As the filing season for tax year 2018 draws to a close with the October 15th extension deadline, taxpayers across the country can breathe a sigh of relief knowing their obligation to Uncle Sam has been satisfied for the year. The 2019 season, however, is just around the corner and the April 15th filing deadline will be here before you know it. The following are just a few different approaches to consider as you start your end-of-year tax planning for 2019 and beyond.
In 2016, former Governor Nathan Deal signed into law a program aimed at “Helping Enhance Access to Rural Treatment” – the Georgia HEART Hospital Program. This program allows Georgia taxpayers to route their tax dollars to an eligible rural hospital of their choice by means of a charitable contribution to the hospital. Through a pre-approval process with the Georgia Department of Revenue, taxpayers can obtain a dollar-for-dollar state tax credit of up to $5,000 ($10,000 for married filing jointly). Essentially, every dollar you contribute to the hospital reduces your state tax liability by the same amount. Donations are capped statewide at $60 million. If the limit is not reached by June 30th of each taxable year, taxpayers can then make unlimited contributions for the remainder of the year until the cap is reached, and claim their contributions fully as a state tax credit. It is important to note that these pre-approved credits have generally been exhausted shortly after the application process begins each year. The application process usually begins in October for the following tax year, which means the application process for 2020 should begin shortly!
For the first year enacted, these credits were also fully deductible as a charitable contribution on Schedule A of the federal tax return. The Tax Cuts and Jobs Act (TCJA), however, would eliminate this federal deduction entirely for Georgia taxpayers once signed into law at the end of 2017. One of the elements of the act limited the deductibility of state and local taxes to a maximum of $10,000. To try to bypass this limit, many states began credit programs similar to the Georgia HEART Hospital Program as a way to afford their taxpayers a federal deduction for state taxes paid, since the charitable contribution would also reduce their state income tax liability. Via regulations effective August 11, 2019 (and applicable to contributions made after August 27, 2018), the US Treasury Department ruled that taxpayers can only deduct the net value of the donation as a charitable contribution. Because Georgia taxpayers receive a 100% tax credit for each dollar contributed, $0 of the donation is deductible on the federal return. This should not dissuade taxpayers from utilizing the credit, however, as it is a good way for you to specifically determine where your tax dollars go to work!
Another element of the TCJA increased the standard deduction for taxpayers, which is $12,200 for single individuals in 2019 and $24,400 for couples filing a joint return. For many individuals, this increase was enough to force them to take the standard deduction rather than itemizing their expenses, as their itemized deductions were far less than these standard amounts. Though the increase is favorable to the federal return, it can be somewhat less beneficial on the Georgia return. Taxpayers who take the standard deduction on the federal return must also take the standard deduction on the Georgia return. This amount is far lower than its federal counterpart: $4,600 for single taxpayers and $6,000 for couples filing jointly. A couple that could previously deduct $20,000 on the federal return and $20,000 on the state return by itemizing would now deduct $24,000 on the federal return and only $6,000 on the Georgia return. Taxpayers may consider bunching certain itemized deductions, such as medical expenses and charitable contributions, into alternating years, if this would push them over the threshold to itemize. Of course, the taxpayer would have to take the standard deduction in the alternate years, but would at least see a greater benefit with these expenses every other year. Through the use of donor-advised funds, taxpayers can make one large donation and take the charitable deduction in the year of contribution, but distribute the funds to one or more organizations over multiple years.
For most taxpayers, bunching medical expenses is not very practical. Though we always hope to live in good health, we cannot always control our medical needs as they arise. Life happens. For this reason, taxpayers may want to consider the use of health savings accounts. Contributions to these accounts (a maximum $3,500 for individuals and $7,000 for families in 2019) are deducted from gross income, a.k.a. pre-tax dollars, and can be used to pay for out-of-pocket medical expenses in the future. Withdrawals for qualified medical expenses are also tax-free and without penalty. However, withdrawals made for expenses other than qualified medical expenses before age 65 are subject to both tax and a 20% penalty. Individuals 65 and older can make withdrawals for expenses other than medical without penalty, but this income is still subject to income tax.
It is never too early to start thinking about tax planning for the future, and your trusty CPA can help! For more information about these and other year-end planning strategies, be sure to contact your tax preparer. For more information on the Georgia HEART Hospital Program, visit www.georgiaheart.org.
Ethan is a licensed CPA with KRT, CPAs and is chock-full of useless pop culture trivia.
Many business owners ask: How can I avoid an IRS audit? The good news is that the odds against being audited are in your favor. In fiscal year 2018, the IRS audited approximately 0.6% of individuals. Businesses, large corporations and high-income individuals are more likely to be audited but, overall, audit rates are historically low. There’s no 100% guarantee that you won’t be picked for an audit, because some tax returns are chosen randomly. However, completing your returns in a timely and accurate fashion with our firm certainly works in your favor. It also helps to know what might catch the attention of the IRS.
A variety of tax-return entries may raise red flags with the IRS and can lead to an audit. A few examples:
- Significant inconsistencies between previous years’ filings and your most current filing.
- Gross profit margin or expenses markedly different from those of other businesses in your industry.
- Miscalculated or unusually high deductions.
Certain types of deductions may be questioned by the IRS because there are strict recordkeeping requirements for them ― for example, auto and travel expense deductions. In addition, an owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can catch the IRS’s eye, especially if the business is structured as a corporation.
If you are selected for an audit, you’ll be notified by letter. Generally, the IRS won’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call. Many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the harshest version, the field audit, requires meeting with one or more IRS auditors. (Note: Ignore unsolicited email messages about an audit. The IRS doesn’t contact people in this manner, these are SCAMS. You can visit this link to our Facebook page https://www.facebook.com/KRTCPA/photos/a.311875905506380/2872721492755129/?type=3&theater for an example of scam letters.)
Keep in mind that the tax agency won’t demand an immediate response to a mailed notice. You’ll be informed of the discrepancies in question and given time to prepare. You’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.
If the IRS chooses you for an audit:
- Ask questions so you can understand what the IRS is disputing (it’s not always crystal clear).
- Gather the specific documents and information needed.
- Respond to the auditor’s inquiries in the most expedient and effective manner.
- Don’t panic if you’re contacted by the IRS. Many audits are routine. By taking a meticulous, proactive approach to how you track, document and file your company’s tax-related information, you’ll make an audit much less painful and even decrease the chances that one will happen in the first place.
As always, if you have any questions, contact us.
Fall is approaching, along with some key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2019. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. If you aren’t sure, reach out to us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
- October 15: If a calendar-year C corporation that filed an automatic six-month extension: File a 2018 income tax return (Form 1120) and pay any tax, interest and penalties due. Make contributions for 2018 to certain employer-sponsored retirement plans.
- October 31: Report income tax withholding and FICA taxes for third quarter 2019 (Form 941) and pay any tax due. (See exception below under “November 12.”)
- November 12: Report income tax withholding and FICA taxes for third quarter 2019 (Form 941), if you deposited on time (and in full) all of the associated taxes due.
- December 16: If a calendar-year C corporation, pay the fourth installment of 2019 estimated income taxes.
Remember, don’t hesitate to reach out to us if you have any questions. We are here to help.