How to Tell if Your ‘Stimulus Check’ is Real (Here are six ways)!

    So, to give you fine folks an update, the Internal Revenue Service is making good progress in getting the Economic Impact Payments (i.e., ‘Stimulus Payments’) to eligible individuals.

    Just in case you missed my article regarding Economic Impact Payments, or would just like to refresh your understanding of these payments and the process involved in their delivery, you can take a look at that article here.

    Most of the money, so far, has been directly deposited into recipients’ bank accounts.

    Some people, however, will be receiving paper checks.

    Paper Check Problems: This is a bit of a concern for two reasons.

    First, as with tax refunds issued by check and snail mailed to taxpayers, there’s always the possibility that crooks could steal the relief payments from their curbside mail boxes.

    Second, some coronavirus crooks have created fake stimulus checks. This is latest variation of the bogus government payment scam that’s been around for years.

    In these instances, con artists send fake checks to their scam victims, advising them to quickly deposit the checks. Then the second part of the scam kicks in, with the crooks telling their prey that the checks are too large.

    Since they got more than they were due, according to the crooks perpetrating this type of scam, the recipients of the fake checks need to send back part of the money. Yep, send the alleged excess back to the crooks who issued the worthless counterfeit checks.

    It’s easy to blame the victim, saying that they should know better, but some of the counterfeit checks are quite convincing. There have been cases where it’s taken even banks weeks to discover that checks they accepted were not real (You can see what the Federal Trade Commission has to say about that here).

    Know your real government check: With so many people eagerly awaiting their much-needed money and the stimulus payments (the physical check version) providing a new opportunity for fake checks, Uncle Sam has called in the big guns. The U.S. Secret Service is getting involved.

    This federal law enforcement agency, which operates under the direction of the Department of Homeland Security, is best known for its agents who protect U.S. presidents. However, Secret Service agents also investigate counterfeiting law violations, as well as a wide range of financial fraud, including financial document counterfeiting.

    Because of its expertise in fighting counterfeiting, the Secret Service has joined the Treasury Department in a new “Know Your U.S. Treasury Check” campaign. This is an effort to make individuals, retailers and financial institutions aware of possibly fake ‘stimulus’ checks and educate them on how they can protect themselves from becoming victims of counterfeit government checks.

    The agencies have created a two page PDF (which you can read right here) with more on the legitimate coronavirus ‘stimulus checks’.

    Here are six security features noted in that document that are found on all real Treasury checks and the COVID-19 Economic Relief Payment (pictured above) in particular:

    1. Treasury Seal — This is a new seal to the right of the Statue of Liberty. It should say “Bureau of the Fiscal Service” and has replaced the old seal that said “Financial Management Service.”
    2. Bleeding Ink — When moisture is applied to the seal to the right of the Statue of Liberty, the black ink will run and turn red.
    3. Watermark — All U.S. Treasury checks are printed on watermark paper. The watermark reads “U.S. TREASURY” and is seen from both front and back when held up to a light source.
    4. Ultraviolet Overprinting — A protective ultraviolet (UV) pattern is invisible to the naked eye, consisting of lines of “FMS” bracketed by the FMS seal on the left and the U.S. Seal (eagle) on the right. As of 2013, a new ultraviolet patter was introduced into the check that says “FISCALSERVICE.” Either one of these UV patterns maybe be seen.
    5. Microprinting — This is located on the back of the check, showing the words “USAUSAUSA.”
    6. Economic Impact Payment Notation — The Economic Impact Payment checks will have a special note at the lower left side of the check, next to the Statue of Liberty image. It says “Economic Impact Payment President Donald J. Trump.”

    When you get your check in your mail box, check it out using the “Know Your U.S. Treasury Check” guidelines.

    So everyone please be careful because the only thing worse than having to wait for your Corona Virus ‘stimulus’ money is falling for a fake stimulus check scam.

    EVERYONE PLEASE, PLEASE, PLEASE STAY WELL and STAY HEALTHY!

    BRUCE

    ______________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com

    Tax Stimulus Checks – Q & A

    As COVID-19 continues to impact the United States, the federal government is taking action to ease the burden on taxpayers. Most recently, the U.S. Senate and the House of Representatives passed a massive stimulus package and the Coronavirus Aid, Relief, and Economic Security or CARES act was subsequently signed into law by the President (You can access the Senate bill at this link—–> THE SENATE and the House version at this link—–> THE HOUSE).

    A key feature of this stimulus package is individual ‘stimulus checks’ (To avoid any confusion, the IRS refers to these ‘stimulus checks’ as ‘Economic Impact Payments’).

    As with anything that is tax-related, there’s a little bit of confusion. To help you sort it out, here are a few questions and answers:

    Who qualifies for the stimulus payments? The payments go to almost any adult with a Social Security number, as long as they aren’t dependents of someone else. Those adults will get the payments for the children in their household.

    When will I get my check? Checks are supposed to be produced “as rapidly as possible”. Treasury Secretary Steve Mnuchin has hinted they will come in April, but it’s been suggested that it could take up to two months. One thing that is true: if you use direct deposit, you’ll get your money faster.

    (UPDATE: The Treasury Department and officials from the IRS have told the House Ways and Means Committee that the initial wave of payments will go out the week of April 13. The payments will be automatically deposited into the same bank account reflected on the 2019 or 2018 tax return filed.

    Taxpayers who will be in the first wave will have already had their direct deposit information on file with the IRS from their 2018 or 2019 tax returns. Paper checks will then start going out in May to people who don’t have direct deposit information on file with the IRS. About 5 million checks will be sent weekly, and it could take up to 20 weeks to distribute all of them. People with the lowest incomes will get their checks first.

    In the coming weeks, the U.S. Treasury  plans to develop a web-based portal that will allow individuals who have not recently submitted banking information to the IRS to do so enabling them to receive payments immediately as opposed to waiting for a check to arrive in the mail.

    In addition the IRS anticipates creating a “Where’s my Economic Impact Payment?” tracker, similar to the “Where’s my refund?” system.)

    How big will my check be? So, there are three dollar figures to be aware of in terms of the stimulus payments: $1,200 will be given to individual taxpayers, $2,400 will go to married couples filing jointly and taxpayers will receive an additional $500 per qualifying child (listed on the taxpayer’s tax return) under the age of 17.

    Are there income limits on checks? The amount of the checks would start to phaseout for those adjusted gross income more than $75,000 ($150,000 for joint returns and $112,500 for heads of household). Take note that this is adjusted gross income (AGI), not taxable income – so this will be income before your standard or itemized deductions. FYI, you’ll find your AGI number on line 8(b) of your form 1040.

    Wait a minute, how does a phaseout work? I am glad you asked. A phaseout means that the benefit goes down as income goes up. In this case, for every $100 of income above those thresholds, your check will drop by $5. So, if you are a single filer and your AGI is $75,100, your check will be $1,195 ($1,200 – $5). If you are a single filer and your AGI is $85,000, your check will be $700 ($1,200 – $500). This also means that your stimulus check will be phased out completely (meaning that you’ll get nothing) once your AGI reaches $99,000 as a single filer, $198,000 as a married couple filing jointly, or $136,500 for heads of household.

    What about limits on children? There are no limits on the number of children that qualify. The definition of child will be the same as for the child tax credit.

    Do children born in 2020 get the payment? Parents of children born this year won’t get a payment for that child now.

    However, assuming the parents qualify based on their 2020 income, they would get $500 added to their tax refund or subtracted from their income-tax bill when they file their 2020 tax returns in early 2021.

    Will I need a Social Security Number to get a check? Yes. Or as an alternative (where applicable), an adoption taxpayer identification number (ATIN). This also holds true for spouses and children.

    So how does this work? Do I need to file anything to get my check? Technically, the checks are advances of refundable credits. The Treasury will advance your check based on your most recently filed tax return (i.e., your 2018 or 2019 tax return). If you haven’t filed a tax return, and your income is from Social Security benefits (or Railroad Retirement benefits), the bill allows the Treasury to use the information on your 2019 Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Social Security Equivalent Benefit Statement . After some initial confusion, this was confirmed by the Treasury. You can see what the Treasury said here and you can see the statement put out by the IRS here.

    Okay, I don’t understand. What the heck is a refundable tax credit? A refundable credit means that you can take advantage of the credit even if you do not owe any tax. Unlike with a nonrefundable credit, if you don’t have any tax liability, the “extra” credit is not lost but is instead refunded to you.

    In this case, the stimulus check acts like a refund that you get in advance based on your 2020 income. That’s confusing because you don’t know yet how much you’re going to earn in 2020, but that is why the IRS is using earlier tax returns. But this advance payment on the credit does not affect your “normal” tax refund for 2020: you won’t lose out on your expected tax refund for 2020 with the stimulus check

    What if I don’t get the right amount? When you file your 2020 tax return, the IRS will compare numbers. If you should have gotten a check and didn’t, or if you should have gotten more than you did because the IRS didn’t know something important (like you had a child in 2020), you should get more money.

    So taxpayers who ultimately qualify for a higher stimulus check amount than they receive this year (for example: a person whose income drops from $100,000 to $70,000) would get the rest through a larger tax refund or smaller tax payment in early 2021.

    On the other hand, if the numbers on your 2020 tax return suggest that you got more than you should because of your income, you should not have to pay it back. As it stands at this point, if your 2020 income is higher than the thresholds mentioned above and you received the stimulus check, you will not need to pay back any part of the payment. Don’t worry: most taxpayers should get just the right amount.

    Is my check taxable? NO! This is not taxable income.

    What if I am expecting a refund for the 2019 tax year? Your 2019 refund will not be affected by the stimulus check.

    How will I get my check? Direct deposit, if you’re lucky. The IRS will deposit your payment directly into the same banking account you used for direct deposit on your last filed return.

    But what if the IRS doesn’t have my direct deposit information? According to the IRS, the Treasury plans to develop has developed a web-based portal for individuals to provide their banking information to the IRS online so that individuals can receive their payments more quickly rather than waiting for a paper check. It’s not up yet but, per the IRS, it slated to be up and running by Mid-April. UPDATE (4/15/2020): That web-based portal is now up and running folks. So you can now enter your bank information to receive, by direct deposit, your ‘Economic Impact Payment’ (i.e.,stimulus payment). You will find it on the web-portal in the ‘Filers: Get Your Payment’ section. For your convenience you can access that web-portal right here.

    UPDATE (4/12/2020): This feature will be unavailable if the Economic Impact Payment has already been > scheduled <  for mail delivery.

    What if I’ve moved? Under the law, the Treasury must send notice of the payment by mail to your last known address. The notice will include how the payment was made and the amount of the payment. The notice will also include a phone number for the appropriate point of contact at the Internal Revenue Service (IRS) if you didn’t receive the payment. You can help make sure that it goes to the right place by updating your address after a move. Usually, you’d do that on your tax return, but you can also submit a federal form 8822, Change of Address (downloads as a PDF). It generally takes four to six weeks to process a change of address.

    What if I haven’t filed for 2018 and 2019? Do it soon, even if you have a simple, zero return. And don’t forget to include your direct deposit banking information on your return.

    But what if I am not required to file a tax return? If you don’t file a tax return due to low income and you do not receive Social Security or Railroad Retirement benefits you can use the new “Non-Filers: Enter Your Payment Info Here” application at the IRS website to provide simple information so that you can receive your stimulus check.

    You will be able to find that website right here.

    What about retired folks? Retired seniors are eligible so long as they meet the other criteria (Social Security numbers, Income thresholds, etc.). As I noted above, if you depend on Social Security (or Railroad Retirement) but normally don’t file a tax return, the Treasury will rely on your SSA-1099 form (or its equivalent the RRB-1099 ) to figure and send your check.

    What about those on government benefits? And those with no income? Yes, eligible folks include those with no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs, such as SSI benefits. I’ve seen a lot of confusion about this; it’s because one of the original proposals limited the checks to those who earned income. This is no longer the case.

    Will I still get the check if I owe the IRS some money? Yes. If your refund would normally be seized to pay a tax debt, that shouldn’t happen here. SHOULDN’T. Assuming it works as planned.

    I will say, though, that while the IRS has not officially provided guidance (i.e., direction) on this matter the Senate Finance Committee stated that the bill turns off nearly all ‘administrative offsets’ that ordinarily may reduce tax refunds for taxpayers who have past tax debts, or who are behind on other payments to federal or state governments, including student loan payments. The only ‘administrative offset’ that will be enforced applies to those who have past due child support obligations that the states have reported to the Treasury Department.

    What if my check is normally seized for child support? Child support is an exception to the “we won’t offset your check” rule. Under the law, your check can be seized for child support arrears.

    This is a done deal, right? Yes. It passed in the Senate and the House. The President has signed it.

    So no changes? Right? I didn’t say that. There could be additional guidance from the IRS. I’ll let you know by updating this blog.

    Not that I don’t trust you, but where can I find this in writing? You can read the Congressional Record, which notes the discussion about the checks, the vote, and the text right —-> here. (downloads as a PDF). The IRS has confirmed some of this information and will eventually post more information on its website right —-> here, but for now, there is just a banner.

    UPDATE (4/12/2020): The IRS is reporting that, for security reasons, it plans to mail a letter about the Economic Impact Payment (i.e., the stimulus check) to the taxpayer’s last known address within 15 days after the payment is paid. The letter will provide information on how the payment was made and how to report any failure to receive the payment. If a taxpayer is not sure that they are receiving a legitimate letter from the IRS, the IRS is urging taxpayers to visit IRS.gov first to protect against scam artists.

    EVERYONE PLEASE, PLEASE, PLEASE STAY WELL and STAY HEALTHY!

    BRUCE

    ______________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com

    The New W-4 Form for 2020 Has Arrived!

    The IRS has recently released the final version of the 2020 Form W-4 – Employee’s Withholding Certificate (you can view and download the new W-4 form here) to, hopefully, properly reflect the changes enacted by the Tax Cuts and Jobs Act.

    Just in case you are not aware of the difference between a W-4 Form and a W-2 Form , a W-4 informs an employer of the appropriate tax withholding amount to be taken from an employee’s paycheck. The W-2, on the other hand, is a report generated by an employer that details an employee’s earnings and tax withholdings for the given tax year.

    The major change to the W-4 is that the concept of “withholding exemptions” no longer exists and, of course, it is now a full page instead of just coupon-sized.

    The form at one point is concerned that “more tax than necessary may be withheld”.  While for the financially prudent taxpayer owing Uncle Sam $1,000 or less at tax time is actually beneficial (because excess withholding is an interest-free loan to the government, and owing a small amount means that you had full use of your money during the year) most taxpayers are more concerned with having less tax than necessary withheld, and would prefer a cushion to avoid a balance due on their 1040.  For a peace of mind, if nothing else, being over-withheld is better than being under-withheld.  And many taxpayers have historically used a substantial tax refund as a form of “forced savings”. This is both an individual and a personal choice.

    In Step 1 (of the W-4) you enter your name, address, Social Security number, and filing status. There is no longer the option to claim “Married, but withhold at higher Single rate”. And the new W-4 includes the Head of Household status option, which was not on the old W-4.

    As a point of information – you should claim “Head of Household” status on your W-4 only if you file your tax return each year as a Head of Household.  So even though some people may consider themselves a “head of household”, the IRS may not.  For IRS purposes a “household” does not consist of one person.  There are very strict and specific rules for this filing status.  Perhaps the best (but not the only) example of what the IRS considers a true “Head of Household” is a single parent with a dependent child.

    Step 2 of the new W-4 finally recognizes the possibility that the job for which the W-4 is being submitted may not be the taxpayer’s only source of income, especially if he or she is married.  If you have more than one job, or you are married and your spouse also has a job, check the box at item (c) in Step 2.

    The complexity of the new W-4 lies in the “Multiple Jobs Worksheet” on Page 3 of the W-4 packet.  Be careful when using this worksheet – it can very likely have your head spinning.

    If you are using withholding as savings, do not make any entries in Step 3 for any dependents you are claiming.  If this is not an issue, as a safety matter claim only half the number of actual dependents – if you have two children under age 17 claim only $2,000 here for one dependent; if you have two children age 17 or older claim only $500.
    For a married couple only the spouse with the higher W-2 income
    should claim any amount for dependents.

    If you are married and both spouses work and one or both of the spouses has a second job neither of you should claim anything for dependents in Step 3.

    Most definitely include any taxable non-W-2 income on line 4(a) in Step 4.  This includes interest and dividends, capital gains, K-1 pass-through income, net self-employment income from Schedule C and any amounts that would be included on Line 8 of Form 1040 Schedule 1.
    You can use your 2018, or starting in January the 2019, tax return as a guide for completing this Section.  If you are receiving IRA, Pension or Social Security income you do not have to include this income here.  You can request a specific percentage be withheld for federal income tax for these sources – and you should have federal income tax withheld from each source.

    It is my recommendation that you do not include anything for “Deductions” on line 4(b) of Section 4 – even if you will be able to itemize or are entitled to any additional deductions.  Here is another opportunity to provide a cushion.

    As for entering any “Extra withholding” on line 4(c) – on the initial 2020 W-4 filing you can leave this blank.  If after a month of withholding under the new W-2 you think you may need more withheld you can submit another W-4 with the same entries you made on the original but adding an additional amount on 4(c).  After your 2019 return is filed (SolidTaxSolutions.com) you may want to submit a revised W-4.

    Note: It is very important that you keep a copy of every 2020 Form W-4 you give to an employer for your records.

    Looking at the form there is no place on the form for an employee to indicate “EXEMPT”, as there was on the old W-4.  Dependent children with summer and after-school jobs do not need to have any income tax withheld.  However, the instructions tell you to write ‘EXEMPT’ on Form W-4 in the space below Step 4(c).  Do not enter anything in Steps 2 and 3 or elsewhere in Step 4.

    While the 2020 Form W-4 is more involved, I believe it is actually better than the old method of calculating withholding, especially under the Tax Cut and Jobs Act.

    For those of you have NYS income tax withholding, NY’s equivalent to the IRS’ W-4 is the IT-2104-Employee’s Withholding Allowance Certificate. You can view and download that NYS form IT-2104, for 2020, right ——> here. 

    Finally, if you are receiving a pension and would like to make a change to the amount of federal income tax that is being withheld (or to start having federal income tax withheld) from your pension there is a form for that too. The name of that form is: W-4P – Withholding Certificate for Pension or Annuity Payments. If you would like to see the W-4P form for 2020 or use this form to make changes to your withholdings from your pension you can view and download that form —–> here.

    Bruce

    ________________________________________________________________________

     

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com

    The Government Shutdown and the IRS! UPDATE: 1/8/2019

    Hello again everyone! Since writing my prior article concerning the effect on the IRS resulting from the ‘government shutdown’ (BTW, you can read that article by clicking here) the IRS late yesterday (Monday, January 7th) has finally announced that they will begin processing tax returns on January 28th (a Monday). Hence that will be the start of ‘Tax Season’.

    As usual, the filing deadline will be April 15th (a Monday) for most people. Taxpayers in Maine, Massachusetts and the District of Columbia will be the exception with the filing deadline to be April 17th due to local holidays.

    The IRS plans to release details on it operational plans in the coming days, but did report that a significant portion of its furloughed employees will be recalled.

    Finally, the Treasury Department and the Office of Management and Budget (OMB) have agreed that the IRS can issue tax refunds during a prolonged government shutdown. However, as a reminder, the IRS cannot issue refunds to those claiming the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) before mid-February.

    Stay Tuned!


    Bruce @

    Solid Tax Solutions (SolidTaxSolutions.com)

    (845) 344-1040

    ☛We are open year round: Government shutdown or no Government shutdown!☚

    ____________________________________________________________________

    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 Government Shutdown and the IRS!

    So, now that Christmas is over and Santa Claus has made all of his visits you may be wondering if the government shutdown will affect the IRS.

    Well, as you know the government is officially on shutdown–or actually on a partial shutdown. There are a number of functions which are relatively unaffected, such as the court system, for one reason or another, but most departments have contingency plans. Most IRS employees are considered nonessential and are going on furlough. That may be good news for someone anticipating an audit, but not if you have a question for the IRS.

    How serious the shutdown is for the IRS will depend on the length of time it continues. Much more than a week and plans will change. Here are some of the functions still staffed under the short-term contingency plan:

    • Completion and testing of the upcoming Filing Year programs
    • Electronic returns processed systemically up to the point of refunds
    • Processing paper tax returns through batching
    • Processing remittances
    • Processing disaster relief transcripts
    • Continuing IRS’s computer and accounting operations to prevent data loss
    • Protection of statute expiration, bankruptcy, liens and seizure cases
    • Upcoming tax year forms design and printing
    • Maintain criminal law enforcement and undercover operations

    Some examples of functions that are non-excepted activities and will be on hold:

    • Service center processing after the point of batching (e.g., data transcription, error resolution)
    • Issuing refunds
    • Processing non-disaster relief transcripts, income verification express service/return and income verification services
    • Processing amended tax returns
    • Most Headquarters and administrative functions not related to the safety of life and protection of property
    • All audit functions, examination of returns, and processing of non-electronic tax returns that do not include remittances
    • Non-automated collections
    • Legal counsel
    • Taxpayer services such as responding to taxpayer questions (call sites) (during Non-Filing Season)
    • Information systems functions (except as necessary to prevent loss of data in process and revenue collections)
    • Planning, research, and training and development activities

    So as you can see, certain basic functions will continue. But if you’re looking for answers to questions, you’ll probably have to look elsewhere. If the furlough approaches the start of the filing season, which is just past the middle of January, it’s likely the IRS will have a problem adhering to the above schedule. Rest assured, it’s highly unlikely the filing deadlines will be extended.

    Bruce @

    Solid Tax Solutions (SolidTaxSolutions.com)

    (845) 344-1040

    ☛We are open year round: Government shutdown or no Government shutdown!☚

    ____________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

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


    The IRS Gives Insight into Entertainment Expenses (Hint: Can You Say Bye-Bye?)

    Hello everyone! Over the past several months I have been heavily asked questions by various business people about how the new tax laws (officially named the Tax Cuts and Jobs Act) will effect their businesses and specifically about business entertainment and its deductibility for taxes.

    So, I thought that it would be helpful to address how business entertaining will be handled, for tax purposes, in tax years 2018 and beyond (or until Congress makes changes to the ‘new’ tax law effecting business entertaining).

    Take note, that if you would like to learn more about the new tax law (or would like a refresher) I have written five articles giving a more in-depth look at the new tax law. You can read Part 1 here.

    So, the rules surrounding business meals and entertainment have been complex for some time. It’s not so much what’s deductible and what isn’t, it’s the record keeping associated with the meals that is challenged most often by the IRS. You can only deduct 50% of the cost of most business meals and, in the past, entertainment. (There are some limited exceptions to the 50% rule for business meals).

    The Tax Cuts and Jobs Act (TCJA), passed in 2017, generally disallows a deduction for expenses with respect to entertainment, amusement, or recreation. Entertainment has been defined to be any activity which is of a type generally considered to constitute entertainment, amusement, or recreation such as entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, or sporting events. The term “entertainment” may include an activity, the cost of which is claimed as a business expense by the taxpayer, which satisfies the personal, living, or family needs of any individual, such as providing food and beverages, a hotel suite, or an automobile to a business customer or the customer’s family. The term “entertainment” does not include activities which, although satisfying personal, living, or family needs of an individual, are clearly not regarded as constituting entertainment, such as (a) supper money provided by an employer to an employee working overtime, (b) a hotel room maintained by an employer for lodging of employees while in business travel status, or (c) an automobile used in the active conduct of trade or business even though also used for routine personal purposes such as commuting to and from work (but other rules apply in this situation).

    Unfortunately, the TCJA didn’t specifically address the deductibility of expenditures for business meals. It seemed clear that meals out-of-town on a business trip or at a business convention were still deducible (subject to the 50% rule). But the question of whether or not taking a client to lunch was still deductible was unanswered because that can be construed as entertainment. The IRS has just issued some guidance, in the form of Notice 2018-76 (which you can read right here) in explaining its position on the issue. The notice also announced the IRS intends to publish proposed regulations which will discuss the deductibility of certain business meals. Until the proposed regulations are effective, taxpayers may rely on Notice 2018-76 for guidance.

    Under prior law, entertainment expenses such as a ball game, theater tickets, etc. would be deductible only if the taxpayer could show the item was directly related to the active conduct of the taxpayer’s trade or business (“directly related” exception) or in the case of an item directly preceding or following a substantial and bona fide business discussion (including business meetings at a convention or otherwise), that the item was associated with the active conduct of the taxpayer’s trade or business (“business discussion” exception).
    Example–The directly related exception applies if you take a client out to lunch or dinner and discuss business during the meal. However, the IRS does make a distinction between a meal at a restaurant and a meal at a facility that wouldn’t be conducive to a business discussion. For example, having dinner at a pub with entertainment. (But that might qualify under the second exception).

    Example–The business discussion exception applies if you have a bona fide business meeting and thereafter take the client for a quiet business meal. For example, you drop in on a client to show him new services your company offers. You’re discussing business from three in the afternoon to five. You take the client out for a business meal, but don’t discuss any business at dinner.

    The new law doesn’t change the definition of entertainment. The IRS has noted that the legislative history of the TCJA clarifies that taxpayers generally may continue to generally deduct 50 percent of the food and beverage expenses associated with their trade or business. The IRS intends to publish proposed regulations clarifying when business meal expenses are nondeductible entertainment expenses and when they are 50 percent deductible expenses. Until the proposed regulations are effective, taxpayers may rely on the guidance in Notice 2018-76.

    Taxpayers may deduct 50 percent of an otherwise allowable business meal if:

    1. The expense is an ordinary and necessary expense, paid or incurred during the taxable year in carrying on a trade or business;
    2. The expenses is not lavish or extravagant under the circumstances;
    3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of such food or beverages;
    4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
    5. In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.

    Notice 2018-76 also says that the entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.

    Requirements 1, 2, 3, and 4 above are not totally new. But, because of the overall new restrictions on entertainment, they may get closer scrutiny. The third item, requiring the taxpayer or an employee to be present is unlikely to cause a problem. But, you should be aware that you can’t just tell a customer to take his or her spouse with them to a local restaurant and put it on your tab and still get a 50 percent deduction.
    Example–Bob invites Michael and Joseph, both customers of Bob’s company to a round of golf. After the game Bob buys lunch for the three of them at the golf club. The cost of the round of golf including any associated fees is entertainment and not deductible. The cost of lunch for the three, assuming all the other requirements are met, is deductible, subject to the 50 percent rule.

    Example–Cindy invites Peter and Paul, both vendors for Cindy’s company to a football game. The company maintains a suite at the stadium and food and drinks are part of the cost of the suite. Since the food and drinks are not separately stated, none of the expense is deductible. If the food and drinks were separately billed, they would be 50% deductible.

    While the notice answers some of the big questions, there are many nuances that it doesn’t. Many may be addressed in forthcoming regulations. The fact that entertainment is no longer deductible will affect trips on the company aircraft, deductions at country clubs, etc. The IRS may concentrate on finding any such disguised deductions when auditing 2018 and later year returns. Heavier scrutiny of meals could also be an expected consequence.

    ———–>Give Solid Tax Solutions (SolidTaxSolutions.com) a call at (845) 344-1040 to discuss the new tax rules and how it will affect you.

    Bruce

    ___________________________________________________________________________________________________________________________

    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 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).