What does your 1040 tell you?

Before we dig into the “year in review,” we’d like to mention a provision that was written in to the CARES Act regarding Donations. Beginning in 2020, there will be an “above the line” charitable deduction (maximum $300) that you will be able to take, even if you don’t itemize. So, save your receipts this year, even if you don’t itemize, those donations will reduce your 2020 tax liability.

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By  Kate Welker, CFP®

This week we would normally be seeing the tax deadline hit and the last minute rush of filers. With the deadline extended the filing season will be drawn out over three more months, but we still encourage you to finalize your return so you can plan accordingly for 2020. Once your return is done you should take time to review the returns and see what the numbers are telling you. Over my years of working with tax returns I have had way too many people tell me they just look to see if they have a refund or owe, sign the return, then stick it in their files. I challenge you not to be one of those individuals. Following are some items I like to look at when assisting with tax planning.

Large Refund- getting a refund is always nice, but if it is a large refund consider why it is so large. If you are over-withholding from your paycheck use the Tax Withholding estimator at www.irs.gov to see how you should adjust your W-4. Your end of the year refund would be smaller, but that could give you several hundred dollars more a month in your budget. 

Balance Due - If you owed over $1,000 on your return you will need to make changes or set up quarterly estimated payment to avoid being penalized on the next year’s return. You can also check the withholding tool at irs.gov to adjust your W-4. 

Credits - Look on your 1040 at lines 13a (Child tax credit) and 13b (other credits from Schedule 3). If there are entries on those lines you received a tax credit. A credit is a dollar for dollar reduction in your tax so changes in these year to year can make a large impact on whether you receive a refund or owe. Take a look at what the credit was for and if this is something that will be the same next year or will change. If you have a child turning 17 you will not receive the child tax credit of $2,000 the following year, this means your refund would be $2,000 less or you would owe $2,000 more. Conversely think about any credits you may qualify in future years. For example if there is a child heading to college you may qualify for the American Opportunity Credit which is up to $2,500. 

Dividends and Capital Gains - If you hold mutual funds or stocks in your portfolio you may have taxable income due to dividends or capital gains distributions. If you find these numbers are large you may want to speak with an advisor to make sure your portfolio is designed correctly for your needs and tax situation. 

Overall your tax return tells you a significant amount of information about your financial situation. These are just a few of the big items I take a look at, but each individual is different. It is one of the places where everything comes together for a quick snapshot. I really want to encourage you to take the time to pull out the papers and look it over, make sure you understand what your income and deductions are, and over time learn a little more about how your information comes together on that 1040 each year.

CARES ACT Part 1 - Recovery Rebate

By Amy Irvine, CFP®, EA, MPAS®, CCFC
FINANCIAL PLANNER

I started with this section because we feel it is important for our clients to know if they are or are not eligible for this rebate.

Over the weekend, I've noticed a great deal of confusion regarding this provision.  Let's start with what it is.

It is a rebate provided to those with eligible income (see below).  The bill actually uses the language "credit" for the first taxable year beginning in 2020.

What are the amounts?

• $1,200 single

• $2,400 joint return

• $500 per qualified child (under the age of 17)

Who is eligible?  

• $75,000 Single (and in my interpretation, married filing separate, since it states "as not described in paragraphs 1 or 2" listed below)

• $112,500 Head of Household

• $150,000 Joint

• If your income is above that limit, it will be reduced by 5% for each $100 of income over those thresholds.  Complete phase out:

  • $99,000 single

  • $146,500 Head of Household

  • $198,000 Joint

What tax year is this based on?

• 2019

• 2018 if you haven't filed your 2019 tax return

• If you haven't filed, the legislation states that they may use alternative information such as your SSA-1099.

What if my income is more in 2018 and 2019, but less in 2020?

• You will receive the credit when you file your 2020 tax return and benefit at that time.

What if my 2018 income was lower and I haven't filed 2019?

• As noted above, the rebate will be based on your 2018 income. 

• Interestingly, the language seems to read that if your 2019 income would have reduced your benefit, then you won't be subject to refunding the rebate.  

When should you expect to receive the rebate?

• "As soon as possible" is the language used.

• Our guess, Mid-May

Will these checks be taxable?

• No

Cares Act Part 2 - Small Business Provisions

By Amy Irvine, CFP®, EA, MPAS®, CCFC and Kate Welker, CFP®

With all of the closings that have been mandated as a result of COVID-19 along with requirements to stay in, many small business owners are worried about their operations. If you are a small business owner you are probably wondering how you are going to keep your business sustainable long term, provide for your employees, and provide for your own needs. Thankfully there has been a lot of legislation passed and the CARES act expanded and added benefits for small business owners. There is a lot of information out there so we wanted to summarize what these different benefits are, who qualifies, and what the effect is.

Unemployment
Who is eligible: 

• If you are self employed and have had to close your business due to the pandemic you will be able to file for unemployment benefits. 

• Self employed individuals who were generally not able to collect unemployment benefits  are now eligible. 

How to file: 

• You will file with your state’s unemployment division.

How much?  

• You will receive the payment you are eligible for under your state’s guideline, plus the $600 weekly benefit from the federal government. 

More details:

• You will need to login in weekly to provide an update on your status.

• This is taxable income so keep that in mind as you keep your books throughout the year and prepare for filing the 2020 tax returns.

This topic will be further explored in Friday’s blog release.

Employee Retention Credit

What it is:

• A credit against the employer’s portion of payroll taxes 

Who is eligible: 

• A business that has had to close or suspend operations or has had a significant decrease in revenue and continues to pay employees. A significant decrease means your quarterly gross receipts are down 50%.

• If there are over 100 employees the credit only applies if the business has been mandated to close. 

How to file: 

• We are waiting on final details as to how this will be claimed.

How much?: 

• The credit is 50% of compensation paid up to $10,000 per employee. It will be a refundable credit against payroll taxes.

More details: 

• The credit will be determined on a quarter by quarter basis as long as the business remains closed or gross receipts continue to be down by 50%.

• This also allows employers to defer payment of the employer’s portion of payroll taxes. Half would be due in 2021 and half would be due in 2022.

• If you take the Small Business Administration Paycheck Protection Loan you are NOT eligible for this credit.

SBA Paycheck Protection Loan
What it is: 

• A forgivable loan to cover payroll and basic operating expenses. 

Who is eligible: 

• Employers with under 500 employees, including self-employed sole proprietors, IF you retain the same number of employees.

• This includes the “gig economy” workers as well.

• Sole proprietors and Independent Contractors - wages, commissions, income or net earnings from self-employment is included and capped at $100,000 on an annual basis

How to apply: 

• These loans will be done through local banks who are approved with the SBA.

• Check with your normal bank and if they do not participate check with others in your area.

How much: 

• 8 weeks of cash-flow

• 250% of average monthly wages and salary (calculated monthly average over the past 12 months).

• Seasonal employers use the 12-week period beginning February 15, 2019 (or March 1st if elected) to June 30, 2019.

More Details:

• The funds are to be used to pay for payroll expenses including healthcare benefits, rent, mortgage interest, and utilities, Rent/lease, and utilities. 

• All or a portion is forgivable if the business uses the loan funds to pay for the covered expenses in the 8 week period after the loan is taken. 

• Updated 04/01/2020 - Unforgiven amounts have a maximum term of 2 year term and 1 year deferment, but interest accrues during that time.

• Updated 04/09/2020 - Interest rate may not exceed 1% on Non-Forgivable portion 

• The fees for this loan are being waived

• The fees for this loan are being waived

• Personal guarantee and collateral requirements are being waived

SBA Economic Injury Disaster Loan  
What it is: 

• A small business loan to offer financial assistance due to COVID-19

• Also known as EIDL

• Immediate advance of $10,000 - provide advance within 3 days of request; never has to be repaid, even if you’re denied a SBA loan.  

  • Update 04/09/2020 - this will be limited to $1,000 per employee, with a maximum of $10,000.  Sole Proprietorship will be considered 1 employee.

• Use of Funds - Overhead/Operating Expenses

  • Payroll (including owner payments)

  • Insurance

  • Rent

  • Utilities

  • Phone/Internet

  • Office Expenses

  • Repairs and Maintenance

  • Fixed Debts

Who is eligible: 

• Small business owners who have suffered economic injury as a result of the virus.

• 501c3 or 501c19 non-for-profit

Who is not eligible:

• Agricultural Businesses (Farms)

• Religious Organizations

• Charitable Organizations

• Gambling Concerns

• Casinos and Racetracks

How to apply: 

• For the immediate advance, apply at https://covid19relief.sba.gov/#/

• Through the Small Business Administration. The application can be found at https://www.sba.gov/disaster/apply-for-disaster-loan/index.html. There was an online application but due to high demand it seems to be requiring a paper application be submitted.

How much:

• Up to $2 million with a guaranteed rate of no more than 4%.

More Details:

• 6-months of working capital

• Maximum Loan $2M

• 3.75% interest rate

• Up to 30-Year Term

• 1-Year Deferment 

• Funds are to be used for payroll including paid sick leave, rent, mortgage, debt payment, accounts payable, and other bills.

• You will need to prove economic injury

• Funds come direct from the US Treasury

• There is authorization to approve based off credit score alone

• Apply directly to the SBA

Other Notable Small Business Provisions

• Employers and self-employed individuals can defer payment of the employer share of the social security tax - half due by 12/31/2021 and the other half due by 12/31/2023

• If you have a current SBA Loan - 6 months deferment principal and interest - talk to your lender.

• You can’t take a loan under multiple programs for the same expenses.

• Want more credible information - watch this webinar: https://www.uschamber.com/co/events/national-small-business-town-hall-inc-us-chamber

• Sole Proprietorship Options

  • EIDL

  • PPP (for your income)

  • Unemployment

  • Can not receive Unemployment and Loans

  • Can apply for both loans, but can’t use the funds for the same expenses

• January 23, 2020 the business must have been in operation

• Active Payroll prior 2/15/2020

Tips for a Low Stress Tax Season

In this weeks blog Financial Planner Becky Eason writes about the big "T" word, that's right - TAXES!

As the end of 2019 quickly approaches, it’s time to start thinking about taxes. As we all know, tax season catches up with us very quickly with the hustle and bustle of the holiday season, and the recovery period in the weeks after the holidays.

Our goal is to make your tax season as low stress as possible. A great way to begin your tax season, is to create an easily accessible folder to keep all of your tax documents in. As you receive these documents in the mail you should open the mail and review the document, then put it directly in your tax folder. If you have any documents that you think may be important, include them in the tax folder and your tax preparer can review them to see if they need to be included with your taxes. I’m a firm believer in the fact that it’s better to have too much information than not enough. Once you believe you have received all of your tax documents you could do a document comparison to your prior year tax documents to make sure it looks like you have everything. At this point you can grab your folder and send the documents off to your tax preparer, or in the case of self-preparing a tax return, you can go ahead and get started.

If you have someone prepare your taxes for you make sure that you let them know of any significant changes that you’ve had during the year. Some of these significant changes would include a change in marital status, filing status, dependents, address, new driver’s licenses, change of income sources, and if you made any estimated tax payments during the year, especially if this is something that you haven’t done in the past. Failing to update some of that information could result in having a rejected tax return or losing out on potential tax credits or deductions. It’s much easier on all parties if you remember to update this information right from the start. In your tax document folder that we talked about earlier, you could keep a running note page with updates that you want to make known or questions that you might have.  

Another tip I have is to review your driver’s license. To help reduce identity theft, some states, such as New York State, require the information on your driver’s license to be entered prior to filing. Make sure that your license hasn’t yet expired and that it won’t be expiring during tax season. If your license is going to expire between the time of giving your tax preparer your tax information and the time that you will be e-filing the return, you will want to let your tax preparer know, because in some states your tax return can’t be filed if your license is going to expire.

As tax season approaches do your best to not feel overwhelmed. We are here to help you and answer your questions.