The IRS has announced increased contribution amounts for various types of retirement plans in 2019. See here for details.
The IRS has a website with some useful information for taxpayers but is their information always accurate? This morning I was looking at a news release from their site containing a table comparing business tax provisions before and after TCJA. Here’s a snippet from their explanation about the new limitation on deducting business interest.
“The change limits deductions for business interest incurred by certain businesses. Generally, for businesses with 25 million or less in average annual gross receipts, business interest expense is limited to business interest income plus 30% of the business’s adjusted taxable income and floor-plan financing interest”
Unfortunately the opposite is true. Businesses with over 25 million in gross receipts are subject to the new limitations while businesses with gross receipts of 25 million or less are exempt. I suppose that they will eventually find and correct this error, but I would suggest that if you want accurate advice you go to a competent tax professional to verify what you see from the IRS. We at L&S Tax Services can help you with any questions you may have about how the new changes can affect your individual situation.
After serving 3 years in prison for failing to file tax returns and filing fraudulent claims, Wesley Snipes still can’t win with the IRS. He owed roughly 23.5 million in federal taxes and filed an Offer In Compromise offering to pay roughly 850,000 to settle his debt with the IRS. The Offer In Compromise program allows people to settle their debt by offering less than they owe, but the offer will not be accepted by the IRS unless it reflects the RCP. (Reasonable Collection Potential) The IRS originally calculated his RCP as over 17 million dollars. Their investigation showed that he owned numerous assets through various entities he controlled. After further negotiations they reduced their calculation to 9.5 million dollars.
Wesley appealed their decision to tax court but lost again. He couldn’t convince the judge that the IRS position was wrong. The Offer In Compromise is one of several alternatives available for someone who owes back taxes. A competent tax professional such as an Enrolled Agent can assist you in determining the best options available for your given situation.
One of my talented clients produced this video to introduce L&S Tax Services.
There has been some mention in the press recently about a tax break for disabled vets. To explain this tax break let’s start with the basics of how retirement pay is taxed for a disabled veteran. First off, disability pensions for a veteran are non-taxable, but regular retirement pay of a veteran is subject to federal income tax. So, for a totally disabled veteran their retirement pay is completely non taxable. A partially disabled veteran would pay tax on their regular pension but the portion that represents retirement disability pay is not taxable. Typically, this is accounted for on the 1099-R received by the retired veteran. For example, a retired veteran with a 30% disability and annual pension of 30,000 would pay tax on 21,000. This 21,000 taxable amount would be reflected on the 1099-R issued by the Department of Defense
However, many combat injured veterans received severance pay upon leaving the military but their disability rating was not determined until some future date. As a result, the severance pay was listed as fully taxable in the year it was received. As an example, let’s say an injured combat veteran received 25,000 in severance pay in 2015, but his disability rating was not completed until 2016. In 2015, he would have received a 1099-R showing that the 25,000 was taxable. In 2016 he is determined to be 50% disabled. For 2016 and each succeeding year his 1099-R would reflect that 50% of his pension is tax free, but what about 2015? 50% of his severance pay should have been non-taxable and he would have to file an amended return to get his refund.
I have filed amended returns for wounded veterans with this exact situation, but there are many veterans who were unaware of this tax benefit. In late 2016 Congress addressed this issue and passed a law allowing disabled vets who had retired since 1991 an opportunity to claim those missed refunds. As part of the Combat Injured Veterans Tax Fairness Act, the Department of Defense has issued over 130,000 letters to disabled veterans who may be entitled to refunds for overpaying the tax on their disability severance pay. Affected veterans will have one year from the receipt of the letter to file any needed amended returns to claim their refunds.
I frequently recommend to my clients with complicated tax situations to do a summertime checkup to see if they are paying sufficient amounts through withholding or estimated payments in order to avoid a negative surprise at tax time. This year that activity is especially important because of the various changes made to the tax law last December. Because tax rates dropped for virtually everyone, nearly all wage earners are having less federal withholding from their pay than last year. However, not all taxpayers will see an overall reduction in their tax liability for 2018. Tax rates dropped and there are some new and expanded tax credits, but some deductions also went away. The standard deduction nearly doubled, exemption allowances were eliminated, the child credit was expanded and there is a new credit for all other dependents that don’t qualify for the child credit.
The IRS has a calculator available to help people in determining the correct number of withholding allowances to claim on their W-4 forms. I have heard various complaints about the limitations of this IRS tool, but it works well for fairly simple situations. If you have multiple sources of income or other factors that make it more difficult to estimate your tax liability, you probably should consult with a competent tax advisor such as an Enrolled Agent to help you with this task. Proper tax planning can avoid that negative surprise when you file your taxes next spring.
Many health professionals recommend limiting our salt intake but to tax professionals, SALT limits have a different meaning. SALT refers to State and Local Taxes which have been deductible for many taxpayers in the past but are now limited to a maximum of 10,000 dollars under the new tax reform passed last December. There are a large number of taxpayers who won’t be affected by this limitation but for high earners especially in high tax states such as California, this could amount to a significant change to their tax liability going forward. However, many people with 6 figure incomes end up paying the AMT (Alternative Minimum Tax) and the new tax bill grants some relief from AMT.
So, what is AMT? The minimum tax was originally enacted in 1969 and has evolved into what is now called the Alternative Minimum Tax. Congress was concerned that there were some high income earners who were ending up paying absolutely no income tax because they were taking advantage of so many tax breaks that they were completely eliminating their tax liability. The AMT is a parallel tax system that eliminates most deductions and credits available for income tax purposes and calculates the tax due under AMT rules. Then you compare the amount due under both methods and pay the higher of the two amounts. State and local income taxes are deductible in calculating income tax but not for AMT.
Let’s demonstrate with a couple of examples:
- Married couple makes a little over 224,000 per year and pays roughly 12,000 in property taxes and 22,000 in state and local taxes. For 2017 they ended up with a federal income tax liability of just over 30,000 dollars and an AMT of a little over 5,000 dollars for a total tax liability over 35,000. For 2018 using these exact same figures the clients would owe slightly over 35,000 in income tax but no AMT. In this case their tax liability dropped by 19 dollars.
- Another couple made roughly 485,000 in 2017 and had a SALT deduction of just over 64,000. For 2018, the SALT deduction is limited to only 10,000 but they also get significant relief from AMT. Their total federal tax liability will increase by just under 400 dollars.
As the income level rises, the benefits of the AMT reduction tend to diminish so if your income is high enough, the SALT limitation could cause a significant increase in federal tax liability. If you have concerns about how this new change will affect your individual situation you can contact us or a competent tax professional such as an Enrolled Agent in your local area.
As I have written about before, although the recent tax reform bill lowers tax rates for virtually everyone, not everyone will have their overall federal income tax reduced. That’s because the law includes some tax breaks but also eliminates some deductions. In doing an analysis of my client base, the vast majority of clients will have a lower tax bill. But, roughly 12% of my clients would pay more if you apply the 2018 law to their 2017 tax information.
In my client base, the largest reason for a tax increase under the new law was the elimination of the deduction for employee business expenses. Under prior law, expenses such as union dues, supplies, continuing education and mileage expense for a temporary job could be deducted if they exceeded 2% of income. Certain conditions had to be met to deduct the expenses and this has been a target area for IRS audits in recent years because of people claiming improper deductions.
Let’s go through a couple of examples:
- Ima and Ura Builder had a combined income of a little more than 72,000. They have 3 children all young enough to qualify for the child credit. In 2017, they had total itemized deductions of roughly 29,000 which included 9,500 of deductible EBE. (employee business expense) If you apply 2018 law to their 2017 situation, they lose the 9,500 EBE but get an additional tax benefit from the expanded child tax credit and the overall tax rate reduction. Their net result would come out with owing an additional $3 in income tax.
- Olive Operator runs heavy equipment on a construction site and earned 115,000 in wages plus some other investment income giving her a total income around 117,000. She worked for roughly 10 months outside her tax home so her EBE including travel costs, union dues, etc was just over 14,000 and total itemized deductions were roughly 19,000. She has no children or other dependents. Applying the 2018 law to her case would result in the loss of EBE, but a lower overall tax rate. She would end up with 1,950 in additional federal tax liability.
Most of my clients who were eligible to deduct EBE will still have lower taxes in 2018 but especially those with large amounts of EBE may not. My next blog post will most likely be about the other reason Californian’s don’t like the Trump tax act which is the limitation on the SALT deduction. We would be happy to answer your questions on how the various provisions of the tax reform bill will impact your individual circumstances.
During the 2018 tax season one of the most common questions I got from clients had to do with whether they will lose their mortgage interest deduction in 2018. Many of them had heard incorrect information about what is changing and not changing in the new law.
So, what does the new law change? For rental properties mortgage interest was and still is deductible as a rental expense. Nothing really changed there. For personal residences there were some changes. Tax law defines two types of deductible interest for personal residences, acquisition indebtedness and equity indebtedness. Under the old law, you could deduct interest on up to 1 million dollars to buy or improve up to two personal residences. (Acquisition Indebtedness) You could also deduct interest on up to 100,000 borrowed against the equity in your residence. (Equity Indebtedness)
Under the new law, the limit for acquisition indebtedness does not change on any existing mortgage, but for new mortgages the limit for acquisition indebtedness has dropped to 750,000. As under the old law, you can still deduct interest on up to two personal residences as long as the total acquisition debt for the two does not exceed the 750,000 limit.
Equity interest, on the other hand, is no longer deductible. It’s important to remember that what determines whether a mortgage loan is deductible under the new law is how the funds were spent and not the title of the loan. For example: let’s say that you have a 500,000 balance on your mortgage and then you take out an equity line of credit and borrow an additional 30,000. Let’s say you spend the 30,000 to remodel your home. In that case the 30,000 spent would qualify as acquisition indebtedness and would be fully deductible. If you then borrow another 30,000 on that same line of credit and take a vacation with the funds, the interest on that 30,000 is not deductible under the new law.
If you are confused about any provisions in this new law, we would be happy to answer your questions regarding how it will impact your individual situation.
Last fall congress passed a tax bill granting special tax relief for anyone who suffered a casualty loss as a result of the devastating hurricanes that impacted the US in 2017. In the budget deal agreed to last month, congress has finally extended those same benefits to victims of the California wildfires.
The special tax benefits have to do with being able to deduct a personal casualty loss. Normally, to deduct a casualty loss you must itemize deductions, the loss has to exceed 10% of adjusted gross income and you then subtract a 100 deductible from the loss. Here’s an example: let’s say your adjusted gross income is 100,000 and you sustain an economic loss from a casualty of 11,000 dollars. You would first deduct 10% of AGI or 10,000 and then you would subtract 100 as a deductible so your loss would be 11,000 – 10,000 – 100 = 900. This 900 would only be a deduction if you itemize deductions on Schedule A.
The special rule for deducting a casualty loss due to the wildfires is that you don’t have to deduct 10% of AGI and you can take the casualty loss whether or not you itemize deductions. However, the 100 deductible is raised to 500. So, if the above 11,000 loss occurred as a result of a California wildfire or the 2017 hurricanes you would now calculate the loss as follows: 11,000 – 500 = 10,500 as a deductible casualty loss. This loss can be taken as an itemized deduction or for those who don’t itemize deductions, the deduction would be added to your standard deduction.
Another important point to remember about casualty losses is that there must be an actual economic loss. In other words, if you were reimbursed for your loss fully by insurance, you have not sustained an economic loss. There are a couple of other tax breaks associated with casualty losses that occur in any federally declared disaster area. For any questions on how to deal with this situation, you can contact us or a competent tax professional such as an Enrolled Agent in your area.