Pay the IRS or Lose Your Passport

The IRS recently announced that the State Department will be denying passports, and may revoke yours if you have a “seriously delinquent tax debt.” A seriously delinquent tax debt is where you owe more than $52,000 (including interest and penalties). While this law has been on the books for some time, the IRS recently started sending certifications of seriously delinquent taxpayers to the State Department last year.

If you owe the IRS money and have plans to travel abroad, there are a couple of options you can use to maintain or obtain a passport even through you may be a “seriously delinquent taxpayer.” Here are the most common options:

1. Installment Agreement

Enter into an installment agreement with the IRS to repay the debt (i.e. A payment plan). So long as you are current on your installment agreement, you can obtain or maintain your passport. An installment agreement is essentially and agreement whereby you agree to the debt owed and set-up a payment plan to have it paid back over time. The IRS usually requires financial disclosures in order to determine the payment amount and schedule. You can learn more here.

2. Offer in Compromise

Have a pending offer in compromise with the IRS, or be paying timely on an agreed upon offer in compromise. An offer in compromise is a method of negotiating a compromise on the amount owed to the IRS. The IRS only accepts an offer in compromise if there is a debt as to the liability (i.e. There is a legitimate tax question over your position and that of the IRS), or there is a doubt as to collect-ability (i.e. “Can you really pay it back?”).  You can learn more about an offer in compromise here. Keep in mind, so long as the offer in compromise request is pending, you can still obtain or maintain your passport. So, start here if you still have issues to work out with the IRS before you agree to the amount owed in an installment agreement. Though, if you don’t have a legitimate reason for an offer in compromise, you should consider the installment agreement.

If you’ve got plans to travel abroad AND you’ve got a serious tax debt, be proactive about paying it back with an installment agreement or start the process of making an offer in compromise. You don’t want to be surprised by a letter in the mail from the state department that your passport has been revoked. Or even worse, have non-refundable travel plans that have to be cancelled because your passport is revoked. And, last but not least, be abroad and have your passport revoked and your travel status in jeopardy. You may just end up spending your foreign trip at the local U.S. Embassy.

2018 Solo 401(k) Contribution Steps, Deadlines, and Rules

Image of a red thumbtack on the December 31 date of a calendar.As 2018 comes to an end, it is critical that Solo 401(k) owners understand when and how to make their 2018 contributions. There are three important deadlines you must know if you have a Solo 401(k) or if you plan to set one up still in 2018. A Solo 401(k) is a retirement plan for small business owners or self-employed persons who have no other full time employees other than owners and spouses. It’s a great plan that can be self-directed into real estate, LLCs, or other alternative investments, and allows the owner/participants to contribute up to $55,000 per year (far faster than any IRA).

New Solo 401(k) Set-Up Deadline is 12/31/18

First, in order to make 2018 contributions, the Solo 401(k) must be adopted by your business by December 31st, 2018. If you haven’t already adopted a Solo 401(k) plan, you should start now so that documents can be completed and filed in time. If the 401(k) is established on January 1st, 2019 or later, you cannot make 2018 contributions.

2018 Contributions Can Be Made in 2019

Both employee and employer contributions can be made up until the company’s tax return deadline including extensions. If you have a sole proprietorship (e.g. single member LLC or schedule C income) or C-Corporation, then the company tax return deadline is April 15th, 2018. If you have an S-Corporation or partnership LLC, the deadline for 2018 contributions is March 15th, 2019. Both of these deadlines (March 15th and April 15th) to make 2018 contributions may be extended another six months by filing an extension. This a huge benefit for those that want to make 2018 contributions, but won’t have funds until later in the year to do so.

W-2’s Force You to Plan Now

While employee and employer contributions may be extended until the company tax return deadline, you will typically need to file a W-2 for your wages (e.g. an S-Corporation) by January 31st, 2019. The W-2 will include your wage income and any deduction for employee retirement plan contributions will be reduced on the W-2 in box 12. As a result, you should make your employee contributions (up to $18,500 for 2018) by January 31st, 2019 or you should at least determine the amount you plan to contribute so that you can file an accurate W-2 by January 31st, 2019. If you don’t have all or a portion of the funds you plan to contribute available by the time your W-2 is due, you can set the amount you plan to contribute to the 401(k) as an employee contribution, and will then need to make said contribution by the tax return deadline (including extensions).

Example

Now let’s bring this all together and take an example to outline how this may work. Sally is 44 years old and has an S-Corporation as an online business. She is the only owner and only employee, and had a Solo 401(k) established in 2018. She has $120,000 in net income for the year and will have taken $50,000 of that in wage income that will go on her W-2 for the year. That will leave $70,000 of profit that is taxable to her and that will come through to her personally via a K-1 from the business. Sally has not yet made any 2018 401(k) contributions, but plans to do so in order to reduce her taxable income for the year and to build a nest egg for retirement. If she decided to max-out her 2018 Solo 401(k) contributions, it would look like this:

  1. Employee Contributions – The 2018 maximum employee contribution is $18,500. This is dollar for dollar on wages so you can contribute $18,500 as long as you have made $18,500. Since Sally has $50,000 in wages from her S-Corp, she can easily make an $18,500 employee contribution. Let’s say that Sally doesn’t have the $18,500 to contribute, but will have it available by the tax return deadline (including extensions). What Sally will need to do is let her accountant or payroll company know what she plans to contribute as an employee contribution so that they can properly report the contributions on her payroll and W-2 reporting. By making an $18,500 employee contribution, Sally has reduced her taxable income on her W-2 from $50,000 to $31,500. At even a 20% tax bracket for federal taxes and a 5% tax bracket for state taxes that comes to a tax savings of $4,625.
  1. Employer Contributions – The 2018 maximum employer contribution is 25% of wage compensation. For Sally: Up to a maximum employer contribution of $36,500. Since Sally has taken a W-2 wage of $50,000, the company may make an employer contribution of $12,500 (25% of $50,000). This contribution is an expense to the company and is included as an employee benefit expense on the S-Corporation’s tax return (form 1120S). In the stated example, Sally would’ve had $70,000 in net profit/income from the company before making the Solo 401(k) contribution. After making the employer matching contribution of $12,500 in this example, Sally would then only receive a K-1 and net income/profit from the S-Corporation of $57,500. Again, if she were in a 20% federal and a 5% state tax bracket, that would create a tax savings of $3,125. This employer contribution would need to be made by March 15th, 2019 (the company return deadline) or by September 15th, 2019 if the company were to file an extension.

In the end, Sally would have contributed and saved $31,000 for retirement ($18,500 employee contribution, $12,500 employer contribution). And she would have saved approximately $7,750 in federal and state taxes. That’s a win-win.

Keep in mind, you need to start making plans now and you want to begin coordinating with your accountant or payroll company as your yearly wage information on your W-2 (self employment income for sole props) is critical in determining what you can contribute to your Solo 401(k). Also, make certain you have the plan set-up in 2018 if you plan to make 2018 contributions. While IRAs can be established until April 15th, 2019 for 2018 contributions, a Solo K must be established by December 31st, 2018. Don’t get the two confused, and make sure you’ve got a plan for your specific business.

Note: If you’ve got a single member LLC taxed as a sole proprietorship, or just an old-fashioned sole prop, or even or an LLC taxed as a partnership (where you don’t have a W-2), then please refer to our prior article here on how to calculate your Solo K contributions as they differ slightly from the s-corp example above.

The IRS Says That You Can Contribute More to Your IRA and 401(k) in 2019

Late last week, the IRS announced increased contribution limits for IRAs, 401(k)s and other retirement plans. IRAs have been stuck at $5,500 since 2013, but are finally moving up to $6,000 starting in 2019. If you save in a 401(k), including a Solo K, the good news is that your contribution limits were increased too, with employee contributions increasing from $18,500 to $19,000 and total 401(k) contributions (employee and employer) reaching $56,000. The IRS announcement and additional details can be found here.

Health savings account (HSA) owners also won a small victory with individual contribution maximums increasing by $50 to $3,500, and family contribution amounts increasing by $100 to $7,000.

Breakdown

Here’s a quick breakdown on the changes:

  • IRA contribution limitations (Roth and Traditional) increased from $5,500 to $6,000, and there is still the $1,000 catch-up amount for those 50 and older.
  • 401(k) contributions also increased for employees and employers: Employee contribution limitations increased from $18,500 to $19,000 for 2019. The additional catch-up contribution for those 50 and older stays the same at $6,000. The annual maximum 401(k) (defined contribution) total contribution amount increased from $55,000 to $56,000 ($62,000 for those 50 and older).
  • HSA contribution limits increased from $3,450 for individuals and $6,900 for families to $3,500 for individuals and $7,000 for families.

These accounts provide advantageous ways for an individual to either save for retirement or to pay for their medical expenses. If you’re looking for tax deductions, tax deferred growth, or tax-free income, you should be using one or all of these account types. Keep in mind there are qualifications and phase out rules that apply, so make sure you’re getting competent advice about which accounts should be set up in your specific situation. Lastly, remember, all of these accounts can be self-directed and invested into assets you know best.