Important Dates In American Tax History Post-1812 Up to The Civil War

We start today’s journey through tax history the year after the war of 1812 with Great Britain. Congress doubled the tariff schedule to fundraise the war.  But it turns out, trading across oceans is very difficult when your navy is just 18-years-old. Comparatively, the British fleet had the power of being the world’s most powerful seafaring nation.

Photo by Dirk Spijkers on Unsplash

Photo by Dirk Spijkers on Unsplash

It was able to effectively strangle commerce on the eastern seaboard, which made up the entirety of young America’s trade paths with other parts of the world.

1813

Due to the conflict and Congress’ need to raise revenue to continue to fund the war, it levied about $3 million in internal taxes on things like refined sugar, distilled spirits, and carriages. These were designed to be repealed after the war was over. To collect this tax, the federal government offered a 15% tax discount for those states that collected the taxes themselves, which caused many states to take advantage of the arrangement.

1816

With the conflict with the British and French behind them, Congress passed the Tariff Act of 1816, which levied 25% duties on items to encourage local manufacturing.

1819

This was the year of the Panic of 1819, which is the crisis sparked by a drop in world agriculture prices. This caused more protectionist policies to be pushed to keep cheap European agricultural interests from flooding the market.

1820

The house pushed a bill that would enact a 5 percent tariff on cotton, wool, clothing, iron, and hemp. The law was never enacted, but it set the stage for similar laws to be passed. The North was split on its opinions of the tariff, but the South was firmly against it. It was losing its voting power in Congress regionally as the population dropped slightly there and rose slightly above the Mason-Dixon line.

1824

Henry Clay served as speaker of the House this year and appointed John Tod, a die-hard protectionist, to head the Committee on Manufactures. He implemented a 35% tariff on imported iron, wool, cotton, and hemp.  This caused American-produced goods to finally be cheaper than the British goods, which in turn stirred up support in states that had been against protectionist measures in the past.

1828

This year, the tariff on imported goods expanded to cover hemp, wool, fur, flax, liquor, and imported textiles. It was also raised to 50% of the value of the goods. This was good for the north and Ohio valley, but bad for the South. They didn’t get the benefits of manufacturing these products in their region. The reduction of cheap British goods isn’t a positive either, as the South relied on the British to buy their cotton in exchange for those cheap goods.  That cotton was often sold back to the states as finished goods, so the tariffs significantly disrupted this system.

1832

In July, Congress reduced tariff rates slightly, but kept the high rates on products like iron and manufactured cloth. South Carolina passed a Nullification Convention, which declared the tariffs unconstitutional and ceased collecting them in the state.

1833

In response, Jackson passed the Compromise Tariff, which reduced tariffs automatically between 1833 and 1842. Simultaneously, he levied the Force Bill, which said that the president could use force and arms to collect tariffs.

1837

By 1837, an extended economic depression had settled in, driven by a financial panic from the reduction of British investment in the states. The depression lasted until 1843. This caused the Whig Party to gain national support for some of its economic development strategies (which included higher tariffs).

1840

In 1840, the Whigs won the presidential seat and implemented revenue tariffs that were to be partially distributed to the states to build roads and canals.

1842

The Compromise Tariff was abandoned due to the states’ need for revenue and many tariffs were returned to their prior rate or slightly lower than the prior rate.

1846

The Walker Tariff was passed, which slashed all duties to the minimum necessary for revenue. In Britain, Parliament repealed the Corn Laws, which levied tariffs on imported bread. Both measures set the stage for freer world trade.

1848

The custom and commerce programs were running so well that the American government was able to pay off the entirety of its debts in the Mexican War before the Civil War even started.

1850

Slavery was becoming a highly political issue and the Northern and Southern states were growing increasingly polarized. The economy was booming but the interests of the Northern and Southern states grew increasingly misaligned.

1857

Tariffs were lowered even further by the Democratic party, which plunged the nation into an economic panic. Government revenues plummeted 30%, which caused Republicans to demand tariffs be increased.

 

How The Tax Cuts and Jobs Act (TCJA) Affects Fantasy Sports

Fantasy sports is becoming increasingly popular, with 59.3 million people playing in the United States and Canada, creating a $7 billion industry. With this though, comes tax implications for winners.  The Tax Cuts and Jobs Act (TCJA) provides tax opportunities and drawbacks that fantasy players should understand.

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There is currently an ongoing debate how winnings should be classified and where they should be reported. Are the winnings considered gambling income or hobby income? The TCJA does not clarify the definition of gambling and to date the IRS has not weighed in as to whether fantasy sports winnings are hobby or gambling income. If fantasy sports are not considered gambling, then the hobby loss rules would apply. In this case, the TCJA eliminates the taxpayers’ ability to deduct any fantasy expenses even if there is fantasy income. Prior to the TCJA, hobby losses were deductible as miscellaneous deductions subject to the 2% adjusted gross income (AGI) floor.

Many have argued that fantasy sports are ‘wagering transactions’ thereby allowing fantasy sports losses to be deductible to the extent of their winnings. Previously, gambling losses were assumed to be the cost of placing the wager, but TCJA suggests that other expenses that are ordinary and necessary to execute wagering transactions are deductible. For traditional gamblers, this includes the ability to deduct expenses related to travel, lodging, etc., to the extent of winnings – but fantasy players may have different ‘ordinary and necessary’ expenses. Potentially deductible fantasy sports expenses under TCJA include: fantasy-related online subscriptions and magazines; cost of any office equipment/space exclusively dedicated to fantasy sports; 50% of food costs at fantasy sports draft parties; and cost of any punishments for losing in a fantasy sports league. Losses from other gambling activities, like traditional casinos, could also be used to offset fantasy sports winnings.

For casual fantasy players, the increase in the standard deduction under the TCJA will reduce the number of taxpayers that itemize, thereby eliminating any potential benefit of fantasy-related expenses, since the deductions allowed are classified as “other itemized deductions” on the schedule A.

For the serious fantasy player, treating gambling as a trade or business may be useful. It is important to remember that taxpayers who recognize profits on their schedule C will be subject to both income and self-employment taxes, so it may not always be beneficial to consider yourself a professional. In the case of the serious professional fantasy player, income and expenses will be reported on schedule C, negating the need to itemize in order to take advantage of the deductions.  The TCJA does have one downfall for professional gamblers; prior to the new tax law, gambling expenses such as travel and lodging were not considered gambling losses, which meant they were not limited to gambling winnings. This allowed professional gamblers to have a net loss on gambling activities. Under the TCJA, these expenses are defined as wagering losses, therefore are limited to the extent of gambling winnings. Those who identify themselves as professionals have the burden to prove their activity is regularly pursued full-time, and to produce a livable income. Taxpayers should expect to hear from the IRS when claiming to be a professional.

Whether a taxpayer is a professional or a casual player, it is very important to keep all records as the burden of proof is on the taxpayer. While gambling is reported on W-2G, fantasy sports sites typically issue 1099-Misc to players winning more than $600. The IRS suggested that the net method of reporting (reports winnings from contests less the entry fees for any contest won) was the appropriate way to calculate winnings, but not all fantasy sports sites comply. It is important for a taxpayer to know how the site they are using reports winnings.

In summary, under the TCJA, fantasy players may benefit by treating their fantasy sports as gambling and claiming fantasy-related expenses that were not previously deductible.

3 Essential Tips for Financial Planning When You Have a Disability

Having a disability is not quite as rare as many people think. In fact, about 14 percent of adults around the world have a disability of some kind. This includes people who have a physical, mental, intellectual, or sensory limitation at a mild, severe, or moderate level. Also, these disabilities could have happened at birth, in old age, or anywhere in between.

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One thing that remains consistent across all forms of disability, however, is that life generally costs more money for those who have them. Normal expenses such as medical care and food, as well as additional costs such as modified housing and assistive devices and technology, can put a major burden on those with disabilities. That’s why it’s essential to have a financial plan in place. If you have a disability, these three tips will help you prepare and form the financial skills it takes to live your best life, both now and in the future.

Consider Life Insurance

One of the first things you should do when planning your finances is to look into life insurance. If you get a policy that benefits your current situation, it could provide significantly for your family if you were to pass away unexpectedly. And life insurance can help cover things like medical expenses, funeral expenses, and lost income. Moreover, shopping for life insurance is fairly straightforward nowadays, as you can easily purchase it online and use online calculators to figure out the coverage you need.

Set a Budget

Much of your financial planning comes down to making a budget. Not only will your budget serve as a guideline for your spending and saving, the process of making a budget will teach you a lot about your financial situation and the steps you can take to grow. If you’re on a fixed income, start with how much you bring in each month. If you are able to work or already have a job, where does that put your monthly income?

Once you factor in your income, write down all of your expenses; include everything you can think of. This might include normal monthly expenses such as your mortgage payment, home and auto insurance, utilities, food, entertainment, gas, etc. Also, consider your medical expenses: How much do you spend on medical care, assistive devices, or any other medical-related expenses? Furthermore, include any credit card debt you want to pay off.

Once you get these basic costs on paper, see where you stand concerning your income and expenses. Then you can determine what you can cut (entertainment, miscellaneous items, etc,) if necessary. Also, be sure to research all your options when it comes to financial assistance.

Build an Emergency Fund

As it is with anyone, saving money is important when you have a disability. Once you figure out your budget, determine how much you can put away in savings. Building an emergency fund will create a safety net in the event that something unexpected happens — whether it’s a medical incident, major home or car repair, or any other kind of sudden expense. Decide on a set amount to put into a cash jar or savings account, and stick to it as close as you can.

There may be many expenses that come with a disability, but that doesn’t mean you can’t navigate them and make a plan that meets your needs and sets you up to be cared for later in life. Work through your finances and set a budget to guide you through your spending and saving. Find the best life insurance plan for you and your family, and start building an emergency fund today. Being financially prepared will help you overcome a lot of challenges and put you in a better position to live a fulfilling life.

 Written by Ed Carter

4 Ways to Pay Less Taxes on Your Investments

If you’re considering jumping into investing (or have already started), you need to know the tactics to avoid paying massive amounts of taxes on them. We’ve compiled a list of tax tips for investors. Check them out.

by Austin Distel

Hold investments for longer than a year

Whenever you make money off your investments (aka capital gains) you are taxed on that income. However, the length of time you held the investment dictates the rate you’ll be taxed at.

These taxes, called capital gains taxes, change at the year mark. If you hold your investments for a year or less, you’ll be taxed at the short term capital gains rate, which is the same rate as income tax.

But if you hold your investments for a year and a day, you’ll get taxed at a more manageable long-term capital gains rate.

This rate can get as high as 20% for big earners, but it’s more likely you’ll pay somewhere between 0 and 15%.

Buy Municipal Bonds  

Buying bonds means you get to collect interest on those bonds, which is a great source of passive income if you buy enough.

But unless you buy municipal bonds, the IRS is entitled to a share of that interest. When you buy either city, state, or county bonds, you are exempt from paying federal income tax on those bonds. If you buy municipal bonds in your home state, you’ll be exempt from state and local taxes as well.

One thing to note is that if you sell your municipal bonds for a profit, you’ll have to pay taxes on the gain.

Sell Losing Investments   

If you’re losing money on a particular investment, you might want to consider selling it off.  Investment losses offset capital gains, so if you make $2,000 and lose the same amount, you won’t have to pay on the amount you’ve lost.

In addition, if your investment losses exceed your gains, you can use them to offset up to $3,000 in taxable income.

Put Your Money in Tax Sheltered Accounts  

Putting your investment money into tax-sheltered accounts is a great way to defer paying taxes on various investments.

Accounts like 401(k)s, 403(b)s, and certain IRA plans aren’t tax-free, but you won’t have to worry about paying taxes until you start making withdrawals. By the time you do that (barring some emergency), you’ll likely be in a lower tax bracket anyway.

 

Have more questions about investments and taxes? Shoot us an email or give us a call.

Important Dates In Post-Revolution American Tax History

The Revolutionary War was sparked in part by the British imposing taxes on the American colonists without their permission or consent.

Once the colonists had freed themselves from British rule, it was time to establish a government that could pay the debts it had incurred during the conflict.

Photo by Patrick Fore on Unsplash

Photo by Patrick Fore on Unsplash

1777 – Articles of Confederation

This was the first constitution of the newly formed United State. It favored decentralization of power, which means that Congress was not given the power to tax.

1781  – Report on Public Credit

Robert Morris, Superintendent of finance, wanted the federal government to own the debt it incurred then issue interest-bearing debt certificates while imposing tariffs and internal taxes.

His proposal was shut down by numerous states over the next few years.

1787 – Ratification of the Constitution

The ratification of the Constitution shifted the focus of power to the federal government and away from individual states.

This gave the federal legislature the power to impose tariffs and coin money, along with the flexibility to collect excises and levy taxes directly on individual citizens.

1789 – Tariff of 1789

This tax bill included the original 5% duty on imports, as well as a list of special items that would be taxed at specific amounts.

1790 – Report on Public Credit

This new tax plan worked on two basic principles:

  • Redemption – Congress would redeem at face value all the securities issued by the Confederation government. These old notes would be exchanged for new government securities with interest of about 4%. This plan aimed to intertwine the wealthy Americans who had financed the initial government with the new government.

  • Assumption – The national government would take on outstanding war debts of the states. This would concentrate the nation wealth into the hands of the wealthy merchant class so they would be able to invest in the nation’s economy and other critical innovations.

1791 – Whiskey Excise Tax

This was a tax specifically for spirit distillers and imposed a 7 cents to 18 cent per gallon tax. This was not a popular tax, as spirits were often used as a form of currency out west.

1794 – Uprising Quelled

North Carolina and Western Pennsylvania were in a state of civil unrest after being cited by the federal government for dodging taxes.

The federal government forced the states to send militia to occupy these territories and take down any organized resistance.

President Madison appealed to Congress for a Declaration of War against Britain as the tension between the two countries reached a head.

There was a lot of conflict over fundraising for the war, but Congress eventually settled on doubling the tariff schedule.

 

Important Dates In Colonial American Tax History

In the spirit of summer, we’re creating a series containing some of the important dates in US tax history.

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Credit: Matt Briney on Unsplash

Why is this something we talk about in July? Back on July 4, 1776, Congress adopted the Declaration of Independence, a document that stated the American colonies wouldn’t accept British rule — or taxation.

But that’s just one key date in the history of American taxes. Let’s look at critical years and dates that lead up to the adoption of the Declaration of Independence.

 1733 Molasses Act

This tax was imposed to keep the American colonies buying from the British West Indies and not the lower cost imported options. The imposition of this act was effective the first year then led to corruption.

 1764 Sugar Act

An extension of the Molasses Act, this act increased the tariff per gallon on molasses. It was enforced by prohibiting vessels from shipping directly to the colonies. Ships would have to unload their cargo, pay tariffs, then reload and proceed to the colonies. It also expanded what the Crown could tax.

 1765 Stamp Act

This act said that every official document in the colonies would need a stamp on it. This was done to solely to increase the revenue of the British government, which caused opposition to emerge.

 1766 Declaratory Act

This act repealed the Stamp Act while also declaring that the American colonies are subordinate to the British Government and so the government had the right to tax them. As you can imagine, this didn’t go over well.

 1767 Townshend Acts

This act taxed 72 addition imports including paint, tea, and paper. The revenue raised was to fund the salaries of colonial officers and its administration. The protests from this act eventually caused the Boston Massacre.

 March 5, 1770 – Boston Massacre

What started as a protest of angry American colonists harassing a single British soldier escalated to a bloody conflict where several colonists were shot and killed. This was used to fan the flames of anti-British sentiment.

 1773 Tea Act

This act established that only tea from the East India Trading Company could be sold in the American colonies. The new tea was cheaper, but it hurt independent shop owners, shippers, and smugglers, which is why it caused a backlash.

 December 16, 1773 – Boston Tea Party

Protesters dumped more than 300 chests of tea into the Boston Harbor in protest of the 1773 tea act.

 1774 Coercive Acts

The British pass a series of policies designed to reestablish authority over the American colonies. One of the provisions was Boston Harbor would remain closed until the colonist paid the East India Trading Company for the losses of the tea party.

 July 4, 1776

The Declaration of Independence is adopted after days of the discussions and 12 of 13 colonies agreeing to succeed. The actual signing of the Declaration didn’t occur until August 2.

 

Taxation is a large portion of why the American colonies felt it necessary to break away from England. Taxation continues to be a large part of America’s history, especially in the years immediately following the Revolution.

 

We’ll cover that time period next.

 

1099, W2, W4, W9 – what’s the difference?

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Fill out this 1099 form. Did you get your W2 from your employer? Fill out this W4 form.

Keeping all the tax forms straight is a challenge. In today’s post, we go through the difference between the most commonly filled out tax forms. That way, you know what you’re signing and why.

Form W4

This is the form that you fill out at the beginning of most conventional employment. The purpose of this paper is to let your employer know how much tax money they should withhold from your paycheck. You can also use this form to adjust your withholdings throughout the year.

Form W2

This is the magical form most of us are waiting on to get started with our taxes. It shows your yearly income and how much was withheld – critical information for both you and your accountant.

Form 1099  

This is a form you receive in any non-conventional payment situation. Basically, if you make money as an independent contractor or self-employed taxpayer, you will receive a version of this form.

If you are working as a contractor, business, or have received money from the government, bank, etc, you will likely get one of these. There are a lot of versions of this form, including:

  • MISC, Miscellaneous Income

  • G, Certain Government Payments

  • K, Payment Card and Third Party Network Transactions

  • R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

  • DIV, Dividends and Distributions

  • INT, Interest Income

Form 1098

There are a few versions of this form from income or payments to institutions like universities and banks. The most common forms of these are:

  • 1098-E, Student Loan Interest Statement

  • 1098-T,  Tuition Statement

  • Mortgage Interest Statement

Schedule K-1

This form reports any income, deductions, or other tax items you might receive as part of a business partnership. You will usually have to wait until later in the tax season to receive this form.

Have a form that’s not covered here? Reach out to us.

Are you withholding enough from your taxes?

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In a prior article, we talk about how moonlighters (those with 1099s and a W2 job) might need to withhold more taxes from their W2 role to avoid owing for the 2019 year.

They aren’t the only ones. Retirees, those with dependents, and a handful of others will need to take a look at how much they’re withholding and adjust accordingly.

Basically, if you were surprised at how low your refund was this year, you might need to adjust your withholding amount. That means if your refund was low or you owed (and never did before) you need to prioritize your withholding amount.

The time to adjust is now, right after the April 15 tax preparation deadline. The longer you wait, the more likely it is that you’ll owe or get a low tax refund amount. This can mostly be done with the IRS withholding calculator, but you’ll likely need to talk to an accountant for proper withholding.

This is for two reasons:

  • State and local taxes aren’t calculated.
  • Without a full understanding of taxes, taxpayers may not fill out the calculator correctly.

Reach out to a tax professional. They’ll help you navigate the muddy waters that were caused by the latest tax bill change.

Additionally, the IRS is cooking up a new W4 form – the form you fill out at the beginning of conventional employment (where you’d receive a W2) or to adjust your withholding amount. It will be ready for the 2020 tax season and won’t affect this year’s taxes.

If you ended up owing in this year or had a small tax refund, reach out to us. We can help ensure you’re withholding enough.

How Moonlighters Can Get Enough Tax Money Withheld

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If you were left surprised (and maybe a little hurt) from your latest tax return and you work as both a W2 employee and have 1099 side gigs, this article is for you.

The Current State of the Side Hustle

The side hustle is a common part of our society today. The latest figures say that nearly 40 percent of Americans have a side job that brings in $8,200 or more each year.

People who work a side job are more likely to be millennials, apparently working more than one job is something that is less common as you age.

And while the extra money is nice, these side hustles make it that much more complicated to do your yearly taxes. If you make more than $600 at any job, that money is taxable.

That’s why its good to get a head start by adjusting your W2 withholdings to help cover the income from your side hustles. Otherwise, you’ll undoubtedly owe

How Do You Do This?

The recent tax law changes impacted many taxpayers, so the IRS created a withholding calculator.

It’s an easy-to-use tool, you just need to come prepared with the proper paperwork.

That includes:

  • Any and all recent pay stubs and invoices(make sure it includes the amount of federal taxes withheld for this year so far
  • A completed copy of your 2018 and 2017 returns

Then open the calculator and answer all the questions. You may not be happy with the amount of taxes you have taken out, but you’ll happier come tax time, so you won’t owe for all your hard work in 2019.

6 Tax Deductions That Went Extinct in 2018

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The Tax Cuts and Jobs Act of 2017 was called one of the largest tax overhauls in 30 years. It went into effect at the beginning of 2018, which means taxpayers are starting to feel the impact now. Some households will benefit from it, others will not. Here are some deductions that have been eliminated or reduced.

Moving Expenses
Unless you or a spouse is in the military and is currently on active duty, you won’t be able to take any deductions for moving. In the past, those who moved for a job and paid the moving cost could deduct most of their expenses.

Personal Deductions
Deductions for personal exemptions, which can be worth $4,050 for each exemption, were eliminated and replaced with a larger standard deduction and an expanded child tax credit.

Paying Alimony
If you’re paying alimony on a divorce finalized before December 31, 2019, then you can deduct those payments one last time.

Unreimbursed Job Expenses
This fell into the category of miscellaneous itemized deductions, an area that has been greatly reduced by the latest tax laws. It means that anything an employee pays for while on the job and doesn’t get reimbursed for, is not deductible.

State and Local Taxes
You used to be able to fully deduct any amount of state or local taxes. Now that cap is set at $10,000 meaning those with high state income and property taxes will get much less back.

Tax Preparation Fees
Tax preparation fee deductions were eliminated as part of the miscellaneous fees. This is will occur from 2018-2025. That means you cannot deduct payments to accountant, tax prep firms, or tax preparation software.

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.