As we approach April 15, there seems to be more and more articles written about taxes every day. With so much noise, sifting through the headlines can be a challenge. For that reason, we compiled a list of some of the hot-button topics in the media right now and how they might impact you.
Tax refunds: You may have heard tax refunds are down 8 percent so far this filing season, according to the IRS' 2019 filing statistics. While it would be easy to pin this on tax reform – revised rates, eliminating exemptions, increased standard deduction, fewer taxpayers itemizing deductions, among others - it’s important to understand that your refund is solely a function of how much you elect to withhold in a given year compared to your ultimate tax bill. In other words, if you did not adjust your paycheck withholdings after the tax changes took place, you could have a smaller refund this year. So it is important to calculate your estimated tax bill ahead of time, while you still have time to adjust your withholding amount. The good news is that modifying your withholdings is an easy fix to avoid future surprises on your returns.
To really determine whether you were hurt or helped by tax reform, take a look at your effective tax rate by dividing the tax due on your taxable income (before any withholding or other payments or credits) by your gross income.
Qualified Opportunity Zones: Qualified Opportunity Zones (QOZs) are economically distressed communities identified by the IRS. Qualifying investments in the QOZs may be eligible for preferential tax treatment. In a nutshell, the QOZ program allows for the deferral of realized capital gains so long as they are subsequently redirected into a qualified investment. The QOZ program offers three main benefits: 1) the deferral of the initial capital gain can last up until December 31, 2026; 2) if the investment is held for a certain length of time, your basis will increase (five years - 10 percent increase; seven years - 15 percent increase); and 3) if you hold the investment for 10 years, all gains from any increase in value of the QOZ investment are eliminated.
While the QOZ program certainly presents opportunity, it’s important to be prudent when opting to invest in a QOZ fund. There are more than 8,700 designated QOZs in the U.S. and funds have become ubiquitous. Make sure you’re doing your due diligence and closely reviewing the credentials of the fund manager before investing.
QBI deduction: The final round of regulations surrounding the qualified business income (QBI) deduction have clarified several areas that were not clear in the original proposal. One such area includes specified service trades or businesses (SSTBs), which are ineligible for the 20 percent QBI deduction. SSTBs involve the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics and certain financial services, among others.
In particular, several new examples were added that are helpful in resolving whether certain activities will constitute SSTBs. The examples clarify, for instance, that a well-known chef who owns multiple restaurants is not engaged in an SSTB for his restaurants, but is engaged in an SSTB with respect to an endorsement fee for a line of cooking utensils and cookware. Another example was included of a senior living facility that would not be an SSTB because it contracts with outside professional healthcare organizations to provide medical and healthcare services at the facility.
Even with the examples, defining an SSTB across such a broad spectrum of potential businesses is a challenge and there are innumerable gray areas left to interpretation.
If you have any questions about how the revised regulations impact you, be sure to contact your tax return preparer or feel free to reach out to me directly at: BillSmith@cbiz.com