Individual businesses may be eligible for up to $10 million in forgivable loans if employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities.

The loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll). Loan payments will also be deferred for six months. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees.

Loan forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels.  Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease. When calculating your loan, salaries will be capped at $100,000.

Otherwise this loan has a maturity of 2 years and an interest rate of 1%.

Tracking 8-Week payroll

According to guidance issued by the Department of Treasury on April 2, 2020, the eight-week period begins on the first day lenders disperse funds to businesses. This regulation also noted lenders should issue funds no later than 10 calendar days from the date of loan approval.

Beware of Scams

It’s as important as ever to be vigilant about consumer protection.

Make sure you never provide private information – social security numbers, credit card details, or banking information – to anyone calling, emailing or some other way claiming to be from the Treasury Department or the SBA offering you grants or stimulus payments. Scammers could use this information to apply for a loan on your behalf.

Be wary of any false promises for quicker loans and faster processing. It is best to go through a federally backed credit union or traditional SBA lender, as they’ll be the most familiar with the program and as such get up to speed on new processes sooner.

 

Source: These summaries are based on interpretations of the CARES Act; U.STreasury guidance released March 31, 2020U.S. Treasury guidance released April 2, 2020; and FAQs released April 7, 2020.

 

Please Note:Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized tax advice from Ballast Tax Services.   To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Ballast Tax Services is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.  

Ballast Tax and Business Services does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Ballast Tax’s  website or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

 

COVID-19 Update

We want you to know that Ballast Tax and Business Services is taking all the necessary precautions to keep business running as usual while our communities deal with the spread of the Coronavirus (COVID 19). We’ve issued a protocol to all our Ballast Tax staff for keeping the workplace clean and safe and for the best interest of employee and client health.

  • Our accountants will be replacing all in-person meetings for the foreseeable future with either a web meeting (via Join.me) or conference call. We would be happy to provide further instructions for this type of meeting.  
  • While we traditionally still receive some tax forms via hardcopy in the mail, we are asking that all clients who are able, please scan your return and electronically submit paperwork through our secure portal.

  • If you are unable to scan your documents, please note that we will delay processing any hand-mailed paperwork we receive for at least a week, to avoid potential virus transmission on surfaces.

  • We will be suspending our receipt of cash payments, but will continue to accept payment by check, money order, and all major credit cards.

  • We will be automatically filing extensions for all individual returns as we away a formal tax deadline extension from the IRS.

  • In the event that our offices were to close, Ballast Tax and Business Services can meet your service needs under many different circumstances. Our accountants have the ability to work remotely using our secure access technology to continue to serve you.
  •  
  • We have technology that shifts our main phone service line to cellphones, so you should continue to call Ballast Tax and Business as usual.
  • We will keep you informed of any changes and potential extensions the IRS may make as things develop.

If you need any additional information on some best practices to reduce the spread, please read best practices issued by the CDC.

Thank you for your cooperation.

Tax Calculation

What is tax calculation?

Tax calculation is the process by which you figure out how much you owe in income tax. If you file federal income tax Form 1040, you must compute your adjusted gross income (AGI) and your taxable income before you can calculate your tax. Essentially, your AGI is your total income minus certain adjustments. Your taxable income is your AGI minus your itemized deductions (or your standard deduction) and your exemptions. (Personal exemptions have been suspended for 2018 to 2025.)

After finding your taxable income, you need to determine your income tax liability from the tax table or the tax rate schedules. This tax amount is then reduced by certain credits you may be entitled to and increased by any other taxes you may owe. In terms of tax calculation and tax planning, certain taxes deserve particular note: the alternative minimum tax, the capital gains tax, and the self-employment tax.

How do you determine your adjusted gross income (AGI)?

AGI is your total income minus any adjustments, including the following:

  • Educator expenses (up to $250 in qualified expenses for eligible educators)
  • IRA deduction for you and for your spouse
  • Deduction for moving expenses (generally suspended for 2018 to 2025)
  • Deduction for employer portion of your self-employment tax
  • Self-employed health insurance deduction
  • Deduction for Keogh, SEP, and SIMPLE retirement plan contributions
  • Penalty on early withdrawal of savings
  • Alimony paid (pre-2019 divorce, unless divorce agreement provides otherwise)
  • Student loan interest deduction
  • Health savings account (HSA) deduction
  • Tuition and fees (qualified tuition deduction)*

Other less common adjustments are also available, including:

  • Archer MSA deduction
  • Certain expenses of qualified performing artists
  • Jury duty pay given to your employer
  • Reforestation amortization and expenses
  • Certain required repayments of supplemental unemployment benefits
  • Contributions to a Section 501(c)(18)(D) pension plan
  • Certain expenses from the rental of personal property
  • Contributions by certain chaplains to Section 403(b) plans
  • Attorney fees and court costs for actions involving certain unlawful discrimination claims

*Not available after 2017 unless extended by Congress.

How do you determine your taxable income?

To figure the amount of your taxable income, you must first subtract either your itemized deductions or your standard deduction from your adjusted gross income (AGI). Next, you subtract your exemptions. (Personal exemptions have been suspended for 2018 to 2025.) Whether or not you itemize deductions, you may also subtract a qualified business income deduction from your AGI.

Deductions

You can choose to itemize your deductions on Schedule A (Form 1040) or take the standard deduction.

  • Itemized deductions: You can itemize your deductions (such as medical expenses, taxes, mortgage interest, and casualty losses) on Schedule A (Form 1040). You can benefit from itemizing your deductions on Schedule A if you have total itemized deductions that are more than the highest standard deduction amount to which you otherwise are entitled. Note, however, that in years 2013 to 2017, itemized deductions may be limited for taxpayers with high AGIs.
  • Standard deduction: The standard deduction is based on your filing status and whether you are 65 or older or blind. If you were 65 or older or blind during this tax year, you’re entitled to a higher standard deduction than taxpayers under 65 and/or not blind. There are special rules that may eliminate or reduce your standard deduction, such as when your filing status is married filing separate and your spouse itemizes deductions.

Exemptions

Whether you itemize your deductions or use the standard deduction, currently, you can generally deduct $4,050 (for 2016 and 2017) for each exemption you are allowed to claim. However, if your AGI exceeds a specified dollar amount for your filing status, the amount of your deductions and exemptions may be limited or phased out (the phaseout did not apply in 2012). Personal exemptions have been suspended for 2018 to 2025.

How do you determine your tax?

After finding your taxable income, the next step is to figure your income tax liability. This tax amount is then reduced by certain credits to which you may be entitled and increased by any other taxes you owe. Finally, you apply any payments or other credits against your liability to determine whether you owe additional tax or whether you are entitled to a refund.

Tax tables and tax rate schedules are used to ascertain tax. The tax table must be used for taxable income of less than $100,000 (unless Form 8615 or Schedule D is used to calculate tax). The tax rate schedule, however, must be used for taxable income of $100,000 or more (unless Form 8615 or Schedule D is used to calculate tax). Form 8615 is used to calculate the tax for a child’s unearned income that is subject to the kiddie tax rules. Regardless of whether you use the tax table or the tax rate schedule, the amount of tax you pay depends on your tax bracket.

A tax bracket is, generally, the income tax rate at which you are taxed for a certain range of income. Brackets are expressed by their marginal tax rate. Currently, there are seven marginal tax rates: 10, 12, 22, 24, 32, 35, and 37 percent. The income levels at which each rate applies vary depending upon your filing status: married filing separately, married filing jointly, head of household, or single.

What are the current tax rates?

The tax rate schedules for 2019 are as follows:

Single:

 

If Taxable Income Is:

Your Tax Is:

Not over $9,700

10% of taxable income

Over $9,700 to $39,475

$970 + 12% of the excess over $9,700

Over $39,475 to $84,200

$4,543 + 22% of the excess over $39,475

Over $84,200 to $160,725

$14,382.50 + 24% of the excess over $84,200

Over $160,725 to $204,100

$32,748.50 + 32% of the excess over $160,725

Over $204,100 to $510,300

$46,628.50 + 35% of the excess over $204,100

Over $510,300

$155,798.50 + 37% of the excess over $510,300

Married filing jointly and surviving spouses:

 

If Taxable Income Is:

Your Tax Is:

Not over $19,400

10% of taxable income

Over $19,400 to $78,950

$1,940 + 12% of the excess over $19,400

Over $78,950 to $168,400

$9,086 + 22% of the excess over $78,950

Over $168,400 to $321,450

$28,765 + 24% of the excess over $168,400

Over $321,450 to $408,200

$65,497 + 32% of the excess over $321,450

Over $408,200 to $612,350

$93,257 + 35% of the excess over $408,200

Over $612,350

$164,709.50 + 37.6% of the excess over $612,350

Married individuals filing separately:

 

If Taxable Income Is:

Your Tax Is:

Not over $9,700

10% of taxable income

Over $9,700 to $39,475

$970 + 12% of the excess over $9,700

Over $39,475 to $84,200

$4,543 + 22% of the excess over $39,475

Over $84,200 to $160,725

$14,382.50 + 24% of the excess over $84,200

Over $160,725 to $204,100

$32,748.50 + 32% of the excess over $160,725

Over $204,100 to $306,175

$46,628.50 + 35% of the excess over $204,100

Over $306,175

$82,354.75 + 37% of the excess over $306,175

Heads of household:

 

If Taxable Income Is:

Your Tax Is:

Not over $13,850

10% of taxable income

Over $13,850 to $52,850

$1,385 + 12% of the excess over $13,850

Over $52,850 to $84,200

$6,065 + 22% of the excess over $52,850

Over $84,200 to $160,700

$12,962 + 24% of the excess over $84,200

Over $160,700 to $204,100

$31,322 + 32% of the excess over $160,700

Over $204,100 to $510,300

$45,210 + 35% of the excess over $204,100

Over $510,300

$152,380 + 37% of the excess over $510,300

Trusts and estates:

 

If Taxable Income Is:

Your Tax Is:

Not over $2,600

10% of taxable income

Over $2,600 to $9,300

$260 + 24% of the excess over $2,600

Over $9,300 to $12,750

$1,868 + 35% of the excess over $9,300

Over $12,750

$3,075.50 + 37% of the excess over $12,750

How do the long-term capital gains tax rates come into play?

Currently, the highest marginal tax rate applicable to ordinary income and short-term capital gains of individuals is 37 percent, whereas the top long-term capital gains rate for individuals is 20 percent for most long-term capital gains. Because of this difference, you need to complete a special capital gains tax worksheet to calculate your capital gains tax.

Long-term capital gains and qualified dividends are generally taxed at special capital gains tax rates of 0 percent, 15 percent, and 20 percent depending on your taxable income. The actual process of calculating tax on long-term capital gains and qualified dividends is extremely complicated and depends on the amount of your net capital gains and qualified dividends and your taxable income. These rates also generally apply to qualified dividends paid to individuals from domestic corporations and qualified foreign corporations.

What about the alternative minimum tax (AMT)?

The purpose of the alternative minimum tax (AMT) is to ensure that taxpayers with substantial income will not escape taxation entirely by employing certain exclusions, deductions, and credits. The tax law gives special treatment to some kinds of income and allows special deductions and credits for some kinds of expenses. Taxpayers who benefit from the law in these ways may have to pay at least a minimum amount of tax through an additional tax: the AMT.

What about the self-employment tax?

If you are self-employed, you must pay Social Security and Medicare taxes for yourself as part of your income tax. The self-employment tax is based on net earnings from self-employment, not on taxable income. The rate on net earnings is 15.3 percent; 12.4 percent is for Social Security and 2.9 percent is for Medicare. The maximum amount subject to the Social Security part is currently $132,900 (up from $128,400 in 2018). All of your net earnings of at least $400 are subject to the Medicare tax.

You generally must report and pay self-employment tax (Schedule SE of Form 1040) if either of the following applies to you (or to your spouse, if you file a joint return):

  • You were self-employed and your net earnings from self-employment were $400 or more
  • You had church employee income of $108.28 or more

For tax years after 2012, a 0.9 percent Medicare surtax also applies to wages and self-employment income in excess of $200,000 for single taxpayers and over $250,000 for married couples filing joint returns ($125,000 for married couples filing separate returns).

What are some other taxes that might affect you?

  • Social Security and Medicare tax on tips not reported to employer: If you received tips of $20 or more in any month while working for one employer but didn’t report all of them to your employer, you must figure your Social Security and Medicare tax on the tips not reported. Use Form 4137 and attach it to Form 1040.
  • Household employment taxes: If you have a household employee, you may need to pay state and federal household employment taxes. You generally must add your federal employment taxes to the income tax that you report on your federal income tax return. Household work is work done in or around your home by baby-sitters, nannies, health aides, private nurses, maids, caretakers, yard workers, and similar domestic workers. A household worker is your employee if you can control not only what work is done but also how it is done. If you have a household worker, you may need to withhold and pay Social Security and Medicare taxes, or you may need to pay federal unemployment tax, or you may need to do both. For more information, see IRS Publication 926, or Schedule H and its instructions.
  • Premature distribution tax: If you take a distribution from your qualified plan before you reach age 59½, you may have to pay a 10 percent premature distribution tax on that part of the distribution that is taxable (unless you meet an exception). This penalty tax can amount to a substantial sum if your distribution is large.
  • A 20 percent tax on excess (golden parachute) payments: If you received an excess parachute payment (EPP), you may have to pay a tax equal to 20 percent of this excess payment.
  • For tax years after 2012, an additional hospital insurance (Medicare) tax of 0.9 percent: This additional tax will be assessed on wages (as well as self-employment income) that exceed $200,000 ($250,000 for married couples filing joint returns, $125,000 for married couples filing separate returns). Employees will be liable for this amount to the extent that the additional tax has not been withheld from wages.
  • For tax years after 2012, a new unearned income Medicare contribution tax on the investment income of high earners: The 3.8 percent tax will apply to the lesser of (1) net investment income or (2) the amount by which adjusted gross income (AGI) exceeds the $200,000 or $250,000 for married couples filing jointly ($125,000 for married couples filing separate returns) threshold amounts. Net investment income generally includes interest, dividends, capital gains, annuity income, royalties, and rents. Tax-exempt interest won’t be included, nor will income or distributions from qualified retirement accounts.
  • Starting in 2014, a new tax on individuals who don’t have adequate health care coverage (this is often referred to as the individual insurance mandate): This tax will be phased in over three years, starting at the greater of $95, or 1 percent of gross income in 2014 (up to a family maximum of $285); increasing to the greater of $325, or 2 percent of gross income in 2015 (up to a family maximum of $975); and rising to the greater of $695, or 2.5 percent of gross income in 2016 and 2017 (up to a family maximum of $2,085). The individual insurance mandate has been eliminated for months beginning after December 31, 2018.

Understanding Personal Tax Credits

Have you ever thought that you’re paying too much income tax? You may be, if you’re not claiming all of the tax credits for which you are eligible when you file your federal tax return. These credits may significantly reduce your tax liability.

What is a tax credit?

A tax credit is a dollar-for-dollar reduction of your tax liability. Generally, after you’ve calculated your federal taxable income and worked out how much tax you owe, you can subtract the amount of any tax credit for which you are eligible from your tax obligation. In some cases, if your tax credits exceed your tax liability, you will be able to claim the difference as a refund.

What is the difference between a tax deduction and a tax credit?

A tax deduction reduces your taxable income, so that when you calculate your tax liability, you’re doing so against a lower amount. Essentially, your tax obligation is reduced by the same percentage as your tax rate.

Here’s an example. If you’re in the 22 percent marginal tax bracket and you have $1,000 in tax deductions, your tax liability will be reduced by $220. That reduction would be greater if you were in a higher tax bracket.

A tax credit, on the other hand, is constant. A tax credit of $100 will reduce your tax liability by $100, regardless of your tax bracket. Here’s a quick summary of some of the main personal federal tax credits that may be available to you.

Child and dependent care credit

If you’re working or looking for work, and you need to pay someone to look after your child or other qualifying individual, you may be eligible for the child and dependent care credit. Depending on your adjusted gross income, you may be able to claim up to 35 percent of the qualifying expenses that you pay to provide care for a dependent child under the age of 13, a disabled spouse, or a disabled dependent. A dollar limit applies to the amount of work-related expenses you can use to figure the credit. This limit is $3,000 for one qualifying person, or $6,000 for two or more qualifying persons.

For more information, see IRS Publication 503.

Child tax credit

The child tax credit provides tax relief for parents and others who have dependent children. If you’re eligible, you may be entitled to take a credit of up to $2,000 per child. A qualifying child is typically a child, grandchild, stepchild, or foster child under the age of 17 who lives with you for more than half the year and provides less than half of his or her own support.

The child tax credit begins to phase out if your modified adjusted gross income (MAGI) exceeds a certain level ($400,000 for married persons filing jointly, $200,000 in any other case).

For more information, see IRS Publication 972.

Earned income credit

The earned income credit benefits working taxpayers who have low income. You can apply for it only if you work, either as an employee or in your own business, and you have earned income during the tax year. The amount of the credit is based on your adjusted gross income, your filing status, and the number of qualifying children you have.

For more information, see IRS Publication 596.

Education credits

There are two tax credits that you may qualify for if you, your spouse, or your children are attending an eligible educational institution: the American Opportunity tax credit (formerly known as the Hope credit) and the Lifetime Learning credit. Whether you can claim one of these credits (they can’t both be claimed in the same year for the same student) depends on your educational status, your modified adjusted gross income (MAGI), and the amount of qualified tuition and related expenses you pay in a given year.

The American Opportunity credit is worth a maximum of $2,500 per year and is available for each student in the household who is in the first four years of undergraduate education (provided the student is attending at least half-time). The Lifetime Learning credit is worth a maximum of $2,000 per year and is more widely available — students who are attending college or graduate school (even less than half-time), taking continuing education courses, or pursuing courses connected to hobbies and other interests may be eligible for this credit. However, the Lifetime Learning credit is limited to $2,000 per tax return per year, regardless of how many students in the family may qualify.

To qualify for the full Lifetime Learning credit, your MAGI must be below $58,000 (in 2019, $57,000 in 2018) if you’re a single filer and $116,000 (in 2019, $114,000 in 2018) if you’re a joint filer. Single filers with a MAGI between $58,000 and $68,000 and joint filers with a MAGI between $116,000 and $136,000 can claim a partial credit in 2019.

To qualify for the full American Opportunity credit, your MAGI must be below $80,000 if you’re a single filer and $160,000 if you’re a joint filer. Single filers with a MAGI between $80,000 and $90,000 and joint filers with a MAGI between $160,000 and $180,000 can claim a partial credit. (The same dollar limits applied for the 2018 tax year.)

For more information, see IRS Publication 970.

Other tax credits

You may also be eligible for other federal tax credits, including the credits listed below:

  • Adoption tax credit
  • Tax credit for the elderly or the disabled
  • Foreign tax credit
  • Tax credit for IRA and retirement plan contributions (the retirement savings contribution, or “savers” credit)
  • Health insurance premium assistance credit

If you would like more information on personal tax credits, contact your tax advisor or log on to the IRS website at www.irs.gov.