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In this edition
February 5, 2019

Multistate Resident? Watch Out for Double Taxation

Podcast: Requirements and Exceptions of Form 1099

You’ve Got Time: Small Businesses Can Still Set Up a 2018 SEP Plan
Multistate Resident? Watch Out for Double Taxation
Contrary to popular belief, there’s nothing in the U.S. Constitution or federal law that prohibits multiple states from collecting tax on the same income. Although many states provide tax credits to prevent double taxation, those credits are sometimes unavailable. If you maintain residences in more than one state, here are some points to keep in mind.

Domicile vs. Residence

Generally, if you’re “domiciled” in a state, you’re subject to that state’s income tax on your  worldwide  income Your domicile isn’t necessarily where you spend most of your time. Rather, it’s the location of your “true, fixed, permanent home” or the place “to which you intend to return whenever absent.” Your domicile doesn’t change — even if you spend little or no time there — until you establish domicile elsewhere.

Residence, on the other hand,  is  based on the amount of time you spend in a state. You’re a resident if you have a “permanent place of abode” in a state and spend a minimum amount of time there — for example, at least 183 days per year. Many states impose their income taxes on residents’ worldwide income even if they’re domiciled in another state.

Potential Solution

Suppose you live in State A and work in State B. Given the length of your commute, you keep an apartment in State B near your office and return to your home in State A only on weekends. State A taxes you as a domiciliary, while State B taxes you as a resident.

Neither state offers a credit for taxes paid to another state, so your income is taxed twice.
One possible solution to such double taxation is to avoid maintaining a permanent place of abode in State B. However, State B may still have the power to tax your income from the job in State B because it’s derived from a  source  within the state. Yet State B wouldn’t be able to tax your income from other sources, such as investments you made in State A.

Minimize Unnecessary Taxes

This example illustrates just one way double taxation can arise when you divide your time between two or more states. Our firm can research applicable state law and identify ways to minimize exposure to unnecessary taxes.
Contact: Jeff Tillema, CPA
Direct: 608.793.3128
Email: jtillema@hawkinsashcpas.com
Podcast: Requirements and Exceptions of Form 1099
As a business owner, did you know that you might be required to send Form 1099s to your vendors and that your customers may be required to send them to you. Listen to this podcast to learn more.
You’ve Got Time: Small Businesses Can Still Set Up a 2018 SEP P lan
Are you a high-income small-business owner who doesn’t currently have a tax-advantaged retirement plan set up for yourself? A Simplified Employee Pension (SEP) plan may be just what you need, and now may be a great time to establish one.

A SEP plan has high contribution limits and is simple to set up. Best of all, there’s still time to establish one for 2018 and make contributions to it that you can deduct on your 2018 income tax return.

2019 Deadlines for 2018

A SEP plan can be set up as late as the due date (including extensions) of your income tax return for the tax year for which the plan is to first apply. That means you can establish a plan for 2018 in 2019 if you do it before your 2018 return filing deadline. You have until the same deadline to make 2018 contributions and still claim a potentially hefty deduction on your 2018 return.

Generally, other types of retirement plans would have to have been established by December 31, 2018, for 2018 contributions to be made (though many of these plans do allow 2018 contributions to be made in 2019).

High Contribution Limits

Contributions to SEP plans are discretionary. You can decide how much to contribute each year. But be aware that, if your business has employees other than you, 1) contributions must be made for all eligible employees using the same percentage of compensation as for you, and 2) employee accounts are immediately 100 percent vested. The contributions go into SEP-IRAs established for each eligible employee.

For 2018, the maximum contribution that can be made to a SEP-IRA is 25 percent of compensation (or 20 percent of self-employed income net of the self-employment tax deduction) of up to $275,000, subject to a contribution cap of $55,000. (The 2019 limits are $280,000 and $56,000, respectively).

Simple to Set Up

A SEP plan is established by completing and signing the very simple Form 5305-SEP (Simplified Employee Pension: Individual Retirement Accounts Contribution Agreement). Form 5305-SEP isn’t filed with the IRS, but it should be maintained as part of the business’s permanent tax records. A copy of the form must be given to each employee covered by the plan, along with a disclosure statement.

Because of their simplicity and the great flexibility you have in making contributions, SEP plans are good “starter” retirement plans for small businesses. They’re also well suited for cash-flow dependent businesses such as construction companies, restaurants and seasonal businesses that may not always have dollars ready to contribute.

Less Onerous

Additional rules and limits do apply to these plans, but they’re generally much less onerous than those for other retirement plans. Contact our firm to learn more about SEP plans and how they might reduce your tax bill for 2018 and beyond.
Contact: Matt Cantlon, CPA
Direct: 507.252.6672
Email: mcantlon@hawkinsashcpas.com
Working Through Tax Reform Together
At Hawkins Ash CPAs, our success is measured by your success, and this year, when it comes to taxes, it's our goal to ensure you and your business are able to make the most of all the changes tax reform thrust onto the playing field. Many final regulations and guidance on the new tax law are still in process. In order to make the best decisions for our clients, we are doing our very best to interpret the information that is so far released.
 
With this, it may be necessary for our professionals to devote additional time to analyze your individual tax situation and develop strategies to deal with tax reform on your behalf. If this is the case, please be aware that you will be billed an additional amount for any such assistance we provide. We look forward to working closely with you and your business to get through these changes together.
 
As always, if you have questions, please contact your Hawkins Ash CPAs professional. 
More Resources from CPA-HQ
Laying the Groundwork for Your 2018 Tax Return
The Tax Cuts and Jobs Act (TCJA) made many changes to tax breaks for individuals. Let’s look at some specific areas to review as you lay the groundwork for filing your 2018 return.
New Wisconsin Law Allows S-Corporations to Pay State Tax at Entity Level
Wisconsin passed several laws in December, including one provision that has a potential benefit for you as an S corporation owner. 
Manufacturers: Revenue Recognition Standard
This guide outlines the five-step approach to determine when revenue and gains included within the scope of the new standard should be recognized.

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