Tax

Tax year 2018 annual inflation adjustments have been updated to reflect changes from the Tax Cuts and Jobs Act (TCJA). These tax year 2018 adjustments are generally used on tax returns filed in 2019. The tax items affected by TCJA for tax year 2018 of greatest interest to most taxpayers include the following:

The standard deduction for married filing jointly rises to $24,000. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,000; for heads of households, $18,000.

The TCJA reduced the personal exemption. The personal exemption for tax year 2018 is $0.

TCJA reduced tax rates for many taxpayers. The new tax rates are: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and a top rate of 37 percent. For tax year 2018, the highest tax rate will apply to married individuals filing jointly and surviving spouses with taxable incomes over $600,000, to single taxpayers and heads of households with incomes over $500,000, and to married taxpayers filing separately with incomes over $300,000.

Itemized deductions. Itemized deductions are eliminated under TCJA.

The Alternative Minimum Tax (AMT). The AMT exemption amount for tax year 2018 is greatly increased under TCJA. For tax year 2018, the exemption amount for single taxpayers is $70,300 and begins to phase out at $500,000, and the exemption amount for married couples filing jointly is $109,400 and begins to phase out at $1 million.

Estates. For estates of any decedent passing away in calendar year 2018, the basic exclusion amount is $11,180,000.

Certain items had minor adjustments. TCJA requires a different method for adjusting for inflation.

Foreign earned income exclusion. For 2018, the foreign earned income exclusion will be $103,900.

Earned Income Credit. The maximum earned income credit amount will be $6,431 for taxpayers with 3 or more qualifying children, for 2018. Other earned income credit amounts are detailed in Revenue Procedure 2018-18.

Medical Savings Accounts. For tax year 2018, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,300, but not more than $3,450. For self-only coverage, the maximum out-of-pocket expense amount is $4,550. For tax year 2018, participants with family coverage, the floor for the annual deductible is $4,550; however, the deductible cannot be more than $6,850. For family coverage, the out-of-pocket expense limit is $8,400 for tax year 2018.

Items not affected by the TCJA

The dollar amounts for the following items remain unchanged under the new method for adjusting for inflation required by the TCJA:

• For tax year 2018, the annual exclusion for gifts is $15,000.
• For tax year 2018, the monthly limitation for the qualified transportation fringe benefit is $260, as is the monthly limitation for qualified parking.
• For tax year 2018, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $114,000.
• For calendar year 2018, the dollar amount used to determine the penalty for not maintaining minimum essential health coverage is $695.

Questions about tax reform? Help is just a phone call away.

• By Leon Clinton
• September 8, 2018

Of all the retirement plans available to small business owners, the SIMPLE IRA plan (Savings Incentive Match PLan for Employees) is the easiest to set up and the least expensive to manage. The catch is that you’ll need to set it up by October 1st. Here’s what you need to know.

What is a SIMPLE IRA Plan?

SIMPLE IRA Plans are intended to encourage small business employers to offer retirement coverage to their employees. Self-employed business owners are able to contribute both as employee and employer, with both contributions made from self-employment earnings. In addition, if living expenses are covered by your day job (or your spouse’s job), you would be free to put all of your sideline earnings, up to the ceiling, into SIMPLE IRA plan retirement investments.

How does a SIMPLE IRA Plan Work?

A SIMPLE IRA plan is easier to set up and operate than most other plans in that contributions go into an IRA you set up. Requirements for reporting to the IRS and other agencies are minimal as well. Your plan’s custodian, typically an investment institution, has the reporting duties and the process for figuring the deductible contribution is a bit easier than with other plans.

SIMPLE IRA plans calculate contributions in two steps:

1. Employee out-of-salary contribution
The limit on this “elective deferral” is $12,500 in 2018, after which it can rise further with the cost of living.

Catch-up. Owner-employees age 50 or older can make an additional $3,000 deductible “catch-up” contribution (for a total of $15,500) as an employee in 2018.

2. Employer “matching” contribution
The employer match equals a maximum of three percent of employee’s earnings.

Example: An owner-employee age 50 or over in 2018 with self-employment earnings of $40,000 could contribute and deduct $12,500 as employee plus an additional $3,000 employee catch up contribution, plus a $1,200 (3 percent of $40,000) employer match, for a total of $16,700.

Are there any Downsides to SIMPLE IRA Plans?

Because investments are through an IRA you must work through a financial institution acting, which acts as the trustee or custodian. As such, you are not in direct control and will generally have fewer investment options than if you were your own trustee, as is the case with a 401(k).

You also cannot set up the SIMPLE IRA plan after the calendar year ends and still be able to take advantage of the tax benefits on that year’s tax return, as is allowed with Simplified Employee Pension Plans, or SEPs. Generally, to make a SIMPLE IRA plan effective for a year, it must be set up by October 1 of that year. A later date is allowed only when the business is started after October 1, and the SIMPLE IRA plan must be set up as soon as it is administratively feasible.

Furthermore, once self-employment earnings become significant other retirement plans may be more advantageous than a SIMPLE IRA retirement plan.

Example: If you are under 50 with $50,000 of self-employment earnings in 2018, you could contribute $12,500 as employee to your SIMPLE IRA plan plus an additional 3 percent of $50,000 as an employer contribution, for a total of $14,000. In contrast, a 401(k) plan would allow a $31,000 contribution.With $100,000 of earnings, the total for a SIMPLE IRA Plan would be $15,500 and $43,500 for a 401(k).

If the SIMPLE IRA plan is set up for a sideline business and you’re already vested in a 401(k) in another business or as an employee the total amount you can put into the SIMPLE IRA plan and the 401(k) combined (in 2018) can’t be more than $18,500 or $24,000 if catch-up contributions are made to the 401(k) by someone age 50 or over. So, someone under age 50 who puts $9,000 in her 401(k) can’t put more than $9,500 in her SIMPLE IRA plan for 2018. The same limit applies if you have a SIMPLE IRA plan while also contributing as an employee to a 403(b) annuity (typically for government employees and teachers in public and private schools).

How to Get Started Setting up a SIMPLE IRA Plan

You can set up a SIMPLE IRA plan account on your own; however, most people turn to financial institutions. SIMPLE IRA Plans are offered by the same financial institutions that offer any other IRAs and 401(k) plans.

You can expect the institution to give you a plan document and an adoption agreement. In the adoption agreement, you will choose an “effective date,” which is the start date for payments out of salary or business earnings. Again, that date can’t be later than October 1 of the year you adopt the plan, except for a business formed after October 1.

Another key document is the Salary Reduction Agreement, which briefly describes how money goes into your SIMPLE IRA plan. You need such an agreement even if you pay yourself business profits rather than salary. Printed guidance on operating the SIMPLE IRA plan may also be provided. You will also be establishing a SIMPLE IRA plan account for yourself as participant.

Ready to Explore Retirement Plan Options for your Small Business?

SIMPLE IRA Plans are an excellent choice for home-based businesses and ideal for full-time employees or homemakers who make a modest income from a sideline business and work well for small business owners who don’t want to spend a lot of time and pay high administration fees associated with more complex retirement plans.

If you are a business owner interested in discussing retirement plan options for your small business, don’t hesitate to contact the office today.

• By Leon Clinton
• September 6, 2018

Small employer HRAs or QSEHRAs (Qualified Small Employer Health Reimbursement Arrangements) allow small businesses without group health plans to set aside money, tax-free, for employees to use toward medical expenses–including the cost of buying health insurance. Here’s what you need to know about QSEHRAs.

Background

Included in the 21st Century Cures Act enacted by Congress on December 13, 2016, was a provision for QSEHRAs, which permit an eligible employer to provide a qualified small employer health reimbursement arrangement (QSEHRA), which is not a group health plan and thus is not subject to the requirements that apply to group health plans. QSEHRAs must meet several criteria such as:

• the arrangement is funded solely by an eligible employer, and no salary reduction contributions may be made under the arrangement;
• the arrangement generally is provided on the same terms to all eligible employees of the employer;
• the arrangement provides, after the employee provides proof of coverage, for the payment or reimbursement of medical expenses incurred by the employee or the employee’s family members; and
• the amount of the payments and reimbursements for any year do not exceed $4,950 for employee-only arrangements or $10,000 for arrangements that provide for payments and reimbursements of expenses of family members. These amounts are adjusted for inflation annually for tax years after 2016. For 2018, the maximum dollar amount for employee-only arrangements is $5,050 ($4,950 in 2017). The maximum dollar amount for arrangements that provide for payments and reimbursements for expenses of family members is $10,250 ($10,050 in 2017).

Which Employers Qualify?

Any small employer from a startup to a nonprofit that doesn’t offer a group health plan is able to set up a QSEHRA as long as they meet certain rules (see below). Small employers are defined as an employer that is not an applicable large employer (ALE). An applicable large employer is defined as one that employs fewer than 50 full-time workers, including full-time equivalent employees, on average.

Tip: If a small employer currently offers a group health plan but wants to set up a QSEHRA, the group health plan must be canceled before the QSEHRA will start.

Are there any other Rules?

Yes. One of the most important rules is that in order for employees to participate in a QSEHRA, they must have health insurance that meets minimum essential coverage. That is, indemnity, short-term health insurance, and faith-based insurance plans (e.g., Liberty HealthShare) do not qualify. Health insurance plans purchased through the Marketplace meet this qualification. Employers may choose whether to reimburse employees for both medical expenses and health insurance premiums or just premiums.

Furthermore, while there are no minimum monthly contribution limits, there is an annual maximum contribution limit. For 2018, the limit is $420 per month for individuals and $854 per month for families.

Note: QSEHRAs are funded entirely by the employer. As such, employees are prohibited from making contributions.

Written Notice to Employees

Eligible employers are required to provide written notice to eligible employees at least 90 days before the beginning of a year for which the QSEHRA is provided. In the case of an employee who is not eligible to participate in the arrangement as of the beginning of the year, the written notice must be furnished on the date on which the employee is first eligible. The written notice must include:

1. a statement of the amount that would be the eligible employee’s permitted benefit under the arrangement for the year;
2. a statement that the eligible employee should provide that permitted benefit amount to any health insurance exchange to which the employee applies for advance payments of the premium tax credit; and
3. a statement that if the eligible employee is not covered under minimum essential coverage for any month, the employee may be liable for an individual shared responsibility payment (eliminated for tax years starting in 2019) for that month and reimbursements under the arrangement may be includible in gross income.

Questions about QSEHRAs?

If you have any questions about QSEHRAs or are wondering whether your small business would benefit from a QSEHRA, don’t hesitate to call.

• By Leon Clinton
• September 5, 2018