The Tax Filing DeadlineApril 17, 2018
56 days to go.

The Tax Cuts and Jobs Act (TCJA) – Part 4

If you haven’t yet read the introduction to my first article on the new law 😟 (or you would like a refresher), please go and have a look at: → Tax Cuts and Jobs Act–Part 1.

In this 4th installment I am going to continue discussing items affecting individuals.

Recharacterization of IRA Contributions

If you make a contribution to an IRA (Traditional or Roth) for a taxable year, you’re permitted to recharacterize the contribution as a contribution to the other type (Roth or Traditional) by making a trustee-to-trustee transfer to the other type of IRA before the due date for your income tax return of that year. In a recharacterization, the contribution is treated as having been made to the transferee IRA (and not the original, transferor IRA) as of the date of the original contribution. Both regular contributions and conversion contributions to a Roth IRA can be recharacterized as having been made to a traditional IRA. In both cases, the recharacterization essentially undoes the conversion.

The new law repeals the special rule allowing a conversion contribution to a Roth IRA to be recharacterized as a contribution to a traditional IRA, but still allows an original contribution from a traditional or Roth IRA to be recharacterized as a contribution to the other type. That is, recharacterization can no longer be used to unwind a Roth conversion. For example, Ted makes a $5,000 contribution to his traditional IRA in 2018. He can recharacterize that as a contribution to Roth as late as October 15, 2019 (the extended due date of his return). Barbara makes a $5,000 contribution to a Roth IRA in 2018. She can recharacterize it as a contribution to a traditional IRA as late as October 15, 2019. In 2018 Suzanne converts $20,000 of her traditional IRA into a Roth, paying tax on the $20,000 of income. In June 2019 the value of the converted shares declines substantially under the new law she can’t recharacterize (undo) the conversion and is stuck with the consequences.

While not done all that frequently, this change will require taxpayers making a conversion contribution to a Roth to consider their actions carefully since they can no longer be undone. This provision applies to tax years beginning after December 31, 2017.

Qualified 2016 Disaster Distribution

Distributions from qualified retirement plans that occur before the participant reaches age 59-1/2 and don’t qualify for any other exception are generally subject to a 10% early withdrawal tax. Under the new law, an exception to the 10% tax applies in the case of a qualified 2016 disaster distribution from a qualified retirement plan, a Sec. 403(b) plan, or an IRA. In addition, income attributable to such a distribution may be included in income ratably over three years, and the amount of a qualified 2016 disaster distribution may be recontributed to an eligible retirement plan within three years. A qualified 2016 disaster distribution is a distribution from an eligible retirement plan made on or after January 1, 2016 and before January 1, 2018, to an individual whose principal place of abode at any time durng calendar 2016 was located in a 20-16 disaster area and who sustained an economic loss by reason of the events giving rise to the Presidential disaster declaration. Only the first $100,000 of distributions qualify for such treatment.

Rollovers of Plan Loan Offset Amounts

If you take a loan from a defined contribution plan and fail to repay the amount or default on the loan the outstanding balance is income and subject to the 10% early withdrawal tax. If an employee terminates employment their obligation to repay a loan is accelerated and, if the loan is not repaid, it’s canceled and the amount in employee’s account balance is offset by the amount of the unpaid loan balance. The loan offset is treated as an actual distribution from the plan and the amount of the distribution is eligible for tax-free rollover to another eligible retirement plan within 60 days. However, the plan is not required to offer a direct rollover. The new law extends the period during which a qualified plan loan offset may be contributed as a rollover contribution is extended from 60 days to to the due date (including extensions) for filing the Federal income tax return for the taxable year in which the plan loan offset occurs.

Qualified Tuition Program Distributions

The income on contributions made to a Section 529 Qualified Tuition Plan (QTP) are not taxable on distribution if made to pay qualified higher education expenses. Under the new law qualified higher education expenses also include tuition in connection with enrollment or attendance of the beneficiary at a public, private or religious elementary or secondary school. Qualified distributions under this provision is limited to $10,000 per tax year. The $10,000 limitation applies on a per-student, rather than a per-account basis.

The provision also modifies the definition of higher education expenses to include certain expenses incurred in connection with a home school. Those expenses are curriculum and curricular materials; books or other instruction materials; online educational materials; tuition for tutoring or educational classes outside of the home (but only if the tutor or instructor is not related to the student; dual enrollment in an institution of higher education; and educational therapies for students with disabilities.

Rollovers Between Qualified Tuition Programs and Qualified ABLE Programs

A qualified ABLE program is a tax-favored savings program intended to benefit disabled individuals. The program is established and maintained by a State agency or instrumentality. The new law allows for amounts from qualified tuition programs (Section 529) to be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of the 529 account, or a member of such designated beneficiary’s family. Such rolled over amounts count towards the overall limitation on amounts that can be contributed to an ABLE account for a taxable year. Any amount rolled over that is in excess of this limitation shall be includible in the gross income of the distributee.

Filing Thresholds

The requirement to file an income tax return for a citizen or a resident alien is based on a certain income level. The thresholds vary by filing status and age (65 or older) and whether or not a taxpayer is legally blind. The thresholds are adjusted for inflation every year. Because of the increased standard deduction, the filing thresholds are higher for every filing status. The new thresholds (assuming no inflation) for 2018 are:

Single $12,000
for 65 or older or blind add $1,600
for 65 or older and blind add $3,200

Married, filing separate $12,000

Married, filing joint $24,000
one spouse 65 or older or blind add $1,300
one spouse 65 or older and blind add $1,300
both spouses 65 or older or blind add $2,600
both spouses 65 or older and blind add $5,200

Head of Household $18,000
for 65 or older or blind add $1,600
for 65 or older and blind add $3,200

Qualifying Widow(er) (surviving spouse) $24,000
for 65 or older or blind add $1,300
for 65 or older and blind add $2,600

The new law also adds to the due diligence requirement of tax preparers to ensure clients qualify for the education and earned income tax credits the requirement a client qualifies to file as head of household. The penalty for failure to do so is $500.

Estate and Gift Tax

The new law increases the federal estate, gift, and generation-skipping transfer tax exemption to $10 million for the estates of decedents dying and gifts and transfers made after 2017. This provision expires at the end of 2025. Before the adjustments for inflation in the old law, the exemption is doubled. The $10 million amount is also adjusted for inflation. The $10 million amount is essentially doubled for a married couple because of the availability of the Deceased Spousal Unused Exclusion (DSUE). The obvious result is that far fewer taxpayers will have to worry about the estate tax in their financial planning. In 2016 only 4,142 returns were filed with a gross estate that exceeded $10 million and only 2,204 of those contained a tax liability. (Those returns represent decedents who died in earlier years, but the return was filed in 2016.) The step-up in basis rule remains in effect.

A new concern is that the exemption will revert to the lower amount when the new law expires at the end of 2025. Taxpayers who could exceed that lower amount should seriously consider careful estate planning. While making gifts may make sense for estate tax purposes, the basis rules for gifts dictate a carry-over basis rather than a step-up basis. That’s an important consideration. Making gifts to lower generations can make sense with the larger exemption, but the portability exemption does not apply to the generation skipping tax exemption amount of $10 million.

Rollover of Gain on Publicly Traded Securities

Under the prior law, a taxpayer could elect to roll over tax-free any capital gain realized on the sale of publicly-traded securities to the extent of the funds used to purchase common stock or a partnership interest in a specialized small business investment company within 60 days of the sale. There were dollar limits on the amount of the gain that could be rolled over. That provision has been repealed under the new law, effective for sales after December 31, 2017.

Self-Created Property not Capital Asset

Also under the prior law, property created by a taxpayer (whether or not associated with his trade or business) was considered a capital asset and would qualify for long-term capital gain treatment on a sale. Certain items were specifically excluded from favorable treatment such as inventory property, certain self-created intangibles, and property subject to depreciation. Self-created intangibles subject to the exception are copyrights, literary, musical or artistic compositions, letters or memoranda, or similar property which is held either by the taxpayer who created the property, or for whom the property was produced. A taxpayer could elect to treat musical compositions and copyrights in musical works as capital assets.

The new law amends Section 1221(a)(3) of the tax code, resulting in the exclusion of a patent, invention, model or design (whether or not patented), and a secret formula or process which is either held by the taxpayer who created the property or a taxpayer with a substituted or transferred basis from the taxpayer who created the property (or for whom the property was created) from the definition of a capital asset. Thus, gains or losses on such assets will not receive capital gain treatment. The provision applies to dispositions after December 31, 2017.

Whew, that is a lot of information.

What do you think about the new tax law and how it will affect you?

And business owners, I didn’t forget about you. I will talk a bit about the new tax provisions and how they will affect your business in the next post. So, stay on the lookout everybody because Part 5 will be on your screen soon 👓.

Remember, Solid Tax Solutions is available to help you with preparing your tax return as well as show you how the new tax laws will affect you.

Just give us a call at (845) 344-1040.

☛(845) 344-1040☚

 

_________________________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com.

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

Categories: Income Tax

The Tax Cuts and Jobs Act (TCJA) – Part 3

So, welcome back boys and girls for Part – 3 of how the The Tax Cut and Jobs Act can affect you.

If you haven’t read the introduction to my first article on the new tax law, please go to Tax Cuts and Jobs Act (TCJA) – Part 1. In this third installment I will continue the discussion of itemized deductions that I started in Part 2 (and you can find Part 2 right here).

 

Gambling Losses

This change is a positive one. The new law makes it clear that losses from wagering transactions includes both the costs of the wagers and other expenses related to the activity of gambling. That could include travel to and from the casino.

 

Charitable Contributions

Charitable contributions that may be deducted in any one year are limited to a percentage of Adjusted Gross Income (AGI). The percentage depends on the type of contribution and the organization receiving the contribution. For cash or property that has not appreciated in value, contributions to public charities under the old law were limited to 50% of AGI. Lower percentages apply to capital gain property and contributions to non-operating private foundations. Under the new law, the 50% limit on contributions to public charities is increased to 60%. Under both prior and new law, charitable contributions deductions disallowed because of the 60% limitation in any year may be carried forward five years.

The new law repeals the deduction for payments made to a college or university in exchange for which the payor receives the right to purchase tickets or seating at an athletic event.

Under prior law you did not have to have a contemporaneous written acknowledgment from a charitable organization for contributions of $250 or more if the donee organization reports the contribution to the IRS. This exception to the general rule has been repealed, effective for the 2017 tax year. Thus, if you made a contribution in 2017 of $250 or more, you’ll need a statement from the charity in order to secure a deduction. This provision does not expire.

 

Casualty and Theft Losses

This change could be particularly difficult for taxpayers in the position of having a casualty loss. Under prior law such net losses were deductible if they exceeded 10% of a taxpayer’s Adjusted Gross Income (AGI) plus $100. The same rules apply to casualty losses sustained in a federally declared disaster. Taxpayers in the later situation could deduct the loss on their current year’s return or the prior year. Any net casualty gains (for example, your insurance reimbursement exceeds your tax loss) are taxable. A deduction for such losses could be taken only if you itemized.

Under the new law any personal casualty losses are not deductible unless attributable to federally declared disaster. This provision applies to tax years beginning after December 31, 2017. Personal casualty gains can still be used to offset losses.

The new law changes other rules for 2016 and 2017. Taxpayers who incur a net casualty loss as a result of a federally declared disaster in 2016 or 2017 are subject to a $500 per casualty threshold, but not to the 10% of AGI rule. In addition, a taxpayer can use the loss to increase their standard deduction. That is, they need not itemize to take the deduction.

Because of the 10% of AGI limitation, most taxpayers wouldn’t be able to deduct small casualty losses such as $2,500 in auto damage not covered by insurance because of a deductible. And even under prior law, a $50,000 deductible loss (after the 10% threshold) as a result of a house fire would only result in $12,500 in tax savings for a taxpayer in the 25% bracket, that’s still a significant saving. You may want to check your insurance policies to make sure you’re adequately covered. You should also check your policy for exclusions.

These changes don’t apply to business property.

 

Moving Expenses

Moving expenses were not deductible as an itemized deduction, but toward Adjusted Gross Income. In order to qualify as a deduction, the expenses had to be business related and there was a distance requirement associated with the move. Moving expenses were limited to the cost of transporting household goods and personal effects and to travel to the new residence.

The new law repeals the deduction for these expenses, with the exception of qualified moving expenses of members of the Armed Forces. And they may continue to exclude from income in-kind expenses and exclude from income any reimbursement for the expenses. The move must be related to a military order and a permanent change of station.

In addition, prior law allowed employers to reimburse qualified moving expenses and exclude them from the employee’s income. Under the new law any moving expense reimbursement must be included in the employee’s income–that is included on his or her W-2. Again, the exclusion for members of the Armed Forces continues to apply.

This change could make some employees think twice about switching jobs and moving to another area of the country. It could also make it less attractive to relocate an employee. Of course, an employer can still reimburse for the moving expense, but it would be taxable income. Thus, reimbursing an employee $4,000 for his moving expenses would increase his income by that amount and result in additional taxes. For example, for an employee in the 24% bracket that would result in additional $960 for just federal income taxes. An employer could “gross up” the payment, in effect paying the taxes (that creates more income for the employee, but makes him whole for his taxes). But, of course, that increases the cost to the employer.

 

Alimony and Separate Maintenance Payments

For many years the rule was that alimony and separate maintenance payments were deductible by the payor and income to the recipient. However, in order to qualify as alimony, the payments had to meet certain requirements. Many taxpayers tried to deduct property settlements or child support as alimony. A poorly worded divorce decree could cloud the issue and often resulted in tax litigation.

Under the new law alimony and separate maintenance payments are no longer deductible by the payor or income to the payee. The new rules don’t apply to existing agreements, but only to ones executed or modified after December 31, 2018. Changes made in the agreement after 2018 are considered modifications only if the modification expressly provides that the amendments made apply to such modification.

Tax professionals and attorneys crafting divorce agreements and taxpayers need to take the new rules into account. The new law will change the calculus of computing settlements. It won’t be possible to create a situation where a payor in a high bracket secures a substantial deduction while a spouse in a lower bracket has the income. In short, there’s less of a chance the government will be helping to finance a divorce.

 

Qualified Bicycle Commuting Reimbursements

Under prior law up to $20 per month of employer reimbursements for qualifying bicycle commuting expenses were excludable from the employee’s income. The reimbursements applied to a 15-month period. Qualifying expenses included the purchase of a bicycle, repair and storage. The new law repeals the exclusion for these reimbursements beginning with taxable years after December 31, 2017.

 

Like-Kind Exchanges

Generally, and an exchange of property for other property is, just like a sale for cash, a taxable event. However, for many years Section 1031 has allowed like-kind exchanges. In a like-kind exchange no gain is recognized on the exchange unless you receive unlike property in return. For example, Hector exchanges a two-family rental property for a strip mall. He receives no other property in return. He reports no gain (or loss) on the exchange. Now assume Fred receives both the strip mall and a backhoe used to maintain the property. At least some of the gain will be taxable. Gain isn’t avoided; it’s just deferred until the property received in the exchange is finally sold. In order to qualify the two properties must be of like-kind and the property must be held for productive use in a trade or business or for investment. (In addition, Sec. 1031 does not apply to stocks, bonds, notes, interests in partnerships, certain exchanges of livestock or foreign property). In addition, there are strict time requirements for identifying the replacement property and consummating the transaction. In the case of tangible property the definition of like-kind has been strictly interpreted. Thus, a car for a car is a like-kind exchange; a truck for a car is not. That’s generally not true for real estate. You can exchange vacant land for an office building and secure Sec. 1031 treatment.

Under the new law, like-kind exchange treatment will only apply to real property. The old law continues to apply to property relinquished or the replacement property is received on or before December 31, 2017. The 45-day identification period and requirement that receipt of the property must occur within 180 days applies.

While the most of the big dollar amounts in like-kind exchanges involve real estate, far more transactions probably involve tangible personal property. Every time you trade in a business vehicle, machinery, or other equipment you’re most likely doing a like-kind exchange. That means you’re deferring any gain on the exchange of the equipment; you’re also deferring any loss. Under the new law you’ll have to recognize gain, or loss, each time you “trade in” equipment. Because of changes in the depreciation rules, that may not make any difference, at least for federal tax purposes.

Example–Oak Inc. purchases a backhoe for $40,000 in 2018 and writes off the entire purchase price. In 2020 Oak Inc. trades in the backhoe for a small bulldozer costing $45,000 paying an additional $10,000 (it’s equivalent to selling the old backhoe for the amount allowed on the trade in, $35,000). The backhoe has been fully depreciated so the trade in produces a gain of $35,000 ($45,000 for the new unit less the $10,000 additional payment). Oak Inc. should be able to write off the full cost of the bulldozer offsetting the $35,000 gain with a $45,000 deduction.

Certain problems can arise. First, the depreciation allowed for state purposes may not be the same as for federal. Second, if the sale and purchase of the two machines occur in different years, there will be no “offset” and Oak Inc. could have a significant a gain in one year and a big deduction in the next.

Having to recognize any loss on a trade in may be advantageous, but not always.

You should talk to your tax adviser —> Solid Tax Solutions before engaging in significant trade ins or other activities that can be affected by the Tax Cut and Jobs Act.

BTW, you can find the next installment of this highly informative series – Part 4 right here.

__________________________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com.

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

Categories: Income Tax

The Tax Cuts and Jobs Act (TCJA) – Part 2

In this second blog post I’ll be discussing individual itemized tax deductions that are taken on Schedule A (And, If by chance you missed Part 1 of this article about the Tax Cuts and Jobs Act you can read it here).

Everyone has been talking about the limit on state and local taxes, but there are additional cutbacks. As under prior law you want to take the larger of the standard deduction or your itemized deductions. The big increase in the standard deduction reduces your chances of your itemized deductions exceeding the standard. That’s made even more difficult by the new restrictions on state and local taxes, mortgage interest, and the elimination of miscellaneous itemized deductions. (Note: There are sometimes reasons to itemize even when you’d come out ahead with the standard deduction.)

For example, Fred and Wilma had state and local income taxes in 2017 $14,000; mortgage interest of $13,000 and charitable contributions of $1,000. Thus, instead of taking the standard deduction of $12,700 they itemized and deducted $28,000. Assuming the same expenses for 2018, because of the $10,000 limit on state and local taxes, their itemized deductions will only total $24,000, the same as the standard deduction.

Clearly, fewer taxpayers are likely to itemize for federal purposes. But that may prove disadvantageous for state purposes. For example, New York (and many other states) uses your federal itemized deductions and disallows the deduction for state income taxes. If, in 2018, Fred and Wilma lived in New York and had real estate taxes of $9,000, interest of $13,000 and $1,000 in charitable contributions they could take itemized deductions of $23,000 for state purposes. Their standard deduction for state purposes would be a bit above $16,050 substantially less (Side note: As of the date of this post the New York State Department of Taxation and Finance has not released their standard deduction amount for 2018, therefore I used the 2017 NYS standard deduction amount of $16,050 for a married couple filing jointly for illustration. Based on history, I do not expect the 2018 NYS standard deduction amount to be significantly higher than the 2017 NYS standard deduction amount). They may have to compute their itemized deductions just for state purposes. But there’s another hitch. Many states don’t allow you to itemize for state purposes if you didn’t itemize for federal. More than likely, a number of states will revise their rules to accommodate the federal changes.

There is some offsetting good news. First, the new law removes the limitation on itemized deductions (the Pease limitation) that’s based on Adjusted Gross Income (AGI). Under the old law taxpayers with AGI of more than $320,000 (married, joint; $266,700 for single individuals) would see their itemized deductions phased out.

Second, state and local taxes, certain interest deductions, etc. were not deductible for Alternative Minimum Tax (AMT) purposes. So many higher-income taxpayers ended up receiving little or no benefit from some of their deductions. The changes in the Alternative Minimum Tax make that much less likely.

 

State and Local Taxes

This change may be the one most talked about, and it’s also one of the most straightforward. Your deduction for state and local income, property, and sales taxes (if you use that option), combined, is limited to $10,000 ($5,000 married filing separate). No deduction is allowed for foreign real property taxes paid in the years 2018 through 2025; foreign income taxes are still deductible, subject to the restrictions on all taxes. If you prepaid state and local income taxes for 2018 in 2017, they’re not deductible until 2018. Real property taxes that are assessed in 2017 are deductible if paid in 2017, if you’re allowed to do so under local law.

There is an exception for state and local real or personal property taxes paid or accrued in carrying on a trade or business or income-producing activity. So let’s say that you have an auto repair business operated as a sole proprietorship. You own the building that is used by the business. The real property taxes would be fully deductible, but on Schedule C. Property taxes related to rental property should be taken on Schedule E as part of the rental expenses.

There are some issues here that will probably be addressed in guidance from the IRS.

If you have a vacation home that’s not being used, you might consider renting it to secure a deduction on Schedule E.

If you are self-employed and use a portion of your home for business, the business portion of the taxes (and other expenses) are deducted on Schedule C (or Schedule F for farm income). For example, you use 20% of your home for business. Your real estate taxes are $10,000 for the year. Of the total $2,000 (20%) would be deductible on Schedule C, the remaining $8,000 would be deductible on Schedule A, subject to the overall$10,000 limit rule.

 

Home Mortgage Interest Deduction

This change, too, is pretty simple. Mortgage interest on acquisition indebtedness on a qualified residence incurred on or after December 15, 2017 is deductible, but only to the extent of the interest on the first $750,000 ($375,000 if married filing separate) of debt, not the $1 million limit under the old law. No deduction is allowed for home equity debt, regardless of when incurred.

A qualified residence is your principal residence plus one other residence. That includes a vacation home, or a boat or recreational vehicle with living accommodations. The old rules continue to apply as well to other definitions. For example, the debt must be secured by the residence and acquisition indebtedness includes refinanced debt not in excess of the original debt. Acquisition debt includes debt incurred in the purchase, construction, or substantial improvement of the residence. There are other rules with respect to refinanced debt including that the refinancing cannot extend the term of the original loan. The qualifying debt on a mortgage refinanced that was taken out before December 15, 2017 can be as much as the old limitation, $1 million.

The two changes here are the loss of a deduction for home equity interest and the lower maximum indebtedness. Like other provisions in the new law, both of these restrictions expire after 2025.

While there are no “loopholes” there are steps you can take to make sure you don’t give away an interest deduction. For example, many taxpayers use their home equity line to add a room, redo a kitchen, finish the basement, etc. Under the prior law the first $100,000 of home equity interest was deductible, so it really didn’t make much difference if the amount was incurred for a addition to the home or a new foreign sports car. But for home improvements the home equity loan is really acquisition debt and the interest on the portion of the total debt used for these purposes should still be deductible, subject to the overall limits. Interest on home equity debt incurred to purchase a new car would not be. If you do use the home equity line for this purpose you need to keep accurate records of the date and amount spent and be able to tie it to the amount withdrawn from the home equity line. Talk to Solid Tax Solutions about the fine points of record keeping here.

Example–In 2017 Bill and Carol drew down $30,000 on a $100,000 home equity line to purchase a car. On July 1, 2018 they take $60,000 from their home equity line to pay for a new kitchen and an additional bathroom. The interest on the $60,000 home improvement debt would be deductible in 2018. But that amount was outstanding for only half the year. Bill and Carol would have to determine the amount of interest on that $60,000 for the last six months of 2018.

Business owners can encounter the situation where they borrow on their home to finance their business or for the purchase of a rental property. In both of these situations the loan and the interest really belongs on the business or the rental property and should be deducted on that business. Debt related to these types of loans is not subject to the $750,000 restriction. For example, John and Susan have a home worth $2.3 million. They borrow $1.25 million to finance their business. Interest on the entire debt would be deductible, but not as an itemized deduction on Schedule A. Again, talk to Solid Tax Solutions about the record keeping and mechanics, both of which can be critical.

Investors can still deduct investment interest. Amounts borrowed through a home equity line should be allocated to the investment interest deduction.

While the interest isn’t deductible, that doesn’t mean taking out a home equity loan no longer makes sense. If you got into financial difficulty and ran up your credit cards, using a home equity loan at 4% or a similar interest rate to pay off 22% credit card balances makes sense. On the other hand, car loans currently carry a low rate. It may make more sense to finance a new car with an auto loan rather than use home equity money. A home equity line can still prove useful in many situations, but you shouldn’t use it indiscriminately.

 

Medical Expense Deduction

Here, the change is a positive one. Under prior law only unreimbursed medical expenses that exceeded 10% of AGI were deductible for regular or AMT purposes. The new law lowers the percentage threshold to 7.5% for both regular and AMT purposes, but only for 2017 and 2018. (It had been 7.5% some years ago.) For example, under the 10% threshold a taxpayer with AGI of $50,000 would be able to deduct only the amount of unreimbursed medical expenses that exceeded $5,000 (10% of $50,000). Under the new law, that same taxpayer would get a deduction for expenses that exceeded $3,750 (7.5% of $50,000). Medical expenses includes health insurance, long-term care insurance (subject to restrictions), unreimbursed doctor and hospital bills, tests, prescriptions, etc.

This change applies to tax years beginning after December 31, 2016. That means it applies to 2017 tax returns, one of the few changes that does.

There’s a downside here though. The lowered threshold only applies to tax years beginning before January 1, 2019. For almost all taxpayers that means it only applies to tax years 2017 and 2018.

 

Miscellaneous Itemized Deductions

Unfortunately, here we will see another cut courtesy of the Tax Cut and Jobs Act. These miscellaneous itemized deductions (subject to a 2% of AGI threshold) include a broad range of expenditures from job hunting expenses, union dues, professional uniforms, an employee’s home office, unreimbursed employee business expenses (e.g., travel, lodging, meals and entertainment), continuing education expenses, to professional subscriptions and dues. The expenses deductible under this category also include expenses for the production and collection of income such as the cost of preparing your tax return, investment advisory publications and advisory fees. They may also include attorney’s fees for the collection of income a safety deposit box, and appraisal fees. Finally, expenses related to “hobby losses” are deductible here.

Many taxpayers don’t break the 2% threshold required to deduct any of these expenses, or do so only sporadically, but the category is such a catchall that more than a few taxpayers, particularly professionals who are employees will feel the pinch on a regular basis.

Taxpayers who are self-employed (that includes partners in a partnership and LLC members) or do business through a regular corporation or ‘S’ corporation should be particularly careful who the expenses belong to and who pays them. For example, you may have been deducting unreimbursed business expenses on Schedule A where you could be deducting them on your S corporation. Talk to Solid Tax Solutions about the correct treatment.

Business owners may have to reconsider their reimbursement policies. If the business had a policy of not reimbursing employees for meals that were business related, the employee will now be forced to absorb the entire bill. In order to placate and retain employees you may have to start reimbursing for items you didn’t in the past.

Please feel free to share this post and any other of our blog posts with your friends and family.

Also, Part 3 is soon to follow. The wait is over 😃. Part 3 is ready and you can read it here.

Call and talk to your tax adviser at Solid Tax Solutions (Web: SolidTaxSolutions.com) about these and other ways the Tax Cut and Jobs Act will affect your 2018 AND 2017 taxes.

→(845) 344-1040←

 

__________________________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com.

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

Categories: Income Tax

The Tax Cuts and Jobs Act (TCJA) – Part 1

Lately I’ve received a lot of calls as well, as impromptu questions when I am moving around town, of people wanting to know what the heck is the ‘new tax law’ all about and how these changes will affect them.

So, I thought the best and most efficient way to get preliminary information out to everyone is through this blog with a “brief” (Lol) overview.

And, off to the races we go……

Soooo, there have been many claims on both sides of the political aisle about the Tax Cuts and Jobs Act which is also referred to as the TCJA (and as a side note the TCJA is over 500 pages). Will your taxes go down? By how much? For middle class taxpayers it will ultimately depend on your particular situation. There’s no doubt that some taxpayers in states with high income and/or real estate taxes could see their taxes go up. And it can also depend on what other deductions you’re losing. But higher-income taxpayers won’t feel the pinch as much. That’s because their deductions under the old law may be phased out or lost because of the Alternative Minimum Tax (AMT). Most taxpayers will see a decline in their taxes, a few will see an increase. The higher your income the bigger the benefit, both in absolute and percentage amounts. The increase in the exemption for the Alternative Minimum Tax will mean far fewer taxpayers will be caught in the trap. In fact the estimate is that only about 200,000 taxpayers will pay the tax, down from 4.4 million. For many taxpayers that can be a big saving.

Home ownership will not be as attractive as it was, particularly in high tax states. And that could depress home prices. On the other hand, new benefits for landlords will make owning a rental more profitable. That could be enhanced because more people may be renting.

Business owners should fare well under the new rules. While owners of business in certain services (medicine, accounting, legal, etc.) may not do as well as others, everyone will get a benefit. For C corporations (otherwise known as a regular corporation) tax rates will be materially lower; for owners of S corporations and other pass-through entities, the benefits are less clear, but should be significant. But there are some changes that could reduce the benefits. For example, an employee who is asked to move to another location may want more of an incentive since his moving expenses are no longer deductible.

One issue that I haven’t heard mentioned more than once is the effect on state income taxes. Most states tie their computation of taxable income to the federal rules. Some do it automatically (when the fed makes a change, the state automatically does), some have to pass a legislation to follow the change. Most states have modifications to federal taxable (or adjusted gross) income. For example, New York State excludes state and federal pensions and allows an exclusion for up to $20,000 in other pension income. It also exempts all of Social Security income. But it doesn’t follow some of the federal depreciation rules.

Some deductions were eliminated in total. For example, moving expenses are no longer deductible (with an exception for the armed forces). But unless a provision of existing law was mentioned, it’s still in effect. The 0.9% medicare tax on wages of higher income individuals as well as the 3.8% tax on net investment income. The special benefits for capital gains and dividends were largely untouched.

Most amounts in the new law are adjusted for inflation using the chained CPI approach (for your reference, a quick read primer about the chained CPI is here), a method that results in smaller annual increases in tax brackets, thresholds, etc.

Finally, keep in mind that most of the provisions take effect January 1, 2018. (Technically, they apply to tax years beginning after December 31, 2017; I’ll point out any that don’t). Most of the provisions that apply to individuals expire on December 31, 2025.

Beginning with this article you and I will take a look at all the important changes in the law and how it will affect taxpayers.

 

Individual Tax Rates

 

Tax Rates Based on Filing Status

 

There’s no question that income tax rates are lower across the board (with the exception of estates and trusts). But how much varies with your situation. Of course, you could still pay higher taxes if your taxable income is higher because you can’t deduct some of your state and local taxes, can’t claim a credit, etc. That’s why it’s important to work through your numbers. Unless you take the standard deduction and never have any unusual circumstances, trying to make them arrive at generic examples is very difficult =>(Solid Tax Solutions can work the numbers for you).

Tax Rates: Single Taxpayers–>2018
      Taxable income:                   Tax:
  Over     But not over         Tax       +%   On amount over            

$      0     $  9,525        $    0.00   10       $      0
   9,525       38,700           952.50   12          9,525
  38,700       82,500         4,453.50   22         38,700
  82,500      157,500        14,089.50   24         82,500
 157,500      200,000        32,089.50   32        157,500
 200,000      500,000        45,689.50   35        200,000
 500,000      .......       150,689.50   37        500,000
 

Tax Rates: Married Individuals Filing Joint and Surviving Spouses–>2018
      Taxable income:                   Tax:
  Over     But not over         Tax       +%   On amount over            

$      0     $ 19,050        $     0.00  10       $      0
  19,050       77,400          1,905.00  12         19,050
  77,400      165,000          8,907.00  22         77,400
 165,000      315,000         28,179.00  24        165,000
 315,000      400,000         64,179.00  32        315,000
 400,000      600,000         91,379.00  35        400,000
 600,000      .......        161,379.00  37        600,000 
 
Tax Rates–Head of Household–>2018
      Taxable income:                   Tax:
  Over     But not over         Tax       +%   On amount over            

$      0     $ 13,600        $     0.00  10       $      0
  13,600       51,800          1,360.00  12         13,600
  51,800       82,500          5,944.00  22         51,800
  82,500      157,500         12,698.00  24         82,500
 157,500      200,000         30,698.00  32        200,000
 200,000      500,000         44,298.00  35        200,000
 500,000      .......        149,298.00  37        500,000 
 
Tax Rates: Married Filing Separate–>2018
      Taxable income:                   Tax:
  Over     But not over         Tax       +%   On amount over            

$      0     $  9,525        $     0.00  10       $      0
   9,525       38,700            952.50  12          9,525
  38,700       82,500          4,453.50  22         38,700
  82,500      157,500         14,089.50  24         82,500
 157,500      200,000         32,089.50  32        157.500
 200,000      300,000         45,689.50  35        200,000
 300,000      .......         80,689.50  37        300,000 
 
Tax Rates: Estates and Trusts–>2018
      Taxable income:                   Tax:
  Over     But not over         Tax       +%   On amount over            

$      0     $  2,550        $     0.00  10       $      0
   2,550        9,150            255.00  24          2,550
   9,150       12,500          1,839.00  35          9,150
  12,500      .......          3,011.50  37         12,500 
 

So what are the savings? I computed the tax using several levels of taxable income. I didn’t take into account different situations such as the loss of tax deductions or the higher standard deductions or the Alternative Minimum Tax. I used 2017 rates for the “old” rates because many taxpayers want to compare last year to the new rates. If the law hadn’t been enacted, 2018 rates would be slightly lower after accounting for the annual cost-of-living adjustment.

Here’s how a married couple would fare under four different taxable income assumptions.

Taxable Income of $40,000– Jack and Jill have taxable income of $40,000. Under the new law they’ll pay tax of $4,419 versus $5,068 under the old law. That’s a savings of $649.

Taxable Income of $100,000– Assume taxable income of $100,000. They’ll pay $13,879 under the new law versus $16,478 under the old. A savings of $2,599.

Taxable Income of $375,000– With taxable income of $375,000 they’ll pay $83,379 versus $98,967 for a $15,588 savings.

Taxable Income of $600,000– Taxable income of $600,000 will result in $161,379 under the new law, down from $182,831 under the old law. A savings of $21,452.

I also computed the saving at taxable income of $75,000. That was $1,699, in between the $40,000 and $100,000 savings amounts.

For single individuals, I computed the differences at taxable income of $100,000 and $500,000. At $100,000 there’s a savings of $2,692; at $500,000 the savings rise to $3,129.

There’s no question that the tax rates are lower, and higher-income taxpayers will see the biggest savings, both in absolute and percentage amounts. But all taxpayers should benefit. The question is how will this be offset by the loss of deductions? That depends on your particular situation. Both the rates and brackets generally combine to lower taxes. For example, in 2017 the 25% rate for a married couple filing joint started at $75,901; under the new law, the rate is 22% and the bracket starts at $77,401. But there are some anomalies, such as the 35% bracket for married, filing joint starts at $416,701 under the old law and $400,001 under the new.

Capital Gain Rates and Related Taxes

The tax rate on long-term capital gains follows the old rules updated for the new rates. For example, under the old rules, you’d pay no tax on qualified dividends or long-term capital gains if you’re in the 10% or 15% bracket. There is no 15% bracket under the new law. The 12% bracket is substituted. Thus, if you’re in the 10% or 12% bracket, you pay no tax on qualified dividends or long-term capital gains. Above that, qualified dividends and long-term capital gains are taxed at 15% until you reach the top bracket. If you’re in the top bracket, they’re taxed at 20%.

The maximum tax rate on unrecaptured Section 1250 gains remains at 25%; the maximum tax on collectibles is 28%, as under prior law.

The Net Investment Income Tax (NIIT) of 3.8% remains in effect. This tax generally applies to dividends, capital gains, and passive income. The additional medicare tax of 0.9% continues to apply to Medicare wages in excess of the threshold amounts.

 

Alternative Minimum Tax

Congress did not eliminate the alternative minimum tax for individuals, but by making two strategic changes it slashed its impact.

The first change is the exemptions. Under prior law the exemption was $84,500 for a married couple filing joint. That’s increased to $109,400. For single individuals or head of household, the exemption increases from $54,300 to $70,300; for married filing separate it goes from $42,500 to $54,700. Under both prior and new law the exemption is phased out 25 cents for each $1 that the Alternative Minimum Taxable Income (AMTI) exceeds the thresholds. That was a big trap for many taxpayers. Under prior law the phaseouts began AMTI of $160,900 (married, joint), $120,700 (single, head of household), and $90,450 for a married couple filing separately. Under the new law, phaseout of the exemption begins at $1 million for a married couple filing joint and $500,000 for all other filers. That, coupled with the fact that only the first $10,000 of state and local taxes are deductible for regular tax purposes (state and local taxes are not deductible for AMT purposes) significantly reduces a major add-back.

The rates for the AMT are unchanged from prior law (after adjustment for inflation). The 26% rate applies to AMTI up to $191,500 ($95,750 if married, filing separate) for 2018; the 28% rate applies to income above those amounts.

For many taxpayers who either paid or had to consider the AMT in the past, they should discuss the tax with their advisor. There’s a good chance a few rules of thumb may provide them with relief from having to consider the tax.

 

Standard Deduction, Personal Exemption and Child Tax Credit

This is where things start to get more complicated. Under prior law, the standard deduction for a single taxpayer was $6,500 and $13,000 for a married couple filing jointly. Each individual was entitled to a personal exemption of $4,150. These were the amounts released by the IRS in November that would have taken effect for 2018. Thus, a single taxpayer, taking the standard deduction would have been entitled to deduct $10,650 from their adjusted gross income to arrive at taxable income. A married couple with no children could deduct $21,300 ($13,000 standard deduction plus two $4,150 exemptions). They could deduct another $4,150 for each dependent child. In addition, a single individual or married couple with children could take a tax credit of $1,000 for each child under the age of 17. The personal exemption and child credit were phased out for higher-income individuals.

Under the new law the standard deduction is increased to $12,000 for a single individual; $24,000 for a married couple filing jointly and $18,000 for head of households. The amounts are adjusted annually for inflation. That seems generous, but the new law also eliminates the personal exemption. That would be $4,150 per person. Thus, the standard deduction isn’t going from $13,000 to $24,000 for a married couple with no children, in effect it’s going from $21,300 to $24,000. For a single individual the deduction is going from $10,650 to $12,000. It’s an increase, but a more modest one than appears on the surface.

A bigger issue is the exemptions for dependent children. These are also eliminated. In their place is a higher child tax credit.

Under prior law taxpayers could claim a tax credit of $1,000 for each child under the age of 17 at the end of the year. The credit is phased out ($50 for every $1000) for taxpayers with Modified Adjusted Gross Income (MAGI) above $110,000 (married, joint) $75,000 (single). Part of the credit may be refundable. There are other restrictions.

Under the new law the credit is increased to $2,000 per qualifying child. Phaseout begins at $400,000 (married, joint); $200,000 for any other filing status. The phaseout is the same as under the old law. In addition, a $500 credit can be claimed for each dependent who doesn’t qualify for the child credit. The maximum refundable portion is $1,400 per qualifying child. The refundable portion is equal to 15% of a taxpayer’s earned income in excess of $2,500 to the amount the tax credit exceeds the taxpayer’s tax liability. In addition, there are new requirements for a proper taxpayer identification number. A social security number will be valid only for a person who is a U.S citizen or is authorized to work in the U.S. Without this, the refundable credit is limited to $500.

So, are you better or worse off under the new law? Here it depends on your tax rate. A credit is a direct reduction in taxes. The tax savings doesn’t depend on your tax rate. With a deduction, the value depends on your tax rate. For example, Bob and Susan can get a $1,000 tax credit or a $4,150 deduction (the amount of the personal exemption for a child). They’re in the 10% bracket. The tax credit will save them $1,000 in taxes, but a $4,150 deduction will only reduce their taxes by $415 (10% of $4,150). Jack and Jill can also choose between a $1,000 credit or a $4,150 deduction, but they’re in the 35% bracket. The $4,150 deduction will reduce their taxes by $1,452.50. They’re better off with a deduction.

Under the old law a qualifying child would give you a $1,000 credit and a $4,150 deduction. Continuing the example above, under the new law Bob and Susan now have $2,000, much better than the $1,000 credit and a personal exemption which would save $415 in taxes. Jack and Jill get a $1,000 credit (which they would not have gotten under prior law because of the phaseout of the credit). But they also get another $1,000 credit instead of a $4,150 deduction which would have been worth $1,452.

There’s another important difference here. Under prior law a qualifying child for the dependency exemption had to be either under age 19 or, if a full-time student, under age 24 at the end of the calendar year. For the $2,000 credit the child must be under the age of 17. For a dependent older than that you’re only entitled to a $500 credit. Offsetting this is the phaseout of the child credit under the new law which occurs at a much higher income level.

Stay tuned ladies and gentlemen there is more TCJA fun to follow, you can find Part 2 of this article here.

You can reach Solid Tax Solutions by ☎ at: (845)344-1040.

You can also visit us on the web at: SolidTaxSolutions.com.

_______________________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com.

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

The IRS Gives Guidance on the Prepayment of State and Local Property Taxes!

To prepay or not to prepay state and local taxes? That’s been the burning question over the past week. With tax reform now law, taxpayers are anxious to take advantage of certain tax planning strategies. But will they work? The Internal Revenue Service (IRS) now has an answer as to whether it might accept prepayment as a tax strategy – and not surprisingly, it’s maybe.

An IRS Building.

Here’s what you need to know about the prepayment of state and local taxes. Typically, those taxes are deducted on a Schedule A. Beginning in 2018, deductions for state and local sales, income, and property taxes remain deductible but are limited: The amount that you can deduct for all state and local sales, income, and property taxes may not exceed $10,000 ($5,000 for married taxpayers filing separately).

One of the ways to “beat” the cap in 2018 is to prepay your taxes in 2017. With that in mind, under the new law, Congress specifically prohibited pre-payments for income tax to be used as state and local tax deductions for the current year. Amounts paid in 2017 for 2018 state or local income taxes will be treated as paid in 2018.

But Congress did not impose a similar restriction on property taxes. Many tax professionals, including yours truly, have suggested that prepaying real estate taxes should be allowed in some circumstances. The IRS, in response to “a number of questions from the tax community concerning the deductibility of prepaid real property taxes” agrees and has finally issued some official guidance.

As part of IR-2017-210: IRS Advisory: Prepaid Real Property Taxes May Be Deductible in 2017 if Assessed and Paid in 2017, the IRS declared that whether the deduction is allowed “depends on whether the taxpayer makes the payment in 2017 and the real property taxes are assessed prior to 2018.” That’s consistent with their prior treatment of prepayments. By way of additional clarification, a prepayment of “anticipated real property taxes that have not been assessed prior to 2018” would not be deductible in 2017. That is also consistent with their prior treatment of prepayments.

So, you might ask, who decides whether those taxes will be assessed prior to 2018? The respective state or local authorities.

On December 22, 2017, New York State Governor Andrew Cuomo signed an Executive Order authorizing local governments “to immediately issue warrants to levy property taxes by the end of the year.” Assuming those bills go out as intended, they should be deductible in 2017 if paid in 2017.

Also, the City of Philadelphia typically issues assessments for the new year in December of the prior year. So, 2018 bills should be in mailboxes now. Under the IRS guidance, those should also be deductible in 2017 if paid in 2017.

The IRS offers the following as an example of a deductible prepayment:

Assume County A assesses property tax on July 1, 2017, for the period July 1, 2017 – June 30, 2018.  On July 31, 2017, County A sends notices to residents notifying them of the assessment and billing the property tax in two installments with the first installment due Sept. 30, 2017 and the second installment due Jan. 31, 2018. Assuming taxpayer has paid the first installment in 2017, the taxpayer may choose to pay the second installment on Dec. 31, 2017, and may claim a deduction for this prepayment on the taxpayer’s 2017 return.

However, there are limitations. The IRS also offered the following as an example of a nondeductible prepayment:

County B also assesses and bills its residents for property taxes on July 1, 2017, for the period July 1, 2017 – June 30, 2018.  County B intends to make the usual assessment in July 2018 for the period July 1, 2018 – June 30, 2019. However, because county residents wish to prepay their 2018-2019 property taxes in 2017, County B has revised its computer systems to accept prepayment of property taxes for the 2018-2019 property tax year. Taxpayers who prepay their 2018-2019 property taxes in 2017 will not be allowed to deduct the prepayment on their federal tax returns because the county will not assess the property tax for the 2018-2019 tax year until July 1, 2018.

So, can you see the difference? A prepayment on its own isn’t enough: Taxes must be assessed in order to claim the deduction for the prepayment.

Even if you can deduct the prepayment, you may want to ask your tax professional whether it makes good tax sense to do so. But keep in mind that there may not be a clear advantage to prepayment – and if you prepay in 2017 for 2018, you can’t claim the deduction in 2018 unless you pre-pay the next year.

And don’t forget about the dreaded Alternative Minimum Tax, or AMT. The AMT was NOT repealed under tax reform for 2018 . And, more importantly, it remains “as is” for 2017.

The AMT is a secondary tax put in place in the 1960s to prevent the wealthy from artificially reducing their tax bill through the use of tax preference items. If you’re subject to the AMT, you have to calculate your taxes a second time, adding back in some of those tax-preference items. For example, normally, if you live in a high-tax state like New York, you can deduct your state and local taxes on your Schedule A if you itemize. For AMT purposes, however, you could lose the deduction. For more on the AMT, check out this prior blog post here.

In addition to the IRS guidance above, you should also make sure any required estimated state income tax payments have been made for your 2017 tax return. In most states the last estimated payment for 2017 is due January 15, 2018, but can be paid earlier. Technically, any amount overpaid is not deductible, in 2017. Therefore, if you estimate you’ll owe (in addition to withholdings) $3,000 for your state income taxes for 2017, pay them now and they’ll be deductible in 2017. However, if you pay $15,000 under the same circumstances because you know you’ll have to pay $12,000 in 2018, the additional $12,000 would not be deductible.

Remember: No two taxpayers are alike. Give Solid Tax Solutions (SolidTaxSolutions.com) a call at (845) 344-1040 if you have questions about whether prepaying your property tax or other year-end tax strategies can work for you.

____________________________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com.

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

The IRS Has Released the Standard Mileage Rates for 2018.

The Internal Revenue Service (IRS) has issued the 2018 optional standard mileage rates and beginning on January 1, 2018, the standard mileage rates for the use of a car, van, pickup or panel truck will be:

  • 54.5 cents per mile for business miles driven (up from 53.5 cents in 2017)
  • 18 cents per mile driven for medical or moving purposes (up from 17 cents in 2017)
  • 14 cents per mile driven in service of charitable organizations (this amount is set by statute and has remained at 14 cents per mile since 1998)
A Picture of a Car Odometer.
Solid Tax Solutions Will Show You How Your Mileage Can Save You Money in 2018: Just Give Us a Call At (845) 344-1040.

And just in case you’re wondering about the difference in the rates for business and medical or moving purposes, there’s a reason: the standard mileage rate for business is calculated using an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas and oil while the rate for medical and moving purposes is based on the variable costs of operating an automobile, such as gas and oil.

The optional standard mileage rates are used to calculate the amount of a deductible business, moving, medical or charitable expense (miles driven times the applicable rate). To use the rates, simply multiply the standard mileage rates by the number of miles traveled. If you use your car for business and personal use, you’ll want to keep appropriate records and back out the cost of personal travel.

It’s possible to use more than one rate on your tax return. Let’s say, for example, that you drive 20,000 miles in 2017. Of those miles, 10,000 are for personal use, 2,000 are for charity and 8,000 are for business use. You would calculate your deduction as follows (for 2017):

10,000 Personal Miles x 0 = 0

2,000 Charitable Miles x .14 = $280

8,000 Business Miles x .535 = $4,280

Your total deductible mileage related expenses would be $4,560 plus additional related charges such as parking fees and tolls.

Under current law, taxpayers have the option of deducting their actual expenses rather than using the standard mileage rates – though admittedly, that’s a lot more work. Ugh!

Whether these 2018 rates will impact most taxpayers in 2018 isn’t yet clear. The current tax reform proposals would eliminate the mileage deduction for moving expenses and job-related business mileage deductions for employees filing a Schedule A. In addition, both proposals would disallow – on the employer’s side – favorable tax treatment for employer reimbursement of employee moving expenses. However, under the Senate version of the bill, the tax treatment of these deductions would sunset, which means that the treatment of expenses would go back to the way the law is now (in 2017) beginning in 2026.

Both proposals would retain the charitable donation deduction, including for charitable miles. And in good news, under the House proposal, the mileage rate for charity would finally be indexed for inflation (it’s been 14 cents per mile since the Clinton era).

Both proposals would continue to allow you to deduct business miles related to your trade or business.

Remember: These are the rates effective at the beginning of 2018 for the 2018 tax year. Assuming that they still apply to you, that means they’ll show up on your 2018 returns (the ones you’ll file in 2018). However, you can still use the 2017 standard mileage rates for the tax return that will be filed in 2018. Even if the tax reform bills eliminate certain deductions as of January 1, 2018, those deductions are still applicable for the 2017 tax year.

____________________________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com.

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

You and Your Spouse Own a Business Together. What are the Tax Issues?

Ahhhhh……….The Husband and Wife owned business.

Love, love, love……….

A man and a women holding hands.

No one knows for sure how many businesses in the U.S. are co-owned by spouses.

A professor from Oklahoma State University estimated in 2000 that there were 3 million such businesses, so the number today likely is much higher.

Some giant corporations — Fiji Water, Forever 21, Panda Express, and Houzz — were founded by husband-wife teams.

There are many personal issues that couples face when co-owning a business.

Here are some of the tax issues that spouses co-owning a business should think about.

Tax Filing for Spousalpreneurs

A couple who co-owns and operates a business that is unincorporated and shares in the profits and losses are in a partnership, whether or not they have a formal partnership agreement. Usually they must file a partnership tax return, Form 1065, as well as report the income, losses, etc. on their personal return. However, they can elect to file Schedule Cs along with their Form 1040 instead of Form 1065, saving them from the complexities of the partnership return. To make this election:

  • Both spouses must materially participate in the business, which essentially means working on a day-to-day basis. (Material participation tests can be found at the IRS.) Neither spouse can be merely an investor.
  • Each spouse must file a Schedule C to report his or her share of income, gain, loss, deduction, and credit attributive to the respective interests in the business. If they split things equally, then both Schedule Cs will look the same.
  • Each spouse must file a Schedule SE to pay self-employment tax on his/her share of the net income from the business. This is the same action that would occur if the couple had filed a partnership return.

Divorce

It’s not uncommon for spouses who co-own a business to get divorced. What happens in the property settlement? Some spouses continue to co-own the business after divorce. Others may transfer interests to the other so that only one spouse owns and runs the business after the couple splits up.  How the business interests are addressed all depends on the couples involved.

From a tax perspective, the transfer of property incident to divorce is tax free. This means the transferring spouse does not recognize any gain or loss on the transfer to the other spouse. The spouse who now owns the business steps into the shoes of the other spouse when it comes to tax basis, so that if the business is later sold, the recipient-spouse recognizes the gain on any appreciation the transferor-spouse had but did not recognize at the time of the property settlement.

If spouses try to co-own and run a business after the divorce but it doesn’t work out, they can still part ways tax free. That’s what happened recently to one couple who had co-owned three dance-related businesses. After 17 months following the divorce, one party bought out the other for $1.6 million, and the Tax Court said this wasn’t a sale but rather part of the property settlement.

Innocent Spouse Relief

Spouses who co-own businesses typically file joint tax returns. These tax returns include the couple’s business income. By filing jointly, each spouse is jointly and severally liable for the tax due on the return, plus any interest and penalties. Can an owner obtain innocent spouse relief for the actions of the other spouse? Seems so.

In another recent case, one spouse was the sole owner of the business; the other handled the books and all other back-office operations. This spouse routinely had the tax return prepared and, after obtaining the other’s signature, filed it. The problem: She didn’t file it one year and he was assessed interest and penalties (she had died by this time). While he owed the tax, the Tax Court gave him innocent spouse relief for the interest and penalties.

Bottom Line

Spouses who co-own businesses should have very good lawyers and tax professionals so that each spouse’s interests are protected.

Solid Tax Solutions (SolidTaxSolutions.com) is skilled in such matters and can be reached year-round at: (845) 344-1040.

__________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com.

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

A Sole Proprietorship May Be The Easiest Route to Travel for SOME Businesses!

A lot of people think that the first step to starting a business is incorporating or organizing a Limited Liability Company (LLC). While both types of entities can provide your business with additional protection, they’re not the answer for everyone. And that protection comes at a cost. I’ve created a list of some factors that should be reviewed before deciding on an LLC, a corporation, or a sole proprietorship. For the sake of this post, I will assume that your business, at least in the beginning is a one-person show with no partners and no employees. While that leaves out many startups, it encompasses many more.

The Words 'Sole Proprietorship'.

Here Are Some Points to Consider:

Potential Liability. If you’re designing and importing a children’s toys, you will need all the protection you can get. On the other hand, if you’re a carpenter your insurance should be able to handle most liability issues. Many professionals are likely to be sued personally even if the business is incorporated. Things quickly change if you have employees. If that’s the case a corporation or LLC can protect you personally.

Business Debts. In earlier times the corporate form was used mostly to protect owners from being personally liable for corporate debts. Today, it’s used for personal protection from a range of lawsuits. But for most small businesses, owners will be required to personally guarantee any bank, etc. loans. The only advantage to a corporation or LLC may be avoiding accounts payable on a default. And even a corporation or LLC won’t protect you if don’t respect the formalities of the entity.

Cost. If you do it yourself, the cost of setting up (and dissolving if it doesn’t work out) a corporation or LLC may be relatively small (generally between $125 and $800). Using an attorney will add to the cost. There may be annual fees such as filing fees and franchise taxes. These vary widely. Not much of an issue if the business is nicely profitable, but a burden if you’re suffering losses. If you do business as a corporation (S or C) you’ll have a separate return to file. That is a consideration if you have a professional prepare it.

LLC vs. S Corporation. While you could do business as a regular C corporation, you could find yourself subject to double taxes. Most small businesses elect S corporation status where profits and losses are passed through to the shareholders. An LLC with only one member is a separate entity for legal purposes, but is disregarded for federal tax purposes. That is, instead of filing a partnership return (the normal return for an LLC with more than one member (owner)), a single-member LLC reports its income and expenses on the owner’s Schedule C. That, plus the fact no balance sheet is required, can save some preparation costs at tax time.

DBA. If you’re doing business as a corporation or LLC you will decide on a name when filing with the state. While you could use your own name (e.g., Ralph Kramden, Inc.) that’s usually not the case. As a sole proprietorship, the default is to use your own name. That’s fine if you’re Ralph Kramden, Attorney-at-Law, but not so attractive if you want to brand the business. The solution is filing with your state for a Doing Business As (DBA) to do business under an assumed name (e.g., Ralph Kramden doing business as Brooklyn Auto Body). You have to decide if you want the extra work of a DBA.

Transactions Between You and Entity. If you’re doing business as a separate entity, you’ve got to respect the formalities. Business assets are purchased and titled in the name of the entity. Assets transferred to shareholders or LLC members should be accounted for on the books and for tax purposes. Loans are taken out in the name of the entity. Not in your name personally. Paying a corporate loan (or other expense) with a personal check won’t get you a deduction. The proper approach is either to make a loan or equity contribution to the business so the business can pay the expense and get the deduction. Alternatively you can submit an expense report and have the business reimburse you. Paying personal expenses with a business check as well as not respecting other formalities such as making customers, creditors, etc. aware that you’re doing business as an LLC or corporation can allow outsiders to challenge the existence of the corporation or LLC. It sounds simple enough, but most small business owners don’t follow through. A sole proprietorship doesn’t have these problems.

Switching Entities. If you start a business as a sole proprietorship and later decide to incorporate or change to an LLC, doing so is relatively straightforward and there are generally no tax consequences. Going in the other direction can be more complicated, particularly if you have fixed assets. In some cases there may be tax consequences.

The Best Approach? If you have or will have shortly, owners in addition to yourself, you might as well use a corporation or LLC from the businesses inception. If additional owners are unlikely (at least for some time) a sole proprietorship should be considered if the liability protection of an LLC or corporation isn’t needed. You should discuss the issue with your attorney and with your tax advisor.

Keep in mind that this discussion is in no way inclusive of all factors to be considered in starting a business.

If you found this information to be helpful drop us a line to let us know and feel free to pass this article along to your friends and family.

If you are considering starting a business (or already have a business) give us a call for a consultation. Your business will thank you.

We can be reached at: (845) 344-1040. You can also learn more about us at our website:
SolidTaxSolutions.com.

__________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com.

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

Donating Your Car to Charity – What You Need to Know!

A customer of mine, whose car recently “died”, told me he wanted to donate that car to charity for a tax deduction. I know that a number of people have expressed an interest in doing the same thing with their cars but think it is as simple as dropping their car off at their favorite charity and then just taking the tax deduction.

Well it not quite that simple.

So, for my customer, all of those who have expressed an interest in donating their vehicle, and all of my valued readers, I thought I would review the rules for donating a car.

Taking a tax deduction for donating your car is not as easy as commercials make it out to be.
Taking a tax deduction for donating your car is not as easy as commercials make it out to be.

I have seen a lot of ads that entice you to donate your car to a charity and get a tax deduction – but you should be aware . . .

First, you will get no tax benefit from donating your personal automobile to charity unless you can itemize on Schedule A! This means the total of your “itemizeable” deductions exceeds your applicable Standard Deduction amount. While the donation itself can put you over the top and cause you to be able to itemize, to get the maximum tax benefit you must be able to itemize without the car donation.

A few years ago a customer expressed excitement when telling me that he donated his car to charity, and that he expected to get a big tax deduction. Unfortunately, his tax benefit from the deduction was zero, nothing, zilch. He was not able to itemize, and had not in the past, and even with the addition of the value of the car he was still not able to itemize.

FYI – you may want to itemize if your total deductions do not exceed your applicable Standard Deduction amount if you fall victim to the dreaded Alternative Minimum Tax (AMT). The Standard Deduction is not allowed in calculating AMT, but an itemized deduction for charitable contributions is.

Second, the amount you receive “in your pocket” will be only a small percentage of the car’s value. The amount of cash you will realize depends on your federal and, if your state allows a similar tax deduction (New York does not), state tax bracket.

And third, you have to wait to file your tax return to get the money. If you donate a car to charity today you will not see the cash until at least next tax season.

When you donate a vehicle (car, motorcycle, boat, or airplane) to a church or charity the amount you can deduct depends on what the organization does with the donated vehicle.

(1) If the organization sells the vehicle without significant interim use or material improvement your tax deduction is limited to the gross proceeds from the sale.

(2) If the organization intends to temporarily or permanently use the vehicle in its operations, or make “material” improvements to the vehicle before selling it, or sell the car to a “needy” individual at a price that is significantly below market value, or give the car to such an individual, you can deduct the “fair market value” of the vehicle.

You can use the “private party value” for the vehicle, adjusted for mileage and condition, as listed in the Kelly Blue Book (www.kbb.com) or a similar established used vehicle pricing guide.  If the fair market value of the vehicle is more than $5,000.00 you must obtain a formal appraisal.

To claim a deduction of more than $500.00 for donating a motor vehicle to charity you must include Copy B of the IRS Form 1098-C, provided by the charity, with the filing of your Form 1040.

The Form 1098-C will include the name and Taxpayer Identification Number of the donee organization, the vehicle identification number, the date of contribution, and information on what the charity did with the vehicle. Form 1098-C must be issued within 30 days of either the date of the contribution or the date of the disposition of the vehicle by the donee organization. The charity can give you a statement in lieu of Form 1098-C as long as it contains all the necessary information discussed above.

So, these are the basics of donating a vehicle to a charitable organization and taking a tax deduction for that donation. If you are considering donating your vehicle, don’t miss out on a very valuable tax deduction. Call Solid Tax Solutions (SolidTaxSolutions.com) before you make the donation: (845) 344-1040.

Your wallet will thank you!

__________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com.

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

HERE IS WHAT YOU SHOULD KNOW ABOUT YOUR SIDE GIG AND TAXES.

Ahh…the ‘Side-Gig’, the ‘Side-Project’, ‘Moonlighting’, or the ‘Side-Hustle’ (NO not this Hustle). From Uber to Dogwalker.com, there are tons of ways to make some money on the side while pursuing your dream job – or just digging out of debt. If you’re hoping to pick up some extra cash with a side gig this year, here’s what you need to keep in mind on the tax side.

1) Income is Income. It doesn’t matter if your extra income is from driving a car or trading stocks, income is reportable unless it’s otherwise excluded.

2) Understand the Difference Between a Real Business and Just a Fun Way to Make Some Money. Income may be income but how and where it’s reported can vary depending on whether you’re engaged in a business or making money with a hobby.

Hobbies and businesses are reported on different spots on your federal income tax return (line 21 for hobby income versus Schedule C for business income), and they are treated differently for purposes of self-employment tax (business income is subject to self-employment tax while hobby income is not). When it comes to deductions, if you earn income in the pursuit of a hobby, you can offset the income with deductions but you cannot claim deductions that exceed your income: if you spend more than you make, you’re unfortunately out of luck.

If, however, you earn income in the pursuit of a business, you can offset the income with deductions, and you can carry losses forward or backward to other years. These are sometimes referred to as the “hobby loss rules,” and they’re important.To distinguish a real business from a hobby, the IRS looks at a lot of factors including whether you expect to make money (if so, you’re typically a business) as well as whether you are actually making money (again, typically a business)—so how seriously you treat your new pursuit will matter.

3) Keep Good Records. It may seem like all good fun when you’re renting out your apartment on the weekends, but you want to be able to verify your income and your expenses. The best way to do this is contemporaneously.

If you’re working by the hour, keep a log of your time. Save your invoices and document income: if you can stash it in a separate account, even better. When it comes to expenses, keep receipts and annotate the nature of the expense (you can write this right on the receipt, or use a scanner and upload the image with an explanation). And please don’t ditch those receipts immediately after Tax Day (click here to find out how long to hold onto your tax records).

4) You May Need to Prorate Some Expenses. Typically, you can only deduct expenses primarily for business use. Sometimes, you may have items like your cell phone or your car that are used for business and personal reasons. When it comes to those expenses, all is not lost: you can typically deduct the business portion of the expense.

To figure that out, you’ll want to document your use and note when it’s for business. The easiest way to do this is to keep a log of your time and mileage (there are also apps that can help you do this). If at the end of the year, you find, for example, that 40% of the use was for business, then you can typically deduct 40% of the expense. Some exceptions apply (for example, the IRS always considers a primary home landline as personal {not business}, even if you swear it’s used solely for business).

5) You May Need to Make Estimated Tax Payments.The extra few hundred dollars you earn from ads on your blog might not drastically affect your tax bill, but if you’re making a significant amount of money, you’ll want to plan ahead.

If you expect to owe more than $1,000 at tax time, you’ll want to make estimated tax payments. To make estimated tax payments, you’ll use federal form 1040ES, Estimated Tax for Individuals (downloads as a pdf). Estimated taxes must be paid quarterly: if you skip a payment or pay late, you may be subject to a penalty.

6) Consider Hiring a Tax Pro. If your tax situation becomes more complicated from your side hustle—especially since all of your income will not be reported by your employer on a W-2, you may need help. Don’t hire just on cost.

If you have a Side-Gig or are just thinking about starting that Side Hustle, don’t get caught up in the IRS tax net.

Solid Tax Solutions (SolidTaxSolutions.com) Can Help You!

Give Us a Call At: (845) 344-1040.

We Are Open Year-Round!

Sometimes, a side hustle is just that. But if it turns out to be something more, don’t ignore the business and tax side of things.

_________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

Categories: Business, Income Tax