Author: Leon Clinton

With health care, housing, food, and transportation costs increasing every year, many retirees on fixed incomes wonder how they can stretch their dollars even further. One solution is to move to another state where income taxes are lower than the one they currently reside in.

But some retirees may be in for a surprise. While federal tax rates are the same in every state, retirees may find that even if they move to a state with no income tax, there may be additional taxes they’re liable for including sales taxes, excise taxes, inheritance and estate taxes, income taxes, intangible taxes, and property taxes.

In addition, states tax different retirement benefits differently. Retirees may have several types of retirements benefits such as pensions, social security, retirement plan distributions (which may or not be taxed by a particular state), and additional income from a job if they continue to work in order to supplement their retirement income.

If you’re thinking about moving to a different state when you retire, here are six things to consider before you make that move.

1. Income Tax Rates

Retirees planning to work part-time in addition to receiving retirement benefits should keep in mind that those earnings may be subject to state tax in certain states, as well as federal income tax if your combined income (individual) is more than $25,000. Combined income is defined as your adjusted gross income + nontaxable interest plus 1/2 of your Social Security benefits. If you file a joint return, you may have to pay taxes if you and your spouse have a combined income that is more than $32,000. If you see this scenario in your future, it may be in your best interest to consider a state with low income tax rates (Pennsylvania, Arizona, or New Mexico for instance) or no income tax such as Florida, Nevada, Alaska, Washington state, or Wyoming.

2. Income Tax on Retirement Income

Income tax on pension income varies for each state. Some states do not tax it at all. In other states, a portion of pension income is exempt, and still other states tax pension income in its entirety. Remember, however, that state tax laws, like federal tax laws, are always changing. Call if you have any questions about tax law changes in your state.

3. Tax on Social Security

In 2018, thirteen states tax social security income in addition to taxing social security income at the federal level. Among them are Colorado, Connecticut, Montana, New Mexico, Vermont, and West Virginia.

4. State and Local Property Taxes

Despite a decline in property values, property taxes have not decreased for most homeowners. Some states, however, offer property tax exemptions to retirees who are homeowners and renters. Again, this varies by individual state. Please call if you have any questions about your state or the state you are planning to move to.

5. State and Local Sales Taxes

State and local sales taxes may or may not be a factor in the overall decision about where you decide to retire, but keep in mind that only five states, Alaska, Delaware, Montana, New Hampshire, and Oregon, do not impose any sales or use tax.

6. Estate Taxes

Estate tax may or may not matter, depending on your estate and whether you care about what happens to your estate after you die. Like other state taxes, estate tax varies depending on which state you reside in. In fourteen states, there is a tax on estates below the federal threshold amount ($11.18 million in 2018). Hawaii uses the same threshold amount as the IRS when figuring federal estate tax, and New York will do so starting in 2019. Many states have no estate tax whatsoever including North Carolina, Delaware (repealed in 2018), Kansas, Oklahoma, and Arizona.

The bottom line

When it comes to retirees, relocating, and taxes there are a number of factors to consider– including the overall tax burden. And, as you’ve read here, not all states are created equal. If you’re thinking about retiring to another state, please contact the office and make an appointment with a tax professional who will help you figure out which state fits your particular circumstances.

• By Leon Clinton
• October 14, 2018

If you employ someone to work for you around your house, it is important to consider the tax implications of this type of arrangement. While many people disregard the need to pay taxes on household employees, they do so at the risk of paying stiff tax penalties down the road.

Who Is a Household Employee?

If a worker is your employee, it does not matter whether the work is full-time or part-time or that you hired the worker through an agency or from a list provided by an agency or association. It also does not matter whether you pay the worker on an hourly, daily or weekly basis or by the job.

If the worker controls how the work is done, the worker is not your employee but is self-employed. A self-employed worker usually provides his or her own tools and offers services to the general public in an independent business.

Also, if an agency provides the worker and controls what work is done and how it is done, the worker is not your employee.

Example: You pay Jane to babysit your child and do light housework four days a week in your home. Jane follows your specific instructions about household and childcare duties. You provide the household equipment and supplies that Jane needs to do her work. Jane is your household employee.

Example: You pay Roger to care for your lawn. Roger also offers lawn care services to other homeowners in your neighborhood. He provides his own tools and supplies, and he hires and pays any helpers he needs. Neither Roger nor his helpers are your household employees.

Can your Employee Legally Work in the United States?

When you hire a household employee to work for you on a regular basis, he or she must complete USCIS Form I-9 Employment Eligibility Verification. It is your responsibility to verify that the employee is either a U.S. citizen or an alien who can legally work and then complete the employer part of the form. It is unlawful for you to knowingly hire or continue to employ a person who cannot legally work in the United States. Keep the completed form for your records. Do not return the form to the U.S. Citizenship and Immigration Services (USCIS).

Do You Need to Pay Employment Taxes?

If you have a household employee, you may need to withhold and pay Social Security and Medicare taxes, or you may need to pay federal unemployment tax or both. If you pay cash wages of $2,100 or more in 2018 to any one household employee, then you will need to withhold and pay Social Security and Medicare taxes. Also, if you pay total cash wages of $1,000 or more in any calendar quarter of 2017 or 2018 to household employees, you are also required to pay federal unemployment tax.

If neither of these two contingencies applies, you do not need to pay any federal unemployment taxes; however, you may still need to pay state unemployment taxes. Please contact the office if you’re not sure whether you need to pay state unemployment tax for your household employee. A tax professional will help you figure out whether you need to pay or collect other state employment taxes or carry workers’ compensation insurance.

Note: If you do not need to pay Social Security, Medicare, or federal unemployment tax and do not choose to withhold federal income tax, the rest of this article does not apply to you.

Social Security and Medicare Taxes

Social Security taxes pays for old-age, survivor, and disability benefits for workers and their families. The Medicare tax pays for hospital insurance. Both you and your household employee may owe Social Security and Medicare taxes. Your share is 7.65 percent (6.2 percent for Social Security tax and 1.45 percent for Medicare tax) of the employee’s Social Security and Medicare wages. Your employee’s share is 6.2 percent for Social Security tax and 1.45 percent for Medicare tax.

You are responsible for payment of your employee’s share of the taxes as well as your own. You can either withhold your employee’s share from the employee’s wages or pay it from your own funds.

Do not count wages you pay to any of the following individuals as Social Security and Medicare wages:

1. 1. Your spouse.
   2. Your child who is under age 21.
   3. Your parent.

Note: However, you should count wages to your parent if they are caring for your child and both of the following apply:

(a) your child lives with you and is either under age 18 or has a physical or mental condition that requires the personal care of an adult for at least four continuous weeks in a calendar quarter; and

(b) you are divorced and have not remarried, or you are a widow or widower, or you are married to and living with a person whose physical or mental condition prevents him or her from caring for your child for at least four continuous weeks in a calendar quarter.

1. 1. An employee who is under age 18 at any time during the year.

Note: However, you should count these wages to an employee under 18 if providing household services is the employee’s principal occupation. If the employee is a student, providing household services is not considered to be his or her principal occupation.

Also, if your employee’s Social Security and Medicare wages reach $128,400 in 2018, then do not count any wages you pay that employee during the rest of the year as Social Security wages to figure Social Security tax. You should, however, continue to count the employee’s cash wages as Medicare wages to figure Medicare tax. Meals provided at your home for your convenience and lodging provided at your home for your convenience and as a condition of employment are not counted as wages

As you can see, tax rules for hiring household employees are complex; therefore, professional tax guidance is highly recommended. This is definitely an area where it’s better to be safe than sorry. If you have any questions at all, please contact the office to set up a consultation.

• By Leon Clinton
• October 11, 2018

Starting a new business is an exciting, but busy time with so much to be done and so little time to do it in. Also, if you expect to have employees, there are a variety of federal and state forms and applications that will need to be completed to get your business up and running. That’s where a tax professional can help.

1. Business Structure

The first decision you will need to make is determining which business structure you will use. The most common types are a sole proprietor, partnership and corporation. The type of business you choose will determine which tax forms you file.

2. Employer Identification Number (EIN) 

Securing an Employer Identification Number (also known as a Federal Tax Identification Number) is the first thing that needs to be done since many other forms require it. The IRS issues EINS to employers, sole proprietors, corporations, partnerships, nonprofit associations, trusts, estates, government agencies, certain individuals, and other business entities for tax filing and reporting purposes.

Note: Even if you already have an EIN as a sole proprietor, for example, if you start a new business with a different business entity you will need to apply for a new EIN.

The fastest way to apply for an EIN is online through the IRS website or by telephone. Applying by fax and mail generally takes one to two weeks, and you can apply for one EIN per day. There is no cost to apply.

3. State Withholding, Unemployment, Sales, and other Business Taxes

Once you have your EIN, you need to fill out forms to establish an account with the State for payroll tax withholding, Unemployment Insurance Registration, and sales tax collections (if applicable). Business taxes include income tax, self-employment tax, employment tax, and excise tax. Generally, the types of tax your business pays depends on the type of business structure you set up. Keep in mind that you may also need to make estimated tax payments.

4. Payroll Record Keeping

Payroll reporting and record keeping can be very time-consuming and costly, especially if it isn’t handled correctly. Also, keep in mind, that almost all employers are required to transmit federal payroll tax deposits electronically. Personnel files should be kept for each employee and include an employee’s employment application as well as the following:

• Form W-4, Employee’s Withholding Allowance Certificate. Completed by the employee and used to calculate their federal income tax withholding. This form also includes necessary information such as address and social security number.
• Form I-9 Employment. Eligibility Verification. Completed by the employer, to verify that employees are legally permitted to work in the U.S.

5. Employee Healthcare

As an employer with employees, you may have certain healthcare requirements you need to comply with as well. If so, you should know about the Small Business Health Care Tax Credit, which helps small businesses (fewer than 25 employees who work full-time, or a combination of full-time and part-time) pay for health care coverage they offer their employees. The maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.

If you need help setting up or completing any tax-related paperwork needed for your business, don’t hesitate to call.

• By Leon Clinton
• October 8, 2018