Wednesday, June 20, 2018

WE NEED A NEW FORM 1098 FOR MORTGAGE INTEREST


Home equity interest is no longer deductible as an itemized deduction on Schedule A.  Period.  There is no “grandfathering” of existing home equity debt.

Only interest paid on “acquisition debt” – a loan secured by your residence the proceeds of which are used to “buy, build or substantially improve” the property – can be deducted.

It does not matter what the lender calls the loan.  Interest on what a bank, credit union or mortgage company calls a “home equity loan” or “home equity line of credit” can be deducted if the proceeds of the borrowing is used to “substantially improve” the residence.

IRS Pub 936 tells us –

An improvement is substantial if it:

Adds to the value of your home,
Prolongs your home's useful life, or
Adapts your home to new uses.

Repairs that maintain your home in good condition, such as repainting your home, aren't substantial improvements. However, if you paint your home as part of a renovation that substantially improves your qualified home, you can include the painting costs in the cost of the improvements.”

A lender will issue IRS information return Form 1098 “Mortgage Interest Statement” to report interest you pay on a loan secured by a home.  It is required to be issued if the interest paid for the year is at least $600.  This form reports mortgage interest received by the lender, the outstanding principal on the mortgage loan on the first day of the year (i.e. 1/1/2018), the origination date of the mortgage loan, and identifies the property that is used to secure the loan. 

You CANNOT just take the number reported as “mortgage interest received” in Box 1 of the Form 1098 and put this on Schedule A.  This form does not tell you whether the interest received is acquisition debt or home equity debt or a combination of the two.  This is because the lender does not necessarily know with certainty what you did with the money you borrowed.

There has always (or at least since October 13, 1987) been a difference between acquisition debt interest and home equity debt interest and limits on the amount of each type of interest deductible.  It has always been important to keep separate track of acquisition debt and home equity debt.  But it is now more important than ever to do this.

The IRS needs to change the Form 1098 and require mortgage lenders to provide additional information to help the taxpayer, tax professional and the Service itself in determining the correct amount of allowable itemized deduction. 

It would be truly great if the Form 1098 would separately report, with legal certainty, the amount of deductible acquisition interest received and the amount of non-deductible home equity interest received - but this would probably truly be impossible.     However, there is some information that a lender does have that should be included on the Form 1098.

The lender should be able to check a box on the Form 1098 to indicate if the loan is (1) an original acquisition mortgage (a loan used to purchase or build a residence) or (2) a refinance of an existing mortgage.  If the loan is an original acquisition mortgage it is obvious that 100% of the interest reported is eligible for a deduction, within the principal limitations.

When you refinance an existing 100% acquisition debt mortgage only the amount of principal on the loan being refinanced is considered acquisition debt.   The additional closing costs of each refinance that were added to the principal of the refinanced mortgage is home equity debt.  The only way you would avoid home equity debt in such a situation is if you literally refinanced only the principal from each old mortgage and paid all closing costs in cash.

John and Mary purchased a home in 2011.  They have one mortgage, from the original purchase, and no home equity debt.  They want to refinance their original mortgage in 2018 to get a better rate.  The principal balance on the original mortgage is $197,374.  The principal balance of the new mortgage will be $200,000.  They did not take any money “out” and paid a little over $1,000 at the closing.  The difference is the closing costs for title insurance, inspections, fees, etc. etc.  John and Mary now have acquisition debt of $197,374 and home equity debt of $2,626. 

If the loan covered by the Form 1098 is a refinance of an existing mortgage the lender should be required to indicate the principal balance of the loan being refinanced and the amount of closing costs paid by principal of the new loan.  In the above example, the 2018 Form 1098 would report $197,374 in the new box for principal balance refinance and $2,626 in the new box for financed closing costs.   

Do you have any suggestions of other information available to the lender that should be added to a revised Form 1098?   

The IRS has issued a draft 2018 Form 1098, and there appears to be no change to the form. 

Unfortunately, if the 1098-T is any indication, if the information reporting requirements of the Form 1098 for mortgage interest is revised it will be years before complete and accurate forms, properly reporting all the necessary additional information, will actually be issued.  By the time the requirements are all fully phased in the law change will have expired.

FYI, I have prepared a MORTGAGE INTEREST GUIDE with worksheets and instructions for keeping separate track of acquisition and home equity debt.

As usual, any thoughts?

TTFN 










Tuesday, June 19, 2018

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?


First, some shameful self-promotion.  Sorry to be so “Trump-like”.

* Want to know “What’s New For 2018” in taxes?  I have a compilation of the inflation and cost of living adjusted numbers you need to know for 2018 federal tax planning and return preparation, incorporating all the changes enacted by the GOP Tax Act, that is available as a pdf email attachment for only $1.00!   A print version sent via postal mail is only $2.00.  It is available from MY DOLLAR STORE.

* And, of course, there is also my book THE GOP TAX ACT AND THE NEW 1040 with tax planning and preparation advice and information for dealing with the new tax laws.  It is available in pdf format, print format, and as an e-book for reading on Kindle. 

* Finally, check out my FREE report “GETTING READY TO PREPARE YOUR 2018 TAX RETURNS”.

And now, on to the BUZZ -   

* I mentioned this issue last week, but here it is from the “mouth” of National Taxpayer Advocate Nina Olsen in her NTA BLOG – One Year Later, The IRS Has Not Adjusted Its Private Debt Collection Initiative To Minimize Harm To Vulnerable Taxpayers”.

Since the IRS implemented the private debt collection (PDC) initiative last year, I have been concerned that taxpayers whose debts are assigned to private collection agencies (PCAs) will make payments even when they are likely in economic hardship – that is, they are unable to pay their basic living expenses. As discussed in my 2017 Annual Report to Congress, this is exactly what has been happening.”

* Ken Berry, not the MAYBERRY RFD and F-TROOP actor (showing my age), reminds us “Section 529 Plans Can Now Be Used for Private Elementary and High Schools” at CPA PRACTICE ADVISER.

* THE TAX FOUNDATION has a new interactive tool called “Mapping 2018 Tax Reform” that identifies the average tax savings for individuals from the GOP Tax Act.

Enter a state and an Adjusted Gross Income (AGI) range and find the average tax savings.

Click here to learn the methodology behind this interactive tool.

* And the TAX FOUNDATION tells us that New Jersey is almost last on another list. The list - “How Well Funded Are Pension Plans in Your State?

Only two states are worse than NJ (in this situation).

* Some good news for the taxpayer consumer from Michael Cohn at ACCOUNTING TODAY – “H&R Block plans to close 400 tax prep offices”.  And, in my opinion, good news for the tax preparation industry in general.

* Kay Bell talks about foundations and tax-exempt organizations in “Tax-exempt system underspotlight in wake of Trump Foundation's legal problems” at DON’T MESS WITH TAXES.

The “inspiration” for the post is the news that the New York Attorney General is filing a lawsuit against Donald J. Trump's charitable foundation.  I truly look forward to Donald T Rump being escorted out of the White House in handcuffs when found guilty of tax fraud.

THE FINAL WORDS


It is not about any particular improper payment by the ‘charity’. It is about Trump's blatant and persistent practice of lying to people, then taking their money, and acting as if no law or regulation or governmental authority ever applies to him.”

Donald T Rump truly is “a con man with an unbreakable habit of fraudulent behavior, never to be trusted.”

TTFN








Wednesday, June 13, 2018

A HUUUGE JOB FOR THE IRS


“The Tax Cuts and Jobs Act” is now the law of the land.  As I said in my book THE GOP TAX ACT AND THE NEW 1040

This Act drastically changed the United State Tax Code.  For 2018 through 2025, or until new tax legislation is enacted, the Tax Cut and Jobs Act will affect every income tax return filed – both business and individual.”  

Interpreting and implementing the new tax laws will be a massive job for the IRS.  Because the Act was so hastily thrown together there is so much that is unclear. 

The latest issue of the National Association of Tax Professional’s TAXPRO MONTHLY discussed the massive job ahead.  Here are some take-aways from this discussion:

(1) The IRS has created a “Tax Reform Implementation Office” (TRIO) for “establishing and monitoring implementation actin plans and ensuring communications with external and internal stakeholders and taxpayers”.

(2) The Service now has a page on its website to answer questions about the Act.  Click here.

(3) The IRS forms, schedules and instructions that need to be revised will be released to the public for review and comment sometime this summer.

(4) The IRS has said it will need to hire 1,734 new full-time positions to implement tax reform over the next two years. 

Let us hope that Congress will increase the IRS budget appropriately to properly and competently implement and deal with what it has wrought.

Also because of the errors resulting from the Act’s hasty creation there will need to be “technical correction” legislation passed.  I do believe this is already being worked on.

It is difficult to properly advise clients about how to respond to the changes because there still is so much that is not known.

TTFN











Tuesday, June 12, 2018

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?



More specifically –

Eliminate the new pass-through deduction and, instead, require all businesses that are not publicly traded to be taxed as pass-through entities, either as partnerships, limited liability companies, or subchapter S corporations. This proposal would ensure that the same income tax rate is imposed on business profits as on wages, eliminating the need for special—and highly complex-- rules to define which business owners can claim the 20 percent deduction.”

While I agree that the special 20% Section 199a deduction is a convoluted mucking fess and should not have been created, I do not agree with Eric.

Check out yesterday's post "The Section 199a Deduction Makes No Sense". 

* My new book on tax planning for the new tax laws “The GOP Tax Act and the New 1040” is now available – as a pdf, in print, and as an e-book for Kindle.  For more information click here.

* Kay Bell reminds us that “Mileage amounts same, but tax situations change” at DON’T MESS WITH TAXES.

FYI, here are the mileage rates for 2017 and 2018.  

2017 & 2018 standard mileage deduction rates
allowed on cents-per-mile basis 
Tax Year
Business
Medical
Moving
Charity
2017
53.5
17
17
14
2018
54.5
18
18
14

Remember that, as Kay points out, employees can no longer deduct employee business expenses on Schedule A.


BTW - I discuss in detail the pros and cons of going from being treated as an employee to being treated as an independent contractor in THE GOP TAX ACT AND THE NEW 1040.

* Do you wonder “Average Per Capita Property Taxes: How Does Your State Compare?”.  The TAX FOUNDATION provided this “map” last month.

No surprise – NJ is #1 with an average $3,074 per person.  My current home state of PA is #20 with $1,481.  So, I made a good move.

* More evidence that legislating this practice proves that the members of Congress are idiots from Michael Cohn at ACCOUNTING TODAY – “IRS private debt collectors target low-income taxpayers”.

The practice of using private debt collection agencies to collect outstanding IRS tax debt has been a failure in each of its previous tries.  Typical Congressional thinking – if it’s broke, keep doing it. 

If you are contacted by an outside collection agency for an outstanding tax debt tell them you refuse to deal with them and will only deal directly with the IRS.

THE FINAL WORDS

Kudos to Robert De Niro for his exclamation at the TONY Awards! 

I share his sentiment and passion – FUCK TRUMP!
 
And one more thing – perhaps the most important – please read this and share with anyone you know who does not oppose and denounce Trump – “TRUMP IS NO JOKE”.

TTFN








Monday, June 11, 2018

THE SECTION 199a DEDUCTION MAKES NO SENSE


The new “Section 199a” deduction – 20% of pass-through business income - created by the GOP Tax Act makes absolutely no sense.

Why does it exist?  The Act reduces the tax rate on regular “C” corporations to 21%. Pass-through businesses – sole proprietors filing Schedule C, partnerships and sub-S corporations – had paid tax on net business income at “ordinary income” rates, as much as 37% under the new rate schedule.  So to make the reduced C corporation rate more palatable Congress felt it had to throw pass-through businesses a bone.

But are C corporation net profits really taxed at only 21%.  A corporation will pay 21% tax on its profits.  When the profits are paid out to shareholders as dividends the individual shareholders include these dividends as income on their personal tax returns.  This is the classic “double-taxation” of corporate dividends.  Qualified dividends are taxed at a lower rate – 0%, 15% or 20%.  Plus, dividends, being investment income, can also be subject to the Obamacare 3.8% surtax.

A taxpayer in the 22% bracket will pay 15% tax on the qualified dividends received.  So, the corporate income represented by the dividend distribution is actually taxed at 36% - 21% and 15%.  If the same taxpayer received the dividend income as a pass-through from a sub-S corporation the tax on $100 would be $18 ($100 - $20 = $80 x 22% = $17.60), or only 18% - half the effective tax on C corporation income.

A person in the top tax bracket would pay 23.8% tax on the dividends – the 20% capital gain rate and the 3.8% Obamacare surtax.  So, the corporate profit would be effectively taxed at 44.8%.  Sub-s pass through income could be taxed at as much as 40.8% (the 20% deduction may not be available).   

Here is what I say should be done.

C corporations should be allowed to claim a tax deduction for “dividends paid” and only pay corporate income tax on the actual “retained” earnings.  Dividends would continue to be taxed on the income tax returns of shareholders.  But since there is no longer any “double taxation” there would no longer be a need for a special tax rate on dividends.  There would be no 20% Section 199a deduction.  So, monies passed through to business owners – either as corporate dividends or pass through business income – would all be taxed at ordinary income rates. 

The inequity in the treatment of corporate income and self-employment income from sole proprietorships and partnerships exists not in the income tax treatment but with the application of the FICA-equivalent “self-employment tax”.  A person who owns a corporation pays himself/herself a salary, subject to FICA tax. The employee pays half the tax and the employer pays half the tax.  The net profits distributed to the owner is in the form of dividends, or sub-S pass through income, which is not subject to self-employment tax.  Employee benefits, such as health insurance premiums and employer pension plan contributions, are not subject to FICA tax.

A sole proprietor and general partner pays self-employment tax – the equivalent of both halves of the FICA tax – on the total amount of “net earnings from self-employment” which is the total net profit reported on Schedule C or the total business income pass through for the general partner, adjusted for half the s-e tax, before any deductions for health insurance premiums or pension contributions.  A large portion of the net earnings from self-employment for sole proprietors and general partners is “wage-equivalent”, but a portion is also “dividend-equivalent”.  

First, health insurance premiums and pension contributions (with the possible exception of the equivalent of 401(k) deferrals) for the self-employed person should be allowed as a deduction in determining net earnings from self-employment.  And only a percentage of the net earnings from self-employment, the percentage representing wage-equivalent earnings, should be subject to the self-employment tax.  It is truly difficult to determine the appropriate allocation of net income to wage earnings and return on investment dividends.  Perhaps using an arbitrary allocation, like 70% wage-equivalent and 30% dividend-equivalent, is the simplest way to go. 

FYI I would also do away with ALL industry-specific loopholes, deductions and credits for ALL business activities, basically taxing ALL business entities on net book profit.  

What do you think?

TTFN









Thursday, June 7, 2018

5 WAYS TO AVOID IRS PROBLEMS


{This advice is taken from my book BOBSERVATIONS.  Click here for more information on this book.}

Nobody wants to hear from the Internal Revenue Service – except to receive a refund check.  Here are five things to do to avoid problems with your “Uncle Sam”.

1.  First and foremost – file a complete and accurate tax return.  The absolute best way to do this is by going to a qualified, competent tax professional.  It will not necessarily cost you a lot of money – actually doing so will probably save you more in federal and state taxes than you will pay for the service.

Whatever you do – do not rely on a “box” (i.e. tax software) to prepare a complete and accurate return if you do not know the tax law.  Remember – garbage-in garbage-out.  And the IRS or the Tax Court will not accept the “Turbo-Tax Defense” if you screw up.

And, in my considered opinion, do not use the services of a “fast food” tax preparation chain.

2. Report all your income.  The IRS matches information reported on your tax return to that reported on such information documents as 1099-INT, 1099-DIV, 1099-MISC and the Form K-1 from partnerships, Sub-Chapter S corporations and estates and trusts.

Just because you have not received a Form 1099 for income earned or received does not mean that one was not sent to the IRS.  Your copy could have been lost in the mail or sent to an old or incorrect address.  If a 1099 information return should have been filed then assume it was.

Compare information reported on 1099 returns to your own records for accuracy and do the same thing with your Form W-2s.  A while back a client received a 1099-INT with someone else’s account, which earned $300+ interest, included in the listing! Had he not carefully checked the form he would have paid close to $100 in unnecessary federal and state income tax.

When you get a Form 1099 you believe is incorrect the first thing you should do is contact the issuer (bank, mutual fund, brokerage firm) and request a corrected return or an explanation.  If they will not reissue the form correctly, or do not explain to your satisfaction the difference, claim the gross amount reported on your tax return (Schedule B for interest and dividends, Schedule C for non-employee compensation, or Schedule E for rental income) and deduct any corrections elsewhere on the Schedule so the correct amount is reflected in the “bottom line”.

You want to make sure that (a) the gross amount of income reported on your return matches exactly the amounts reported to the IRS on information returns, and that (b) the net income on which you are ultimately taxed is the correct amount.

If you have received a Form 1099-INT reported under your Social Security number for bank interest on a joint account, and you want to claim your half of the interest and have the co-owner report his/her half, you should enter the name of the bank and the total amount of the interest on your Schedule B and on the next line write “less amount reported by co-owner XXX-XX-XXXX (indicate co-owner’s Social Security number)” and deduct out half of the total interest.

If you receive a Form 1099 for interest or dividends from the account of your dependent child that also has your name on it as co-owner or custodian – an investment that truly belongs to the child but is reported under your Social Security number – do the same thing.  Enter the total amount of income on your Schedule B, write “less amount reported by XXX-XX-XXXX”, and deduct out the full amount of the interest.  On the Schedule B of your dependent child you would write the name of the bank or stock and next to it write “reported under XXX-XX-XXXX”.

3. Make sure that all the names and Social Security numbers reported on your Form 1040 match exactly the names and Social Security numbers as they appear in the records of the Social Security Administration (i.e. – they are the same as they appear on the individual’s Social Security card).

If when your son was born his last name was recorded with SSA as hyphenated (i.e. father = Smith and mother = Jones, so son = John Smith-Jones) and it appears that way on his SS card, but over the years the hyphenation was dropped and he is referred to now as John Smith, make sure to report the name as John Smith-Jones when identifying dependents on the Form 1040 – unless you have officially changed the name with SSA by requesting a new Social Security card.  I have had this very problem with a client a few years ago.

Similarly, if in a marriage the wife took her new husband’s last name (i.e. Jane Jones now becomes Jane Smith), but never changed her name with the Social Security Administration, make sure to report her name as Jane Jones on the 1040.  If a wife chooses to take her husband’s last name as her married name the first thing she should do, after returning from the honeymoon and mailing out all the thank you notes, is to officially change her name with SSA by requesting a new Social Security card.  This can be done at the SSA website.

4. Another piece of advice that bears repeating.  Do not accept tax advice from anyone other than a qualified, competent professional tax preparer.   Don’t listen to a broker, a banker, an insurance salesman, or your Uncle Charlie!  You wouldn’t ask your auto mechanic for a medical opinion, so why would you listen to tax advice from your MD?

Over the years clients have come to me wanting to claim the strangest things – telling me “my neighbor” or “a guy I ride in to work with on the train” said it was deductible.  And it seems that just about every workplace has a resident self-proclaimed “tax pro”.

If you are given any tax information by a non-tax person make sure to check it out with your own tax professional first before taking any action. You may have to pay your tax pro a few bucks for the consultation – but it is money well spent and far more preferable to losing thousands of dollars by following bad advice.

5. If you do receive correspondence from the IRS do not ignore it.  If you receive a CP-2000 or other notice from the IRS, or a state tax authority, indicating that income was omitted from your tax return, or asking for clarification on an item reported on your return, or for any other reason, give it to your tax professional immediately so that he/she can respond accordingly.

If you prepared your own return review the notice carefully and respond promptly.  If you do not understand the notice, or are not sure what to do, consult a qualified and competent tax professional.

In my 40+ years of experience I have found that about 75% of the notices received from the IRS or a state tax agency are incorrect.  You should not just automatically assume the notice is correct and pay the amount requested without verification. 

However, do not ignore IRS correspondence. You must respond to all notices you receive – even if only to point out the errors.  By ignoring such correspondence, the problem will not go away – it will only get worse.

TTFN







Wednesday, June 6, 2018

NOBODY EVER SAID TAXES WERE FAIR – GOING IN THE OTHER DIRECTION – PART II


OK, here is another deduction in the US Tax Code that unfairly benefits specific taxpayers by disproportionately distorting economic reality.  This is also taken from “The Tax Code Must Be Destroyed”.

The standard mileage allowance for business use of the taxpayer’s personal auto currently includes a component for depreciation of the vehicle.  Depreciation is not a factor in the standard mileage allowance for medical, moving, or charitable travel.  If you elect to deduct the business percentage of actual auto expenses you can include depreciation in the calculation of the deduction.  

For the most part taxpayers who use their car for business would own a car whether or not one was needed for business. The business use, however extensive, is basically secondary to personal use.

I have always owned a car.  Although a large percentage of my driving is for business, I own the car primarily for personal reasons, and would own a car whether it was needed for business or not.   

Currently the standard mileage rate for business is calculated using an annual study of the fixed and variable costs of operating an automobile - including depreciation, insurance, repairs and maintenance, tires, and gas and oil. The rate for medical and moving purposes is based only on the base variable costs, like gas and oil.

Because the main reason for purchasing a car is personal and not business, depreciating the cost of purchasing the car, based on business use, is not really a true business expense.  Only the business use percentage of actual operating expenses should be allowed as a deduction – because the more miles you drive the more you spend for gas, oil, repairs and maintenance, tires, and insurance.

The 2017 business standard mileage rate of 53.5 cents per mile, for example, included 25 cents allocated to depreciation.  Under my change if you use your car for business, either as an employee or a self-employed individual, the standard mileage allowance for business miles would not include a component for depreciation.  So, using the 2016 rate as an example, business standard mileage allowance would be 30 cents per mile and not 54 cents.

Taxpayers electing to deduct the business percentage of actual expenses should not be able to include depreciation in the calculation.  Those who lease a car and use it for business should have the option of using the standard mileage allowance or actual expenses, but the actual expenses should not include the monthly lease payment.

In the case of motor vehicles used 100% in a business – trucks, vans, limos, cars that are leased out to others (including one’s corporation) or used exclusively by couriers or for deliveries – a deduction should be allowed for 100% of the actual costs of maintaining and operating the vehicle, including depreciation. The standard mileage allowance should not be allowed here

This inequity has been to a degree addressed by the elimination of the itemized deduction for all employee business expenses for 2018 through 2025 via the GOP Tax Act.  However, it still exists for business entities, including sole proprietorships reporting income and expenses on Schedule C.

Your thoughts?

Do you have any deductions or credits to add to this list?

TTFN