Be Right About Free Money: Potential Legal Risks of the Paycheck Protection Loan Program

Paycheck Protection Loan ProgramOne of the most important provisions of the CARES Act for small businesses is called the Paycheck Protection Program (PPP). The PPP is a $349 billion program designed to assist small businesses (fewer than 500 employees) facing financial difficulties as a result of the COVID-19 pandemic through specifically structured loans.

The loan program offers funding to cover payroll for up to eight weeks, with the intent of stemming from unemployment. These loans can be forgiven and essentially become a grant if your business meets certain criteria with no need to repay the money.

As the old saying goes, there’s no such thing as a free lunch – or in this case, free government money. There are potential legal risks that could jeopardize the forgivability of the loan.

Conditional Grants

Another way to look at the PPP loans is as conditional grants. The U.S. Small Business Administration (SBA) notes that loans will be forgiven in full if the funds are used for appropriate costs. Covered costs include payroll, mortgage interest, rent and utilities. Further, the payroll costs must account for at least 75 percent of the loan proceeds used. The employer needs to maintain or quickly rehire employees and maintain wage and salary levels in order to receive 100 percent forgiveness.

The Devil’s in the Certification Details

The loan application process requires certain certifications. Businesses that are still operating need to certify that the current economic uncertainty makes the loan necessary to keep operations going.

If this seems vague, it’s because it is. There probably isn’t a small business out there that is not facing significant uncertainty in the current climate. The problem is that the certification standard the PPP lays out is extremely subjective. As a result, with the encouragement for businesses to apply, many may do so under the impression that they will have their loan fully forgiven to only run into trouble later if they don’t meet the certification standards.

Legal Risks

By not providing any definition about the nature or extent of the required impact to operations that would make the loan request “necessary to support ongoing operations,” the SBA is making both applicants and lenders apprehensive.

Some law firms are even warning clients via their newsletters about potential legal exposure under the False Claims Act (FCA). Legal counsels are cautioning that a misrepresentation included in an application could result in FCA liability. Businesses must navigate between being as aggressive as possible to bolster their application while staying within the rules of the program.

More Certification Guidance is Needed

The government agencies involved need to provide more clear and objective guidance on the conditions needed to meet the certification requirements of the loan application process. Without clear and definable guidance as to what constitutes facing economic uncertainty, small businesses could face problems in the future.

Objective criteria such as a percentage of revenue decline or order capacity would provide a rather bright-line test and give both guidance to businesses and confidence in the process. 

2020 Tax Brackets, Deductions, Plus More

Beginning on Jan. 1, 2020, the Internal Revenue Service (IRS) has new annual inflation adjustments for tax rates, brackets, deductions and retirement contribution limits. Note, the amounts below do not impact the tax filing you make in 2020 for the tax year 2019. These amounts apply to your 2020 taxes that you will file in 2021.

2020 Tax Rates and 2020 Tax Brackets

Below are the new 2020 tables for personal income tax rates. There are separate tables each for individuals, married filing jointly couples and surviving spouses, heads of household and married filing separate; all with seven tax brackets for 2020.

Tax Brackets & Rates – Individuals
Taxable Income Between Tax Due
$0 – $9,875 10%
$9,876 – $40,125 $988 plus 12% of the amount over $9,875
$40,126 – $85,525 $4,617 plus 22% of the amount over $40,125
$85,526 – $163,300 $14,605 plus 24% of the amount over $85,525
$163,301 – $207,350 $33,271 plus 32% of the amount over $163,300
$207,351 – $518,400 $47,367 plus 35% of the amount over $207,350
$518,400 and Over $156,234 plus 37% of the amount over $518,400

 

Tax Brackets & Rates – Married Filing Jointly and Surviving Spouses
Taxable Income Between Tax Due
$0 – $19,750 10%
$19,751 – $80,250 $1,975 plus 12% of the amount over $19,750
$80,251 – $171,050 $9,235 plus 22% of the amount over $80,250
$171,051 – $326,600 $29,211 plus 24% of the amount over $171,050
$326,601 – $414,700 $66,542 plus 32% of the amount over $326,600
$414,701 – $622,050 $94,734 plus 35% of the amount over $414,700
$622,050 and Over $167,306 plus 37% of the amount over $622,050

 

Tax Brackets & Rates – Heads of Households
Taxable Income Between Tax Due
$0 – $14,100 10%
$14,101 – $53,700 $1,410 plus 12% of the amount over $14,100
$53,701 – $85,500 $6,162 plus 22% of the amount over $53,700
$85,501 – $163,300 $13,158 plus 24% of the amount over $85,500
$163,301 – $207,350 $31,829 plus 32% of the amount over $163,300
$207,351 – $518,400 $45,925 plus 35% of the amount over $207,350
$518,400 and Over $154,792 plus 37% of the amount over $518,400

 

Tax Brackets & Rates – Separately
Taxable Income Between Tax Due
$0 – $9,875 10%
$9,876 – $40,125 $988 plus 12% of the amount over $9,875
$40,126 – $85,525 $4,617 plus 22% of the amount over $40,125
$85,526 – $163,300 $14,605 plus 24% of the amount over $85,525
$163,301 – $207,350 $33,271 plus 32% of the amount over $163,300
$207,351 – $311,025 $47,367 plus 35% of the amount over $207,350
$311,025 and Over $83,653 plus 37% of the amount over $311,025

 

Trusts and Estates have four brackets in 2020, each with different rates.

Tax Brackets & Rates – Trusts and Estates
Taxable Income Between Tax Due
$0 – $2,600 10%
$2,601 – $9,450 $260 plus 12% of the amount over $2,600
$9,451 – $12,950 $1,904 plus 35% of the amount over $9,450
$12,950 and Over $3,129 plus 37% of the amount over $12,950

 

Standard Deduction Amounts

Amounts for standard deductions see a slight increase from 2019 to 2020 based on indexing for inflation. Note that again as in 2019, there are no personal exemption amounts for 2020.

Standard Deductions
Filing Status Standard Deduction Amount
Single $12,400
Married Filing Jointly & Surviving Spouses $24,800
Married Filing Separately $12,400
Heads of Household $18,650

 

Alternative Minimum Tax (AMT) Exemptions

Like the above, the AMT exemption amounts are increased based on adjustments for inflation, with the 2020 exemption amounts as follows.

 

Alternative Minimum Tax (AMT) Exemptions
Filing Status Standard Deduction Amount
Individual $72,900
Married Filing Jointly & Surviving Spouses $113,400
Married Filing Separately $56,700
Trusts and Estates $25,400

 

Capital Gains Rates

Capital gains rates remain unchanged for 2020; however, the brackets for the rates are changing. Taxpayers will pay a maximum 15 percent rate unless their taxable income exceeds the 37 percent threshold (see the personal tax brackets and rates above for your individual situation). If a taxpayer hits this threshold, then their capital gains rate increases to 20 percent.

Itemized Deductions

Below are the 2020 details on the major itemized deductions many taxpayers take on Schedule A of their returns.

  • Medical Expenses – The floor remains unchanged from 2019 to 2020, so you can only deduct these expenses that exceed 10 percent of your AGI.
  • State and Local Taxes – The SALT deductions also remain unchanged at the federal level with a total limit of $10,000 ($5,000 if you are married filing separately).
  • Mortgage Deduction for Interest Expenses – The limit on mortgage interest also remains the same with the debt bearing the interest capped at $750k ($375k if you are married filing separately).

Retirement Account Contribution Limits

Finally, we look at the various retirement account contribution limits for 2020.

  • 401(k) – Annual contribution limits increase $500 to $19,500 for 2020
  • 401(k) Catch-Up – Employees age50 or older in these plans can contribute an additional $6,500 (on top of the $19,500 above for a total of $26,000) for 2020. This $500 increase in the catch-up provision is the first increase in the catch-up since 2015.
  • SEP IRAs and Solo 401(k)s – Self-employed and small business owners, can save an additional $1,000 in their SEP IRA or a solo 401(k) plan, with limits increasing from $56,000 in 2019 to $57,000 in 2020.
  • The SIMPLE – SIMPLE retirement accounts see a $500 increase in contribution limits, rising from $13,000 in 2019 to $13,500 in 2020.
  • Individual Retirement Accounts – There are no changes here for IRA contributions in 2020, with the cap at $6,000 for 2020 and the same catch-up contribution limit of $1,000.

Conclusion

There are no dramatic changes in the rates, brackets, deductions or retirement account contribution limits that the vast majority taxpayers tend to encounter for 2020 versus 2019. Most changes are simply adjustments for inflation. Enjoy the stability – as history has shown, it likely won’t last long.

How to Defer, Avoid Paying Capital Gains Tax on Stock Sales

The markets are hitting all-time highs, so if you are thinking of selling stocks now or in the near future, there is a good chance that you will have capital gains on the sale. If you’ve held the stocks for more than a year, then they will qualify for the more favorable long-term capital gains tax (instead of being taxed at ordinary income rates for short-term sales). But the total tax due can still be enough to warrant some tax planning. Luckily, the tax laws provide for several ways to defer or even completely avoid paying taxes on your securities sales.

1. Using Tax Losses

Utilizing losses is the least attractive of all the options in this article since you obviously had to lose money on one security in order to avoid paying taxes on another. The real play here is what is often referred to as tax-loss harvesting. This is where you purposely sell shares that are at a loss position in order to offset the gains on profitable sales and then redeploy this capital somewhere else. You’ll need to carefully weigh where to put the money from the sale of the shares sold at a loss as you can’t just buy the same stocks back. This is considered a “wash sale” and invalidates the strategy.

2. The 10 Percent to 15 Percent Tax Bracket

For taxpayers in either the 10 percent or 12 percent income tax brackets, their long-term capital gains rate is 0 percent. The income caps for qualifying for the 12 percent income tax rate is $39,375 for single filers and $78,750 for joint filers in 2019 ($40,000 and $80,000, respectively in 2020). Also, keep in mind that the stock sales themselves add to this limit – so calculate carefully.

Aside from selling appreciated securities yourself, another way to take advantage of the 0 percent bracket is to gift the stock to someone else instead of selling the securities and then giving the cash. Beware, however, as trying to do this with your kids can disqualify the 0 percent treatment because the kiddie tax is triggered on gifted stock sold to children younger than 19 or under 24 if a full-time student.

3. Donate

Donating appreciated securities is where we start to get into the more beneficial strategies. This technique only makes sense if you were already planning to make charitable contributions. Say for example you are planning to donate $10,000 to an organization and are in the 25 percent tax bracket. In order to write a donation check for $10,000, you would have had to earn $13,333 in income to sell the same amount of stock in order to have $10,000 left after taxes to make a cash donation in that amount.

If you donate appreciated stock instead, you only need to donate securities valued at $10,000 and you get to deduct $10,000 as a charitable deduction. That avoids the capital gains tax completely. Plus, it generates for you a bigger tax deduction for the full market value of donated shares held more than one year – and it results in a larger donation.

4. Qualified Opportunity Zones

This is the newest and most complicated (as well as controversial) way to defer or avoid capital gains taxes. Opportunity Zones were created via the Tax Cuts and Jobs Act to encourage investment in low-income and distressed communities. Qualified Opportunity Zones can defer or eliminate capital gains tax by utilizing three mechanisms through Opportunity Funds – the investment vehicle that invests in Opportunity Zones.

First, they offer a temporary deferral of taxes on previously earned capital gains if investors place existing assets into Opportunity Funds. These capital gains defer taxation until the end of 2026 or whenever the asset is disposed of – whichever is first.

Second, capital gains placed in Opportunity Funds for a minimum of five years receive a step-up in basis of 10 percent – and if held for at least seven years, 15 percent.

Third, they offer an opportunity to permanently avoid taxation on new capital gains. If the opportunity fund is held for at least 10 years, the investor will pay no tax on capital gains earned through the Opportunity Fund.

Again, the caveat here is that the details of Opportunity Zone investments can be extremely complicated, so it’s best not to attempt this one on your own. Consult with your tax advisor.

5. Die with Appreciated Stock

Unfortunately, while probably the least popular method for readers, this is certainly the most effective. When a person passes away, the cost basis of their securities receives a step-up in basis to the fair market value to the date of their death. As an example, if you purchased Amazon stock for $50 per share and when you pass away it is worth $1,700 per share, your heir’s basis in the inherited stock is $1,700. This means if they sell it at $1,700, they pay no tax at all.

Conclusion

None of the above methods are loopholes or tax dodges; they are all completely legitimate. However, your ability to take advantage of these techniques will depend on your income level, personal goals and even your age. As a result, it’s best to consult with your tax advisor to see what makes sense for your personal situation.

Tax Changes 2019

Tax Changes 2019With the start of the fourth quarter of 2019 underway, it’s time to see what the Internal Revenue Service (IRS) will expect of filers for their 2019 taxes. The following are a list of major changes that filers need to be aware of:

1. Removal of the Affordable Care Act’s (ACA) Individual Mandate Penalty

With the passage of the Tax Cuts and Jobs Act (TCJA), filers and households who failed to carry adequate health insurance according to the ACA’s minimum coverage requirements will no longer have to pay the penalty on their 2019 taxes. This is because the TCJA lowered the penalty to zero dollars permanently. In previous years, households not meeting ACA health insurance requirements were mandated to pay either 2.5 percent of household income or $347.50 per child and $695 per adult, up to $2,085.

2. Greater Medical Expense Deduction Requirements

2019 filers are only able to deduct out-of-pocket medical expenses that exceed 10 percent of their adjusted gross income (AGI). The threshold was lowered to 7.5 percent for the 2017 and 2018 tax years by the TCJA, but will revert to the original 10 percent threshold in 2019.  

3. Changes to Treatment of Alimony

The TCJA removed the ability for those paying alimony to their former spouse to deduct these payments for the 2019 tax year. The IRS also removed deductibility for alimony or separate maintenance payments for divorce or separation agreements signed off after Dec. 31, 2018. If a divorce or separation agreement that provides for alimony or separate maintenance payments was agreed to before Dec. 31, 2018, and is then modified after Dec. 31, 2018, such payments lose deductibility. Former spouses receiving alimony or separate maintenance payments from an agreement created or modified after Dec. 31, 2018, are not required to report such payments on their tax return.  

4. Contribution Limits Raised for Retirement Accounts

Those with 401(k), almost all 457 plans, the federal government’s Thrift Savings Plan and 403(b) account plans can contribute $19,000 in 2019, an increase of $500 from 2018’s $18,500 limit. Taxpayers 50 and older can still contribute another $6,000 for 2019, a catch-up contribution. Taxpayers with Individual Retirement Accounts (IRAs) can contribute $6,000 in 2019, $500 more than 2018’s $5,500 limit. Those 50 years or older can add another $1,000 to their IRA accounts in 2019. The increase in IRA contribution limits is the first increase since 2013.     

5. Increased HSA Contribution Limits

Health Savings Accounts’ contribution limits for 2019 have increased, according to the IRS. For an individual or a self-only High Deductible Health Plan, 2019’s contribution limit is raised to $3,500, or $50 more than 2018’s contribution limit of $3,450. For a family high deductible health plan, 2019’s contribution limit is raised to $7,000, $100 more than 2018’s contribution limit of $6,900. The catch-up contribution is an extra $1,000 for account holders age 55 or older.

6. Increasing Standard Deduction Allowances

For those choosing not to itemize their deductions in 2019, the IRS has increased standard deduction amounts for filers. For single filers and those filing as married filing separately, the standard deduction increased by $200, to $12,200. For those filing as head of household, the standard deduction increased by $350, to $18,350. For those choosing to file married filing jointly, there’s an increased allowance of $400, to $24,400.

7. 2019 Income Brackets

With the new tax year comes higher income tax brackets. Depending on how much taxpayers made in 2019, the following are the new income level brackets:

  • 37 percent: Individual single taxpayers making more than $510,300 or married couples filing jointly making $612,350.
  • 35 percent: Individuals making more than $204,100, or $408,200 for married couples filing jointly.
  • 32 percent: Individuals making more than $160,725, or $321,450 for married couples filing jointly.
  • 24 percent: Individuals making more than $84,200, or $168,400 for married couples filing jointly.
  • 22 percent: Individuals making more than $39,475, or $78,950 for married couples filing jointly.
  • 12 percent: Individuals making more than $9,700, or $19,400 for married couples filing jointly.
  • 10 percent: Individuals making up to $9,700, or $19,400 for married couples filing jointly.

How to Get the IRS to Pre-Approve Your Taxes

IRS to Pre-Approve Your TaxesIt might seem odd, but it is possible to get the IRS to give you a straight-forward and binding answer to ambiguous tax positions in advance. How does this happen, you ask? The answer is through an IRS private letter ruling.

IRS private letter rulings provide many benefits, but they are not easy to obtain. There are costs, potential delays, and even then, you run the risk of not being granted a ruling. This dynamic might seem odd as the entire point of applying for a private letter ruling is to obtain certainty. If your position is weak from a tax law perspective, the government could refuse to rule on it. Alternatively, if the position you are seeking is obviously correct, the government might refuse to rule as well because they don’t like to issue “comfort rulings.” Essentially, the only way to get the government to rule is to make a request regarding a position that is in the middle.

If you believe the tax position in question lies somewhere in the middle, requesting a private letter ruling may make sense. If you are more likely one of the outliers, then requesting a tax opinion usually makes more sense. The problem is that tax opinion, unlike private letter rulings, doesn’t bind the IRS.

Deciding Which Path to Take

If the relative certainty of the tax position in question doesn’t provide enough guidance, how do you decide to go after a tax opinion versus a private letter ruling? To make the choice, it helps to understand more details.

First, tax opinions can cover a broader range of topics and can be written about pretty much anything; rulings cannot. In fact, the IRS has an explicit list of subjects that it will not produce private letter rulings on (they modify it occasionally, but there’s always a list). As a result, the first step is to assess the list as this might make the choice for you.

Second, don’t request a private letter ruling unless there is a good chance you think it will be granted. For one, rulings are not cheap with fees often costing upward of $25,000 to obtain a ruling. If you get a “No” ruling against your position, you can withdraw the request to take the ruling off the books, but you may or may not get the fee back. Moreover, when you withdraw a request for a ruling, the IRS sends a notice to your local IRS field office, potentially flagging your return for audit.

Third, opinions can be quick and obtained in as little as a few days or weeks. Rulings, on the other hand, often take months. Also consider that a request for a ruling must be specific and there is little room for modification after filing. Opinions have more flexibility.

Private Letter Ruling Process

Given the specificity and consequence of requesting a ruling, there are intermediate steps to help you test the water before you go all in. Nearly all ruling requests start by initiating a discussion with the IRS to get their general view on your proposed ruling. After this, the taxpayer usually submits a brief memo covering the facts and ruling they are looking to obtain. Next, there are more meetings either in person or by phone with IRS attorneys involved. At this point, if everything looks good, you can prepare and submit the actual ruling request. If you back out at this point, you avoid triggering any fees (IRS fees – not your lawyers or accountants) or audit notices.

Benefits of a Ruling Versus an Opinion

The reason taxpayers go through the time, expense and effort to obtain rulings instead of opinions is that they have several advantages. First, rulings are binding on the IRS. Second, you don’t need to consider penalty protection. Most of all, they provide certainty. Given the difficulty in obtaining a ruling, they generally make financial sense only when a taxpayer has a seriously substantial tax position in play, or at least will over time, and he wants to protect against future audits and legal challenges.

The Five Key IRS Rules of Taxation for Lawsuit Settlements

Taxation for Lawsuit Settlements

Coming out on the winning side of a lawsuit as a plaintiff can be a gratifying feeling, especially if there is a financial settlement involved. There is likely a sense of both relief and vindication. Unfortunately, far too often people are in for a shock when they realize that they must pay taxes on the award. You can even be taxed on your attorney fees! However, a little tax planning can go a long way, especially if you do it before the settlement is finalized and the award is substantial. Below are the five key rules to know so you can make the right move. Taxation for Lawsuit Settlements.

  1. The Origin of the Claim Largely Determines the Tax Consequences
    The taxation of legal settlements is based on the origin or reason of the claim. For example, if you win a wrongful termination suit against an employer, your award will be taxed as both wages and likely some other income for whatever is allocated to emotional damages. On the other hand, if you sue the contractor who built your house for damage caused by his negligence, the settlement might not be deemed income at all and you could treat it as a reduction of the purchase price of the real asset. There are many exceptions in this area, and it always depends on the facts and circumstances of the case.
  2. Physical Injuries Produce Tax-Free Awards, but Emotional Distress and Damages Are Taxable
    Damages received for suits involving a physical injury or illness are tax-free. Suits for emotional distress and defamation are taxable, including the physical symptoms of emotional distress (gastrointestinal problems, etc.). Be careful as the latter can be ambiguous, so agreeing on the nature of a physical symptom as the cause or result of emotional distress is best done with the defendant before you finalize the case.
  3. Allocating Damages
    Legal disputes typically involve several issues and courses of conduct. As a result, settlements typically have multiple types of consideration, each with potentially different tax treatments. If the plaintiff and defendant both agree on the tax treatment before finalizing the case, then you can allocate the total damages to certain categories and save taxes. Such agreements are technically non-binding on the IRS, but they are rarely challenged.
  4. Attorney Fees
    Plaintiffs who use a contingent fee lawyer are typically taxed on receiving 100 percent of the money recovered. This means you have to pay taxes even on the portion of your settlement that the lawyers keep as their fee. This is still the case even if your contingent fees are paid directly by the defendant. In clear cases of physical injury where the entire settlement is non-taxable, there’s no issue – but if your award is taxable, you’ll need to be careful.Take an example where you collect a contingent fee settlement for emotional distress and receive $200,000, with your lawyer taking 30 percent or $60,000. In this case, you’ll typically be liable for taxes on the entire $200,000 and not just the $140,000 you keep. To make matters worse, aside from legal fees in employment and certain whistleblower claims, there’s no corresponding deduction for legal fees. There are potential ways to mitigate this, but tax advice early in the process is key.
  5. Punitive Damages and Interest
    Generally, punitive damages and interest are always taxable. For example, take a case where you are hurt in an automobile crash and receive $100,000 in compensatory damages and another $3 million in punitive damages. The $100,000 is tax-free, whereas the $3 million is taxable.Interest is treated similarly. Even if you receive a tax-free type of settlement, but it took time to finalize the settlement through the pre- or post-judgement process, the interest you receive is taxable. Therefore, it is often advantageous to settle a case instead of having it go to judgement.

Conclusion

The taxation of legal settlements and awards are nuanced and largely depend on the facts and circumstances of the case at hand. There are, however, many opportunities through proper tax planning to minimize the tax consequences, but only if you are proactive and plan early in the process.

2017 vs. 2018 Federal Income Tax Brackets

Single Taxpayers
2018 Tax Rates – Standard Deduction $12,000 2017 Tax Rates – Standard Deduction $6,350
10% 0 to $9,525 10% 0 to $9,325
12% $9,525 to $38,700 15% $9,325 to $37,950
22% $38,700 to $82,500 25% $37,950 to $91,900
24% $82,500 to $157,500 28% $91,900 to $191,650
32% $157,500 to $200,000 33% $191,650 to $416,700
35% $200,000 to $500,000 35% $416,700 to $418,400
37% Over $500,000 39.60% Over $418,400

 

Married Filing Jointly & Surviving Spouses
2018 Tax Rates – Standard Deduction $24,000 2017 Tax Rates – Standard Deduction $12,700
10% 0 to $19,050 10% 0 to $18,650
12% $19,050 to $77,400 15% $18,650 to $75,900
22% $77,400 to $165,000 25% $75,900 to $153,100
24% $165,000 to $315,000 28% $153,100 to $233,350
32% $315,000 to $400,000 33% $233,350 to $416,700
35% $400,000 to $600,000 35% $416,700 to $470,700
37% Over $600,000 39.60% Over $470,700

 

Married Filing Separately
2018 Tax Rates – Standard Deduction $12,000 2017 Tax Rates – Standard Deduction $6,350
10% 0 to $9,525 10% 0 to $9,325
12% $9,525 to $38,700 15% $9,325 to $37,950
22% $38,700 to $82,500 25% $37,950 to $76,550
24% $82,500 to $157,500 28% $76,550 to $116,675
32% $157,500 to $200,000 33% $116,675 to $208,350
35% $200,000 to $500,000 35% $208,350 to $235,350
37% Over $500,000 39.60% Over $235,350

 

Head of Household
2018 Tax Rates – Standard Deduction $18,000 2017 Tax Rates  – Standard Deduction $9,350
10% 0 to $13,600 10% 0 to $13,350
12% $13,600 to $51,800 15% $13,350 to $50,800
22% $51,800 to $82,500 25% $50,800 to $131,200
24% $82,500 to $157,500 28% $131,200 to $212,500
32% $157,500 to $200,000 33% $212,500 to $416,700
35% $200,000 to $500,000 35% $416,700 to $444,500
37% Over $500,000 39.60% Over $444,500

 

Estates & Trusts
2018 Tax Rates 2017 Tax Rates
10% 0 to $2,550 15% 0 to $2,550
24% $2,550 to $9,150 25% $2,550 to $6,000
35% $9,150 to $12,500 28% $6,000 to $9,150
37% Over $12,500 33% $9,150 to $12,500
N/A N/A 39.60% Over $12,500

 

FICA (Social Security & Medicare)
FICA Tax 2018 2017
Social Security Tax Rate: Employers 6.2% 6.2%
Social Security Tax Rate: Employees 6.2% 6.2%
Social Security Tax Rate: Self-Employed 15.3% 15.3%
Maximum Taxable Earnings $128,400 $127,200
Medicare Base Salary Unlimited Unlimited
Medicare Tax Rate 1.5% 1.5%
Additional Medicare Tax for income above $200,000 (single filers) or $250,000 (joint filers) 0.9% 0.9%
Medicare tax on net investment income ($200,000 single filers, $250,000 joint filers) 3.8% 3.8%

 

Education Credits & Deductions
Credit / Deduction 2018 2017
American Opportunity Credit (Hope) 2500 2500
Lifetime Learning Credit 2000 2000
Student Loan Interest Deduction 2500 2500
Coverdell Education Savings Contribution 2000 2000

 

Miscellaneous Provisions
2018 2017
N/A – No longer exists N/A Personal Exemption $4,050
Business expensing limit: Cap on equipment purchases $2,500,000 Business expensing limit: Cap on equipment purchases $2,030,000
Business expensing limit: New and Used Equipment and Software $1,000,000 Business expensing limit: New and Used Equipment and Software $510,000
Prior-year safe harbor for estimated taxes of higher-income 110% of your 2018 tax liability Prior-year safe harbor for estimated taxes of higher-income 110% of your 2017 tax liability
Standard mileage rate for business driving 54.5 cents Standard mileage rate for business driving 53.5 cents
Standard mileage rate for medical/moving driving 18 cents Standard mileage rate for medical/moving driving 17 cents
Standard mileage rate for charitable driving 14 cents Standard mileage rate for charitable driving 14 cents
Child Tax Credit $2,000 Child Tax Credit $1,000
Unearned income maximum for children under 19 before kiddie tax applies $1,050 Unearned income maximum for children under 19 before kiddie tax applies $1,050
Maximum capital gains tax rate for taxpayers with income up to $51,700 for single filers, $77,200 for married filing jointly 0% Maximum capital gains tax rate for taxpayers in the 10% or 15% bracket 0%
Maximum capital gains tax rate for taxpayers with income above $51,700 for single filers, $77,200 for married filing jointly 15% Maximum capital gains tax rate for taxpayers above the 15% bracket but below the 39.6% bracket 15%
Maximum capital gains tax rate for taxpayers with income above $425,800 for single filers, $479,000 for married filing jointly 20% Maximum capital gains tax rate for taxpayers in the 39.6% bracket 20%
Capital gains tax rate for unrecaptured Sec. 1250 gains 25% Capital gains tax rate for unrecaptured Sec. 1250 gains 25%
Capital gains tax rate on collectibles 28% Capital gains tax rate on collectibles 28%
Maximum contribution for Traditional/Roth IRA $5,500 if under age 50 $6,500 if 50 or older Maximum contribution for Traditional/Roth IRA $5,500 if under age 50 $6,500 if 50 or older
Maximum employee contribution to SIMPLE IRA $12,500 if under age 50 $15,500 if 50 or older Maximum employee contribution to SIMPLE IRA $12,500 if under age 50 $15,500 if 50 or older
Maximum Contribution to SEP IRA 25% of eligible compensation up to $55,000 Maximum Contribution to SEP IRA 25% of eligible compensation up to $54,000
401(k) maximum employee contribution limit $18,500 if under age 50 $24,500 if 50 or older 401(k) maximum employee contribution limit $18,000 if under age 50 $24,000 if 50 or older
Estate tax exemption $11,200,000 Estate tax exemption $5,490,000
Annual Exclusion for Gifts $15,000 Annual Exclusion for Gifts $14,000

Avoid IRS Trouble by Reporting Bitcoin Cash

Avoid IRS Trouble by Reporting Bitcoin Cash

IRS guidance on the tax treatment of cryptocurrencies already exists. Right now, the IRS considers cryptocurrencies to be “intangible assets.” As a result, they are subject to capital asset treatment. However, recent developments complicate matters.

On Aug. 1, Bitcoin split into two separate cryptocurrencies – Bitcoin and Bitcoin Cash. The currently issued guidance does not address cryptocurrency splits, also known as fork transactions.

How to Report Your Bitcoin Cash

At the split, Bitcoin Cash’s initial price was set at 9.5 percent of Bitcoin’s unit price of $2,801 – or $266. Holders of Bitcoin received one Bitcoin Cash unit for every Bitcoin they held at the time of the split, making Bitcoin Cash a separate financial instrument. As a result, this makes it taxable – so recipients of Bitcoin Cash should include the transaction on their 2017 income tax returns.

Since a cryptocurrency is not technically a security or a debt-like interest, the transaction is considered neither a dividend nor interest income. So how should you report the transaction? While there is no clear-cut guidance as of yet, the best place to report the transaction is as “Other Income” on Form 1040, since this is where you can report transactions that do not neatly fit anywhere else.

Another reporting alternative is to use Form 8949, where you report the sale of capital assets. If you use this form you would report $266 per unit and offset it with a corresponding 9.5 percent of your Bitcoin cost basis. By transferring a proportional amount of your basis from the original investment you will reduce your taxable income. This reporting method also has the advantage of allowing you to offset the capital gains with capital losses and carryovers. Beware however, that this method is less likely to be accepted by the IRS.

What to Do if You Sold Your Bitcoin Cash

Selling some or all of your Bitcoin Cash means you’ll need to treat it as a capital gain and report it via Form 8949. If you sell any Bitcoin Cash, make sure you report your receipt as “Other Income” per above, since this will then serve as your basis for offsetting your sale. Your selling price would be whatever value you sold it for, less any commissions or fees on the sale. Also, remember that for your 2017 tax return filing, your holding period would start from the split date of Aug. 1, and therefore be short-term.

Why Cryptocurrency Splits Are Not Tax-Free Exchanges

Some will argue that cryptocurrency splits such as Bitcoin Cash qualify as tax-free exchanges; however, this view is unlikely to hold up to IRS scrutiny since none of the corporate reorganization non-recognition events under Section 368 apply. Bitcoin Cash is economically different from Bitcoin, and therefore should be viewed as a new category of financial instrument.

Beware the IRS

Over the past several years, many investors sold cryptocurrencies, including Bitcoin, but did not report any taxable income from the transactions, while others used Section 1031 like-kind exchange laws to postpone taxation. The IRS is none too pleased by all of this and is taking action.

The IRS estimates that hundreds of thousands of U.S. taxpayers failed to report cryptocurrency income sales over the past few years. Combined with the recent meteoric rise in prices, the IRS is hungry for the potential to collect billions in interest, penalties and back taxes.

Recently for example, the IRS summoned a large cryptocurrency exchange (Coinbase) to hand over its customer lists. Subsequently, they reached an agreement to disclose only transactions in excess of $20,000; however, it is clear from this case that the IRS is going to get aggressive on the matter.

Cryptocurrency investors need to be aware of the evolving nature of taxation in this space in order to avoid IRS problems. This is an emerging issue and one on which you can bet the IRS is not going to stand down. As always, consult a tax professional for details about your particular situation.