Hawkins Ash CPAs https://hawkinsashcpas.com Part of your business. Part of your life. Tue, 10 Jul 2018 20:18:36 +0000 en-US hourly 1 Mark Your Calendar: Wisconsin Sales Tax Holiday August 1-5 https://hawkinsashcpas.com/mark-your-calendar-wisconsin-sales-tax-holiday-august-1-5/ Tue, 10 Jul 2018 20:03:07 +0000 https://hawkinsashcpas.com/?p=6119 In order to purchase certain items without sales tax, be sure to get your child’s school shopping done between August 1st and 5th. Tax exempt items for this five-day period include: Clothing, if the sales price of any single item is $75 or less A computer purchased by a consumer for the consumer’s personal use, […]

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In order to purchase certain items without sales tax, be sure to get your child’s school shopping done between August 1st and 5th.

Tax exempt items for this five-day period include:

  • Clothing, if the sales price of any single item is $75 or less
  • A computer purchased by a consumer for the consumer’s personal use, if the sales price of the computer is $750 or less
  • School computer supplies purchased by the consumer for the consumer’s personal use, if the sales price of any single item is $250 or less
  • School supplies, if the sales price of any single item is $75 or less

More information can be found on the Wisconsin Department of Revenue website>>>

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Podcast: Changes to the Charitable Giving Deduction https://hawkinsashcpas.com/podcast-changes-to-the-charitable-giving-deduction/ Tue, 10 Jul 2018 18:22:53 +0000 https://hawkinsashcpas.com/?p=6115 One of the unintended consequences of the increased standard deduction was that many people who received a tax deduction for charitable giving in the past may not get that deduction going forward. Click the orange button below to listen to this episode of the Tax Insights Podcast. Script Previously we discussed the TAX CUTS AND […]

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One of the unintended consequences of the increased standard deduction was that many people who received a tax deduction for charitable giving in the past may not get that deduction going forward.

Click the orange button below to listen to this episode of the Tax Insights Podcast.

Script

Previously we discussed the TAX CUTS AND JOBS ACT OF 2017 and how it increased the standard deduction beginning in 2018. One of the unintended consequences of that was that many people received a tax deduction for charitable giving in the past, and now some of those same people may not get that charitable deduction so that may change how much they give.

WHY WOULD IT CHANGE HOW MUCH PEOPLE GIVE?

It really shouldn’t, but if we think about us humans in general, people always thought about charitable giving as a win – win. Therefore, they were able to give to charitable organizations and receive a tax benefit at the same time. With the change in the tax law and the increase in the standard deduction, one of those two benefits may be reduced or eliminated – the tax deduction part, so now they might be giving it just because they want to.

WHAT IS THE DEFINITION OF A CHARITABLE DONATION?

A charitable donation is a gift made by an individual to a nonprofit organization, public charity or private foundation. The IRS has a listing of all of the charitable organizations that they recognize on their website.

Most people give donations in cash, but you could also give property such as stocks, cars, household items, clothing, etc.

Each type of donation has its own set of substantiation rules and valuation methods. You have to figure out what the fair market value is of each particular donation. Cash and marketable securities are pretty easy, but when you come to things like cars, household items and clothes, it is pretty hard to determine what the fair market value is.

WHO DETERMINES THE FAIR MARKET VALUE OF A CHARITABLE DONATION?

The fair market value is determined at the taxpayer level. There are a lot of resources on the internet that will give you ranges of about what things are worth. It is up to you as an individual to determine whether it is a good item or a bad item, or is it somewhere in the middle? And then you base your own judgment on how much you are going to take as a deduction.

Gifts directly to individuals and many gifts made outside of the United States are not charitable donations for tax purposes.

WITH THE CHANGE IN THE STANDARD DEDUCTION AMOUNTS, ARE THERE WAYS THAT PEOPLE CAN STILL BENEFIT FROM MAKING CHARITABLE DONATIONS?

Absolutely. We talked in past episodes about bunching of itemized deductions. This is where you make both cash and noncash donations in a particular calendar year. You make as many of those donations as possible, or you prepay some donations that you planned on making in the next year. This would allow you to maybe itemize in one year and then take the standard deduction the following year.

There are also other things that you can do:

  • Age 70 ½ – Distribution from IRA directly to the charity – $100k max
  • Not from ongoing SEP or SIMPLE IRA
  • Can satisfy the Required Minimum Distribution for a year
  • Reported as distributions on Form 1099 – must notify your tax preparer
  • Trustee to trustee transfer
  • Some investment companies provide checkbook

In summary, if you are over 70-1/2, you could do what’s called a Qualified Charitable Distribution. You can give up to about $100,000 each year directly from your IRA to a charity. Once again, you have to be over 70-1/2 and it has to be from an IRA. So if you are still working and you have an SEP Plan or a Simple Plan, that generally doesn’t work. It has to be from your IRA. As most people over 70-1/2 know, you also have what is called the Required Minimum Distribution that you have to take out each year. This amount that you give directly to charity can count towards the required minimum distribution for that year. This will be reported as distributions on your Form 1099, but what will happen is that you don’t claim that income on your return. You also don’t get to claim the tax deduction. Therefore, it allows you to reduce your income without having to use that deduction as an itemized deduction.

WHAT ABOUT A DONOR ADVISED FUND?

Sure. I believe these will become more popular now with the new tax law. A Donor Advised Fund is basically a charitable giving vehicle that is administered by a public charity. A donor can give a lump sum to this entity on an annual basis, but the entire amount doesn’t necessarily need to be spent all in the current year. Therefore, the person gets a tax deduction today for say $25,000-$30,000, and they can take that and donate it to different organizations over the next 2-3 years. You can also set up things such as family foundations. If you are really looking to accelerate your donations, depending on the method, you may be limited to deducting 20%, 30%, or 60% of your total income as a charitable donation. If you go over that amount, those excesses can be carried over for up to five years.

With the changes in the tax law, it will be more difficult to get the benefit from charitable contributions, but by doing a little bit of planning with your accountant and investment advisor, you can still provide to the charity and get a tax deduction at the same time.

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Hawkins Ash CPAs Announces 2018 Employee Promotions https://hawkinsashcpas.com/hawkins-ash-cpas-announces-2018-employee-promotions/ Mon, 09 Jul 2018 20:53:50 +0000 https://hawkinsashcpas.com/?p=6103 At Hawkins Ash CPAs, we’re extremely proud to announce the following employee promotions. Emily Baldwin, CPA – Senior Associate Emily Baldwin is promoted to senior associate. At Hawkins Ash CPAs, Emily provides audit services to housing authorities, school districts, employee benefit plans, nonprofit organizations and commercial entities. She also assists with tax return preparation for […]

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At Hawkins Ash CPAs, we’re extremely proud to announce the following employee promotions.

Emily Baldwin, CPA – Senior Associate

Emily Baldwin is promoted to senior associate. At Hawkins Ash CPAs, Emily provides audit services to housing authorities, school districts, employee benefit plans, nonprofit organizations and commercial entities. She also assists with tax return preparation for individuals, businesses, and tax-exempt organizations. She graduated from UW-Eau Claire.

Emily McGuire, CPA – Senior Associate

Emily McGuire is promoted to senior associate. She joined Hawkins Ash CPAs in 2016. She performs reviews, compilations and audits of credit unions and nonprofits. Prior to Hawkins Ash CPAs, she worked for Krueger International, Inc., preparing month-end sales reports and processing commissions. She graduated from St. Norbert College in De Pere, WI.

Kelly Oliver, EA – Senior Associate

Kelly Oliver is promoted to senior associate. She joined the La Crosse office of Hawkins Ash CPAs in 2015. Her responsibilities include tax return preparation for businesses, individuals and tax-exempt organizations, and review and compilation of financial statements. Kelly also works on Parish agreed upon procedures. Kelly graduated from UW-La Crosse.

Heather Whitten, EA – Manager

Heather Whitten is promoted to tax manager. She joined the Rochester office of Hawkins Ash CPAs in 2017. She provides tax preparation, compilation, monthly bookkeeping and payroll services to individuals and businesses. Heather previously held various accounting and tax roles within Rochester area companies. Heather graduated from College of the Ozarks.

Brittany Leonard, CPA – Manager

Brittany Leonard is promoted to audit manager. From the firm’s La Crosse office, she provides audit services to tax credit projects, educational agencies, municipalities, nonprofit organizations, commercial enterprises, and housing authorities. Her experience also includes tax return preparation and small business bookkeeping. Brittany is a Certified Public Accountant. Brittany graduated from UW-La Crosse.

Jill Wrensch – Manager

Jill Wrensch is promoted to tax manager. She has been working in public accounting since 1995, when she began her career with the Kenneth E. Noble, CPA, SC practice, which merged with Hawkins Ash CPAs in 2009. From the Marshfield office of Hawkins Ash CPAs, Jill prepares individual and business tax returns. Jill also provides general accounting services for clients. Jill graduated from UW-Marshfield and UW-Stevens Point.

Joe Haas, CPA – Senior Manager

Joe Haas is promoted to senior manager. He joined Hawkins Ash CPAs in 2008. He is the director of audit and accounting for the firm and is a senior manager. He serves as the in-charge auditor for several municipality, employee benefit plan, school district and commercial audits. He is a member of the firm’s governmental service and employee benefit plan service groups. Joe graduated from UW-La Crosse

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Podcast: Standard Deduction vs. Itemizing https://hawkinsashcpas.com/pod-cast-standard-deduction-vs-itemizing/ Tue, 03 Jul 2018 14:50:30 +0000 https://hawkinsashcpas.com/?p=6095 The Tax Cuts and Jobs Act increases the standard deduction, but it also eliminated personal exemptions beginning in 2018. There have been many planning ideas that we have used in the past for taking advantage of both the standard deduction and the itemized deductions in alternating years – most of these revolved around bunching of […]

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The Tax Cuts and Jobs Act increases the standard deduction, but it also eliminated personal exemptions beginning in 2018.

There have been many planning ideas that we have used in the past for taking advantage of both the standard deduction and the itemized deductions in alternating years – most of these revolved around bunching of deductions.

Click the orange circle below to listen.

Script

In December of 2017, the President signed into law what is called the TAX CUTS AND JOBS ACT OF 2017. This did increase the standard deduction, but it also eliminated personal exemptions beginning in 2018.

There have been many planning ideas that we have used in the past for taking advantage of both the standard deduction and the itemized deductions in alternating years – most of these revolved around bunching of deductions.

With the new tax law and the increase in the standard deduction, some of these planning ideas have become harder to achieve.

The new tax law increases the standard deduction for a single person from $6,350 in 2017 to $12,000 for 2018, roughly doubling it. It did the same for married couples. For married couples it was $12,700 in 2017, and it has increased to $24,000 for 2018. There are additional increased standard deduction amounts for those 65 and older and for the blind.

HOW DO I DETERMINE WHETHER I WILL USE THE STANDARD DEDUCTION OR IF I WILL ITEMIZE?

It all comes down to math. As mentioned earlier, the standard deduction for a married couple filing a joint return is $24,000. As long as your itemized deductions are greater than $24,000, you are going to be able to itemize.

WHAT DEDUCTIONS ARE ALLOWED FOR ITEMIZING PURPOSES?

Less than in 2017, but there still are a number of them.

Things you can use for itemizing purposes are:

  1. Medical costs. The thing with medical costs is you kind of have a hurdle. It’s a 7.5% hurdle of your page one income–otherwise known as your AGI (Adjusted Gross Income). So if you look at the first page of your Form 1040 and multiply that income by 7.5%. You need to have more medical expenses than that in order to get any tax benefit.
  2. State, local and real estate taxes. In the past you could deduct this amount without limits. However, beginning in 2018 the new tax bill actually limits all those amounts (your state withholding, your local withholding, and real estate taxes) to $10,000.
  3. Mortgage interest. New limitations for 2018 which we will discuss at a future time (in-depth issue).
  4. Donations. Both cash and non-cash.
  5. Gambling. Losses to the extent of gambling income.

At this point I should mention, there were items allowed last year that will not be allowed in 2018 for itemized deduction purposes. One of the items is employee business expenses, such as mileage and meals. There are a number of employers that do not reimburse their employees for their employee business expenses. In the past people were able to deduct that on their returns and get some tax benefit for it. That went away for 2018. This is going to really hurt people who travel a lot for their jobs but are not reimbursed by their employer. In addition, you could deduct investment expenses, certain legal expenses and accounting fees. These all went away with the new tax bill.

All that said, the deductions I just mentioned have to be more than the standard deduction of $24,000 for a married couple filing jointly to be able to itemize.

Let’s take a closer at the numbers:
If $24,000 is the number that we need to itemize; and the maximum for state, local and real estate tax you can take is $10,000; that leaves $14,000 that you would have to have in deductible medical costs, mortgage interest, investment interest, and donations. That will be a pretty high hurdle for many people to meet.

Therefore, we will see many people taking the standard deduction this year where they may have otherwise itemized in the past.

SO WILL BUNCHING OF DEDUCTIONS STILL WORK?

In some cases, yes it still will (bunching of deductions is when you try to get as many deductions into a year as possible).

Examples:

  1. Paying your real estate taxes in both January and December of the same year.
  2. Giving a large donation to your favorite charity in a particular year where you may itemize, and then giving less in a non-itemizing year.

So whatever you do, you are trying to get as many deductions into an itemizing year as possible, and then in a year that you don’t have a lot of deductions, you just take the standard deduction. If you take advantage of these two strategies you will pay less tax over your lifetime because you will be taking advantage of both the itemized deductions when you can and taking advantage of the standard deduction when you can’t.

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Tax+Business Alert: July 2018 https://hawkinsashcpas.com/taxbusiness-alert-july-2018/ Tue, 03 Jul 2018 14:22:44 +0000 https://hawkinsashcpas.com/?p=6093 The July headlines of our bi-weekly Tax+Business Alert newsletter include the following: Physical Presence Nexus Standard Overturned for Sales and Use Tax Collection Podcast: The New (But Temporary) Income Tax Brackets Tax Calendar Retirement Plan Options for Business Owners View the publication>>> Sign up today>>>

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The July headlines of our bi-weekly Tax+Business Alert newsletter include the following:

  • Physical Presence Nexus Standard Overturned for Sales and Use Tax Collection
  • Podcast: The New (But Temporary) Income Tax Brackets
  • Tax Calendar
  • Retirement Plan Options for Business Owners

View the publication>>>

Sign up today>>>

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Avoid Litigation With Attention to Common Red Flags https://hawkinsashcpas.com/avoid-litigation-with-attention-to-common-red-flags/ Tue, 03 Jul 2018 09:36:40 +0000 http://hawkinsashcpas.com/?p=5867 Any size retirement plan can run into serious trouble when sponsors aren’t careful. With some planning, though, your qualified retirement plan doesn’t have to be the target of ERISA litigation. A reminder of the most common red flags leading to litigation might be helpful. Reasonable Expenses Of course, you can’t assure consistently strong investment performance. […]

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Any size retirement plan can run into serious trouble when sponsors aren’t careful. With some planning, though, your qualified retirement plan doesn’t have to be the target of ERISA litigation. A reminder of the most common red flags leading to litigation might be helpful.

Reasonable Expenses

Of course, you can’t assure consistently strong investment performance. But plan sponsors can — and must — ensure that expenses are reasonable.

When your plan’s investment portfolios are performing well, it’s easy to pay less attention to the recordkeeping costs and investment management fees. But when performance is subpar, out-of-line expenses stick out like the proverbial sore thumb. Make sure you schedule regular, independent reviews of your plan expenses and fees every three to five years as part of your due diligence.

Opaque Fee Structures

In the past, complex and opaque fee structures such as revenue-sharing arrangements between asset managers and third-party administrators made it harder to get a handle on cost. But with the U.S. Department of Labor’s fee disclosure regulations now in their fourth year, pleading ignorance is no excuse. In fact, it never really was.

Mutual fund shares with built-in revenue sharing features still exist but, with required disclosure statements, it’s easier for you (and plan participants) to understand what they are. Although these built-in revenue sharing features aren’t inherently bad, they tend to be associated with funds that have higher expense charges.

Try not to incorporate such funds into your plan — absent a good reason that you can explain to participants. In some plan fee litigation, courts have deemed fee-sharing arrangements a payoff to an administrator to recommend those funds, subordinating its assessment of the funds’ merits as sound investments.

Bundled Services

Another expense-related red flag that could trigger litigation is exclusive use of a bundled plan provider’s investment funds. This also can raise questions about the effort that you put into investment performance evaluation.

So if you use only a bundled provider’s funds, you could give the appearance of not performing your fiduciary duty to seek out the most appropriate and competitively priced funds. And in fact, the odds are slim that one bundled provider has best-of-class funds in all of your desired investment strategy categories and asset classes. When retaining a bundled provider, question whether the recommendation of primarily proprietary funds could result in a conflict of interest if better performing and lower cost funds are available on their platform.

Share Classes

Even when your plan’s investment lineup features funds from multiple asset management companies, you could be inadvertently flying a red flag if the funds in your investment menu are in an expensive share class. Individual investors, unless they have very deep pockets, generally have access to only retail-priced share classes. In contrast, retirement plans, even small ones, typically can use more competitively priced institutional share classes. The failure to use institutionally priced share classes has been at the heart of many class actions against plan sponsors.

Different share classes of the same mutual fund have different ticker symbols; that’s one easy way to determine what’s in the portfolio. Fund companies that offer shares with sales loads typically offer more variations, with “A,” “B” and “C” categories of retail shares, and an institutionally priced “I” share class without embedded sales charges.

Having some high-cost investments in your fund lineup isn’t in itself a reason that you’ll be deemed to have breached your fiduciary duties. There may indeed be good reasons to include them, notwithstanding the higher costs.

Investment Policy Statements

The concept of “procedural prudence” is embedded in ERISA and case law. This means plan sponsors must establish — and follow — policies and procedures to safeguard participants’ interests and set the criteria used to evaluate vendors, including asset managers.

Create an investment policy statement (IPS) to articulate your vision for plan investments overall, and the investment options you want to make available to participants. The IPS should clearly state:

  • What kind of assets you’ll include in investment options
  • The degree of investment risk and volatility that’s acceptable
  • How you’ll assess investment performance
  • When you’ll change managers

Although having an IPS isn’t obligatory, doing so can show that you’re exercising procedural prudence — provided you can document your compliance with it. Merely signaling prudence won’t get you off the hook; following carefully crafted procedures and policies will go a long way toward preventing missteps that could lead to litigation in the first place. If you already have an IPS, be sure to follow it.

Next steps

Avoiding ERISA litigation is on every plan sponsor’s wish list. Reviewing expenses, fee structures and bundled services, and creating and following an IPS, can help you achieve this. Start by making periodic review of these areas the norm, in good times and bad.

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Company Credit Cards and Employee Reimbursements: Is Your Organization Safe? https://hawkinsashcpas.com/company-credit-cards-and-employee-reimbursements-is-your-organization-safe/ Tue, 03 Jul 2018 09:20:29 +0000 http://hawkinsashcpas.com/?p=5847 Employee theft occurs in all organizations. It can range from taking home company supplies to embezzling money or falsifying documents. Two areas where occupational fraud is frequently committed is the use of company credit cards and employee reimbursements. As with all fraud, an employee is motivated to commit the crime when he or she: Has […]

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Employee theft occurs in all organizations. It can range from taking home company supplies to embezzling money or falsifying documents. Two areas where occupational fraud is frequently committed is the use of company credit cards and employee reimbursements. As with all fraud, an employee is motivated to commit the crime when he or she:

Has a financial need that cannot be solved
Has a perceived opportunity to commit the act and believe that it will go undetected
Rationalizes that somehow the act is justifiable

Out of these three factors, the only factor that an organization can defend against is to stop the perceived opportunity to commit the act in the first place.

Guarding against the opportunity to commit employee credit card and expense report theft begins with a strong policy that clearly defines the expectations that must be followed when using the organization’s credit card and/or submitting a request for an employee expense reimbursement. The policy should contain the following specific guidelines:

  • The responsibilities of the cardholder
  • The types of expenditures allowed
  • The requirement that all supporting documentation for the expenditure be turned in on a regular basis and that cash advances on the card be strictly prohibited

It may also be prudent to set a dollar limit, where pre-approval is required before the purchase is made. The policy should also clearly state the consequences for any type of abuse. The policy should be signed by the employee to acknowledge that they have read and understand the content. The signed policy should be kept in the employee’s file.

Management should also review and assess the need for the employee to have a company credit card on an annual basis and set limits on the card that are appropriate for the employee’s duties.

A reconciliation of the credit card statement to all purchases should occur monthly and any discrepancies should be investigated and resolved timely. Someone who holds a credit card should not perform the reconciliation process. The reconciliation should be signed, dated, and reviewed by a member of management.

A similar process should be performed for employee expense reports. The report should be turned in timely with all supporting documentation. It should be signed, reviewed and approved by the employee’s superior. Any discrepancies should be investigated quickly and missing documentation should not be reimbursed. Someone who is requesting or approving the report should not be the person who reconciles the reports.

As with all policies, to be effective, the importance of it must be regularly communicated, monitored and enforced.

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Physical Presence Nexus Standard Overturned for Sales and Use Tax Collection https://hawkinsashcpas.com/physical-presence-nexus-standard-overturned-for-sales-and-use-tax-collection/ Thu, 28 Jun 2018 20:11:19 +0000 https://hawkinsashcpas.com/?p=6086 Under South Dakota law (if you are not in South Dakota keep reading), retailers have nexus for sales tax purposes if they (1) deliver more than $100,000 of goods or services into the state or (2) engage in 200 or more separate transactions for the delivery of goods or services into the state. In a […]

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Under South Dakota law (if you are not in South Dakota keep reading), retailers have nexus for sales tax purposes if they (1) deliver more than $100,000 of goods or services into the state or (2) engage in 200 or more separate transactions for the delivery of goods or services into the state. In a 5-4 decision on June 21, 2018, the U.S. Supreme Court sided with South Dakota, ruling that the physical presence standard in Quill is “unsound and incorrect.” The Court characterized the Quill standard as a “judicially created tax shelter” that benefits internet retailers that limit their physical presence to one or two states, but sell goods and services to consumers in multiple states.

So What Does This Mean to You?

As a consumer, it means you will start to see sales tax charged on more and more out of state or internet purchases. As a retailer, it means you may need to start to charge sales tax in states where your product is delivered.

Previously, a retailer needed a physical presence in a state before the state could force you to charge sales tax. This physical presence could be traveling into the state to deliver goods, holding inventory in a state or having sales people in a state. Now, the shipping of items to a state, even by common carrier (UPS/FedEx) can trigger physical presence for sales tax purposes.

The South Dakota law thresholds mentioned above mean that small retailers will continue to be exempt from the sales tax requirements, but based on the Supreme Court ruling, each state will be developing their own thresholds which may be lower than South Dakota’s thresholds.

We recommend businesses develop systems to track the origins of their sales so a determination can be made if sales to a state will be greater than the state’s threshold.

We will continue to monitor each state’s approach to this issue, but if you have any questions, please contact your local Hawkins Ash representative.

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Tax Reform Education Event-Medford, WI https://hawkinsashcpas.com/tax-reform-education-event-medford-wi/ Tue, 26 Jun 2018 16:30:05 +0000 https://hawkinsashcpas.com/?p=6090 Wouldn’t you like to know in advance if the new tax law will help or hurt you? At this free event, we’ll help you take maximum advantage of the law to lower your Federal income taxes and increase your cash flow. Tax reform affects every business and individual differently. Be sure you attend our event […]

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Wouldn’t you like to know in advance if the new tax law will help or hurt you? At this free event, we’ll help you take maximum advantage of the law to lower your Federal income taxes and increase your cash flow. Tax reform affects every business and individual differently. Be sure you attend our event to get all the facts before you’re surprised when filing your 2018 tax return next year.

Date

Tuesday, August 7, 2018

Time

9:00 a.m. – 11:00 a.m.

Location

Broadway Theatre
910 West Broadway
Medford, WI 54451

Register today!

Click to register.

Questions?

715.748.2856

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Podcast: New (But Temporary) Income Tax Brackets https://hawkinsashcpas.com/podcast-new-but-temporary-income-tax-brackets/ Mon, 25 Jun 2018 20:11:00 +0000 https://hawkinsashcpas.com/?p=5998 As part of the TAX CUTS AND JOBS ACT OF 2017, the IRS made temporary changes to the individual tax rates beginning in 2018. There was talk of decreasing the number of brackets, but the new law keeps the number of brackets the same at seven. Click the orange circle button to listen to this […]

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As part of the TAX CUTS AND JOBS ACT OF 2017, the IRS made temporary changes to the individual tax rates beginning in 2018. There was talk of decreasing the number of brackets, but the new law keeps the number of brackets the same at seven.

Click the orange circle button to listen to this five-minute podcast.

Script

As part of the TAX CUTS AND JOBS ACT OF 2017, the IRS made temporary changes to the individual tax rates beginning in 2018. There was talk of decreasing the number of brackets, but the new law keeps the number of brackets the same at seven.

What you’re going to find is that in 2018, the tax brackets range from 10% up to 37%. In that range there are seven different brackets that people are going to hit (last year the range was 10% to 39.6%).
The top bracket went down by approximately 2.6% (most brackets went down between 2 and 4%).

SO EXPLAIN TO ME HOW TAX BRACKETS ACTUALLY WORK

This is an area that has a lot of misconceptions. I hear people say that they do not want to make any more money because it will push them into a higher tax bracket! Although that may be true, not all of their income is taxed at the higher bracket. Only the portion of their income in that particular bracket gets taxed at that rate.

CAN YOU GIVE ME AN EXAMPLE?

Sure. Let’s say a married couple has taxable income of $80,000. They are essentially in the 22% tax bracket for 2018. The 22% bracket is actually the third bracket on the scale of the 7 tax brackets.
Of the $80,000, the first $19,050 of their income is taxed at 10% – the first bracket. So whether you make a million dollars or $80,000, that first $19,050 is always taxed at 10%. The next $58,350 of their income is taxed at 12% – the second bracket. Therefore, you are only paying the 12% for the next $58,350 of income. After adding those amounts together, that leaves $2,600 of their income that hasn’t been taxed yet. Therefore, just that portion is to be taxed at the 22% tax bracket rate.

SO THE ENTIRE $80,000 IS NOT TAXED AT 22%?

Correct. In my example, only that $2,600 amount is taxed at the 22% rate.

CAN PEOPLE EXPECT TO GET LARGER TAX REFUNDS DUE TO THIS CHANGE?

Probably not. What happened is that the IRS put out new payroll tables that were implemented by employers around February 15, 2018. So around February 15, 2018, you may have noticed that your withholding went down a little bit and that is because of these new tables. These new tables reduced the amount of your federal withholding on your paychecks. These tables actually gave you the refund or the tax savings earlier than if you would have filed your return. What the IRS wanted to do was to give the refunds or tax savings to people as soon as possible, rather than waiting for early 2019 when tax returns were filed. Doing this out of withholding is the perfect way to do that. If they didn’t adjust the payroll tables, then you would get larger refunds, but you wouldn’t see that savings until probably early 2019 when you actually file your taxes. Therefore, if everything works as expected, the refund for the 2018 year should be similar to 2017.

IS THERE ANYTHING PEOPLE SHOULD DO TO MAKE SURE THEIR NEW WITHHOLDING AMOUNT IS CORRECT?

I would go to the IRS website, IRS.gov, or search for the IRS withholding calculator. This is a good tool to determine what your withholding rate should be. If it is different than your current withholding – talk to your employer about filing a new Form W-4.

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