For tax purposes, December 31 means more than New Year’s Eve celebrations. It affects the filing status box that will be checked on your tax return for the year. When you file your return, you do so with one of five filing statuses, which depend in part on whether you’re married or unmarried on December 31.
More than one filing status may apply, and you can use the one that saves the most tax. It’s also possible that your status options could change during the year.
Here are the filing statuses and who can claim them:
- Single. This status is generally used if you’re unmarried, divorced or legally separated under a divorce or separate maintenance decree governed by state law.
- Married filing jointly. If you’re married, you can file a joint tax return with your spouse. If your spouse passes away, you can generally file a joint return for that year.
- Married filing separately. As an alternative to filing jointly, married couples can choose to file separate tax returns. In some cases, this may result in less tax owed.
- Head of household. Certain unmarried taxpayers may qualify to use this status and potentially pay less tax. The special rules that apply are described below.
- Qualifying widow(er) with a dependent child. This may be used if your spouse died during one of the previous two years and you have a dependent child. Other conditions also apply.
Head of household status
Head of household status is generally more favorable than filing as a single taxpayer. To qualify, you must “maintain a household” that, for more than half the year, is the principal home of a “qualifying child” or other relative that you can claim as your dependent.
A “qualifying child” is defined as someone who:
- Lives in your home for more than half the year,
- Is your child, stepchild, foster child, sibling, stepsibling or a descendant of any of these,
- Is under 19 years old or a student under age 24, and
- Doesn’t provide over half of his or her own support for the year.
Different rules may apply if a child’s parents are divorced. Also, a child isn’t a “qualifying child” if he or she is married and files jointly or isn’t a U.S. citizen or resident.
Maintaining a household
For head of household filing status, you’re considered to maintain a household if you live in it for the tax year and pay more than half the cost of running it. This includes property taxes, mortgage interest, rent, utilities, property insurance, repairs, upkeep, and food consumed in the home. Don’t include medical care, clothing, education, life insurance or transportation.
Under a special rule, you can qualify as head of household if you maintain a home for a parent of yours even if you don’t live with the parent. To qualify, you must be able to claim the parent as your dependent.
You must generally be unmarried to claim head of household status. If you’re married, you must generally file as either married filing jointly or married filing separately, not as head of household. However, if you’ve lived apart from your spouse for the last six months of the year and a qualifying child lives with you and you “maintain” the household, you’re treated as unmarried. In this case, you may be able to qualify as head of household.
If you have questions about your filing status, contact us.
© 2019 Covenant CPA
You can reduce taxes and save for retirement by contributing to a tax-advantaged retirement plan. If your employer offers a 401(k) or Roth 401(k) plan, contributing to it is a taxwise way to build a nest egg.
If you’re not already contributing the maximum allowed, consider increasing your contribution rate between now and year end. Because of tax-deferred compounding (tax-free in the case of Roth accounts), boosting contributions sooner rather than later can have a significant impact on the size of your nest egg at retirement.
With a 401(k), an employee elects to have a certain amount of pay deferred and contributed by an employer on his or her behalf to the plan. The contribution limit for 2019 is $19,000. Employees age 50 or older by year end are also permitted to make additional “catch-up” contributions of $6,000, for a total limit of $25,000 in 2019.
The IRS just announced that the 401(k) contribution limit for 2020 will increase to $19,500 (plus the $6,000 catch-up contribution).
A traditional 401(k)
A traditional 401(k) offers many benefits, including these:
- Contributions are pretax, reducing your modified adjusted gross income (MAGI), which can also help you reduce or avoid exposure to the 3.8% net investment income tax.
- Plan assets can grow tax-deferred — meaning you pay no income tax until you take distributions.
- Your employer may match some or all of your contributions pretax.
Take a look at your contributions for this year. If your current contribution rate will leave you short of the limit, try to increase your contribution rate through the end of the year to get as close to that limit as you can afford. Keep in mind that your paycheck will be reduced by less than the dollar amount of the contribution, because the contributions are pretax — so, income tax isn’t withheld.
Employers may also include a Roth option in their 401(k) plans. If your employer offers this, you can designate some or all of your contributions as Roth contributions. While such contributions don’t reduce your current MAGI, qualified distributions will be tax-free.
Roth 401(k) contributions may be especially beneficial for higher-income earners, because they don’t have the option to contribute to a Roth IRA. Your ability to make a Roth IRA contribution in 2019 will be reduced if your adjusted gross income (AGI) in 2019 exceeds:
- $193,000 and your filing status in 2019 is married-filing jointly, or
- $122,000, and your filing status in 2019 is that of a single taxpayer.
Your ability to contribute to a Roth IRA in 2019 will be eliminated entirely if you’re a married-filing-jointly filer and your 2019 AGI equals or exceeds $203,000. The cutoff for single filers is $137,000 or more.
How much and which type
Do you have questions about how much to contribute or the best mix between regular and Roth 401(k) contributions? Contact us. We can discuss the tax and retirement-saving considerations in your situation.
© 2019 Covenant CPA
A month after the new year begins, your business may be required to comply with rules to report amounts paid to independent contractors, vendors and others. You may have to send 1099-MISC forms to those whom you pay nonemployee compensation, as well as file copies with the IRS. This task can be time consuming and there are penalties for not complying, so it’s a good idea to begin gathering information early to help ensure smooth filing.
There are many types of 1099 forms. For example, 1099-INT is sent out to report interest income and 1099-B is used to report broker transactions and barter exchanges. Employers must provide a Form 1099-MISC for nonemployee compensation by January 31, 2020, to each noncorporate service provider who was paid at least $600 for services during 2019. (1099-MISC forms generally don’t have to be provided to corporate service providers, although there are exceptions.)
A copy of each Form 1099-MISC with payments listed in box 7 must also be filed with the IRS by January 31. “Copy A” is filed with the IRS and “Copy B” is sent to each recipient.
There are no longer any extensions for filing Form 1099-MISC late and there are penalties for late filers. The returns will be considered timely filed if postmarked on or before the due date.
A few years ago, the deadlines for some of these forms were later. But the earlier January 31 deadline for 1099-MISC was put in place to give the IRS more time to spot errors on tax returns. In addition, it makes it easier for the IRS to verify the legitimacy of returns and properly issue refunds to taxpayers who are eligible to receive them.
Hopefully, you’ve collected W-9 forms from independent contractors to whom you paid $600 or more this year. The information on W-9s can be used to help compile the information you need to send 1099-MISC forms to recipients and file them with the IRS. Here’s a link to the Form W-9 if you need to request contractors and vendors to fill it out: https://bit.ly/2NQvJ5O.
Form changes coming next year
In addition to payments to independent contractors and vendors, 1099-MISC forms are used to report other types of payments. As described above, Form 1099-MISC is filed to report nonemployment compensation (NEC) in box 7. There may be separate deadlines that report compensation in other boxes on the form. In other words, you may have to file some 1099-MISC forms earlier than others. But in 2020, the IRS will be requiring “Form 1099-NEC” to end confusion and complications for taxpayers. This new form will be used to report 2020 nonemployee compensation by February 1, 2021.
Help with compliance
But for nonemployee compensation for 2019, your business will still use Form 1099-MISC. If you have questions about your reporting requirements, contact us.
© 2019 Covenant CPA
If you devote all your business’s security resources to fending off hackers and other cybercriminals, you may be unlocking the door, literally, to more basic types of theft. “Creepers” are criminals who gain access to offices or other physical facilities via unlocked doors and social engineering tactics. Once in, they steal proprietary information, inventory, computers and personal property, or gather information that makes it easier to hack your network.
Creepers in action
A major energy company’s Houston office was infiltrated by a creeper who’s believed to have stolen sensitive information, possibly to sell to a rival company or foreign government. Surveillance footage released by the FBI shows a man walking through an unlocked door in the middle of the night. He’s wearing office-appropriate clothing and moves confidently, like an employee who has a right to be there.
A Washington D.C. creeper also looked like she belonged where she didn’t. She walked into many supposedly secure government offices by chatting with employees outside the office, then following them through the door. When questioned, she claimed she’d left her badge at her desk.
In other cases, creepers use uniforms and props such as mops, toolboxes and clipboards to suggest they’re cleaners or that they work for building maintenance. They may wear stolen or forged ID badges, assuming that no one will examine them too closely.
To protect your business’s and its employees’ property, keep all doors locked, even during work hours. Issue keycards and photo-ID badges to workers and instruct them to be on the lookout for possible intruders. They shouldn’t automatically assume, for example, that someone wearing coveralls and carrying a ladder is authorized to be there. And they shouldn’t unlock the door for anyone — even if that person seems like an employee — unless they know for certain he or she is.
If workers are uncomfortable approaching a possible intruder, they should immediately report the person to your office manager, HR director or building security. The stranger in question may well be an authorized visitor, but it’s better to be safe than sorry. Also ask employees to report the presence of former employees, who sometimes are recruited to carry out corporate espionage.
Even if you don’t keep high-value inventory or electronics on the premises, install security cameras. And instruct employees to lock up purses and wallets and to password-protect computers whenever they leave their workspaces — even if it’s only for a few minutes.
Virtual vs. physical threats
Obviously, IT security must remain a priority for all organizations. But don’t let virtual threats blind you to the need to protect against physical ones. Contact us for help preventing fraud and other forms of theft.
© 2019 Covenant CPA