New Jersey Tax

How Much is the NJ Health Insurance Penalty?

Although there are no longer Obamacare penalties at the Federal level starting 2019, the State of New Jersey has implemented its own penalties for 2019. What are some of the requirements, exemptions, and penalties regarding this new law?

Requirements: The law requires you to have minimum essential health coverage or qualify for an exemption of coverage. If you do not have coverage or qualify for an exemption, then you will incur a shared responsibility payment when you file your 2019 New Jersey tax return next year.

Exemptions: There is a list of over 20 exemptions, and some of them are as follows: income related, such as marketplace affordability and income below filing thresholds, gaps in coverage of less than two consecutive months, hardships, and group memberships, such as being a part of a health care sharing ministry.

Penalties: The minimum penalty is the greater of 2.5% of your household income or $695 for an individual taxpayer. This increases to a maximum of $15,060 for a family of two adults and three dependents with a household income greater than $400,001.

The penalties are steep so make sure that you are properly covered or are able to receive an exemption to the penalties. For those who are looking for non-traditional coverage options, health care sharing ministries such as Solidarity HealthShare or Christian Healthcare Ministries may prove to be good, low-cost options. However, make sure to perform your due diligence to make sure that these can be the right fit for you.

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What Keeps Business Owners Up at Night?

Aside from worrying about everything, there are really just a few timeless concerns of most business owners. If you don’t have at least one of these concerns then that is probably a concern. Here they are with a few solutions:

Employees: No matter how well you run your business, it will always be a challenge to manage employees. Common problems are: finding good employees, keeping good employees, and making sure that they are productive. There are several ways to address these concerns that are simple, but no way full-proof. The first step is to take your time hiring and to hire the right people from the beginning. Next, treat your employees well and fair. Lastly, spend the time to train your employees properly so they are productive. It sounds so simple, but maybe that is why it is so difficult.

Taxes: Who wants to overpay their taxes? Not only paying taxes, but staying compliant with all of the numerous tax filings can be a huge burden. Having a good accountant can help to alleviate this concern.

Growing: If you are not growing then your expenses will soon eat up a good portion of your profits. Growing sales is a major concern, however, the focus should be to grow your sales profitably. Aside from smart marketing, each new dollar of sales should be profitable to you, otherwise something is wrong.

Cash flow: Either not knowing where your cash is going or not having enough are both problems. Your accountant should help to explain where your cash is going and why there is a shortage. Common solutions are to improve your accounting systems and procedures, increase sales, implement better collection processes, increase your profit margins, and obtain a line of credit.

Too many hours: I don’t think that you are allowed to stop thinking about your business so technically you work 24 hours a day. How can you work less hours? There are dozens of ways, but a few easy to implement solutions are: better scheduling, delegation, and a commitment to work smarter, not harder.

There are a few other closely-related concerns, such as health insurance for employees, feeling burnt out, and the economy. Unfortunately, we cannot control the economy.

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What’s Your Chance of an IRS Audit?

The IRS publishes statistics regarding the percentage of returns that have been examined by type of return. Not surprisingly, some taxpayers have a greater chance of being audited than others according to the latest statistics. Let’s take a look at some stats:

The majority of audits, 74.8%, were conducted via correspondence, and the remaining 25.2% were conducted in the field.

Overall audit rate: The overall audit rate is .5%, but the audit rate of individual returns is .6%.

Corporate audit rates:

.9% for all corporate returns, excluding s-corporations

8.1% for large corporations with assets of $10M or more

.2% for s-corp returns

Individual audit rates:

2.4% for returns with business income and gross receipts of $100,000 to $200,000

3.2% for returns with positive income of $1M or more

.2% for returns with income lower than $200,000, no Earned Income Tax Credit, no business income or rental income.

If you read the footnotes of the statistics, it appears that 37% of individual returns that were selected for examination were due to a taxpayer claiming the Earned Income Tax Credit (EITC). Also, the statistics do not include several million CP2000 notices that are sent to taxpayers each year when there is a mismatch between what is reported on their tax return and what is reported to the IRS. If those notices were included, then the audit rate would be much higher.

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What Should You Do When You Receive a Notice from the IRS?

Did you notice that the title states “when” and not “if” you receive a notice? The volume of notices received from the IRS, along with those from the states, has steadily increased over the years, which means that the odds of you receiving a notice are pretty high. What are some of the steps you should take?

Don’t ignore the notice: This may sound basic, but do not ignore the notice. Usually, there is a deadline for your response, and if you do not respond then the issue may get worse and more complicated. If you do not understand the notice or have an accountant, then quickly send the notice to him/her.

Make sure it belongs to you: Sometimes, the notice may not even be yours. Sometimes the IRS or the states have an old address on file, which happens to now be yours. If the notice does not belong to you then ask the post office to return to sender. That is an easy fix, but not as common as one could hope for.

Time period and type of tax: The notice should show what periods and type of tax the notice relates to. Common notices are for Form 1040 (individual taxes), Form 941 (payroll taxes), and various states’ sales and payroll taxes.

What is the notice asking for: A commonly received notice from New Jersey and New York is one requesting additional information to process a refund after filing your tax return. You should provide the information requested and send a cover letter via certified mail. Other common notices state that there was additional income that was not reported, such as stock sales or pension income, and now there is a proposed change to your tax return. The scariest notices are levy notices or lien notices, which are supposed to come after no action has been taken on previous notices.

Compare the notice to your records: In many cases you want to verify the validity of the notice and should compare the information in the notice to your own records. It is possible that the notice may be incorrect or only partly correct.

Always respond timely: Make sure to always adhere to the timeline of the notice and to send any correspondence by certified mail as timely proof of a response. Even though you may respond timely this does not mean that the IRS or states will respond timely to you, and you may have to be patient.

As a warning, the IRS will never email you nor will they ask you to purchase prepaid gift cards from CVS to provide to them. Also, they will not threaten to deport you or throw you in jail. If you did something criminal then they will just show up at your house at 6 AM or possibly 5 AM, and I am sure that you already know why they are there.

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Do This to Avoid a Big Tax Surprise

If there is one recurring theme from this tax season that caused the biggest tax surprise it is this:

Double-check your withholdings: The withholding tables were revised and many taxpayers were under withheld, which caused them to owe taxes versus receiving a refund. The easiest way to correct this is to see how much you owed and then divide it by the number of paychecks left in the year. Then, either ask your employer to withhold this extra amount or complete a new Form W-4 to request this additional amount to be withheld from your paycheck.

Remember, a lower refund does not mean a lower tax liability. A refund is a function of your withholdings and estimated tax payments versus your tax liability.

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Some Horrible Ways to Lower Your Tax Bill That are Not Recommended

I don’t think that I ever met anyone that likes to pay taxes. Everyone feels better when their taxes are paid in full with no outstanding balances, but not actually paying them. Sometimes this hatred of paying taxes can go too far and here are a few examples of what not to do:

Understate your income: As a business owner there is a huge temptation to “pocket” any cash that is received or cash checks instead of depositing them to your account. However, if you understate your income too much then you may be facing jail time and massive penalties.

Overstate expenses: Maybe you really like cars and use multiple cars for your business. However, if your spouse does not work in your business then her car payment is not a tax deduction. The same goes for personal meals, personal expenses, and outright lying about your expenses and deductions. Most likely you do not give 15% of your income to charitable. It’s possible, but not very probable.

Losing money in a side business: The main purpose of starting a business is to make money. Maybe some contemporary experts think that you should try to change the world, but most likely you are selling a product or service that is not going to cure illnesses. Sometimes a newer business owner is so intent on losing money to not pay taxes that they never let their business actually become a business. A business can only lose money for so long. The same goes for real estate investments and traditional investing.

Spend a dollar to save a quarter: Do not ever spend money on an unnecessary tax deductible expense just to save taxes. The math is very simple – spend $1 to produce $.25 of tax savings, which equals $.75 lost.

Multi-state taxation: The tax laws are extremely complex and each state has its own set of rules. However, don’t let this stop you from doing business or working in other states to take advantage of opportunities.

Tax-exempt investments: Even though municipal bonds are exempt from Federal taxes and possibly state taxes, this does not mean that they are appropriate for you. You must do the math to make sure you compare after tax returns of taxable investments to tax exempt investments, otherwise you may be worse off economically.

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If You Are Looking for a Good Business Partner Then Pay Attention to What They Do, Not What They Say

Running a business is probably one of the most challenging, while equally rewarding endeavors that only the brave embark on. Some go at it alone, while others choose a business partner because sometimes 1 + 1 = 3 or 5 or 10. However, before choosing a partner you must minimize the risk of choosing the wrong partner by paying attention at what they do or have done, not just what they say.

Look at their past: No one is perfect, but generally, when a person is not able to overcome some of their difficulties, then there is a high probability that they will not magically fix their problems when you are their partner. Rather they will bring these issues into your business and wreak havoc. One time events or actions may not be too meaningful, but repeated patterns are a very bad sign.

Specific examples:

Tax problems: It is not uncommon for business owners to have a tax problem at one time or another due to the complexity and burden of an ever increasing number of taxes, fees, penalties, etc. that they need to be aware of. However, if there is a history of not filing tax returns, especially willfully, or not paying their taxes then watch out.

Health, mental, and addictions: The number of times that I speak to people regarding mental issues or addictions is so high that it doesn’t seem real and seems to be on the rise. Just because someone has a mental illness, doesn’t mean that they will make a bad business partner, unless it is not under control and has been for some time. The same goes for addictions, which can include gambling, spending, drugs, alcohol, and everything else. If the addiction was in the way past and has been overcome, then that is a plus. If it constantly resurfaces or is currently happening then that is a sign that it has not been defeated. Unfortunately, it is hard to know these things, especially if you only know a potential business partner casually. Although, thorough background checks and taking a look at the last year or so of bank statements may shed some truth.

Half truths or lies: Maybe your potential business partner ran a business in the past and it didn’t work out, which is not that uncommon. They may have the issues above, they may not be so good at running a business, or maybe there is another reason. One way to find out is to ask a lot of questions and then try to verify their answers with some research and legwork. For example, they may say that their landlord kicked them out of the building because the building was sold. Well, you can easily find out if the building was sold, speak directly to the old and new landlord, and look at their bank statements to see if they were actually paying their rent. Another example is to ask if they ever filed bankruptcy and then look into the public records to see if this is the truth and/or to have them run a credit report in front of you.

These are all of the bad things to look out for, but what are the good things to look out for? The answer is to look for the exact opposite. As I tell my children often: seek truth.

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When Should Your Parents Stop Being Involved in Your Financial Affairs?

Our parents raised us and shaped who we are today, and there is probably nothing that we can do in comparison to what our parents did for us, except for perhaps raise our own children well. But, when should our parents stop taking charge of our finances, career and/or business?

It is a good for us to always seek counsel from our parents, especially on matters that they may have more experience with or needed expertise. Even when we are in our fifties it is wise to communicate financial issues with a knowledgeable parent. However, make sure to separate having trust in someone versus their ability to competently advise you.

Once you are in the workforce and are an adult, then you need to deal with your employer directly. Several examples have been shared with me regarding parents contacting their adult child’s previous employer over payroll issues. Even worse is that in those situations the adult child was a professional that advises others! Again, feel free to seek the advice of your parents, but do not have them act as your “proxy.” I can just picture this now, “This is Mr. Smith, and I am calling to let you know that Timmy will not be at work today because he is under the weather. Please cancel his meetings with the executive vice-presidents of Fortune 500 Co.”

Sometimes you may own and operate a business and employ one of your parents, which does happen occasionally. Your parent may be able to give you insight that you are not seeing regarding employees, customers, or finances. However, unless you hired your parent as a strategic advisor because they have developed successful companies in the past, or the CEO, which small business owners actually are, then your parent should not be actively deciding the direction of the company or connections with key people.

Anecdotally, it seems that adults who enforce boundaries with their parents make better financial decisions, are more successful, and have more confidence.  I’ll let the psychologists further elaborate on this topic.

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Who Will Come Out Ahead When Filing Their Returns This Season?

Who will benefit the most from the tax law changes this year? The biggest winners will be:

Corporations: With reduced corporate tax rates of 21% versus the previous 35%, most corporations will come out ahead. Although corporations that have income of less than approximately $75,000 may not benefit.

Business owners: Business owners that operate sole-proprietorships, s-corporations, and partnerships that will benefit from the section 199A deduction, which generally is a deduction of 20% of your business income. However, there are limitations based upon the type of business such as healthcare providers, wages paid, income, etc.

Large families: With a child tax credit of $2,000 per child, families with many children will benefit from this credit. However, there are no exemptions this year which offset the benefit of the credit, and there is a phase-out of the credit if your income is greater than $200,000 or $400,000 if filing jointly.

Higher income households: Since the tax brackets have all been lowered and mostly expanded as your income increases, then the more money you make the more you will benefit. The highest individual tax bracket is 37% versus a high of 39.6% previously.

On second thought, who will be available to process all of the returns at the IRS?

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Paid Sick Leave in NJ? What You Need to Know

Another change in New Jersey that affects both employers and employees in the state is paid sick leave, which was effective starting October 29, 2018. Here are the details:

Number of sick days: The New Jersey Earned Sick Leave Law allows employees to accrue 1 hour of sick leave for every 30 hours worked, up to a maximum of 40 hours each year. An employee is eligible to use the earned sick days beginning 120 days after commencing employment.

Permitted usage of sick leave: Sick days can be used for diagnosis, care, treatment or recovery from an employee’s mental or physical illness or for the needs of a family member. The time can even be used by an employee in connection with their child to attend a school-related conference, meeting, or function.

Alternatives: An employer is in compliance if they offer paid time off, including personal days, vacation days, etc. that can be used as sick days, as long as they are accrued at the same or greater rate.

Carry forward: The employer shall not be required to permit the employee to accrue or use in any benefit year, or carry forward from one benefit year to the next, more than 40 hours of earned sick leave.

The interesting aspect of this law is that as an employee-owner, you have to include yourself. When do owners take a sick day?!

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