Tax Reform is Coming

The House of Representatives and the Senate both have approved a new tax reform bill.  Now what?  The versions are similar, however, they are different.  Now they will both send their people to a joint committee on tax to hash out the differences to come to common ground.  Then they both vote again.  Once approved by both the House and the Senate and signed by the President the tax bill will become law.

Both sides may promote that this is a long time coming and this tax reform will be good for the american people, and american companies.  However, it is only good until a future congress decides to change our tax laws again.

The Tax Foundation has provide a good chart to see the difference between the two bills.

Provision House Version Senate Version
Individual Income Tax Rates and Brackets Consolidates current seven income tax rates into four, while retaining the top marginal rate of 39.6 percent and including an income recapture provision which phases out the effect of the 12 percent bracket for high earners, sometimes called a “bubble rate”

Single Filer Rate Schedule

12% > $0
25% > $45,000
35% > $200,000
39.6% > $500,000
Retains seven brackets while reducing rates, bringing the top marginal rate to 38.5 percent and avoiding a bubble rate; individual income tax rate changes sunset at the end of 2025

Single Filer Rate Schedule

10% > $0
12% > $9,525
22% > $38,700
24% > $70,000
32% > $160,000
35% > $200,000
38.5% > $500,000
Standard Deduction $12,200 for single filers, $18,300 for heads of household, and $24,400 for joint filers, indexed to chained CPI $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers, indexed to chained CPI
Child and Family Tax Credits Increases child tax credit value to $1,600, with the phaseout for joint filers beginning at $230,000, while creating a new $300 per-person family tax credit for those not eligible for the child tax credit, to expire after five years Increases credit value to $2,000, with the phaseout for joint filers beginning at $500,000; provision sunsets at the end of 2025
Medical Expense Deduction Repeals Retains, and for tax years 2017 and 2018, allows it to be taken if eligible expenses exceed 7.5 percent of AGI rather than 10 percent under current law
Mortgage Interest Deduction Limits the mortgage interest deduction to the first $500,000 in principal value Keeps the mortgage interest deduction for acquisition debt, but eliminates the deduction for equity debt
Graduate Student Income Treats graduate student tuition waivers as taxable income Not included in Senate version
Treatment of Pass-Through Income Caps the pass-through rate at 25 percent, then setting anti-abuse rules that begin with the rebuttable presumption that 70 percent of pass-through income is wage income (subject to the regular rate schedule), while 30 percent is business income (subject to the lower rate cap), while excluding many professional service companies from the preferential rate Adopts a 23 percent deduction for pass-through income (limited to 50 percent of wage income) for qualifying businesses, including publicly traded partnerships but with a slightly longer list of ineligible service providers; the provision expires at the end of 2025
Corporate Rate Reduction Timing Cuts rate to 20 percent, effective tax year 2018 Cuts rate to 20 percent, delayed to tax year 2019
Capital Investment Allows full expensing of short-lived capital investment, such as machinery and equipment, for five years; increases the Section 179 small business expensing cap from $500,000 to $5 million, with the phaseout beginning at $20 million, and maintains current depreciation schedules for real property Allows full expensing of short-lived capital investment, such as machinery and equipment, for five years, then phases out the provision over the subsequent five; raises Section 179 small business expensing cap to $1 million with a phaseout starting at $2.5 million, and shortens the depreciation of real property to 25 years
Alternative Minimum Tax Repeals both the individual and corporate alternative minimum taxes (AMTs) Retains the corporate AMT in its current form, and retains the individual AMT with higher exemption amounts (about 40 percent higher than current law)
Tax Treatment of Interest Caps net interest deduction at 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) Caps net interest deduction at 30 percent of earnings before interest and taxes (EBIT)
Net Operating Losses Eliminates net operating loss (NOL) carrybacks while providing for indefinite net operating loss carryforwards, increased by a factor reflecting inflation and the real return to capital, while restricting the deduction of NOLs to 90 percent of current year taxable income Eliminates net operating loss carrybacks while limiting NOL carryforwards to 80 percent of taxable income
Cash Accounting Increases small business eligibility for small businesses, from $5 million to $25 million Increases small business eligibility for small businesses, from $5 million to $15 million
Business Credits and Deductions Eliminates credits for orphan drugs, energy, private activity bonds, rehabilitation, and contributions for capital, among others Modifies, but does not eliminate, the rehabilitation credit and the orphan drug credit, while also limiting the deduction for FDIC premiums and retaining certain other preferences eliminated in the House version
International Income Moves to a territorial system with base-erosion rules including the inclusion of 50 percent of excess returns by controlled foreign corporations in U.S. shareholders’ income, and an excise tax on payments made to foreign firms unless claimed as effectively connected income Moves to a territorial system with anti-abuse rules and a base erosion minimum tax of the excess of 10 percent of modified taxable income over an amount equal to regular tax liability
Deemed Repatriation Enacts deemed repatriation of currently deferred foreign profits at a rate of 14 percent for liquid assets and 7 percent for illiquid assets Enacts deemed repatriation of currently deferred foreign profits at a rate of 14.49 percent for liquid assets and 7.49 percent for illiquid assets
Estate Tax Increases exemption to $10 million, indexed for inflation, with repeal after six years Doubles the estate tax exemption
Individual Mandate Penalty No change Reduces the individual mandate penalty to $0
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Texas Property Taxes and Tax Reform

With both the House and Senate tax reform plans calling for a $10,000 limit to the property tax deduction, it further strengthens prepaying your Texas property taxes before 12/31/2017 for those who would pay more than $10,000 per year.  At least pay the amount that would make the remaining portion to pay 2018 by less than $10,000 for the deduction.

 

Charitable 501(c)(3) organizations must meet inspection and disclosure requirements

Charitable organizations enjoy significant benefits, such as receiving tax deductible contributions and not having to pay taxes on income.

In return, Congress allows the public to inspect documents (such as the Form
990 or 990-EZ) that these organizations file with the IRS. These forms – which
report gross receipts, expenses, etc. – are information returns and do not report
paying taxes.

In addition, the public can review an organization’s original application for
recognition of tax-exempt status, any documents filed with the application, and
any correspondence between the organization and the IRS regarding the
application.

The public can also inspect a charitable organization’s Form 990-T, the tax return
filed by organizations that receive unrelated business income of more than
$1,000 annually.

In addition to disclosing annual returns and applications for exemption, 501(c)(3)
organizations must make certain disclosures to donors to whom something has
been given in return for their contributions. This is called a quid pro quo
contribution, which in Latin means “something for something.”

For example, suppose a donor gives a charitable organization $100. As an
incentive or thank-you, the organization sends the person a concert ticket with a
fair market value of $40.

The donor’s tax deduction in this transaction may not exceed $60. In this case,
the donor’s payment exceeds $75, requiring the charitable organization to furnish
a disclosure statement to the donor, even though the deductible amount does not
exceed $75.

The disclosure must:
 Be in a written statement that is likely to come to the attention of the
donor
 Be provided at the time the contribution is solicited or when the
payment is received
 Inform the donor that the amount of the contribution deductible for
federal income tax purposes is limited to the excess of the amount
of money and the value of any property contributed by the donor
over the value of goods or services provided by the organization
 Provide the donor with an estimate of the fair market value of the
goods or services provided by the organization

If an organization fails to meet the written disclosure requirement, a penalty of
$10 per contribution, up to $5,000 per fundraising event or mailing, may be
assessed.

In addition to the public inspection and quid pro quo contribution disclosure
requirements, if a charity offers to sell goods or services that are available free
from the federal government, it must disclose that fact in a recognized format.

For more information on this or other IRS topics, go to IRS.gov.

Helpful topics:
Publication 1771, Charitable Contributions – Substantiation and
Disclosure Requirements
Tax Information for Charities & Other Non-Profits
Exempt Organization Public Disclosure and Availability Requirements
Subscribe to IRS free exempt organization newsletter, the EO Update
Review phone forum presentations on tax-exempt issues

Know Your Rights As A Taxpayer

  1. The Right to Be Informed Taxpayers have the right to know what they need to do to comply with the tax laws. They are entitled to clear explanations of the law and IRS procedures in all tax forms, instructions, publications, notices, and correspondence. They have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes.
  2. The Right to Quality Service Taxpayers have the right to receive prompt, courteous, and professional assistance in their dealings with the IRS, to be spoken to in a way they can easily understand, to receive clear and easily understandable communications from the IRS, and to have a way to file complaints about inadequate service.
  3. The Right to Pay No More than the Correct Amount of Tax Taxpayers have the right to pay only the amount of tax legally due, and to have the IRS apply all tax payments properly.
  4. The Right to Challenge the IRS’s Position and Be Heard Taxpayers have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions, to expect that the IRS will consider their timely objections and documentation promptly and fairly, and to receive a response if the IRS does not agree with their position.
  5. The Right to Appeal an IRS Decision in an Independent Forum Taxpayers are entitled to a prompt and impartial administrative appeal of IRS actions and have the right to receive a written response explaining the Appeals Division’s decision. Taxpayers generally have the right to take their cases to court.
  6. The Right to Finality Taxpayers have the right to know the maximum amount of time they have to challenge the IRS’ position, as well as the maximum amount of time the IRS has to audit a particular tax year. Taxpayers have the right to know when the IRS has finished an audit.
  7. The Right to Privacy Taxpayers have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections and a collection due process hearing.
  8. The Right to Confidentiality Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers have the right to expect appropriate action will be taken against employees, return preparers, and others who wrongfully use or disclose taxpayer return information.
  9. The Right to Retain Representation Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to seek assistance from a Low Income Taxpayer Clinic if they cannot afford representation.
  10. The Right to a Fair and Just Tax System, Including Access to the Taxpayer Advocate Service Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. 

Steve Eubanks, EA

Strategic Tax Group

Enrolled Agents Week in Texas

On Friday, January 29, Governor Greg Abbott proclaimed the week of January 31 – February 6, 2016 to be Enrolled Agents Week in Texas. Governor Abbott joins eleven of his fellow governors in recognizing EAs for a week.

EA Week

Time to Issue 1099-MISC

The form 1099-Misc is filed by businesses and self-employed people, primarily for services provided by businesses or people who are not a corporation (except law firms). You’ll need to file a 1099-Misc for everyone last year that you:

Paid $600 or more for
• Services (including parts and materials)
• Rent
• Prizes and awards
• Other income payments

Paid any amount for
• Services paid to any law firm or attorney

If you paid by credit card or a third party service (i.e., paypal) then you do not include them.

To collect the legal name, address, and taxpayer identification (SSN or EIN), you will need to have the vendor or individual fill out a W-9. This stays with you and doesn’t get filed with the IRS.

If you need assistance with issuing the 1099-MISC to your vendors we can help you in preparing and sending to those individuals.

Steve Eubanks, EA
Strategic Tax Group

www.strategictaxgroup.com

IRS Identity Protection PIN Letters

We have been notified by the IRS that due to an error, taxpayers are receiving Identity Protection PIN letters with an incorrect year listed. Taxpayers and tax professionals should be advised the IP PIN listed on the CP 01A Notice dated January 4, 2016 is valid for use on all 2015 individual tax returns.

The notice incorrectly indicates the IP PIN issued is to be used for filing the 2014 tax return when the number is actually to be used for the 2015 tax return. The IRS emphasizes the IP PIN listed on the CP 01A notice is valid for the 2015 returns. Taxpayers and their tax professionals should use this PIN number for 2015 tax returns, which the IRS will begin accepting from taxpayers starting January 19, 2016.

The IRS apologizes for the confusion and any inconvenience.

Steve Eubanks, EA, NTPI Fellow

www.strategictaxgroup.com