Author: Leon Clinton

Tax

Avoiding an Unexpected Tax Bill

Tax withholding can be complicated, and with the passage of the Tax Cuts and Jobs Act (TCJA) legislation, it’s even more so since a number of tax provisions have changed. As such, it’s important to make sure the right amount of tax is withheld for your particular tax situation.

Many taxpayers have already adjusted their withholding, but for those with more complicated tax situations who have been putting it off, it’s not too late. You should be aware, however, that the longer you wait, the fewer pay periods there are to withhold the necessary federal tax. In other words, more tax will have to be withheld from each remaining paycheck.

Let’s take a look at which taxpayers would benefit from a “paycheck checkup” right now to avoid an unexpected tax bill next year.

Taxpayers Receiving Large Refunds

Taxpayers who typically adjust their tax withholding so that they receive a large refund at tax time could be affected by tax law changes in the TCJA including reduced tax rates and significantly different tax brackets, as well as the removal of personal exemptions and doubling of the standard deduction. Adjusting tax withholding now will help taxpayers make sure the amount withheld is best for their particular tax situation–and avoid an unpleasant tax surprise next year.

High Income Taxpayers with Complex Returns

High-income taxpayers often find that itemizing instead of taking the standard deduction is more beneficial, but with the passage of tax reform legislation, that might no longer be the case. Taxpayers affected by any of the following tax changes should check and adjust their withholding as soon as possible:

  • Changes to tax rates and brackets.
  • Expansion of the child tax credit.
  • The standard deduction nearly doubled to $24,000 for joint filers and $12,000 for singles.
  • A $10,000 cap on deductions for state and local property, sales and income taxes.
  • New limits on deductions for some mortgage interest and home equity debt.
  • Higher limits on the percent of income a taxpayer can deduct as charitable contributions.
  • No deductions for miscellaneous expenses including investment expenses and unreimbursed employee expenses such as travel, meals, entertainment and uniforms.

It is especially important for those with high incomes and complex returns to review withholding because these taxpayers are often affected by more of these changes than people with simpler returns. This is also true if they also make quarterly estimated tax payments to cover other sources of income or are subject to the self-employment tax or alternative minimum tax.

Taxpayers with Dependents

In addition to expanding the Child Tax Credit, the TCJA added a new tax credit for parents or other qualifying relatives supporting a dependent age 17 or older at the end of 2018. This new tax credit – Credit for Other Dependents – is a non-refundable credit of up to $500 per qualifying person. This change, along with others, can affect a family’s tax situation in 2018 and it’s important to check and adjusted withholding amounts if necessary to prevent an unexpected tax bill and even penalties next year at tax time.

Tip: Families with qualifying children under the age of 17 should first review their eligibility for the expanded Child Tax Credit, which is larger. Taxpayers should also note that both credits begin to phase out at $400,000 of modified adjusted gross income for joint filers and $200,000 for other taxpayers.

Taxpayers Working in the Sharing Economy

Because the U.S. tax system operates on a pay-as-you-go basis, taxes must be paid on income as it is received rather than at the end of the year. Generally, people who are part of the sharing economy and who do not have an employer need to make sure they pay their taxes either through withholding from other jobs they may have or by making quarterly estimated tax payments to cover their tax obligations.

Taxpayers Owing Estimated Taxes

Underpayment of taxes is a common scenario with more than 10 million taxpayers facing a penalty for underpayment of estimated tax last year alone. Tax is typically withheld for most people who receive salaries, wages, pensions, unemployment compensation and the taxable part of Social Security benefits. However, with numerous changes to the tax system due to tax reform many taxpayers may need to adjust withholding on their paychecks or the amount of their estimated tax payments to help prevent penalties.

While most income is subject to tax withholding, some income from self-employment or rental activities is not. Furthermore, individuals, including sole proprietors, partners, and S corporation shareholders, may need to make estimated tax payments unless they owe less than $1,000 when they file their tax return or they had no tax liability in the prior year (subject to certain conditions). As a reminder, in the U.S. taxes are required to be paid as income is earned or received during the year.

Retirees with Pension and Annuity Income

The TCJA also changed the way tax is calculated for retirees, many of whom have income from pensions and annuities. As such, retirees who receive a monthly pension or annuity check may need to raise or lower the amount of tax they pay during the year. Retirees should treat their pension similar to income from a job. Pension recipients that need to change their withholding can do so by filling out Form W-4P and submitting it to their payor. Retirees should submit Forms W-4P to their payors as soon as they can to give payors enough time to apply any changes to withholding to as many payments as possible this year.

Note: Because it is already November, some retirees may be unable to cover their expected tax liability through withholding, and could instead make estimated or additional tax payments directly to the IRS. Please call if you need more information about this option.

Questions about Withholding?

If you have any questions about Form W-4 or need to make adjustments to your withholding, don’t hesitate to contact the office and speak to a tax professional you can trust.

Tax

Tax Due Dates for October 2018

October 10

Employees who work for tips – If you received $20 or more in tips during September, report them to your employer. You can use Form 4070.

October 15

Individuals – If you have an automatic 6-month extension to file your income tax return for 2017, file Form 1040, 1040A, or 1040EZ and pay any tax, interest, and penalties due.

Corporations – File a 2017 calendar year income tax return (Form 1120) and pay any tax, interest, and penalties due. This due date applies only if you timely requested an automatic 6-month extension, Otherwise, see April 17, earlier.

Employers Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in September.

Employers Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in September.

October 31

Employers – Social Security, Medicare, and withheld income tax. File form 941 for the third quarter of 2018. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until November 13 to file the return.

Certain Small Employers – Deposit any undeposited tax if your tax liability is $2,500 or more for 2018 but less than $2,500 for the third quarter.

Employers – Federal Unemployment Tax. Deposit the tax owed through September if more than $500.

Accounting

How to Use Memorized Transactions in QuickBooks

Last month’s Quick Books article explored the benefits of having QuickBooks on your desktop. Among those listed were three that impact every business. To recap, QuickBooks helps you:

  • Save time.
  • Save money.
  • Minimize errors.

There are numerous examples that could be used to illustrate how this software accomplishes this but for this month the topic is using memorized transactions. These are templates you set up that contain most if not all the information that could be repeated at specified intervals, eliminating the need for you to enter the same repetitive data regularly and reducing the chances that you’ll make a mistake.

You can create these transaction “models” for both sale and purchase transactions. For example, you might have wireless service bills that remain the same every month or vary by just a bit. Or, you have customers who have monthly standing orders for the same products, or services, or subscription fees.

QuickBooks makes it very easy to set up transactions for repetitive use, and you’ll see how it works in more detail below. We recommend you use one of QuickBooks’ sample files for this tutorial.

Creating a Template

Let’s start by creating a repeating bill. Click Enter Bills on the home page and complete all the fields that will remain the same every time the bill is created. In our example, we’re paying a utility bill whose Amount Due will change every month, so we’re leaving that blank. When you’re done, click Memorize in the toolbar to open this window:


Figure 1: Once you’ve created a transaction template, you’ll have to complete the fields in this window to memorize it correctly.

The vendor name appears automatically in a field in the upper left. Below that is a list of four options. These have to do with how/if you want to be notified when it’s time to process a memorized transaction. Your choices are:

  • Add to my Reminders List. QuickBooks will display an entry in your Reminders List for each memorized transaction. Not using Reminders? Please call.
  • Do Not Remind Me. Nothing will be done.
  • Automate Transaction Entry. You would only select this option if nothing but the date of the transaction changes when it recurs. QuickBooks would automatically process and dispatch the transaction.
  • Add to Group. If you have multiple recurring transactions that come due at the same time, you can create Groups and assign transactions to them (more on this later).

On the right side of the window, open the drop-down list in the field next to How Often and select from the options provided. Click the calendar icon to choose the transaction’s Next (Due) Date. If you only want QuickBooks to automate the entry a specific number of times, add that in the field next to Number Remaining. Then enter the Days In Advance To Enter.

Further Explanation Needed

Let’s expand on two of the concepts discussed here. First, advance notice for transactions. If you’ve selected Add to my Reminders Listfor any memorized transactions, you need to tell QuickBooks how far in advance your reminders should start to appear. Open the Edit menu and select Preferences, then Reminders.


Figure 2: If you want Reminders for memorized transactions, you’ll need to tell QuickBooks what your Preferences are.

Memorized Transactions Due appears toward the bottom of the Company Preferences list. Click on the appropriate button to indicate whether you want to see a summary or a list in your Reminders (or nothing at all) and how many days in advance the alert should appear.

Next, Groups. As mentioned earlier, you can combine memorized transactions due at the same time within a group. To create one, go to Lists | Memorized Transaction List. Click the arrow next to Memorized Transaction in the lower left, then click New Group and give it a name. Choose from the options available for notification and click OK.

Now you can add memorized transactions to this Group by right-clicking on it, selecting Edit Memorized Transaction, and clicking in the button next to Add to Group. Click the down area to the right of the field assigned to Group Name and select the one you just created.


Figure 3: You can add memorized transactions to a Group and process them at the same time.

Caution Advised

This particular QuickBooks feature has been shared with you because software like this can save time and minimize errors. There are many other features that can help you as well, so don’t hesitate to call if you would like to learn more about them.

The mechanics of creating memorized transactions are fairly simple. But mistakes can be costly in terms of bills that don’t get paid on time (or at all) and items or services that don’t get invoiced. If you’re new to QuickBooks, call for assistance as working on your own could be tricky. Even if you’re a seasoned user, you may want help setting up memorized transactions for the first time. Please contact the office if you need assistance with this or any other element of QuickBooks accounting. Help is just a phone call away.

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