Individual Taxpayer Identification Numbers (ITINs) are obtained by those persons who are required to make a tax filing or have a payment obligation under U.S. law but are not eligible for a Social Security Number. Periodically, the IRS issues a list of ITINs which will expire if not renewed.
The following ITINs are expired or will expire on December 31, 2019:
• ITINs with middle digits of 70 through 87 (e.g., NNN-70-NNNN); and
• ITINs that have not been used on a tax filing in the last three years.
If a person with an ITIN which meets one of the above criteria expects to have a 2020 filing requirement, the ITIN should be renewed as soon as possible. There are three options for renewing an ITIN with the IRS:
• By mail to the IRS address listed on the Form W-7
• Through a Certified Acceptance Agent
authorized by the IRS or
• In person at an IRS Taxpayer Assistance Center
Information on ITINs is available online
in English, Spanish, Chinese, Korean, Haitian Creole, Russian and Vietnamese.
On April 20, 2019, the IRS outlined a plan that provides a six-year strategy to modernize IRS information technology systems and build critical infrastructure needed for the future of the nation’s tax system. The plan is anticipated to cost between $2.3 billion and $2.7 billion over six years through fiscal year 2024.
The IRS Commissioner, Chuck Rettig stated that “a critical component of the plan involves the IRS’s ongoing efforts to secure their systems and protect taxpayer data.”
The announcement made by the IRS stated that the initiative, including those underway and others, will enhance taxpayer service and enforcement activities over the next several years.
The plan, as outlined, envisions the IRS being able to:
• Significantly improve the taxpayer experience by standardizing customer workflows and by expanding access to information.
• Reduce call wait and case resolution times.
• Simplify identity verification to expand access to online services while protecting data.
• Increase systems availability for taxpayers and tax practitioners.
• Make implementation of new tax provisions more straightforward.
For more information on the IRS plan, see the IRS Integrated Modernization Business Plan.
The IRS levies a tax known as “backup withholding” on certain payments to a payee that are not otherwise subject to withholding at the time of payment. As of January 1, 2018, the backup withholding tax rate dropped from 28% to 24%.
When does the IRS require backup withholding?
A payee may be subject to backup withholding under the following circumstances:
• Failure to complete Form W-9, Request for Taxpayer Identification Number, or the taxpayer provided an incorrect taxpayer identification number (Social Security Number, Employer Identification Number or Individual Taxpayer Identification Number). Form W-9 is required upon opening a new account, making an investment or receiving payments reportable on Form 1099
• Failure to report interest, dividend or patronage dividend income on income tax return.
What payments are subject to backup withholding?
Payments that may be subject to backup withholding include:
• Interest (Form 1099-INT)
• Dividends (Form 1099-DIV)
• Patronage dividends, but only if at least half of the payment is money (Form 1099-PATR)
• Rents, profits and other income (Form 1099-Misc)
• Royalties (Form 1099-Misc)
• Commissions, fees or other payments for work performed as an independent contractor (Form 1099-Misc)
• Certain payments made by fishing boat operations (Form 1099-Misc)
• Broker and barter exchange transactions (Form 1099-B)
• Payment Card and Third-Party Network Transactions (Form 1099-K)
• Gambling winnings, if not already subject to regular gambling withholding (Form W-2G)
How can backup withholding be prevented?
Backup withholding can be prevented by accurately completing Form W-9 and reporting the correct income on federal income tax returns.
If you receive a notice from a payer stating you haven’t provided a taxpayer identification number or that it’s incorrect, you can usually prevent backup withholding or stop it once you provide the correct name and taxpayer identification number.
How is the backup withholding reported on an income tax return?
If you were subject to backup withholding, the amount withheld will be reported on Form 1099 and should be reported as a payment toward the tax due on your federal income tax return for the year in which it is reported.
Isn’t Roth 401(k) the same as after-tax 401(k)?
While both involve making contributions using after-tax dollars, the two differ in a few key ways.
First, Roth 401(k) contributions are subject to the usual 401(k) contribution limits. In 2019, that limit is $19,000, plus a $6,000 catch-up limit for individuals aged 50 and older. After-tax 401(k) contributions are not considered to be “deferrals” and are not subject to the $19,000/$25,000 limit. Therefore, after-tax 401(k) contributions can be higher as long as total 401(k) contributions don’t exceed $56,000.
The tax treatment of Roth 401(k) contributions and after-tax contributions is also different at withdrawal. While both contributions are tax-free at withdrawal, any earnings generated on Roth 401(k) contributions are tax-free but earnings generated on after-tax contributions are only tax-deferred and are taxed as ordinary income at the time of distribution.
What happens to after-tax 401(k) contributions when I leave my job or retire?
Your after-tax contributions can be rolled into a Roth IRA and any earnings can be rolled into a Traditional IRA. If you want to convert any of the earnings to Roth, taxes would be due—on the earnings portion only.
What is this “back door” business with after-tax 401(k) contributions?
A back door Roth IRA is a method used by taxpayers to place retirement savings in a Roth IRA, even if their income is higher than the maximum the IRS allows for regular Roth IRA contributions. After-tax 401(k) contributions can eventually be converted to Roth IRA without including earnings. This allows individuals whose income exceeds IRS Roth IRA contribution limits a “back door” to Roth IRA.
While any unpaid tax balance is subject to interest that compounds daily and a monthly late payment penalty until the tax liability is fully paid, the Internal Revenue Service (IRS) does have a payment option available to taxpayers.
Please note that entering into an agreement with the IRS does not stop the interest and penalty accumulation.
Full payment agreements for up to 120 days
The IRS can grant you up to 120 days to pay in full. The IRS does not charge a user fee for this arrangement. An individual can apply by filling out the Online Payment Agreement or by calling (800)-829-1040.
An installment agreement allows you to make a series of monthly payments over time. Payments can be made through direct debit from your bank account; payroll deduction from your employer; payment by electronic federal tax payment system (EFTPS); or payment by credit card, check, money order or cash at a retail partner.
To request an installment agreement, use the Online Payment Agreement application or complete an Installment Agreement Request, Form 9465, and mail it to the IRS. The IRS charges a user fee when you enter into a standard installment agreement or a payroll deduction agreement.
Be advised that before your installment agreement can be considered, you must be current on all filing and payment requirements. Taxpayers in an open bankruptcy proceeding are not eligible.
Offer in compromise
An offer in compromise is an agreement between you and the IRS that resolves your tax liability by payment of an agreed upon reduced amount.
Before the IRS considers an offer, you must have filed all tax returns, made all required estimated payments for the current year and made all required federal tax deposits for the current quarter if you are a business owner with employees.
As in the case of the installment payment agreement, taxpayers in an open bankruptcy proceeding are not eligible.
Temporarily delay collection
If the IRS determines that you cannot pay your tax debt due to financial hardship, the IRS may temporarily delay collection by reporting your account as currently not collectible. Changing the debt status as currently not collectible, however, does not mean the debt goes away. As mentioned before, interest and penalties still continue to accrue even if the debt is delayed for collection.
Before the IRS approves your request to delay collection, you need to complete a Collection Information Statement (Form 433-F, Form 433-A or Form 433-B). By filling out these statements, you are providing the IRS with your assets information as well as your monthly income and expenses.
The IRS may temporarily suspend certain collection actions, such as issuing a levy until your financial condition improves but can still file a Notice of Federal Tax Lien while your account is suspended. The IRS may also file a Notice of Federal Tax Lien in the public records, which means that your creditors are notified that the IRS has a claim against all your property. By doing so, your credit rating may be affected. Once a lien arises, the IRS cannot release the lien until the tax, the penalty, interest and recording fees are paid in full or until the IRS may no longer legally collect the tax.
Other payment options
In addition to the IRS payment options mentioned above, you might also consider financing the full tax payment of your tax liability through loans, such as a home equity loan or a credit card. The interest and penalties set by the Internal Revenue Code may be higher than any applicable fees charged by the bank or credit card company.
The “kiddie tax” generally applies to most unearned income of children under age 19 and of full-time students under age 24 (unless the student provides more than half of their own support from earned income). Unearned income for purposes of the kiddie tax means income other than wages, salaries, professional fees and other compensation for professional services.
Before 2018, unearned income subject to the kiddie tax was generally taxed at the parents’ tax rate. The Tax Cuts and Jobs Act (TCJA) makes the kiddie tax harsher by revising the tax rate structure.
From 2018 to 2025, the parents’ tax rate will not matter. Instead, a child’s unearned income beyond $2,100 (in 2018) will be taxed according to the tax brackets used for trusts and estates. For 2018, once taxable income exceeds $12,500, a child’s unearned income will be taxed at the highest marginal rate of 37%.
In contrast, for a married couple filing jointly, the highest marginal rate of 37% does not kick in until their 2018 taxable income tops $600,000.
In other words, under the TCJA, a child’s unearned income, in some cases, can be taxed at a higher rate than their parents’ income beginning in 2018.
However, high-income taxpayers who are already in the highest 37% tax bracket, could potentially benefit by paying lower rates of 10% to 24% on additional income above the first $2,100 of up to $11,250 per child. In addition, if the parents’ tax rate for capital gains is already the 20% maximum, they can save on the first $2,600 of capital gains above the $2,100 income limit as they qualify for a 0% rate, and the 15% rate applying up to $12,700 per child.
The IRS has announced limited penalty relief for underpayment of estimated income tax due for the year 2018. IRS Notice 2019-11 provides a waiver of penalties to individuals whose total tax payments for 2018 via wage withholding and/or timely-made estimated tax payments exceed 85% of the tax ultimately determined to be due.Background.
Generally, the Internal Revenue Code requires taxpayers to pay federal income tax as they earn income. Payments are made via wage withholding or by quarterly estimated income tax payments. The required estimated payment is generally the lesser of (1) 90% of the tax ultimately determined to be due or (2) 100% of the tax owed by the taxpayer for the prior year (110% if the taxpayer’s adjusted gross income for the prior year was greater than $150,000). If the taxpayer fails to make these estimated payments, a penalty is imposed. There are some exceptions to the imposition of penalties for underpayment, the most common one being that there is no penalty if the remaining tax owed on April 15th is less than $1,000.
The Tax Cuts and Jobs Act (“TCJA”) of December 2017 made substantial changes to the Internal Revenue Code. These changes made it challenging for taxpayers to determine the appropriate amount of their wage withholding or estimated payments for 2018. In February 2018, the IRS issued a revised Withholding Calculator to help taxpayers determined their proper withholding (or estimated tax payment) amounts for 2018. The updated federal tax withholding tables reflected the TCJA’s lower tax rates and doubled standard deduction. It resulted in less tax withheld. However, the new tables did not completely reflect changes such as the suspension of dependence exemptions and significantly decreased itemized deductions. As a result, some taxpayers did not pay enough in federal taxes via wage withholding or estimated payments for 2018.The General Accounting Office (GAO) reports that the Department of the Treasury expects that 21% of filers will be under withheld for 2018. While this number is significant, the GAO reports that 18% of filers were likely to have been under withheld if the tax laws had not changed.Notice 2019-11.
The Notice reports that due to the substantial changes generated by the TCJA (and despite the publication of the revised Withholding Calculator) the IRS is providing relief to individual taxpayers. To qualify for the waiver of penalties due to underpaid tax estimates, the taxpayer must (1) be an individual (2) whose total withholding and estimated tax payments for the year 2018 were made by January 15, 2019, and (3) whose payments equaled at least 85% of the tax ultimately determined to be owed for 2018.
To claim the relief, the taxpayer must file Form 2210, Underpayment of Estimated Tax by Individuals, Estate and Trusts, with his/her 2018 income tax return.Handling 2018.
Given the magnitude of the changes to the Internal Revenue Code, it may be smart to gather your tax information as soon as possible to do a rough draft of your 2018 federal income tax return. You can pull information from your final paystub and from your financial records to estimate your wage and other income. Your tax records will help you determine if you are limited to the new standard deduction or if itemizing is available to you.Planning for 2019.
After you have attended to your 2018 income taxes, make sure your tax estimates for 2019 are on-target using the 2019 Withholding Calculator
on the IRS website.
Everyone knows what a scholarship is. Free, no-strings-attached money to help a student pay for their higher education. Right? Usually. But not always.A (very) brief history of the tax treatment of scholarships
The tax status of scholarships was first codified in 1954, and until 1980 it was exceedingly simple: for students pursuing a degree, all scholarships, fellowships and grants were tax-free, no matter what the funding was used for.
The first major change to this system came in 1980, with the Tax Treatment Extension Act. This amendment stated that scholarships, grants or fellowships could be taxed if they could be considered “fees for services.” This can include... “[money] received as payments for teaching, research or other services required as a condition for receiving the scholarship or fellowship grant.” Exceptions were later added for teaching and research assistantships and for certain federal student aid programs, but this represented the first time any income related to scholarships was regarded as taxable.
The 1986 Tax Reform Act added significantly more potential taxation to scholarship and grant funds. For the first time, the new law specified that portions of scholarship aid used for living, travel or research expenses would be treated as taxable income. While later amendments eased some of the tax burden (especially for graduate student teachers), this potentially costly law remains on the books today.
Finally, current law also states that scholarships for non-degree-candidates are taxable.What is tax-free?
A scholarship, a fellowship grant or other grant may be partly or entirely tax free if you meet the following conditions:
• You’re a candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities; and
• The amounts you receive are used to pay for tuition and fees required for enrollment or attendance at the educational institution, or for fees, books, supplies and equipment required for courses at the educational institution.What is taxable?
You must include in taxable income:
• Amounts used for incidental expenses, such as room and board, travel and optional equipment.
• Amounts received as payments for teaching, research or other services required as a condition for receiving the scholarship or fellowship grant. However, you don’t need to include in gross income any amounts you receive for services that are required by the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program.
For a complete plain English explanation of the rules refer to IRS publication 970 – Tax Benefits for Education
The Tax Cuts and Jobs Act (TCJA) affected several tax provisions related to saving for education costs.
Section 529 plans provide a valuable tax-advantaged savings opportunity. You can choose a prepaid tuition plan to secure current tuition rates or a tax-advantaged savings plan to fund college expenses beyond just tuition. Some states offer both types of plans, while other states only administer one type of plan or the other. Here are some of the possible benefits of such plans:
· Although contributions are not deductible for federal purposes, any growth is tax-deferred. Some states do offer tax breaks for contributing.
· Plans usually offer high contribution limits but there are no income limits for contributing.
· Generally there is no beneficiary age limit for contributions or distributions.
· You, the donor, can control the account, even after the child is of legal age.
· You can make tax-free rollovers to another qualifying family member’s 529 plan.
· A special break for 529 plans allows you to front-load five years’ worth of annual gift tax exclusions and make up to a $75,000 contribution (or $150,000 if you split the gift with your spouse) in 2018.
Prepaid tuition vs. savings plan
Understanding the difference between the two plans is critical for making your decision.
With a 529 prepaid tuition plan, if your contract is for four years of tuition, tuition is guaranteed regardless of its cost at the time the beneficiary actually attends the school. One downside is that there’s uncertainty in how benefits will be applied if the beneficiary attends a different school. Another negative is that the plan typically doesn’t cover costs other than tuition, such as room and board.
A 529 college savings plan, on the other hand, can be used to pay a student’s expenses at most postsecondary educational institutions. Distributions used to pay qualified postsecondary school expenses (such as tuition, mandatory fees, books, supplies, computer equipment, software, Internet service and, generally, room and board) are income-tax-free for federal purposes and typically for state purposes as well, thus making the tax deferral a permanent savings.
TCJA has permanently expanded qualified expenses to include elementary and secondary school tuition. But tax-free distributions for such expenses are limited to $10,000 annually per student. The biggest downside may be that you don’t have direct control over investment decisions; you’re limited to the options the plan offers. Additionally, for funds already in the plan, you can make changes to your investment options only twice during the year or when you change beneficiaries. For these reasons, some taxpayers prefer Coverdell ESAs.
Education Savings Accounts
Coverdell Education Savings Accounts (ESAs) are like 529 savings plans in that contributions are not deductible for federal purposes, but plan assets can grow tax-deferred and distributions used to pay qualified education expenses are income-tax-free.
One of the biggest ESA advantages used to be that they allowed tax-free distributions for elementary and secondary school costs and 529 plans did not. With the TCJA enhancements to 529 plans this is less of an advantage. However, tax free withdrawals from 529 plans are limited to K–12 tuition, while Coverdell ESAs can be used to pay for elementary and secondary qualified education expenses other than tuition and there is no dollar limit on such annual distributions.
Another advantage is that you have more investment options. ESAs are worth considering if you want to fund elementary or secondary education expenses in excess of $10,000 per year or beyond just tuition or would like to have direct control over how and where your contributions are invested. However, the $2,000 contribution limit per year for each beneficiary, and only until they turn 18, is low and is phased out based on income. The limit begins its phase out at a modified adjusted gross income (MAGI) of $190,000 for married couples filing jointly and $95,000 for other filers. No contribution can be made when MAGI hits $220,000 and $110,000, respectively.
Amounts left in an ESA when the beneficiary turns age 30 generally must be distributed within 30 days and any earnings may be subject to tax and a 10% penalty.
Political contributions are heavily regulated by the government and can impact public perception. If you are considering donating to a political candidate or organization, ensure that you carefully consider the following five factors before doing so.
1. Campaign finance laws that regulate and restrict political contributions vary greatly by jurisdiction, and restrictions on political giving can come in many different shapes and sizes.
In particular, you should always be mindful of whether there are applicable contribution limits, prohibitions or disclosure requirements when making a contribution. Penalties for violating these rules can be very significant, including potentially hefty fines and, in rare instances, incarceration.
Depending on the circumstances, making a political contribution can even result in canceling a government contract or making a contractor ineligible to bid on government contracts in some jurisdictions. Accordingly, it’s critical that donors do their own due diligence or seek counsel to confirm that their political contributions are compliant with the applicable rules before making a contribution.
2. When you contribute to a candidate or a political organization, you are expressly endorsing them. You may be supporting them for a very specific reason, but you are generally associating yourself and potentially your business with that candidate or organization when you make a contribution.
Further, the world of campaign finance is generally very transparent. Despite what you may have heard about “dark money” in politics, there are very few options, if any, to effectively participate in elections confidentially. You should assume that any political contribution that you make will either be reported in a public filing or discoverable by the general public and the media.
3. Although political laws vary from jurisdiction to jurisdiction, one rule is consistent everywhere—it’s illegal for an individual or entity to reimburse another individual or entity for making a contribution to a political candidate. Not only is it a violation of campaign finance laws but also it’s a felony in most jurisdictions. While most campaign finance violations won’t result in jail time, this is one violation that could. Simply put, you should never pay or reimburse anyone for making a political contribution.
4. You should never make a request of a candidate or officeholder when making a political contribution. Similarly, never mention a political contribution when making a request to a candidate or officeholder. Political giving and lobbying requests shouldn’t be made contemporaneously. It’s frowned upon and makes most candidates and officeholders uncomfortable. In addition, it could be a crime depending on the circumstances. There’s a time for lobbying and making requests, and there’s a time for fundraising. Those times are never the same.
5. Elected officials contribute to the climate in which we do business and pursue happiness. Thus, elections can have consequences that negatively or positively affect us, so participating in the political process can make a difference. Not only is it a fundamental right, but also supporting certain candidates and political organizations can often be in the best interest of both you as an individual and your business. While there are risks with everything you do in life, the risks involved with making political contributions can be mitigated. Depending on the circumstances, being apolitical or apathetic could be riskier.