Are You Thinking About Putting Your Kids on The Payroll?

Should I Put My Kids on the Payroll or Not Really?

Will it make sense to put your children on the payroll for a summer or part-time job? While there are certainly tax implications, there are business and personal issues to consider too. Before digging into the details, I’d like to discuss some general issues with you. First, is the child going to get paid? If they are going to occasionally help you out in your home office, doing some filing, stuffing envelopes, etc. and the work is minimal, you might want to bypass the formalities and just put something extra in his or her allowance. Paying a salary, withholding, etc. can be a nuisance if you have no other employees. On the other hand, adding him or her to an existing payroll is usually easy.

Second, can the child do the work? Let’s say that you are a heavy equipment contractor doing business as a corporation and the state law requires any one working in a dangerous industry to be at least 17. Your son is only 15 and, since you use a bookkeeping service for all your paperwork, the only job is in the field. Or you claim your 10-year old daughter who works in your auto body shop. If you are audited, the IRS will be quick to investigate family members on the payroll. If it’s clearly not possible the child could have performed the work as claimed, the IRS will simply disallow the payments. And the IRS could interview current or former employees to check your story.

Sole Proprietorship or Another Type of Entity?

How you do business makes a difference here. Payments for the services of a child under age 18 who works for his or her parents in a trade or business are not subject to Social Security and Medicare taxes (FICA) if the business is a sole proprietorship or a partnership in which each partner is a parent of the child (i.e., you and your spouse are both members of an LLC and there are no other members). In addition, the payments are not subject to Federal Unemployment tax (FUTA) if the child is under 21. In any other situation, the payments are subject to FICA as well as FUTA.

For example, Kristy works for her father’s LLC that’s owned by her father and uncle. The ownership by the uncle means the partnership doesn’t qualify and her wages are subject to FICA and Medicare.

FICA taxes aren’t insignificant. There are two portions–the employer’s portion is 7.65% of his or her salary; the employee’s portion is a like amount. Since I am looking at a family situation, the total cost to the family is 15.3% of the salary. Half of that (the employer’s portion) is deductible. However, even if you’re in the 40% tax bracket (federal and state), the out-of-pocket cost will be a little over 9%. On $5,000 of salary that would be about $460. If you’re in a lower tax bracket your out-of-pocket would be higher because the deduction is worth less. If you have multiple businesses and at least one is operated as a sole proprietorship and your child is under 18, consider having the sole proprietorship employ the child, if possible.

Computing Your Tax Savings

Tax savings result from the switching of income from a high bracket (yours) to a low bracket (your child’s). While that’s true most of the time, it’s not unheard of for a business owner to sustain losses that put him or her in a low bracket, so it pays to check.

Even if your child is still your dependent, he or she can claim the standard deduction. That’s equal to $350 plus earned income, but not more than $12,000 (2018 amount). That means if he or she has no other income, the first $12,000 is not subject to tax. I’ve ignored state taxes on your child’s income in the discussion below. While the rules vary widely, state taxes are likely to be minimal.

The actual savings depends on your tax rate, your child’s rate, and the entity under which the business operates. I will give you a rundown on the different entities. In the discussion immediately below, I’ll assume the child’s only salary is from your business and it’s $5,000.

Regular Corporations: If you do business this way, the corporate tax rate is now (starting in 2018) a flat 21 percent on all income. The child will have income of $5,000, none of which will be taxable to him or her. The corporation gets a deduction for the $5,000, saving $1,050 in income taxes ($5,000 X 21%). Social Security and Medicare taxes will cost the corporation about $302 ($382.50 in FICA taxes [$5,000 X 7.65%] less the benefit of a tax deduction {$382.50 X 21%]). Your son or daughter will have $4,617.50 (net after their share of social security taxes) in their pocket; the corporation will be out-of-pocket only about $4,252 (Step 1: $5,000 + $382.50 (i.e., the employer’s portion of FICA taxes) = $5,382.50 Step 2: $5,382.50 X 21% (i.e., the ‘new’ corporate rate) = $1,130.33 Step 3: $5,382.50 – $1,130.33 = $4,252.17 (round this off to $4,252). So, the government has picked up about $748 of the amount you’ve given your child = 😎.

Partnerships and LLCs: Here the situation depends on the tax rates of the partners. I am going to assume the tax savings go to you alone. In this situation lets assume that you’re in the 24% bracket for federal purposes (FYI, the ‘new’ marginal tax rates starting in 2018 are: 10%, 12%, 22%, 24%, 32%, 35%, 37%); 5% for state. In partnerships and LLCs your share of the profits is subject to the self-employment tax (15.3%) up to the $128,700 (2018 amount) limit. There is no limit on Medicare taxes and there’s an additional 0.9% tax on individuals with higher income ($200,000/$250,000). Chances are you won’t break the limit, so the $5,000 you pay your child will reduce the partnership’s income and, therefore, your self-employment taxes by 15.3% of $5,000 or $765 as well as reducing your taxable income. In addition, you’ll pay $382.50 in social security taxes (7.65% X $5,000) on your child’s salary. Your marginal tax rate is 24% for federal plus 5% for state and about 12.8% for the self-employment tax (it’s 15.3%, but you get to deduct half of it on your personal return) or 41.8%. Thus, the $5,382.50 (salary plus employer’s share of social security taxes) will save you $2,250 in taxes. Your out-of-pocket cost will be $3,132.50. Your son or daughter will have $4,617.50 after social security taxes ($5,000 less $382.50). To find the total tax in other brackets you’re pretty safe in just adding your federal and state rates and then add 12.8% for the self-employment tax. In the top brackets the benefits are a bit more; in the lower brackets, less.

Sole Proprietorships: The result would be similar to that for partnerships and LLCs, unless the child is under age 18. Then we don’t have to worry about social security taxes. In that case the tax benefits are a bit more.

S Corporations: The computation here is similar to partnerships and LLCs, above, but the child’s salary and social security taxes will only reduce your social security taxes if you reduce your salary by a like amount. Since that’s unlikely, I won’t use that assumption. Again assume the 24% bracket for federal purposes and 5% for state. The cost of paying your child is $5,000 plus the $382.50 in the employer’s portion of social security taxes or $5,382.50. The tax savings would be 29% of that or $1,561. Therefore, your out-of-pocket would be $3,821. Your son or daughter will have $4,617.50 after social security taxes ($5,000 less $382.50). The savings here are less. Why? Because there’s no saving from the self-employment tax, the overall tax rate is less. When the tax rate is less the government picks up less of the cost.

You can see from the situations above, the biggest savings occur if you’re doing business as a sole proprietorship, partnership, or LLC since the self-employment tax boosts your tax rate resulting in larger savings from the deduction.

Some Other Points

Clearly, I’ve made it simpler than in real life. Fortunately, your savings could be more. If you’re in the 37% bracket and your state taxes are 7%, the savings will be larger. The rest of the discussion assumes you’re doing business as anything but a C corporation.

There are additional, hidden savings. By paying your child, you reduce your own Adjusted Gross Income (AGI) in all but a C corporation (unless you reduce your salary). There are many tax benefits and limitations based on your AGI. For example, the child care credit is phased out for higher income individuals as are itemized deductions, the $25,000 allowance for rental real estate losses, etc. To the extent you can shift income to your children, you can reduce or avoid these phaseouts.

While the discussion above was aimed at a summer job for your child still in school, the approach can have benefits for older, working children. The benefits will be less because they’ll be paying taxes on the income if it’s about the standard deduction, but they can still be significant. For example, if you’re in the 37% bracket and can transfer income to your daughter in the 12% bracket by employing her part-time in the business, the 25 percentage point spread could save considerable tax dollars. Of course, as her and your brackets converge the savings become less.

By the Book

Will it work? The IRS has gone to court and won some and lost some. You can win if you’re careful. This is another one of those the devil is in the details. First, you’ve got to put the child on the payroll. If you’re a sole proprietorship or LLC without any employees you’ll have to start filing Form 941 (employment taxes) quarterly, filing state employment tax returns, and paying state unemployment insurance. You’ll probably need workers’ compensation insurance. If you don’t currently have employees, this may be more of a hassle than it’s worth. If you already have employees, adding your son or daughter shouldn’t cost much.

Don’t try to claim the child is an independent contractor. That’s often tough to do even when the worker is older, experienced and has some professional credentials. It’s highly unlikely to fly here.

Make sure the child is qualified to handle the job. The IRS is going to be skeptical. You’ll be on firmer ground if you’ve hired individuals close to your child’s age for the job in the past, or others in the industry have done so. If the job requires special skills, make sure the child has them and you can document that.

Pay the going salary. Don’t pay more than you would to an unrelated party who would have filled the job. If you never had anyone in that position, ask around. An excessive salary is sure to raise a red flag. And, although it seems obvious, give your child a check. Don’t pay him or her with a trip to a theme park, a new bike, etc. Even when you pay by check you may have to rebut the supposition that payments made to dependent children are in the nature of support and nondeductible.

The jobs the child does should be clearly work related. If you have a regular place of business (office, laundromat, motel, farm, etc.) that may be easy. If you work out of your house, that may be more difficult. Don’t give them jobs that aren’t work related but that would free you to work. For example, having your daughter do the laundry to free you up to spend time calling customers. It may be valuable to you, but payments for that service aren’t any more deductible than hiring a housekeeper.

Document everything. Keep a log of days and hours worked, what was done, etc. Do it on a daily basis. Reconstructing six months or a year later won’t work. This doesn’t have to be ultradetailed, but it should be specific.

What about your 27-year old daughter with her MBA? The same rules apply, although you don’t have to document her work as carefully. Make sure you can show a reasonable salary and that he or she performed actual work. The same applies to your father or mother. There’s often an advantage here to putting them on the payroll. You may not need to cover them with health insurance (they may be on Medicare) and they’re probably in a lower tax bracket. Make sure they can do the job, especially if there are physical requirements.

As always, check with your tax adviser at Solid Tax Solutions (845) 344-1040 (or visit us on the web at: SolidTaxSolutions.com) before committing.

So my friends, are you still considering putting your child (or children) on the payroll???

____________________________________________________________________________________________________________________

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 Tax Cuts and Jobs Act (TCJA) – Part 5

Hello again everyone and welcome to the fifth installment of our discussion about how the new Tax Cuts and Jobs Act can affect you. I hope that you find these articles enlightening.

To start off, if you haven’t read my introduction to the new law, please go to → Tax Cuts and Jobs Act–Part 1.

In this fifth installment I will be continue the discussion about items affecting individuals but with a business slant. There are a number of changes to the provisions applicable to business. Many are straight-forward, some are complex and will require regulations by the IRS to fully implement. I’ll start this discussion with some of the easier ones.

Immediate (Section 179) Expensing of Depreciable Assets

There are a number of ways of treating depreciable tangible personal property and certain other qualifying real property. Taxpayers can expense an asset with a cost of no more than $2,500 ($5,000 for certain taxpayers) under a safe harbor rule. That works well for small items such as laptops, calculators, small tools, etc. largely because it involves less paperwork and follows financial accounting rules. But there are some restrictions. For larger assets Section 179 allows an immediate deduction, but you must make an election to do so. In addition, there’s an income limitation. But it’s still simpler than taking annual depreciation.

Under prior law the Section 179 election was limited to $510,000 (adjusted for inflation) of assets in any one year and that amount was decreased for taxpayers who put more than $2,030,000 of tangible personal property in service during the year. There was a $25,000 restriction on SUVs (not adjusted for inflation) and for property used in connection with certain lodging facilities.

Increased Expensing Limits The new law increases the amount of property that can be expensed in any one year to $1 million and the investment limitation is increased to $2.5 million from $2 million. The higher $1 million limit on qualifying property means many small businesses won’t have to worry about depreciation of most assets. By combining the $2,500 safe harbor for lower-cost assets and the Section 179 option, over $1 million can be written off in any one year.

Tax TipTaxpayers doing business as a pass-through entity (S corporations, partnerships, etc.) may not want to use the full available amount. That’s because of the graduated rates for individuals where the pass-through income is taxed. Taking a large deduction in one year that drops your income into a low bracket only to push yourself into a high bracket in the following year will result in overall higher taxes. You do have some options and you don’t have to decide to depreciate or expense an asset until you file your return.

Qualified Real Property Definition The provision expands the definition of qualified real property eligible for expensing to include certain improvements to non-residential real property placed in service after the date such property was first placed in service. The improvements include roofs, heating, ventilation, and air-conditioning property, fire protection and alarm systems and security systems. This change not only allows a direct deduction for such improvements that are often encountered several times during the life of a building and that frequently generated controversy. Qualified improvement property continues to include certain leasehold improvement property, retail improvement property, and restaurant improvements and buildings. As under prior law, qualified improvement property is an improvement on the interior of a building. Modifications that enlarge the building do not qualify. The new law repeals the requirement that the improvement qualifies only if placed in service more than three years after the building is placed in service.

Property Used in Connection with Lodging The provision also expands the definition of Section 179 property to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with the furnishing of lodging. In the past longer-term lodging such as an apartment was distinguished from lodging such as a hotel, motel, inn, etc. Property used predominantly to furnish lodging or in connection with the furnishing of lodging generally includes beds and other furniture, refrigerators, ranges, and other equipment used in the living quarters of a lodging facility such as an apartment house, dormitory, or any other facility where sleeping accommodations are provided.

Sport Utility Vehicle Limitation The new law changes the rule with respect to the $25,000 limitation on sport utility vehicles such that this amount will be adjusted for inflation. The sport utility rule applies not only to the general definition of a sport utility vehicle but also a vehicle not subject to Section 280F and which is rated at not more than 14,000 pounds gross vehicle weight and has a seating capacity of less than 10 persons or truck with an interior cargo bed shorter than six feet.

 

Bonus Depreciation

Background For a number of years the law has contained a “bonus depreciation” provision, the intent of which has generally been to increase capital investment. Under normal rules, the first years’ depreciation is one-half of double the straight-line rate. The one-half is to account for the fact the property is in service for only a portion of the year. (Property placed in service in January gets 1/2 year of depreciation; so does property placed in service in December.) Bonus depreciation front loads the depreciation deduction even more. Under 50% bonus depreciation you can deduct half the asset’s value in the first year, plus you can take the regular depreciation on the other half. That was the rule in effect prior to the new law.

New Law The new law allows 100% bonus depreciation rather than 50% on property placed in service after September 27, 2017 and before January 1, 2023. Bonus depreciation drops to 80% for property placed in service after December 31, 2022 and before January 1, 2024; 60% in the following year then 40% in the following year and 20% for property placed in service after December 31, 2025 and before January 1, 2027. No bonus depreciation is allowed for subsequent years. Property subject to a written binding contract for its acquisition entered into before September 28, 2017 does not qualify. The placed in service dates for property with a longer production period and noncommercial aircraft are extended by one year. Bonus depreciation applies to both new and used property. (Under prior law it only applied to new property.) Special rules apply to prevent abuse. They include:

  • the property can not have been used by the taxpayer before purchase,
  • the taxpayer must have acquired the property by purchase,
  • the property can’t have been acquired from a related party if loss would be barred under Sec. 267 of the Internal Revenue
    Code.

Qualified leasehold improvement, restaurant property and qualified retail property retains a 15-year depreciation life, but now can be depreciated using MACRS (a faster method) rather than straight-line depreciation and the bonus depreciation rules apply.

The 100-percent bonus depreciation rules do not apply to assets used in a trade or business where the property has had floor plan financing indebtedness.

Bonus depreciation can be taken on qualified film, theatrical productions, or television shows placed in service after September 27, 2017.

Luxury Auto Limits Under Sec. 280F depreciation deductions for vehicles are capped on an annual basis. Under the old law it could take nine years to depreciate a $30,000 auto. The new law changes the limits for vehicles placed in service after December 31, 2017 and for which 100-percent bonus depreciation is taken. The new amounts are:

$10,000 for the first year,
$16,000 for the second year,
$9,600 for the third year,
$5,760 for the fourth and subsequent years.

These amounts will be adjusted annually for inflation.

Farm Assets The new law shortens the recovery period from 7 to 5 years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business if the original use of the property commences with the taxpayer and is placed in service after December 31, 2017. The provision also repeals the required use of the 150-percent declining balance method for property used in a farming business (3-, 5-, 7-, and 10-year property only). The 150-percent method will continue to apply to 15- and 20-year property. A farming business electing out of the limitation on the deduction for interest (see later) must use the ADS method of depreciation any property with a recovery period of 10 years or more (e.g., single purpose agricultural or horticultural structures).

Computers Listed property is property of a type that could be used for recreational purposes such as autos, computers, cameras, audio equipment, etc. Computers used in an office environment aren’t included, but those used at home are. In order to secure a deduction for listed property special record keeping requirements apply. That generally means keeping a log. Cellphones were removed from this list a number of years ago. The new law removes this computers and peripheral equipment from the definition of listed property (and the stricter substantiation requirements) effective for property placed in service after December 31, 2017.

Tax TipBeing able to write off the full value of an asset in the first year will maximize cash flow for that year, but it could result in higher taxes down the road. You can elect out of the bonus depreciation for any class of asset for the year. If you do business as a pass-through entity (e.g., S corporation, LLC, partnership, etc.) the income or loss is passed through to the shareholders, partners, etc. and subject to the progressive tax rates. Moreover, you can generally no longer carry back losses to an earlier year. That means you could be getting a current deduction and saving taxes only to put yourself in a higher bracket in a subsequent year. There’s no easy rule of thumb–you’ve got to work through the numbers. You should be looking at making an election if you’re in a lower bracket and the depreciation deduction will be a substantial percentage of your before depreciation income.

Tax TipBuy or lease? It’s a frequent question when it comes to vehicles. Depreciation deductions are capped. Deductions for lease payments are restricted through the lease inclusion amount. But that restriction on lease payments appears to be less than those on depreciation under the old law. The new law may favor purchase and depreciation of an auto, at least for less expensive vehicles. While it’s a point for consideration, the IRS has yet to release the lease inclusion tables for 2018 and there are other factors to take into account when leasing a vehicle for business purposes.

Tax TipWhile the new law removes the stringent record keeping requirements for computers, the IRS can still challenge the business use of any property. You should be able to show that the computer is used regularly in your business. In many cases it’s obvious. Let’s say that you’re an independent salesperson on the road and take and place orders with your office using the computer. That probably won’t be questioned. On the other hand if you have a landscaping business and keep all your records using a paper ledger, you may want to be able to prove the business use in some way.

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).

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. In the next post (i.e., Part 5), I will talk a bit about some of the new tax provisions and how they will affect your business. You can find it right here.  👓

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).

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).

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←

 

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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 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 consumer price index’ (C-CPI-U) approach (for your reference, a quick read primer about the ‘chained consumer price index’ (C-CPI-U) is here. This is a method, that will be used going forward, 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 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.

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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).

ARE YOU SELLING YOUR HOME?

Ahhh……Summer Is Here!

 

Summer is typically a “hot season” in the home sale market. Young families typically want to get settled in a new home before school begins in the fall, and older home sellers in northern climates want to head south before winter sets in. People who are buying a new home will need to do some serious number crunching to determine what they can afford to pay and how they will pay it. However, those of you who are home sellers will need to do some number crunching as well.

Under current tax rules, a loss on a home sale is not deductible. On the other hand, the first $250,000 of gain on a home sale is excluded from income. What’s more, for joint filers, the exclusion is generally doubled to $500,000. However, for long-time homeowners, even those generous exclusions may not shelter all of that gain from tax. Therefore, you will need to:

Get Back to Basis

To properly determine gain (or loss) on the sale or exchange of a home, a taxpayer must know the basis of the home for tax purposes. And calculating basis will involve information that dates back to the time the home was purchased. Or perhaps even earlier.

The amount of gain or loss on a sale is determined by comparing the amount realized on the sale to the adjusted basis of the home. If the amount realized is greater than the adjusted basis, the difference is a gain. If the amount realized is less than the adjusted basis, the difference is a loss.

Cost Basis

In most cases, the starting point for determining basis is the cost of the home. So, if a home was purchased from the builder or from a former owner, the initial cost basis includes the purchase price and certain settlement costs. The purchase price generally includes the down payment and any debt, such as mortgage or notes given to the seller in payment for the home.

Settlement fees or closing costs associated with the purchase of the home can be added to basis. However, fees associated with a mortgage on the home (e.g., appraisal fees, costs of a credit report or mortgage insurance fees) are not added to basis. In addition, escrow amounts for payment of future liabilities are not included in the basis of the home. Some examples of settlement fees that can be added to basis include:

  • Abstract of title fees
  • Charges for installing utility services
  • Legal fees (e.g., fees for a title search and for preparing the sales contract and deed)
  • Recording fees
  • Survey costs
  • Title insurance
  • Transfer taxes

When a home changes hands, real estate taxes for the year of the sale are apportioned between the buyer and seller based on the number of days each of them held the property during the year. The date of the sale counts as a day the property is owned by the buyer. Real estate taxes for the year of sale may increase or decrease basis, depending on how the taxes were handled at the closing. If the buyer paid taxes owed by the seller and was not reimbursed, the taxes increase the buyer’s basis of the home. If the seller paid taxes owed by the buyer and was not reimbursed, the taxes decrease the buyer’s basis of the home.

In the case of a home that was constructed by or for the taxpayer, basis includes the cost of the land plus the construction costs. However, if the taxpayer did all or part of the construction personally, basis does not include the value of the taxpayer’s own labor or the value of any other unpaid labor. 

Basis Other Than Cost

Special rules apply in determining basis if a home was acquired other than by purchase or construction—for example, as a gift or inheritance or as part of a divorce settlement. In addition, a taxpayer may have a basis other than cost if a home was acquired as a replacement home in a home-sale rollover under prior law. 

Adjustments to Basis

A taxpayer’s basis in a home is not static. Basis may be adjusted upward or downward to reflect expenditures made in connection with the home or payments or other benefits received.

Improvements that increase basis include:

  • Additions to the home, such an extra bedroom or bath, a family room, a deck or patio, or a garage.
  • Landscaping and other outdoor improvements, such as a new driveway or walkway, fences and walls, a sprinkler system, or a swimming pool.
  • Systems improvements, such as a new heating system, central air conditioning, a new furnace or ductwork, wiring upgrades, a septic system, a water heater or water filtration system, a satellite dish, or a security system.
  • Exterior improvements, such as new storm windows or doors, roof, siding or shutters.
  • Interior improvements, such as built-in appliances, kitchen cabinetry, flooring, wall-to-wall carpeting and insulation.

CAUTION: Improvements that are no longer part of a home are not included in the home’s basis.

Example: John Smith bought his home for $200,000 in 2005. In 2006, John added a deck to the home at a cost of $6,000. In 2012, John remodeled the home, which involved removal of the deck and the addition of a new covered porch. The addition and porch cost $30,000. Result: After the addition of the deck in 2006, John’s basis in the home increased to $206,000. However, after the deck was removed in 2012, it was no longer included in the home’s basis. Therefore, John’s basis for the home following the remodeling is $230,000 ($206,000 – $6,000 + $30,000).

Some examples of repairs that do not increase basis (unless they are part of an overall renovation or remodeling) include interior or exterior painting, fixing gutters, repairing leaks or plastering, and replacing broken windowpanes.

AND HERE ARE 11 ADDITIONAL ‘HOME SELLING’ TAX TIPS:

  1. Generally, you can exclude a gain from the sale of only one main home per two-year period.
  2. If you can exclude all of the gain, you probably don’t need to report the sale of your home on your tax return.
  3. You can choose not to exclude the gain from a sale. If you expect to sell another main home within two years, you may want to consider claiming the gain on sale of your current main home instead of excluding the gain. You can only claim an exclusion on the sale of your main home once every two years (See Tax Tip #1). Depending on your specific sale, it may be more beneficial to claim the current gain as income and use the exclusion on the future sale of your main home.
  4. If you can’t exclude all of the gain, or you choose not to exclude it, you’ll need to report the sale of your home on your tax return. You’ll also have to report the sale if you received a Form 1099-S – Proceeds From Real Estate Transactions.
  5. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is usually the one you live in most of the time.
  6. If you received the First-Time Homebuyer Credit when you purchased your home, you may have to pay some or all of it back.
  7. If you didn’t live in the home the entire time you owned it, you may have to pay tax on part of the gain. If your house went up in value when you were not living in it; for example, when you used the property as a rental house, you cannot exclude gain from the time you rented it out. For determining the amount of the gain you cannot exclude, the property is assumed to have gone up in value evenly over the period of time you owed it.
  8. You don’t have to buy a home of greater value, or any other home, to exclude this gain.
    There are no longer any requirements to buy another home after you sell in order to exclude the gain from the sale of your home.
  9. Long-term capital gains rates are lower than the ordinary tax rates you pay on short-term gains. Long-term capital gains tax rates for 2017 are 0%, 15%, or 20%, depending on your income tax bracket. Ordinary income tax rates for 2017 range from 10% to 39.6%. High-income taxpayers must pay an additional 3.8% tax on Net Investment Income (NIIT), including any gain from the sale of a residence that is not excluded from income. For this purpose, a high-income taxpayer is a taxpayer with a Modified Adjusted Gross Income (MAGI) of more than $200,000 ($250,000 if married filing jointly or a qualifying widow(er), $125,000 if married filing separately).
  10. When you sell your home and move, be sure to update your address with the IRS and the U.S. Postal Service. File Form 8822 – Change of Address, to notify the IRS.
  11. Most Importantly——>If you are selling your home (or are just thinking about it) contact Solid Tax Solutions and let us help you: (845) 344-1040.

Hey, if you like this article let us know and also take the time to look at some of the other helpful articles here at The Tax Nook and please feel free to share our blog with your family and friends.

Until the next time….

_________________________________________________________________________________________________

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).

Do You Need to ‘Timely’ Send Out Your Tax Return?

Hi all! For those of you who want to send tax returns to the IRS by Private Delivery Service (i.e., don’t or can’t e-file) but wonder if the tax return will reach the IRS in a ‘timely’ manner and can you use just any ole’ PDS……well the answers are right below.

In most cases the IRS considers ‘timely mailing as timely filing’. That is, if the tax return, payment, election, etc. is mailed on or before the due date, the IRS considers it filed on time, regardless of when it arrives. Prior to 1997, this rule only applied to the U.S. Postal Service. Thus, if you mailed your return by a private delivery service, the IRS considered it filed on time only if it arrived on time. Now, certain private delivery services are afforded the same status as the post office. The delivery services and the type of service are:

The list of designated PDSs effective April 11, 2016 is as follows:

DHL Express

  • DHL Express 9:00
  • DHL Express 10:30
  • DHL Express 12:00
  • DHL Express Worldwide
  • DHL Express Envelope
  • DHL Import Express 10:30
  • DHL Import Express 12:00
  • DHL Import Express Worldwide

Federal Express (FedEx)

  • FedEx First Overnight
  • FedEx Priority Overnight
  • FedEx Standard Overnight
  • FedEx 2 Day
  • FedEx International Next Flight Out
  • FedEx International Priority
  • FedEx International First
  • FedEx International Economy

United Parcel Service (UPS)

  • UPS Next Day Air Early AM
  • UPS Next Day Air
  • UPS Next Day Air Saver
  • UPS 2nd Day Air
  • UPS 2nd Day Air A.M.
  • UPS Worldwide Express Plus
  • UPS Worldwide Express

FedEx and UPS are not designated with respect to any type of delivery service not identified above. Therefore, for UPS regular ground service doesn’t qualify.

Notes:

Only the services listed above for each carrier qualifies for this special rule. Other services provided by these carriers are not covered.

You may still want to use the postal service. The rules for substantiating the “postmark” on private delivery services varies. Don’t forget, it’s not just the mailing but proving the date of mailing that counts. Check with the delivery service on their policy for the various types of delivery. Obtaining a proof of mailing from the U.S. Postal Service may be more convenient.

In addition, just keep in mind that the rules for  the states vary. Check the individual state. For example, at least one state accepts delivery by the above carriers, but to a different address than if you’re sending the return or other item by U.S. Postal Service. And, as of the writing of this blog post, one state has not accepted the updated list.

References:

  • Notice 2016-30
  • Notice 2015-38
  • Notice 2004-83
  • Notice 2002-62
  • Notice 2001-62
  • Notice 1998-47
  • Notice 1997-50
  • Rev. Proc. 97-26
  • Rev. Proc. 97-19

___________________________________________________________________________________________________

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: Tax Return Filing