Budget deal changes tax law for 2017 returns being prepared now

This morning President Trump signed into law a new budget deal that ends the very brief government shutdown.  It contains some good news for taxpayers, but a logistical nightmare for the IRS and for tax preparers.  Some tax breaks that expired at the end of 2016 have now been reinstated retroactively for 2017.  These include a deduction for mortgage insurance premiums for certain taxpayers, an exclusion from cancellation of debt income for homeowners, some expired energy related credits are returning and various other provisions.  I will post updates as they become available, but for now here’s a summary of the tax changes that affect 2017.

Now for the nightmare.  There is no place on the current 2017 tax forms to take advantage of these tax savings, which means in the middle of tax season, IRS will have to redesign various tax forms, all tax software will have to be reprogrammed for the changes and then there is the issue of how much time tax preparers have to learn the new changes and let their clients know about them.  Anyone who has already filed but is eligible for one of these retroactive benefits can file an amended return to take advantage of the additional tax savings.  We are available to help with this or any other tax related concerns you may have.

Myths about the new tax bill

There has been a great deal of talk in the media and elsewhere about the new tax overhaul signed by President Trump in late December.  This has included a great deal of misinformation about what the bill actually contains.  Many experts tried to analyze what they thought the bill would contain prior to passage, and others were simply misinformed or mistaken.  Here are some of the common misconceptions I have either heard from clients or seen in the media.

  1. This bill increases taxes on the middle class – The vast majority of middle class taxpayers will get a tax break from this bill.  One good analysis I read showed that the average middle class taxpayer would see a decrease in tax of 8 – 10%.  In reviewing scenarios from my client base, this appears pretty accurate.  The bill has new lower tax rates for virtually everyone but it also eliminates some tax deductions.  It is possible for a middle class taxpayer to have an increased tax by losing more in deductions than they gain from the lower tax rates, but the vast majority of the middle class will pay less tax because of this bill.
  2. Your taxes will be so simple they can be filed on a post card – First off, most taxpayers efile their returns and don’t use any paper.  As for the claim that this bill simplifies taxes, well that depends.  Currently around 35% of taxpayers itemize deductions on Schedule A.  This bill nearly doubles the standard deduction and eliminates or limits other itemized deductions so many taxpayers who have itemized deductions in the past will not be itemizing under the new tax law.  So for those taxpayers there will be one less schedule to file with their taxes.  There are many other changes in this bill which will create new and complex tax planning opportunities, especially for business taxpayers.
  3. Mortgage interest is no longer deductible on my second home or on rental property – Both of those are false.  Elimination of the mortgage deduction was proposed for 2nd homes, but it didn’t make it into the final bill.  There was never any proposal to disallow mortgage interest for rental properties. (even though some of my clients called me on this one)
  4. Businesses will no longer be allowed to deduct any expenses for doing business.  Instead there will be a flat tax on gross receipts – This was never a part of the bill although I did hear this as a proposal before either bill passed the house or senate.  I heard a similar rumor regarding the disallowance of all expenses on rental property.
  5. Charitable contributions are no longer deductible – This is another false one but I heard it from multiple sources.  This bill does eliminate the deduction for certain miscellaneous itemized deductions though.  Under prior law these deductions were allowed if they exceeded 2% of your adjusted gross income.  This includes deductions such as employee business expenses, investment advisory fees, and tax preparation fees.

This bill makes numerous changes to our tax laws.  I will be blogging in the future about some of those changes that most affect my clients.  My advice would be to not rely on anything you hear in the media but contact a competent tax professional such as an Enrolled Agent to discuss any concerns you have regarding the new tax bill.

Another judge rules to hold the IRS accountable

Despite attempts by the IRS, many politicians, and the media to pretend that the tea party targeting scandal did not occur, lawsuits from groups affected by the illegal behavior of the IRS are still continuing.  Judge Reggie B. Walton recently ruled in favor of some of these groups and ordered the IRS to produce more records relating to who was involved and how the scandal occurred.  For more details on how the scandal evolved see here.

Summer Time tax tip

Many clients grumble if they owe taxes at the end of the year.  Now is a good time to do a quick mid-year checkup to see if you are having enough taxes paid in through withholding or quarterly payments.  Here’s a link to an IRS publication that discusses the issue.  If you need assistance in this area, we are here to help.

Scary IRS Notices

No one likes getting mail from the IRS. In recent balance due notices sent by the IRS they are including a paragraph that says at the top in BOLD letters. Denial or Revocation of United States passport.  In December of 2015 congress passed the FAST act which includes a provision allowing for the revocation of a passport for a person with seriously delinquent tax debt.  There are various conditions that need to be met in order to meet the definition of “seriously delinquent tax debt.”  One of those provisions is that the tax debt must exceed 50,000.  Yet, I just got a notice for a client owing $142.64 that included that warning.  IRS notices can be confusing and difficult to understand.  If you need help dealing with an IRS notice you can get competent advice from a tax professional such as an Enrolled Agent to represent you before the IRS.

Former Congresswoman convicted of tax fraud

Corrine Brown, who had represented her district in Florida for nearly 25 years, has been convicted of tax fraud and other charges in connection with a “charity” allegedly set up to provide scholarships to underprivileged youth.  Out of more than 800,000 raised for the “charity”, one scholarship was awarded of $1,200.  Large amounts of the donations were deposited into her personal accounts and those of her associates.  Sometimes tax cheaters get caught.  If you have any questions regarding the tax obligations of legitimate charities, contact a competent tax professional such as an Enrolled Agent or CPA.

Tax break for pet owners?

I can’t tell you how many times over the years I have been asked if veterinary costs are deductible for your pets.  Well, a bill has now been introduced in California that would give a tax credit of 50% of costs for vet bills for your pet cat or dog.  AB 942 was introduced last month.  Roads and bridges all over the state are crumbling from the recent storm damage, the state is facing severe funding shortages for pensions but at least pet owners may have something to smile about if this bill passes.

Don’t believe everything you hear.

This morning I was listening to a home improvement show on the radio and they spent several minutes explaining various tax credits available for doing certain home improvement projects related to energy efficiency.  Just one problem.  All of those credits expired on December 31, 2016.  There is still a credit available for installing solar systems, but the remainder of the energy related credits for hvac, insulation, windows etc. no longer exist.  Moral of the story: don’t get your tax advice from a salesman, instead rely on a competent tax professional such as an Enrolled Agent for your tax questions.