Category Archives: Individual Taxation (1040)

IRS extends upcoming deadlines, provides tax relief for victims of Hurricane Florence

Hurricane Florence victims in parts of North Carolina and elsewhere have until Jan. 31, 2019, to file certain individual and business tax returns and make certain tax payments, the Internal Revenue Service announced today.

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance. Currently, this only includes parts of North Carolina, but taxpayers in localities added later to the disaster area, including those in other states, will automatically receive the same filing and payment relief. The current list of eligible localities is always available on the disaster relief page on IRS.gov.

The tax relief postpones various tax filing and payment deadlines that occurred starting on Sept. 7, 2018 in North Carolina. As a result, affected individuals and businesses will have until Jan. 31, 2019, to file returns and pay any taxes that were originally due during this period.

This includes quarterly estimated income tax payments due on Sept. 17, 2018, and the quarterly payroll and excise tax returns normally due on Oct. 31, 2018. Businesses with extensions also have the additional time including, among others, calendar-year partnerships whose 2017 extensions run out on Sept. 17, 2018. Taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018 will also have more time to file.

In addition, penalties on payroll and excise tax deposits due on or after Sept. 7, 2018, and before Sept. 24, 2018, will be abated as long as the deposits are made by Sept. 24, 2018.

The IRS disaster relief page has details on other returns, payments and tax-related actions qualifying for the additional time.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Thus, taxpayers need not contact the IRS to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2018 return normally filed next year), or the return for the prior year (2017). See Publication 547 for details.

The tax relief is part of a coordinated federal response to the damage caused by severe storms and flooding and is based on local damage assessments by FEMA. For information on disaster recovery, visit disasterassistance.gov.

See also the Hurricane Florence Information Center.

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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.

 

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

Are Club Dues Tax Deductible

Like many other enterprises, your business may pay club dues to one or several types of organizations. These dues may or may not be deductible, depending on the type of organization and its purpose.

Your business generally cannot deduct dues paid to a club organized for business, pleasure, recreation or other social purposes. This disallowance rule takes in country clubs, golf clubs, business luncheon clubs, athletic clubs, and even airline and hotel clubs. However, you can deduct 50% of the cost of otherwise allowable business entertainment at a club, even if the dues you pay to the club are nondeductible. For example, if you have dinner with a client at your country club after a substantial and bona fide business discussion, 50% of the cost of the dinner is deductible as a business expense.

The club-dues disallowance rule generally doesn’t affect dues paid to professional organizations including bar associations and medical associations, or civic or public-service-type organizations, such as the Lions, Kiwanis or Rotary clubs. The dues paid to local business leagues, chambers of commerce and boards of trade also aren’t affected. However, an organization isn’t exempt from the disallowance rule if its principal purpose is to provide entertainment facilities to its members, or to conduct entertainment activities for them.

Finally, keep in mind that even if the general club-dues disallowance rule doesn’t apply, there’s no deduction for dues unless you can show that the amount you pay is an ordinary and necessary business expense.

Steve Eubanks, EA

www.strategictaxgroup.com

Tax Professionals You Need

Any tax professional with an IRS Preparer Tax Identification Number (PTIN) is authorized to prepare federal tax returns. However, tax professionals have differing levels of skills, education and expertise.

An important difference in the types of practitioners is “representation rights”. Here is guidance on each credential and qualification:

UNLIMITED REPRESENTATION RIGHTS: Enrolled agents, certified public accountants, and attorneys have unlimited representation rights before the IRS. Tax professionals with these credentials may represent their clients on any matters including audits, payment/collection issues, and appeals.

Enrolled Agents – Licensed by the IRS. Enrolled agents are subject to a suitability check and must pass a three-part Special Enrollment Examination, which is a comprehensive exam that requires them to demonstrate proficiency in federal tax planning, individual and business tax return preparation, and representation. They must complete 72 hours of continuing education every 3 years. Learn more about the Enrolled Agent Program.

Certified Public Accountants – Licensed by state boards of accountancy, the District of Columbia, and U.S. territories. Certified public accountants have passed the Uniform CPA Examination. They have completed a study in accounting at a college or university and also met experience and good character requirements established by their respective boards of accountancy. In addition, CPAs must comply with ethical requirements and complete specified levels of continuing education in order to maintain an active CPA license. CPAs may offer a range of services; some CPAs specialize in tax preparation and planning.

Attorneys – Licensed by state courts, the District of Columbia or their designees, such as the state bar. Generally, they have earned a degree in law and passed a bar exam. Attorneys generally have on-going continuing education and professional character standards. Attorneys may offer a range of services; some attorneys specialize in tax preparation and planning.

LIMITED REPRESENTATION RIGHTS: Preparers without one of the above credentials (also known as “unenrolled preparers”) have limited practice rights. They may only represent clients whose returns they prepared and signed, but only before revenue agents, customer service representatives, and similar IRS employees, including the Taxpayer Advocate Service. They cannot represent clients whose returns they did not prepare and they cannot represent clients regarding appeals or collection issues even if they did prepare the return in question.

Annual Filing Season Program Participants – This new voluntary program recognizes the efforts of return preparers who are generally not attorneys, certified public accountants, or enrolled agents. The IRS issues an Annual Filing Season Program Record of Completion to return preparers who obtain a certain number of continuing education hours in preparation for a specific tax year.

Beginning with Filing Season 2015, unenrolled return preparers may opt to participate in this IRS program, which is designed to encourage education and filing season readiness. Learn more about the new program.

PTIN Holders –Tax return preparers who have an active preparer tax identification number, but no professional credentials and do not participate in the annual filing season program, are authorized to prepare tax returns. In 2015 they also have limited representation rights. This is the final year this category will have limited representation rights. Beginning in 2016, only annual filing season program participants will have limited representation rights.

DIRECTORY OF FEDERAL TAX RETURN PREPARERS WITH CREDENTIALS AND SELECT QUALIFICATIONS: To help taxpayers determine return preparer credentials and qualifications, the IRS will launch a public directory on the IRS website in early 2015. The searchable, sortable database will contain the name, city, state, and zip code of attorneys, CPAs, enrolled agents, enrolled retirement plan agents, and enrolled actuaries with valid PTINs for 2015, as well as AFSP Record of Completion recipients.
REMINDER: Everyone described above must have an IRS issued preparer tax identification number (PTIN) in order to legally prepare your tax return for compensation. Make certain your preparer has one and enters it on your return filed with the IRS. They are not required to enter it on the copy they provide you.

Key Tax Development For The Third Quarter

The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Availability of premium credit for health insurance purchased on federal exchange. A premium tax credit is available for qualifying individuals who purchase health insurance on an exchange. The credit is payable in advance if the taxpayer chooses. Income affects the amount of the credit, so the taxpayer must go through a special computation when he files his return to see if he received too much or too little of the credit. A controversy has erupted concerning the credit. The statute makes the credit available for insurance purchased on an exchange established by a state. A federal exchange was established for many states that did not establish their own exchanges. The IRS has issued regulations making the credit available for insurance purchased on a federal exchange, but two Circuit Courts reached opposite results on the validity of these regulations. One upheld them, while the other said they were invalid. However, the latter decision was put on hold because, subsequently, that circuit agreed to have the issue considered by all of the judges in the circuit. Depending on what happens in that and other cases, the issue might ultimately have to be resolved by the Supreme Court.

More regulations and guidance on the premium credit. The regulations allowing the premium tax credit for insurance purchased on a federal exchange were issued in 2012. They also covered other basic matters pertaining to the credit but did not address a number of issues that could come up in specialized situations. Recently, the IRS issued additional regulations on the credit. Among other things, these regulations address the specialized situations that were left out of the 2012 regulations. For example, they explain how to reconcile advance payments with credit amounts in the case of divorced taxpayers and married taxpayers who file separately. They also provide rules for the interaction between the credit and the deduction for the health insurance costs of a self-employed individual. At the same time, the IRS, in separate guidance, provided two optional computation methods that a taxpayer can use to avoid the circular computations that would otherwise apply if he qualified for both the deduction for health insurance costs for self-employed individuals and the premium tax credit.

Publication outlines exemptions from penalty for not having health coverage. The IRS has released Publication 5172, Facts about Health Coverage Exemptions. It is a one-page outline of the exemptions from the individual shared responsibility provisions of the Affordable Care Act (ACA), also referred to as the individual mandate. Under the ACA provision, beginning in 2014, individuals and their family members must have qualified health insurance (i.e., minimum essential coverage), make a shared responsibility payment when filing their federal income tax return, or qualify for an exemption. A taxpayer obtains an exemption from either the Health Insurance Marketplace or the IRS, depending on the type. All exemptions are reported on the tax return, although a taxpayer is automatically exempt if he doesn’t have to file a return because his income is below the filing threshold for his status. A brief description of the available exemptions and where a particular exemption may be obtained (IRS, Marketplace or Either) follows:

Members of certain religious sects (Marketplace)
Short coverage gap (IRS)
Certain noncitizens (IRS)
Coverage is considered unaffordable (IRS)
Household income below the return filing threshold (IRS)
Members of federally-recognized Indian tribes (Either)
Members of health care sharing ministries (Either)
Incarceration (Either)
Hardships (Either depending on which hardship exemption is claimed)

Money market gains and losses simplified. Historically, money market funds were allowed to have a stable value of $1 per share. Recently, the Securities and Exchange Commission started requiring certain money market funds to price shares in a manner that more accurately reflects the market value of the funds’ underlying portfolios. With these funds, the share price “floats.” If a shareholder frequently purchases and redeems shares (as is the case where the fund is used as a “sweep arrangement”), the shareholder may experience a high volume of small gains and losses. The IRS has provided a simplified method of accounting for such gains and losses. This method simplifies tax computations by basing them on the aggregate of all transactions in a period and on aggregate fair market values. The IRS also has provided an exemption from the wash sale rule (i.e., the rule that disallows a loss realized by a taxpayer on a sale or other disposition of fund shares if, within a period beginning 30 days before and ending 30 days after the date of the sale or disposition, he acquires substantially identical stock or securities) for the new floating value money market fund shares.

Favorable result for taxpayer who sold home after converting it to rental property. If certain requirements are met, a married couple filing jointly can exclude up to $500,000 of gain on the sale of their residence. Under the passive activity losses (PAL) rules, losses from rentals and other passive activities generally can’t offset passive income, but such losses can be so used when the taxpayer disposes of his entire interest in the activity. In such cases, the freed up losses usually offset gain from the disposition. These rules could have produced a negative result for a married couple who converted their home to a rental, in the next few years had $30,000 of losses that were suspended under the PAL rules, and then sold the home for a gain of $100,000. The IRS determined that the gain qualified for the homesale exclusion and that the taxpayers did not have to offset the $30,000 of losses against the $100,000 excluded gain. This was good for the taxpayers because it meant that they could use the $30,000 of losses to offset other income.

Simplified per-diem increase for post-Sept. 30, 2014 travel. An employer may pay a per-diem amount to an employee on business-travel status instead of reimbursing actual substantiated expenses for away-from-home lodging, meal and incidental expenses (M&IE). If the rate paid doesn’t exceed IRS-approved maximums, and the employee provides simplified substantiation, the reimbursement isn’t subject to income- or payroll-tax withholding and isn’t reported on the employee’s Form W-2. In general, the IRS-approved per-diem maximum is the GSA per-diem rate paid by the federal government to its workers on travel status. This rate varies from locality to locality. Instead of using actual per-diems, employers may use a simplified “high-low” per-diem, under which there is one uniform per-diem rate for all “high-cost” areas within the continental U.S. (CONUS), and another per-diem rate for all other areas within CONUS. The IRS released the “high-low” simplified per-diem rates for post-Sept. 30, 2014 travel. The high-cost area per-diem increases $8 to $259, and the low-cost area per-diem increases $2 to $172.

Relief gives automatic tax deferral to many in Canadian retirement plans. The IRS has provided that eligible U.S. citizens and residents who are beneficiaries of certain Canadian retirement plans will be treated as having made an election under the U.S.-Canada Income Tax Treaty to defer U.S. income tax on income accruing in their retirement plans until a distribution is made. This relief is retroactive to the first year in which they would have been entitled to make the election under the treaty.

Very truly yours,

Steve Eubanks, EA

www.strategictaxgroup.com

TRADITIONAL YEAR-END STRATEGIES

Some traditional year-end planning strategies are important to maximize benefits in connection with your personal tax situation. The following are traditional income and deduction acceleration and deferral strategies you should consider. Defer if your income is higher this year then it will be next year, or accelerate if the opposite occurs.

Income Deferral or Acceleration:

– Enter into installment contracts
– Defer or Receive bonuses before January
– Hold or Sell appreciated assets
– Accelerate income to use available carryforward losses
– Hold or Redeem U.S. Savings Bonds
– Accumulate or Declare special dividend
– Postpone or Complete Roth conversions
– Delay or Accelerate debt forgiveness income
– Minimize or Maximize retirement distributions
– Delay or Accelerate billable services
– Structure or Avoid mandatory like-kind exchange treatment
– Deductions and Credits Acceleration or Deferral
– Bunch itemized deductions into 2014 and take standard deduction in 2015 or take standard deduction in 2014 and bunch itemized deduction into 2015
– Pay bills in 2014 or postpone payments until 2015
– Pay last state estimated tax installment in 2014 or delay payment to 2015
– Consider AGI limitations on deductions or credits
– Consider net investment interest restrictions
– Take advantage of passive activity income and losses